[Federal Register: April 2, 2007 (Volume 72, Number 62)]
[Proposed Rules]
[Page 15627-15633]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02ap07-8]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 15627]]
FEDERAL HOUSING FINANCE BOARD
12 CFR Part 915
[No. 2007-05]
RIN 3069-AB34
Financial Interests of Appointive Directors
AGENCY: Federal Housing Finance Board.
ACTION: Proposed rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing
to clarify the types of financial interests a Federal Home Loan Bank
(Bank) appointive director may own in a Bank member. The proposal would
incorporate into Finance Board rules its long-standing policy that
financial interests in a Bank member acquired though ownership of
shares of a diversified mutual fund are permissible holdings for an
appointive director. The proposal would extend the rationale for
permitting mutual fund investments to other types of vehicles and
accounts that share certain of the same key features as mutual funds
and thus are unlikely to pose a risk of conflict of interest for an
appointive director. The proposal also would set forth additional
criteria to define when owning shares of a holding company, or having
other types of financial interests in a member, would be permissible
for an appointive director.
DATES: The Finance Board will accept written comments on the proposed
rule on or before May 17, 2007.
ADDRESSES: Submit comments to the Finance Board using any one of the
following methods:
E-mail: comments@fhfb.gov.
Fax: 202-408-2580.
Mail/Hand Delivery: Federal Housing Finance Board, 1625 Eye Street
NW., Washington DC 20006, Attention: Public Comments.
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
Finance Board at comments@fhfb.gov to ensure timely receipt by the
agency. Include the following information in the subject line of your
submission: Federal Housing Finance Board. Proposed Rule: Financial
Interests of Appointive Directors. RIN Number 3069-AB34. Docket Number
2007-05.
We will post all public comments we receive without change,
including any personal information you provide, such as your name and
address, on the Finance Board Web site at http://www.fhfb.gov/Default.aspx?Page=93&Top=93
.
FOR FURTHER INFORMATION CONTACT: Neil R. Crowley, Acting General
Counsel, crowleyn@fhfb.gov or 202-408-2990; or Thomas E. Joseph, Senior
Attorney-Advisor, Office of General Counsel, josepht@fhfb.gov or 202-
408-2512. You can send regular mail to the Federal Housing Finance
Board, 1625 Eye Street NW., Washington, DC 20006.
SUPPLEMENTARY INFORMATION:
I. Background
Section 7(a) of the Federal Home Loan Bank Act (Bank Act) (12
U.S.C. 1427(a)), provides for management of each Bank by a board of
directors of at least 14 persons, with 8 directors elected by the
members and 6 directors appointed by the Finance Board. This provision
also states that any individual appointed by the Finance Board may not,
``during such Bank director's term of office, serve as an officer of
any Federal Home Loan Bank or a director or officer of any member of a
Bank, or hold shares, or any other financial interest in, any member of
a Bank.'' \1\ The provision concerning the qualifications for
appointive directors was added to the Bank Act by section 706 of the
Finance Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) (Pub. L. 101-73, 103 Stat. 183 (Aug. 9, 1989)). In adopting
the FIRREA amendments, Congress indicated that it did not intend these
conflict of interest provisions to preclude an appointive director from
investing in a diversified mutual fund that in turn may own shares in a
Bank member. See H.R. Conf. Rep. 101-209 at 430 (1989). The Bank Act,
however, does not further define the terms ``shares'' or ``financial
interests,'' nor does it otherwise indicate how the provision should be
applied. As a result, the Finance Board has had to interpret these
terms whenever prospective appointive directors have asked whether
certain of their investments were permissible under this provision. The
Finance Board has provided guidance to these individuals in the past on
a case-by-case basis, as well as through its regulations.
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\1\ Should an appointive directorship become vacant during the
term of the appointment because the director no longer meets any of
the statutory or regulatory requirements for serving on a Bank's
board or for any other reason, section 7(f) of the Bank Act (12
U.S.C. 1427(f)) authorizes the Finance Board to fill the vacancy for
the remainder of the unexpired term.
