Board of Directors of Federal Home Loan Bank System Office of Finance, 23152-23167 [2010-10075]

Agencies

• Federal Housing Finance Board
• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 75, Number 84 (Monday, May 3, 2010)]
[Rules and Regulations]
[Pages 23152-23167]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-10075]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 985 and 989

FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1273 and 1274

RIN 2590-AA30


Board of Directors of Federal Home Loan Bank System Office of 
Finance

AGENCY: Federal Housing Finance Agency.

ACTION: Final Rule.

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SUMMARY: Governed by the Federal Housing Finance Agency's (FHFA) 
regulations, the Federal Home Loan Bank System's (Bank System) Office 
of Finance issues debt (``consolidated obligations'') as agent for the 
Federal Home Loan Banks (Banks) on which the Banks are jointly and 
severally liable and publishes combined financial reports on the Banks 
so that members of the Bank System, investors in the consolidated 
obligations, and other interested parties can assess the strength of 
the Bank System that stands behind them. The Office of Finance (OF) is 
governed by a board of directors, the composition and functions of 
which are determined by FHFA's regulations. FHFA's experience with the 
Bank System and with the OF's combined financial reports during the 
recent period of market stress suggests that the OF and the Bank System 
could benefit from a reconstituted board and strengthened audit 
committee. This regulation is intended to achieve that end.

DATES: This rule is effective June 2, 2010.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, 202-408-2845, 
Division of Federal Home Loan Bank Regulation, Federal Housing Finance 
Agency, 1625 Eye Street, NW., Washington, DC 20006; Neil Crowley, 
Deputy General Counsel, 202-343-1316; or Thomas E. Joseph, Senior 
Attorney-Advisor, 202-414-3095, Office of General Counsel, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552. The telephone number for the Telecommunications Device for 
the Deaf is 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Creation of the Federal Housing Finance Agency and Recent 
Legislation

    Effective July 30, 2008, the Housing and Economic Recovery Act of 
2008 (HERA), Public Law 110-289, 122 Stat. 2654, transferred the 
supervisory and oversight responsibilities of the Office of Federal 
Housing Enterprise Oversight (OFHEO) over the Federal National Mortgage 
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation 
(Freddie Mac) (collectively, the Enterprises), the oversight 
responsibilities of the Federal Housing Finance Board (FHFB or Finance 
Board) over the Banks and the Office of Finance (OF) (which acts as the 
Banks' fiscal agent), and certain functions of the Department of 
Housing and Urban Development to FHFA, a new independent executive 
branch agency. See id. at section 1101, 122 Stat. 2661-62. FHFA is 
responsible for ensuring that the Enterprises and the Banks operate in 
a safe and sound manner, including that they maintain adequate capital 
and internal controls, that their activities foster liquid, efficient, 
competitive, and resilient national housing finance markets, and that 
they carry out their public policy missions through authorized 
activities. See id. at section 1102, 122 Stat. 2663-64. The 
Enterprises, the Banks, and the OF continue to operate under 
regulations promulgated by OFHEO and the FHFB until FHFA issues its own 
regulations. See id. at sections 1302, 1313, 122 Stat. 2795, 2798.

B. The Bank System Generally

    The twelve Banks are instrumentalities of the United States 
organized under the Federal Home Loan Bank Act (Bank Act).\1\ See 12 
U.S.C. 1423, 1432(a). The Banks are cooperatives; only members of a 
Bank may purchase the capital stock of a Bank, and only members or 
certain eligible housing associates (such as state housing finance 
agencies) may obtain access to secured loans, known as advances, or 
other products provided by a Bank. See 12 U.S.C. 1426(a)(4), 1430(a), 
1430b. Each Bank is managed by its own board of directors and serves 
the public interest by enhancing the availability of residential 
mortgage and community lending credit through its member institutions. 
See 12 U.S.C. 1427. Any eligible institution (generally a federally 
insured depository institution or state-regulated insurance company) 
may become a member of a Bank if it satisfies certain criteria and 
purchases a specified amount of the Bank's capital stock. See 12 U.S.C. 
1424; 12 CFR part 1263.
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    \1\ Each Bank is generally referred to by the name of the city 
in which it is located. The twelve Banks are located in: Boston, New 
York, Pittsburgh, Atlanta, Cincinnati, Indianapolis, Chicago, Des 
Moines, Dallas, Topeka, San Francisco, and Seattle.
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    As government-sponsored enterprises (GSEs), the Banks are granted 
certain privileges under federal law. In light of those privileges and 
their status as GSEs, the Banks typically can borrow funds at spreads 
over the rates on U.S. Treasury securities of comparable maturity lower 
than most other entities. The Banks pass along a portion of their GSE 
funding advantage to their members--and ultimately to consumers--by 
providing advances and other financial services at rates that would not 
otherwise be available to their members. Consolidated obligations 
(COs), consisting of bonds and discount notes, are the principal 
funding source for the Banks. The OF issues all COs on behalf of the 
twelve Banks. Although each Bank is primarily liable for the portion of 
consolidated obligations corresponding to the proceeds received by that 
Bank, each Bank is also jointly and severally liable with the other 
eleven Banks for the payment of principal and interest on all COs. See 
12 CFR 966.9.