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In January 1990, the Finance Board adopted an interim final rule
implementing the FIRREA appointive director and conflict of interest
provision. See Interim Final Rule: Election of Directors; Eligibility
Requirements, 55 FR 1393 (Jan. 18, 1990), codified at 12 CFR 932.18
(1991). The Finance Board later modified this rule somewhat based on
the comments it received on the interim final rule. See Final Rule:
Eligibility and Financial Disclosure Requirements for Directors of the
Federal Home Loan Banks, 56 FR 55205 (Oct. 25, 1991). The rule, as
amended in October 1991, provided among other things, that no
appointive director may during his or her term of office have a
financial interest in any member (or a subsidiary or non-diversified
holding company thereof, or affiliate of such holding company) of the
Bank on whose board the director served.\2\ It also specifically
defined a financial interest to include the ownership or control,
either directly or indirectly, of any shares of common or
[[Page 15628]]
preferred capital stock, any other equity security, any debt security
or obligation (except deposit or savings accounts) including
subordinated debt, but allowed an appointive director to hold such
interests if they arose solely through ownership of shares or other
investment units of one or more diversified mutual funds (as defined in
section 5(a) and (b)(1) of the Investment Company Act of 1940, as
amended).\3\ The rule also prohibited an appointive director from
having other financial relationships, including loans or other
extensions of credit, with a member of the Bank on whose board the
director served, or with the member's subsidiary, or its non-
diversified holding company (or an affiliate of such holding company),
which were not transacted in the ordinary course of business and on
normal commercial terms, as discussed in the rule itself. 56 FR at
55220.
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\2\ See 56 FR at 55220. The 1991 amendments clarified the
prohibition on serving on the board of, or ownership in, a member,
member subsidiary or a non-diversified holding company of a member
or affiliate of such holding company to make clear that the term
``member'' meant only a member of the Bank on whose board an
appointive director served and not a member of another Bank. See 56
FR at 55206-207. The 1991 amendments also added a definition for the
term ``diversified holding company'' that read:
A holding company whose member subsidiary and related
activities, as specified in 12 U.S.C. 1467a(c)(2), represented on
either an actual or pro forma basis less than fifty (50) percent of
both its consolidated net worth and its consolidated net earnings at
the close of its preceding fiscal year. For purposes of the
foregoing, consolidated net worth and consolidated net earnings
shall be determined in accordance with generally accepted accounting
principles. 56 FR at 55219.
\3\ 56 FR at 55219, 55220. The definition of ``financial
interest'' applied if the interest was held by an appointive
director or director candidate or by his or her immediate family
member and related interests, or the related interest of the
immediate family member. 56 FR at 55219.
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In 1998, the Finance Board substantially revised its rules
governing elective and appointive directors.\4\ Among other things, the
1998 amendments required the Banks to adopt conflict of interest
policies that applied to both elective and appointive directors. The
rule specifically required the conflict of interest policy to prohibit
an appointive director from serving as an officer of any Bank or as an
officer or director of any member or from owning any equity or debt
security issued by a member or from having any other financial interest
in a member. See 63 FR at 65690.
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\4\ See Final Rule: Election of Federal Home Loan Bank
Directors, 63 FR 65683 (Nov. 30, 1998). These rules are now found in
part 915 of the Finance Board's regulations (12 CFR part 915).
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The 1998 revisions also deleted the detailed provisions addressing
appointive director qualifications and prohibited financial interests
in favor of more general references to the Bank Act and somewhat more
general definitions of terms such as ``financial interests.'' The new
definition of ``financial interests'' specifically excluded deposit or
savings accounts maintained with a member and loans and other
extensions of credit from a member so long as they were obtained in the
normal course of business on terms generally available to the public.
See 63 FR at 65691. Among the provisions that were dropped in 1998,
however, was the one that specifically had allowed an appointive
director to hold shares or other financial interests in a member if
they arose solely through ownership of one or more diversified mutual
funds. Notwithstanding that change, the Finance Board has continued to
interpret section 7(a) as it had done previously, and has allowed
appointive directors to have indirect financial interests in a member
if held through ownership of shares of a diversified mutual fund.
The conflict of interest rules for appointive directors remain
substantively the same as adopted in 1998, and currently are found at
12 CFR Sec. 915.11. The Finance Board recently adopted an interim
final rule to address procedures for how appointive directors are
selected.\5\ Under the new procedures, the boards of directors of each
Bank have to submit to the Finance Board a list of individuals who
could serve in appointive directorships. Along with the list, the Banks
must submit information regarding each individual's eligibility and
qualifications to serve as a Bank director.
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\5\ See Interim Final Rule: Federal Home Loan Bank Appointive
Directors, 72 FR 3028 (Jan. 24, 2007) (adopting new Sec. 915.10).
The Finance Board also solicited comments on this interim final
rule. The Finance Board considered the comments received and adopted
a final rule to address the selection process at the same meeting in
which it approved this proposed rule for publication in the Federal
Register.