C. The OF

    The OF was one of a number of joint Bank offices established by 
regulation by the former Federal Home Loan Bank Board (FHLBB), a 
predecessor agency to

[[Page 23153]]

FHFA. See 65 FR 324, 326 (Jan. 4, 2000). The OF was originally formed 
from two other joint Bank Offices, the Office of System Finance and the 
Office of Fiscal Agent. Among other things, OF was assigned the duties 
previously vested in the Fiscal Agent which included facilitating the 
issuance of COs. Id.
    In 1989, as part of the amendments made to the Bank Act by the 
Financial Institutions Reform, Recovery, and Enforcement Act 
(FIRREA),\2\ all joint offices of the Bank System other than the OF 
were abolished. The FHLBB was also abolished and its regulatory 
authority over the Bank System, including the OF, was transferred to 
the Finance Board. The FHLBB's regulations were also transferred to the 
Finance Board. Id. In 1992, the Finance Board reorganized the OF as 
fiscal agent of the Finance Board for issuing COs under section 11(c) 
of the Bank Act, and set forth other duties for OF.\3\ See 57 FR 11429 
(Apr. 3, 1992) (adopting 12 CFR part 941). The regulation also 
instituted a three-member board of directors for the oversight and 
management of the OF, made up of two Bank presidents and a private 
United States citizen with demonstrated expertise in financial markets. 
Id.
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    \2\ Public Law 101-73, 103 Stat. 183 (Aug. 9, 1989).
    \3\ As it existed in 1992, section 11(c) of the Bank Act 
provided the Finance Board authority to issue the debt on which the 
Banks were jointly and severally liable. 12 U.S.C. 1431(c)(1992). 
HERA recently amended this provision and removed authority from the 
regulator to issue such debt on behalf of the Banks and provided the 
OF as agent for the Banks with authority to issue the COs. See 
section 1204(3)(B), Pub. L. 110-289, 122 Stat. 2786.
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    In January 2000, the Finance Board proposed changes to its 
regulations to alter how COs were issued under section 11 of the Bank 
Act, reorganize the OF and its board of directors, and expand the 
duties of the OF, including assigning the OF the duty to prepare the 
Bank System combined annual and quarterly financial reports. See 65 FR 
324. As proposed, the January 2000 regulation transferred authority for 
issuance of the Bank COs from the Finance Board, which had been issuing 
debt pursuant to then-existing authority under section 11(c) of the 
Bank Act, to the Banks themselves pursuant to authority under section 
11(a) of the Bank Act and subject to the requirement, among other 
things, that all such debt issued by the Banks be the joint and several 
obligations of all twelve Banks and be issued through the OF as their 
agent. Id. Under the proposed regulation, the Finance Board retained 
the option to issue COs itself under section 11(c) of the Bank Act at 
any point in the future.
    The Finance Board also believed that ``[a]s a natural and necessary 
adjunct to the issuance of COs, the Banks also should be responsible 
for the preparation of the disclosure documents that facilitate CO 
issuance and for the periodic combined financial statements for the 
Bank System.'' Id. at 325. The Finance Board therefore proposed that 
the OF, as the only joint Bank System office and existing agent for CO 
issuance, be assigned the duty of preparing the Bank System's combined 
financial reports. Id. The Finance Board also proposed to codify 
disclosure standards in the regulation, many of which had been set 
forth in a Finance Board policy statement. Other duties related to debt 
issuance and management were also proposed to be assigned to the OF.
    In light of the expanded duties assigned to the OF as well as 
amendments to the Bank Act that had recently been made by the Gramm-
Leach-Bliley Act (GLB Act) of 1999,\4\ the Finance Board also thought 
it was appropriate to alter both the size and composition of the OF 
board. Id. at 326. The Finance Board had two main goals in proposing 
its changes. First, it wanted to build on the governance structure in 
the Bank Act by which the Banks should be provided greater autonomy to 
manage their affairs. Second, it wanted to assure each Bank had 
representation on the OF board to help achieve operational goals and 
wanted to assure that the OF board itself had directors with experience 
and qualification to help the OF meet the evolving needs of the Bank 
System.
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    \4\ Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
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    After consideration of the comments on the proposed regulation, the 
Finance Board adopted many of the changes including those authorizing 
the Banks to issue COs under section 11(a) of the Bank Act and 
assigning to the OF the function of preparing the Bank System's 
combined financial reports, along with additional duties. See 65 FR 
36290 (June 7, 2000) (adopting among other parts 12 CFR parts 966 and 
985). The Finance Board did not, however, adopt the proposed changes to 
the OF board structure or composition. Instead, the new regulation 
incorporated the prior three-person board structure. The Finance Board 
also specified some additional duties for the OF board consistent with 
the additional functions that had been assigned to the OF over the 
years. Since the 2000 rulemaking, no significant changes to the 
regulations governing the OF have been proposed.

D. Proposed Rule

    On August 4, 2009, FHFA published a proposed rule for comment which 
would have altered the structure, composition and duties of the OF 
board of directors and its audit committee. See 74 FR 38564. As 
proposed, the rule also would have transferred the current OF board 
regulations, as well as regulations related to Banks' financial 
statements, respectively from parts 985 and 989 of title 12 to parts 
1273 and 1274 of Title 12.
    The proposal would have expanded the OF board of directors to 
between fifteen and seventeen members, consisting of the twelve Bank 
presidents and from three to five Independent Directors (as defined 
under the rule). The proposed rule also would have created an Audit 
Committee for the OF board made up of the Independent Directors. The 
Audit Committee would have been assigned the duty to oversee the audit 
of the OF and the preparation of the Bank System's combined financial 
report. To help ensure that information from the Banks could be 
combined in a meaningful and accurate fashion in the combined financial 
report, the proposed rule also would have empowered the OF Audit 
Committee to require the Banks to establish common accounting policies 
and procedures with regard to information submitted to the OF. As with 
the current regulation, the proposed rule also set forth standards for 
the combined financial reports. The proposed rule addressed the duties 
of the OF board of directors generally, although it would have carried 
over many of the provisions in the current regulations with regard to 
the OF board's duties.
    Under the proposed rule, FHFA would have selected the initial 
Independent Directors for staggered terms of up to five years.\5\ Each 
Bank was given the right to nominate one candidate for appointment. 
Thereafter, Independent Directors would have been elected by the full 
board of directors for five-year terms, subject to the right of FHFA to 
review and object to a particular Independent Director's election, 
reserving to FHFA the right to appoint Independent Directors if it 
thought the OF board had not elected suitably qualified persons. Under 
the proposed rule, FHFA also would have appointed the first chairman of 
the reconstituted OF board from among the Independent Directors and a 
vice chairman from among all directors.

[[Page 23154]]

Thereafter, the chairman would be elected by the full board of 
directors from among the Independent Directors and the vice chairman 
would be elected by the board from among all directors. The proposed 
rule also set standards for a quorum for board meetings, established a 
minimum number of board meetings per year, and addressed issues related 
to board committees and other matters such as compensation and 
indemnification of directors.
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    \5\ Terms would have been staggered such that no more than one 
Independent Director's seat would be scheduled to become vacant in 
any year.
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    The proposed rule also would have readopted current regulations 
addressing the financial statements for the Banks, subject to technical 
corrections made necessary by proposed changes in the composition and 
duties of the OF Audit Committee. See 12 CFR part 989. The proposed 
rule also would have made changes to part 989 to reflect the fact that 
the Banks had registered equity securities with the Securities and 
Exchange Commission subsequent to the adoption of these requirements.
    The proposed rule originally had a comment period of 60 days, which 
was set to close on October 5, 2009. This comment period was later 
extended for an additional 30 days. See 74 FR 50926 (Oct. 2, 2009). 
FHFA received 23 comment letters on the proposed rule. These comments 
are discussed below.