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II. Analysis of the Proposed Rule
A. Reasons for the Proposed Changes
The recent changes in the selection process for appointive
directors have prompted questions to the Finance Board about whether
specific investments held by potential candidates would be barred by
section 7(a), and thus would have to be sold if the person were to
accept an appointment to the board of a Bank. These questions have
brought to light the extent to which developments in the financial
services marketplace in recent years have created different types of
investment accounts and investment vehicles that either did not exist
when FIRREA was enacted or were not as widely held as they are today,
and for which the Finance Board has not previously provided formal
guidance.
The Finance Board believes that the lack of a rule providing clear
guidance as to what investments are encompassed by the terms ``shares''
and ``financial interests'' could cause some potential appointive
director candidates to decline to consider an appointive directorship
for fear that they would be required to divest certain investments in
order to accept the position. Any such divestiture could prove
financially costly and disruptive to their personal financial planning
strategies. At the same time, the Finance Board recognizes that as the
Banks have become involved in more complex financial activities, it is
important that some of a Bank's individual appointive directors have
more sophisticated skills and a deeper understanding of financial
markets to provide strong oversight. Such persons can bring business
and leadership skills to the boards that will complement the skills and
expertise brought by the elective directors and the community interest
directors. In some cases, persons who possess those analytical skills
and related business experience may also be sophisticated investors in
their own right and have investments that go beyond traditional stock,
bond, and mutual fund holdings.
The possibility that persons who can bring needed skills and
experience to the board of a Bank might be discouraged from serving as
appointive directors due to uncertainty about how the conflict of
interest limitations may apply to their investments has caused the
Finance Board to consider whether it should amend its regulations. The
Finance Board hopes that in updating these provisions, a new rule will
better reflect the range of investments or investment vehicles (beyond
traditional investments) through which an appointive director may
obtain some interest in a member but which, because of the director's
lack of control over the investment or the minimal value of the
interest obtained, would not present concerns that should disqualify
such individual from serving as an appointive director. Thus, the
Finance Board is proposing this rule in an attempt to balance the need
to assure that appointive directors do not have actual or apparent
conflicts that would undermine their ability to represent the public
interest against the need to attract a sufficient pool of candidates
with sophisticated skills in areas such as housing and finance to build
boards of directors capable of overseeing the Banks as they evolve and
undertake new activities.
The proposal is based primarily on the Finance Board's experience
to date in administering section 7(a) and the questions raised about
potential conflicts as a result of interests in various investment
vehicles and strategies. The Finance Board recognizes that it has had
only limited experience in dealing with the types of investment
products that are available in today's financial marketplace,
particularly those that are available to high net worth individuals. In
order to craft a final rule that will strike an appropriate balance
between allowing investments that
[[Page 15629]]
share key characteristics associated with mutual fund shares, which
were permitted by Congress, and barring investments that are more like
direct ownership interests in member stock, the Finance Board will
benefit greatly from the perspectives of persons more familiar with the
universe of investment products currently available. Accordingly, the
Finance Board welcomes all comments on how to further refine the
proposal to assure that the rule will not unintentionally allow
individuals to hold investments that may create conflicts with their
duties as appointive directors but still remain flexible enough not to
create unnecessary barriers to finding candidates with the skills and
experience to be strong Bank directors.
B. Proposed Rule Changes
General. The Finance Board is proposing to add a new paragraph (f)
to Sec. 915.10 of its rules to address the issues described above.\6\
The proposed provision first would set out the general prohibition
against an appointive director owning any debt or equity securities
issued by, or otherwise having any financial interest in, a member of
the Bank on whose board the director serves. The provision also would
restate the statutory requirements that an appointive director may not
serve as an officer of any Bank or as an officer or director of any
member of the Bank on whose board the director serves.\7\ This proposed
language closely follows the wording of section 7(a) of the Bank Act
and the requirements of current Sec. 915.11(a)(2) of the Finance
Board's rules.\8\ The proposal goes on to describe certain types of
investments or contractual relationships that would not be deemed to
constitute shares or financial interests in a member for purposes of
determining whether an appointive director may hold such interests
while serving on the board of a Bank.
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\6\ As already noted, Sec. 915.10 sets forth the new process
for the selection of appointive directors.
\7\ For purposes of applying the prohibitions on financial
interests in a member and on serving as an officer or director of a
member, the Finance Board interprets the term ``member'' broadly to
include the member institutions itself, as well as any subsidiary,
holding company and affiliate. See Federal Home Loan Bank Appointive
Director Application Form, Statutory Eligibility Requirements Sec.
4, Conflict of Interests (reproduced at 72 FR at 3033). The Finance
Board currently intends to continue to interpret the term ``member''
in this broad manner.