E. Considerations of Differences Between the Banks and the Enterprises

    Section 1201 of HERA (codified at 12 U.S.C. 4513(f)) requires the 
Director, when promulgating regulations relating to the Banks, to 
consider the following differences between the Banks and the 
Enterprises: Cooperative ownership structure; Mission of providing 
liquidity to members; Affordable housing and community development 
mission; capital structure; and Joint and several liability. The 
Director also may consider any other differences that are deemed 
appropriate. In preparing this final regulation, FHFA considered the 
differences between the Banks and the Enterprises as they relate to the 
above factors, and determined that the rule is appropriate.

II. The Final Rule

A. Comments

    FHFA received 23 comment letters on the proposed rule from the 
Banks, the OF, trade associations, and individual representing members. 
The OF along with eleven of the twelve Banks submitted a single joint 
comment letter, while the remaining Bank submitted its own comment 
letter. FHFA also received comments from six trade associations that 
represent Bank System members, as well as fifteen letters from 
individuals representing member institutions. Copies of the comments 
are available at FHFA's Web site, https://www.fhfa.gov.
    The comments generally supported the proposed expansion of the OF 
board of directors to include all twelve Bank presidents and additional 
independent directors. The comments were also generally supportive of 
the proposal to establish for the OF an Audit Committee made up of 
Independent Directors. The commenters opposed, however, some of the 
specific powers and duties assigned to the Audit Committee under the 
proposed rule, especially those provisions mandating the Audit 
Committee to require the Banks to adopt common accounting policies. A 
number of commenters felt that some of the duties and authority 
assigned to the Audit Committee should be vested in the full OF Board 
or were inconsistent with the role and authority of the individual 
Banks' boards of directors and audit committees.
    Commenters also felt that the duties that would be assigned to 
either the OF board of directors or its Audit Committee should not be 
described by reference to the part 917 rules. The commenters noted that 
the part 917 rules addressed the duties and authority of the individual 
Banks' board of directors and that the relationship of the OF to the 
Banks was different from the relationship of a Bank to its members. A 
number of commenters suggested that the duties of the OF board of 
directors or Audit Committee be limited specifically to those 
enumerated in the rule. Some commenters also believed that the proposed 
rule gave FHFA too much authority to appoint Independent Directors and 
to overrule decisions of the OF board of directors and urged FHFA to 
change these provisions. Commenters also made specific suggestions of 
wording changes in a number of proposed provisions of the rule that 
they believed would clarify the meaning of the provision or otherwise 
improve the rule.

B. Final Rule Provisions

    FHFA has considered all the comments in developing the final rule. 
It has accepted a number of the suggestions made by commenters and, as 
discussed below, has made changes in the final rule as a result. FHFA 
believes, however, that the basic approach of the proposed rule remains 
correct, as do its underlying reasons for initially proposing the 
changes. FHFA views the changes in this final rule as an important step 
in assisting the Banks to coordinate among themselves the process of 
providing the OF with information to prepare the Bank System's combined 
financial reports and assisting the OF otherwise to obtain information 
where the coordination process has not worked well. Most importantly, 
FHFA continues to believe that high-quality combined financial reports 
play an important role in the ability of the Banks to access financial 
markets and issue debt and that they provide financial markets with 
needed information about the Bank System. Therefore, much of the 
proposed rule is carried over into the final regulation, albeit often 
with some small changes in language to clarify the extent and scope of 
the provision in question. Comments, and the changes that FHFA has made 
to the rule, are discussed in more detail below in the section 
describing each final rule provision.
Section 1273.1--Definitions
    FHFA has adopted the definitions as proposed. FHFA did not receive 
any comments that addressed the proposed definitions directly, although 
one commenter suggested using a term other than ``Independent 
Director'' since the term is used somewhat differently under the rule 
than in the general corporate governance context. FHFA has considered 
this comment, but is continuing to use the term Independent Director. 
The qualifications for Independent Director are set forth in the rule. 
The definition of this term makes clear that the term means a party 
that meets such qualifications, and its use is not intended to imply 
any other meaning. Thus, FHFA has not made the requested change.\6\
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    \6\ Additional comments were received on the proposed 
qualifications for an Independent Director. These comments are 
discussed below in the section addressing Sec.  1273.7, which sets 
out the qualifications for Independent Directors.
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Section 1273.2--Authority of the OF
    FHFA has adopted this section as proposed. The provision, as 
proposed, was similar to Sec.  985.2 which had previously set forth the 
OF authority. The proposed provision reflected the fact that HERA 
amended section 11 of the Bank Act so that the regulator was no longer 
authorized to issue COs. See Public Law 110-289, Div. A, Title II, 
section 1204(3) (amending 12 U.S.C. 1431(b) and (c)). Thus, Sec.  
1273.2 as adopted, unlike former Sec.  985.2, does not provide that the 
OF may act as agent for FHFA in the issuance of COs.
Section 1273.3--Functions of the OF
    FHFA has made a number of clarifying changes in the final version 
of Sec.  1273.3, which describes the general functions of the OF, in 
response to

[[Page 23155]]

comments on the proposed rule. These changes do not alter the scope of 
the proposed provision, but FHFA believes that the changes will make 
its original intent more clear.
    First, FHFA has altered Sec.  1273.3(a) to provide that, in the 
offering, issuance and servicing of COs, the OF is acting as agent for 
the Banks. As originally proposed, the provision merely stated that the 
OF was agent. Some comments indicated that language in this provision 
and in Sec.  1273.6 should make clear that the OF administers these 
functions on behalf of the Banks but is not the issuer of debt and does 
not enjoy independent authority to undertake these activities. FHFA 
believes that the change in the final rule, along with the description 
in Sec.  1273.2 that OF acts as agent for the Banks makes clear that 
the OF is not acting independently of the Banks in these activities. 
Moreover, the language in Sec.  1273.3(a) now closely follows the 
language in section 11(b) and (c) of the Bank Act, as amended by HERA, 
which states that ``the Office of Finance as agent for the Banks may 
issue'' consolidated Bank debentures or bonds.\7\
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    \7\ FHFA is adopting a similar change to wording in Sec.  
1273.6(a) for the same reasons discussed here.
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    Second, FHFA has changed Sec.  1273.3(b) to clarify that, in 
preparing the combined financial reports, the OF shall apply consistent 
accounting policies and procedures as provided under Sec.  1273.9(b). 
Commenters urged that the reference to ``consistent accounting policies 
and procedures'' should be removed from this section, and from Sec.  
1273.6(b)(2), because the references were confusing and raised issues 
as to whether the language created a ``consistency'' requirement beyond 
or in addition to that set forth in Sec.  1273.9(b). FHFA believes that 
the change in the language makes clear that language in this section is 
referencing Sec.  1273.9(b) and is not creating a ``consistency'' 
requirement independent or separate from that under Sec.  1273.9(b). 
The provision makes clear, however, that the OF has the duty to apply 
policies adopted under Sec.  1273.9(b) in preparing the Bank System 
combined financial reports.\8\
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    \8\ FHFA is adopting a similar change to the language in Sec.  
1273.6(b)(2) for the same reasons discussed here.
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    Commenters also asked that Sec.  1273.3 be changed to specifically 
limit the OF's functions to those listed in the section. FHFA sees no 
need for this change. As now written, the provisions clearly delineate 
the OF functions, and FHFA does not believe the rule as adopted is 
vague or will be subject to expansive interpretation.
Section 1273.4--FHFA Oversight
    As proposed, the provision would have carried over Finance Board 
regulation Sec.  985.5 with minor technical changes. It also would have 
added a new paragraph (c) that provided that FHFA would determine 
whether a combined Bank System annual or quarterly financial report 
complied with the standards of the part 1273 regulations, a provision 
that in scope and content was basically the same as Finance Board rule 
Sec.  985.6(b)(5). One commenter noted that the ramifications of this 
proposed section were unclear and was not sure why the section was 
included in the regulation. The commenter asked that the section be 
removed or expanded to better explain its purpose.
    FHFA disagrees that the provision is unclear. As proposed, the 
provision described FHFA's general oversight authority with regard to 
the OF, and provided more specific statements about FHFA's examination 
of the OF and its oversight of the combined financial reports. FHFA 