\8\ See 12 U.S.C. 1427(a) and 12 CFR Sec. 915.11(a)(2). As
discussed in the next section, the Finance Board also is proposing
conforming changes to Sec. 915.11(a)(2) of its rules.
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The Finance Board emphasizes that because it is not proposing to
amend the broad definition of ``financial interests'' now contained in
Sec. 915.11(f)(2), the proposed rule would not change the extent to,
or the manner in which an individual Bank's disclosure and recusal
policies must address the types of investments or activities identified
in proposed Sec. 915.10(f), even if the investments themselves would
no longer be deemed to disqualify an individual from serving as an
appointive director. See 12 CFR Sec. Sec. 915.11(b) and (f)(2). The
Finance Board views continued application of the rules related to the
Bank's recusal and disclosures policies to the types of investments
identified in proposed Sec. 915.10(f) as an additional safeguard to
assure that these investments would not create a conflict of interest.
The Finance Board, however, requests comments on whether this approach
is appropriate or if some modification to Sec. Sec. 915.11(b) and
(f)(2) may be warranted. The Finance Board also requests comment on
whether it should require appointive directors to disclose their
financial holdings to the Banks as part of their application so the
Banks can verify that the investments--including the vehicles and
accounts described below--do not create a conflict that would be barred
by section 7(a).
Investment Vehicles. Both the legislative history of FIRREA and the
Finance Board's prior regulations expressly permitted an appointive
director to own shares of a diversified mutual fund that in turn owned
debt or equity securities issued by a member of the Bank on whose board
the director served. The legislative history offers scant insight into
the intent of Congress in adding this provision, but the use of the
term ``diversified mutual fund'' appears to reflect a view that an
appointive director can own indirectly securities he or she cannot own
directly under certain circumstances. Thus, in the case of mutual
funds, indirect ownership of member securities would be permissible,
provided the securities are owned by a legally distinct entity (the
fund), and the investment decisions are made by that entity (or by an
investment adviser acting on its behalf), and the appointive director
lacks any control over the purchase or sale of the securities owned by
the entity. The proposed rule is intended to include within the
universe of permissible investments other types of investment vehicles
and accounts that share those key concepts, and thus should pose no
greater risk of conflict than would exist in the case of ownership of
shares through a mutual fund.
Accordingly, proposed Sec. 915.11(f)(1) would allow an appointive
director to own shares or other interests in certain investment
vehicles, which in turn may own equity or debt securities issued by a
member of the director's Bank, without violating section 7(a) of the
Bank Act. In order for such an investment to be permissible, the
investment vehicle must be a legally separate entity and the appointive
director must not control the investment vehicle or play any role in
the selection of the entity's underlying investments. By providing that
the investment vehicle must be organized as a ``legally recognized
entity,'' the proposal would require that the vehicle be a corporation,
limited partnership, trust, or similar entity that is recognized as
having its own corporate existence under state law and is legally
separate and distinct from the individual appointive director. As
drafted, the provision would include registered investment companies
(mutual funds) as well as limited partnership interests and other
passive interests in distinct entities, even if those investment
vehicles were not required to register under the Investment Company
Act.
The proposal would require that an appointive director not control
the investment entity or be involved in decisions involving investments
or trading strategies, which is intended to assure that the director
could not direct the entity to purchase or sell member securities or
otherwise manipulate trading based on knowledge acquired as a result of
the individual's duties on the Bank's board. Because a general partner
typically is deemed under state law to have the ability to control or
otherwise act on behalf of either a general or limited partnership, a
general partnership interest would not be permissible under this
proposal.
Investment Accounts. Since the Congress adopted the limitation on
appointive directors' financial interests in 1989, the financial
investment marketplace has evolved considerably. It has come to the
attention of the Finance Board that among the investment alternatives
used with much greater frequency by the investing public are
arrangements that, while structured differently than mutual funds, are
functionally similar, especially with respect to the client's lack of
control over the investment decisions for the portfolio. Such
investments may have somewhat differing structures and may have
different names depending on the company offering the investment. One
such investment alternative has been described as a ``managed account''
or a ``separately managed account.'' Persons using these accounts may
direct the
[[Page 15630]]
investment adviser to allocate the portfolio among certain classes of
assets, such as growth stocks, value stocks, bonds, or foreign
equities, but do not direct the purchase or sale of securities within
those asset classes. A key distinction between a mutual fund and a
managed account is that in the former case the investor owns shares of
the fund, which in turn owns the portfolio securities in its own name,
whereas in the latter case the investor will own the portfolio
securities in his or her own name. A key similarity between the two is
that in both cases the investor plays no role in the purchase or sale
of the portfolio securities, as a typical requirement of the managed
account is that the investor must confer full investment discretion on
the investment adviser that manages the portfolio.