agrees that, because of revisions made by HERA the provision needs 
revision from what was proposed. Prior to HERA, the Bank Act did not 
clearly delineate the regulator's authority over the OF. HERA, however, 
added provisions to the Bank Act and the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 \9\ which more clearly 
define this authority. Paragraph (a) therefore has been changed to make 
specific reference to FHFA regulatory authority over the OF under these 
statutes.
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    \9\ 12 U.S.C. 4501 et seq.
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Section 1273.5--Funding of the OF
    As proposed, Sec.  1273.5 set forth the Banks' responsibility for 
jointly funding the OF and the process for, and other requirements 
related to, this funding. The rule, as proposed, carried over most of 
the provisions that had been in Finance Board regulation Sec.  985.5. 
FHFA proposed certain changes to the Finance Board requirements, 
however. Most significantly, the proposed rule allowed that each Bank's 
pro rata share of the OF's expenses could be calculated by any 
reasonable formula set by the OF Board of Directors, subject to FHFA's 
review and right to require the OF to make changes to that formula. By 
contrast, under the Finance Board's regulation, the formula was 
specified in the rule, although the OF board retained the right to 
implement an alternative funding formula with the Finance Board's 
approval.
    FHFA received one comment that was generally supportive of the 
approach in the proposed rule for establishing the method of 
calculating each Bank's share of the OF's funding. Another commenter 
believed, however, that FHFA did not need to reserve authority to 
require the OF board of directors to change the formula. The commenter 
stated that the rule required that any formula be reasonable and that 
FHFA maintained its general oversight and enforcement authority to 
enforce this requirement so that the agency could take action if the OF 
board of directors did not adopt a reasonable approach to calculating 
each Bank's share of the OF's expenses.
    FHFA considered this comment asking for a change to the provision 
but decided not to alter the proposed approach to establishing the 
funding formula. FHFA believes the approach in Sec.  1273.5 will 
provide greater flexibility than the approach in the Finance Board 
regulation while maintaining regulatory oversight to make sure any 
formula remains fair to all Banks and provides for adequate funding of 
the OF. By removing from the rule a specific formula for calculating 
each Bank's share of the OF expenses and the requirement that the OF 
Board of Directors obtain pre-approval from FHFA for any change to such 
formula, Sec.  1273.5 will allow the OF board of directors to take 
action in response to changed conditions while allowing FHFA to 
intervene quickly if needed. Thus, FHFA is adopting Sec.  1273.5 as 
proposed.
Section 1273.6--Debt Management Duties of the OF
    Proposed Sec.  1273.6 described the debt management duties of the 
OF, and these duties substantively remained similar to those set forth 
in Finance Board regulation Sec.  985.6. As indicated in the notice of 
proposed rulemaking, however, FHFA proposed certain changes to the 
standards governing the preparation of the combined financial report. 
These proposed changes were needed, among other reasons, to conform the 
duties in this section to new responsibilities proposed for the Audit 
Committee with regard to ensuring consistency of information provided 
by the Banks for use in the combined financial reports. See 74 FR at 
38566, 38567. As already discussed, FHFA received comments on certain 
aspects of proposed Sec.  1273.6 and has made clarifying changes to the 
proposed language similar to changes made to proposed language in Sec.  
1273.3. See notes 7 and 8, supra.

[[Page 23156]]

    FHFA also received comments asking that it alter Sec.  1273.6(b)(4) 
so that the deadline for publication of the combined financial report 
be 21 days after the Banks' filing deadline with the SEC. The 
commenters indicated that this would give the OF sufficient time to 
complete the combined reports after each Bank finalized its reporting 
to the SEC. After considering this request, FHFA is not altering the 
deadline for publication of the quarterly and annual combined financial 
reports. The Bank System is one of the largest non-governmental issuers 
of debt in the world, with the level of outstanding COs approaching $1 
trillion. The combined financial report is an important and convenient 
source of information for investors and other parties interested in the 
Bank System and Bank System debt. FHFA believes that timely publication 
of the combined financial report is important to the Banks' continued 
access to financial markets. Therefore, the combined reports are as 
important, if not more so, than the individual Bank reports. FHFA, 
therefore, expects that the OF and the Banks will take whatever steps 
are necessary to file the combined financial reports on the schedule 
set forth in SEC rules for the individual Banks. Further, given the 
limited nature of the Banks' business lines--advances, and in some 
cases acquired member assets--and the limited universe of their 
investment activities, FHFA also thinks the deadlines set forth in the 
rule are reasonable.
    With regard to the requirements for delivering copies of the 
combined reports to the Banks and Bank members also found in Sec.  
1273.6(b)(4), FHFA confirms that OF may continue to rely on Finance 
Board Regulatory Interpretation 2007-RI-01 (Jan. 19, 2007), which sets 
forth terms and conditions for the electronic distribution of these 
financial reports, to meet these requirements.
    Other commenters suggested that FHFA modify Sec.  1273.6 to give 
the OF Board of Directors authority to limit issuance of COs by any 
Bank or Banks to enforce OF policies. While the OF board has delegated 
to OF's management the authority to prohibit or redirect issuance of 
COs because of market reasons, the OF does not currently enjoy the 
power to prohibit the issuance of debt to enforce specific policies. 
FHFA, therefore, has carefully considered making these changes but has 
decided not to do so at this time because it does not believe such 
changes are necessary to achieve the goals of this final rule. Under 
rules adopted herein (and carried over from the Finance Board 
regulations), the Banks are required to provide the OF with information 
in form and timeframes set forth by the OF to facilitate the 
preparation of the combined financial reports. See 12 CFR 1274.3 (as 
adopted herein). Under the assessment formula approved by FHFA in 
February 2009, a Bank that fails to meet a deadline for the submission 
of information to OF can be subject to a special assessment. Thus, the 
Banks could be subject to enforcement and other actions if they fail to 
comply with OF policies with regard to submission of information.
    Commenters also suggested that Sec.  1273.6 be modified to give the 
OF authority to impose appropriate limits on any Bank's or the Bank 
System's exposure to risk as necessary to facilitate the issuance of 
COs. Assigning the OF risk management duties of the type suggested 
would go beyond the current scope of the OF's duties, and FHFA does not 
wish to take such a step at this time.
    FHFA, however, intends to monitor how the OF board, and its Audit 
Committee, implement the changes being adopted at this time, and may 
consider proposing changes along the lines suggested in these comments 
if it believes this type of authority needs to be granted to the OF 
board to achieve the goals of this final rule.
Section 1273.7--Structure of the OF Board of Directors
    Commenters generally supported the basic structure of having an OF 
board of directors made up of the twelve Bank presidents and some 
Independent Directors, but provided a number of comments about specific 
aspects of this section. As discussed below, FHFA made a number of 
changes to the provisions as a result of these comments and made some 
other changes to clarify the meaning of some provisions in this 
section.
    In response to comments, FHFA clarified language in Sec.  
1273.7(a)(1) to state that if a Bank presidency becomes vacant, the 
person designated by the Bank's board of directors to fill temporarily 
the duties of president shall serve on the OF board of directors until 
the presidency is filled permanently. The language in the proposed rule 
created some unintended ambiguity on this point, by stating that a 
person appointed to temporarily fill the duties of president may serve 
on the OF board of directors. The change will assure that a Bank has 
representation on the board as soon as the Bank's board designates a 
temporary or interim president.
    Given that the proposed rule provided that from three to five 
Independent Directors would serve on the OF board of directors, 
commenters also requested that the final rule clarify how the final 
number of Independent Directors should be determined within the 
authorized range. They suggested that the OF board of directors be 
given authority to make this determination. FHFA agrees that some 
certainty on this point is needed, and has decided to change Sec.  
1273.7(a)(2) to specify that five Independent Directors shall serve on 
the OF board of directors. FHFA believes that five Independent 
Directors will better help assure a diversity of perspective and 
experience on the board and the Audit Committee and provide better 
representation with regard to the public interest than would having as 
few as three Independent Directors.
    FHFA also received a number of comments concerning the 
qualifications proposed in Sec.  1273.7(a)(2) for Independent 
Directors. First, commenters felt that the criteria limiting an 
Independent Director's financial interest in a Bank member or a 
consolidated obligation dealer or seller group should be eliminated 
because the requirement could prevent many qualified individuals 
serving as Independent Directors, especially given the large number of 
Bank members. Commenters also urged FHFA to adopt criteria closer to 
those used by the New York Stock Exchange to determine independence of 
board members, which would include a requirement that the board of 
directors affirmatively determine that the Independent Director had no 
material relationship with the Bank System. Commenters also indicated 
that the rule should make clear that only current officers, directors, 
or employees of a Bank or a Bank System member were prohibited from 
serving as Independent Directors and that this prohibition did not 
apply to former officers, directors, or employees.
    FHFA has considered these comments and has modified the 
qualifications for Independent Directors. Under the final rule, a 
director, to be considered independent, must not have any material 
relationship with a Bank or the OF (either directly or as the partner, 
shareholder, or officer of an organization with a material 
relationship) as determined under criteria set forth in a policy 
adopted by the OF board of directors. This policy should address when a 
financial interest in, or other relationship with, a Bank System member 
would constitute a material relationship with a Bank or the OF. This 
approach would give the board more flexibility to look at the nature of 
an individual's financial interests in a member and determine whether 
the