Proposed Sec. 915.10(f)(2) is intended to allow appointive
directors to hold securities of a member through such an account, based
principally on the requirement that the director would have no control
over the acquisition of securities for the account. Thus, the proposal
would deem any debt or equity securities issued by a member that an
appointive director owns through accounts where the director has no
investment discretion not to constitute shares or financial interests
in a member. To qualify for the exclusion under the proposed provision,
however, the account would have to be managed by an investment adviser
registered with the Securities and Exchange Commission under the
Investment Advisers Act, the appointive director would have to pay a
fee to the adviser for the advisory services that are provided as an
integral component of the account, and the director would have to give
the adviser complete discretion to buy or sell all securities in the
account. The Finance Board believes that where an appointive director
has turned over all investment decisions regarding the portfolio to a
professional adviser and is not otherwise involved in the investment
decisions concerning the account to have no greater interest in the
member securities, in a practical sense, than does a director who owns
such securities indirectly through a mutual fund. To further assure
that the director could not indirectly influence the purchase or sale
of securities within the portfolio, the proposal provides that the
director could not be affiliated with the investment adviser and could
not otherwise have control over the choice of securities acquired for
the account. Given these proposed safeguards (coupled with the
continued application of current disclosure and recusal policies), the
Finance Board views accounts covered by this proposed provision as not
presenting risks of a conflict of interest greater than those posed by
investments in mutual funds or similar investments.
In applying this provision, an investor's right to identify broad
financial goals or broad investment strategies or asset classes (e.g.,
aggressive growth, value investing, etc.) would not constitute
sufficient investment discretion to violate section 7(a), so long as
the strategies would not allow a director to direct the purchase of
individual securities. The Finance Board understands that persons
investing through such accounts sometimes are able to direct an
investment adviser not to purchase securities issued by a particular
company, such as where the investor is an officer or director of a
publicly traded company and instructs the adviser not to purchase any
securities issued by that company. In such circumstances, the Finance
Board would not be inclined to view that limited right to identify
specific companies whose securities should be excluded from the account
as violating the statute or the proposed rule. If the type of account
held by an appointive director gives the director the ability to
identify securities to sell on an ad hoc basis or based on current
market conditions, however, such an arrangement would confer
significant investment discretion in the client, and thus would not
fall within the proposed exclusion established by this provision.
Holding Companies. Section 7(a) of the Bank Act speaks in terms of
shares or other financial interests in ``any member'' of the Bank, but
does not refer expressly to treatment of securities issued by a holding
company for a member. In the current financial services sector, many
depository institutions are owned by one or more holding companies and
thus do not issue their own equity securities to the public. Although
the statute does not address this matter, the Finance Board previously
had regulations that effectively exempted securities issued by certain
holding companies from the reach of section 7(a). Under that
regulation, which was in effect from 1991 to 1998, securities issued by
a diversified holding company were permissible investments for an
appointive director. A bank holding company or a savings and loan
holding company was deemed to be ``diversified'' for these purposes if
less than 50 percent of its net worth and net earnings, on a
consolidated basis, were attributable to the depository institutions
that it controlled. See n.2. The Finance Board is proposing to adopt a
similar test for determining whether an appointive director may own
securities issued by a holding company that controls one or more
members of the Bank on whose board the director serves.
Accordingly, proposed Sec. 915.10(f)(3) would deem debt or equity
securities issued by a holding company that controls one or more
members to not constitute ``shares'' or ``financial interests'' in a
member, provided that the assets of all members of the Bank that are
controlled by the holding company constitute less than 25 percent of
the total assets of the holding company, on a consolidated basis. The
Finance Board believes that where the assets of the institutions that
are members of the Bank on whose board the director sits constitute
less than 25 percent of the total assets of a holding company, the debt
or equity instruments issued by the holding company represent interests
that are predominately something other than an interest in a member.
The Finance Board believes the proposed standard limiting members'
assets to less than 25 percent of the consolidated assets would be more
restrictive than the standard applied under the former the definition
of ``diversified holding company'' (i.e., 50 percent of consolidated
net worth and net earnings). The Finance Board also believes the
proposed standard would be easier to apply and would be less subject to
fluctuations over time (so that companies would be less likely to shift
status under the exclusion from year-to-year). Nonetheless, the Finance
Board specifically seeks comments on how best to measure the relative
sizes of the holding company and its member subsidiaries (i.e., a
percentage of assets or a percentage of capital or earnings) and
whether some threshold other than 25 percent would be appropriate.
Moreover, while proposed Sec. 915.10(f)(3) would deem interests in
certain holding companies not to constitute shares or financial
interests in a member, the proposed provision does not deal with other
relationships with a holding company. Given the current practice,
however, the Finance Board would not permit an appointive director to
serve as an officer or director of any holding company that controls a
member, even if the member constitutes less than 25 percent of the
assets of the holding company.\9\ It would appear to
[[Page 15631]]
be incompatible with the independence expected of an appointive
director and the public interests the director is expected to serve to
allow that person simultaneously to serve as an officer or director of
any holding company that controlled any member of the Bank. As an
appointive director, the individual would owe fiduciary duties to the
Bank and the Finance Board does not believe that an appointive director
also should owe fiduciary duties to a member or its holding company.
These competing duties could make it difficult for the appointive
director to competently serve in either capacity. The Finance Board is
requesting comment on whether it should apply the same standard for
determining if a holding company's securities are permissible
investments for an appointive director to other types of relationships,
such as service as a director or officer of such company or contractual
relationships with, or receipt of income from, such company.
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\9\ While the prohibition on an appointive director serving as
an officer or director of a holding company or an affiliate or a
subsidiary of a member is not set out in the current rules, it has
been agency policy to interpret the term ``member'' for purposes of
applying the conflict of interest rules broadly to refer to the
member itself, any subsidiary or affiliate of the member or any
holding company of the member. See n.7. As previously noted, this
interpretation currently is embodied in the explanation addressing
conflict of interest provided in the application form for appointive
directors, but the Finance Board specifically is requesting comment
as to whether this interpretation should be clearly incorporated
into the text of its rules.
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Loans and Deposits. Proposed Sec. 915.10(f)(4) would provide that
loans from, or deposits in, a member would not constitute a financial
interest in the member if the transaction occurs in the normal course
of business and on terms that are no more favorable than those
available under like circumstances to members of the public. This
provision does not represent a change in current Finance Board
practices. Loans and deposits meeting the proposed criteria already are
excluded from the definition of financial interest contained in Sec.
915.11(f)(2) and holding such loans and deposits does not currently
disqualify a candidate from consideration for an appointive
directorship. See 12 CFR Sec. 915.11(f)(2); see also Federal Home Loan
Bank Appointive Director Application Form, Statutory Eligibility
Requirements Sec. 4, Conflict of Interest. Such items also had been
permitted under the prior regulations. See, e.g., 56 FR at 55220
(adopting Sec. Sec. 931.30 and 932.18 of the Finance Board's rules).
Contractual Relationships. There have been instances in the past in
which individuals have asked if certain contractual relationships with
a member, such as those associated with serving as legal counsel or as
auditor, would constitute a financial interest in the member that is
prohibited by section 7(a).\10\ The answers to such questions are
largely dependent on the facts of each case, and typically have been
addressed by staff on a case-by-case basis. Although it is not
practicable to create a regulation that would address all such
circumstances, the Finance Board believes that the regulations could be
revised to establish a type of safe harbor for contractual
relationships that do not contribute a significant amount to the
person's income. Accordingly, proposed Sec. 915.11(f)(5) would
establish a presumption that an appointive director's contractual
relationships with members of the Bank would not constitute a financial
interest in a member if the money paid to the person under such
contracts in any calendar year constitutes less than 10 percent of the
appointive director's adjusted gross income for that year.
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\10\ As already noted, when determining if a contractual
relationship with a member exists, the Finance Board would interpret
the term ``member'' broadly to include a member itself, any
subsidiary or affiliate of a member, and any holding company of a
member. See n.7 and n.9.
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The Finance Board would intend the director to calculate his or her
adjusted gross income for the purposes of this proposed test in the
same manner as would be done for federal tax purposes. The Finance
Board would also expect the director to aggregate all amounts earned
(or to be earned) under contracts with all members of the Bank on whose
board the director serves in determining the amount due the director
for purposes of applying the proposed test. Given the attribution
provision in proposed Sec. 915.11(f)(6), if an appointive director's
spouse has contractual relationships with Bank members, the amounts due
under those contracts also would be combined with those of the director
(and the adjusted gross income would represent that of both the
director and the spouse) to determine if the contracts exceed the 10
percent threshold. If only the director's spouse had a contract with
Bank members, the adjusted gross income used in applying the test would
be that of the spouse only.
The proposed rule also would require an appointive director to
disclose all contractual relationships with members of the Bank on
whose board the director serves (or will serve) whether or not the
amounts due exceed 10 percent of the director's adjusted gross income,
as well as those of a spouse. Where the amounts due under such
contracts would be 10 percent or more of the director's adjusted gross
income, the proposed rule would require the Finance Board to determine
on a case-by-case basis whether the contractual relationships represent
a financial interest that would disqualify an individual from serving
as an appointive director. In making the determination, the Finance
Board would consider, among other things, if the contractual
relationships may result in the appointive director not fairly
representing the public interest when considering matters that come
before the board or otherwise causing the director to be partial toward
or biased against any member or otherwise partial in his or her
judgment. In weighing this matter, the Finance Board would consider
whether the contractual relationships may create an appearance of
partiality in deciding if the contractual relationship may disqualify a
person from holding an appointive directorship.
Attribution. Proposed Sec. 915.10(f)(6) would establish that debt
or equity securities owned by a spouse or minor child of an appointive
director are attributed to the appointive director for purposes of
complying with proposed Sec. 915.10(f). This proposed provision also
would make clear that any contractual relationships between a member
and the spouse of a director would be attributed to the appointive
director. How the calculation would be performed to determine whether
such contracts exceeded the proposed threshold in Sec. 915.10(f)(5)
has already been discussed above. The Finance Board has not included
minor children in the proposed attribution provision with regard to
contracts because it would not expect that minor children would, or
could legally, enter into such agreements. The Finance Board believes
that the financial interests of a spouse or minor child of a director
would be so closely aligned with the interests of the director that
these proposed attribution provisions are fair and are generally
consistent with how attribution provisions dealing with conflict of
interests and similar matters are generally structured.
C. Other Conforming Amendments
The Finance Board also is proposing amendments to Sec.
915.11(a)(2) to conform this provision to the changes proposed in new
Sec. 915.10(f). As now written, Sec. 915.11(a)(2), given the broad
definition of financial interest in Sec. 915.11, could be read to
require the Banks to adopt policies for appointive directors that would
be more restrictive with regard to allowable investments than the
changes proposed in Sec. 915.10(f). Because the Bank Act provides the
Finance Board the sole discretion to select appointive directors,
[[Page 15632]]
the Finance Board would not intend the Banks to apply more restrictive
criteria in determining when an appointive director may hold certain
investments than that set forth in the Finance Board rules and
policies. Thus, proposed Sec. 915.11(a)(2) would state that a Bank's
conflict of interest policy must require appointive directors to comply
with Sec. 915.10(f).
The Finance Board also is proposing to delete Sec. Sec. 915.16 and
915.17, which applied only to election cycles that occurred between
1999 and 2001 and primarily were needed to implement changes made by
the Gramm-Leach-Bliley Act \11\ to the Bank Act's election and director
provisions. Thus, the regulatory provisions in Sec. Sec. 915.16 and
915.17 no longer serve any purpose and are not applicable to current or
future election cycles. Similarly, the Finance Board is proposing to
delete Appendix A to part 915, which includes matrices that were
created in conjunction with earlier elections and appointments and
related to the directorships of the Banks. Over the past few years, as
part of its annual designation of elective directorships, the Finance
Board has created updated versions of these matrices to reflect the
revised board structure for each Bank for that year, and expects to
continue to create new matrices as part of each annual designation
exercise. Because the matrices in Appendix A relate to prior years and
have been superseded by more current versions, it no longer is
necessary to include them in the regulations.
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\11\ Pub. L. No. 106-102, 133 Stat. 1338 (Nov. 12, 1999).
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III. Paperwork Reduction Act
The appointive director application form is part of the information
collection entitled ``Federal Home Loan Bank Directors.'' Under the
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Office of
Management and Budget (OMB) has assigned control number 3069-0002,
which is due to expire on November 30, 2007. The Finance Board and the
Banks use the information contained in the application form to
determine whether prospective appointive Bank directors satisfy the
statutory and regulatory eligibility requirements and are well
qualified to serve as a Bank director. Only individuals meeting these
requirements may serve as Bank directors. See 12 U.S.C. 1427. The
proposed rule, if adopted as a final rule, would not make substantive
or material modifications to the ``Federal Home Loan Bank Directors''
information collection. Consequently, the Finance Board has not
submitted any information to OMB for review.
IV. Regulatory Flexibility Act
The proposed rule would apply only to the Banks and to individuals
who may be willing to serve as Bank appointive directors. Neither the
Banks nor individuals come within the meaning of ``small entities'' as
defined in the Regulatory Flexibility Act (RFA). See 5 U.S.C. 601(6).
Thus, in accordance with section 605(b) of the RFA, 5 U.S.C. 605(b),
the Finance Board hereby certifies that the proposed rule, if
promulgated as a final rule, will not have a significant economic
impact on a substantial number of small entities.
Lists of Subjects in 12 CFR Part 915
Conflict of interests, Elections, Federal home loan banks,
Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Finance Board is
proposing to amend 12 CFR Part 915 as follows:
PART 915--BANK DIRECTOR ELIGIBILITY, APPOINTMENT, AND ELECTIONS
1. The authority citation for part 915 continues to read as
follows:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1427, and
1432.
2. Amend Sec. 915.10 by adding a new paragraph (f) to read as
follows:
Sec. 915.10 Selection of appointive directors.
* * * * *
(f) Financial interests. Except as otherwise provided in this
section, an appointive director may not own any debt or equity
securities issued by, or have any other financial interest in, a member
of the Bank on whose board the director serves. An appointive director
also may not serve as an officer or director of any member of the Bank
on whose board the director serves or serve as an officer of any Bank.
(1) Investment vehicles. An appointive director's investment in a
legally recognized entity that owns debt or equity securities issued by
a member shall not be deemed to constitute the shares or other
financial interests in a member, provided that the appointive director
does not control the entity and plays no role in the purchase or sale
of the securities owned by the entity.
(2) Investment accounts. Debt or equity securities owned by an
appointive director through an account managed by an investment adviser
registered under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1
et seq.), for which the director pays a fee for advisory services and
with respect to which the director has given the investment adviser
complete discretion to buy and sell all securities in the account,
shall not be deemed to constitute the shares or other financial
interests in a member, provided that the appointive director is not
affiliated with the investment adviser and has no control over the
selection of securities acquired for the account.
(3) Holding companies. Debt or equity securities issued by a
holding company that controls one or more members of the Bank on whose
board an appointive director serves shall not be deemed to constitute
the shares or other financial interest in a member, provided that the
assets of all such members constitute less than 25 percent of the
assets of the holding company, on a consolidated basis.
(4) Loans and deposits. Loans obtained from a member and money
placed on deposit with a member shall not be deemed to constitute a
financial interest in a member, provided that the transactions occur in
the normal course of business of the member and are on terms that are
no more favorable than those that would be available under like
circumstances to members of the public.
(5) Contractual relationships. Any contractual relationship between
an appointive director and one or more members of the Bank on whose
board an appointive director serves, under which the director has a
contractual right to the payment of money, shall be presumed not to
constitute a financial interest in a member if the amount due to the
director under such contracts in any calendar year is less than 10
percent of the director's adjusted gross income for that calendar year.
An appointive director with any such contractual relationships, or any
contractual relationship involving amounts greater than the above
threshold, shall disclose the relationship to the board of directors of
the Bank and to the Finance Board. The Finance Board shall determine,
on a case by case basis, whether any contractual relationships greater
than the above threshold constitutes a financial interest in a member.
(6) Attribution. Any debt or equity securities owned by the spouse
or minor children of an appointive director shall be attributed to the
director for purposes of complying with this section, as shall be any
contractual relationships between a member and the spouse of an
appointive director.
3. Amend Sec. 915.11 by revising paragraph (a) to read as follows:
[[Page 15633]]
Sec. 915.11 Conflict of interests policy for Bank directors.
(a) Adoption of conflict of interest policy. Each Bank shall adopt
a written conflict of interest policy that shall apply to all Bank
directors. At a minimum, the conflict of interest policy of each Bank
shall:
(1) Require the directors to administer the affairs of the Bank
fairly and impartially and without discrimination in favor of or
against any member or nonmember borrower;
(2) Require appointive directors to comply with Sec. 915.10(f) of
this part;
(3) Prohibit the use of a director's official position for personal
gain;
(4) Require directors to disclose actual or apparent conflict of
interests and establish procedures for addressing such conflicts;
(5) Provide internal controls to ensure that reports are filed and
that conflicts are disclosed and resolved in accordance with this
section; and
(6) Establish procedures to monitor compliance with the conflict of
interests policy.
* * * * *
Sec. 915.16 [Removed]
4. Remove Sec. 915.16.
Sec. 915.17 [Removed]
5. Remove Sec. 915.17.
Appendix A to Part 915--[Removed]
6. Remove Appendix A to part 915.
Dated: March 27, 2007.
By the Board of Directors of the Federal Housing Finance Board.
Ronald A. Rosenfeld,
Chairman.
[FR Doc. E7-5973 Filed 3-30-07; 8:45 am]
BILLING CODE 6725-01-P