[[Page 23157]]

interest would constitute a material relationship with a particular 
Bank that gives rise to a disqualifying conflict (or the appearance of 
such a conflict). The policy should also consider and address issues 
such as when a family member's professional or financial interest may 
create a conflict that should disqualify an individual from serving as 
an Independent Director, or whether other direct or indirect 
relationships of an individual with the Bank System (which can include 
business or advisory relationships) should disqualify such individual 
from serving. FHFA expects that the OF board of directors will refer to 
rules of the New York Stock Exchange and similar organizations in 
developing the policy, but recognizes that the cooperative nature and 
other unique aspects of the Bank System may not allow such criteria to 
be adopted without appropriate modification.
    The final rule also sets forth minimum criteria that the 
``independence'' policy must meet. First, such policy must provide that 
an Independent Director may not be an officer, director or employee of 
any Bank, or member of a Bank. This requirement basically carries over 
previously proposed criteria. After considering the comments, FHFA also 
believes that recent employment or service as a director at a Bank or 
Bank member may also create at least an appearance that a director is 
not independent. Therefore, the OF board of directors' policy must 
disqualify an individual who was an officer, director or employee of 
any Bank, or member of a Bank at any time in the past three years from 
serving as an Independent Director. The final rule also states that the 
policy must provide that a current officer or employee of the OF, or a 
person who was an officer or employee of the OF at any time during the 
past three years, cannot serve as an Independent Director.
    Second, the OF board policy must prohibit from serving as an 
Independent Director, a person who is affiliated with any consolidated 
obligations selling or dealer group under contract with the OF, or who 
has a financial interest in such group that exceeds the lesser of 
$250,000 or 0.01% of the group's market capitalization. This final 
provision basically carries over the proposed financial interest limits 
for consolidated obligation seller or dealer groups. The final rule 
also adopts the proposed criteria as to when a financial interest in a 
holding company of a consolidated obligations seller or dealer group 
would disqualify a person from serving as an Independent Director. FHFA 
has further altered the final rule so that a person who has combined 
financial interests of more than $1,000,000 in more than one 
consolidated obligation seller or dealer groups under contract with the 
OF must also be disqualified by the OF board policy from serving as an 
Independent Director. FHFA continues to believe that, given the OF role 
in issuing COs, an Independent Director's possessing such a financial 
interest in a consolidated obligation seller or dealer group or groups 
would create a conflict, or an appearance of conflict, that would 
prevent such a director from being considered independent, and is 
therefore adopting this provision as part of the final rule.
    As in the proposed rule, the final rule requires that Independent 
Directors be United States citizens and, as a group, have substantial 
experience in financial and accounting matters. With regard to this 
latter requirement, some commenters asked that FHFA verify that the 
reference to ``as a group'' meant that the requirement could be met 
when considering the collective expertise of the Independent Directors 
and did not have to be met by each Director. FHFA confirms that this 
was its intent. Commenters also requested confirmation that the 
experience can be derived from a variety of sources including past 
experience as an attorney, government official, or business executive 
that was involved in financial and accounting matters. Again, FHFA 
confirms that this was its intent as long as such involvement qualified 
as substantive experience and not merely tangential involvement in 
these areas.
    As proposed, Sec.  1273.7(b) of the final rule provides that 
Independent Directors will serve for five-year terms which will be 
staggered so that no more than one Independent Director seat is 
scheduled for election in any one year. The final provision also 
provides, as in the proposed rule, that when an Independent Director 
seat becomes vacant prior to the end of a scheduled term, any 
individual will be elected (or appointed by FHFA) only for the 
remainder of the term associated with that seat. In response to 
comments, FHFA has clarified in the final rule that where a director is 
elected or appointed to fill an Independent Director seat that has 
become vacant before the end of the term, the partial term does not 
count for purposes of the prohibition on an Independent Director's 
serving for more than two full terms.
    The final rule also continues to provide for FHFA to appoint the 
initial Independent Directors, the initial chairman of the 
reconstituted board from among the Independent Directors, and the 
initial vice chairman from among all directors, even though some 
commenters urged that these positions initially be filled through 
election by the board as a whole. FHFA believes that it has an 
important role to play in the initial selection of the board members to 
ensure that the overall goals of the rule are met, and thus has not 
altered the proposal on this point.
    To enable the current OF board of directors and the Banks to play 
an important role in nominating candidates for initial selection, 
however, FHFA has changed the process for nominating the initial slate 
of Independent Directors. Under Sec.  1273.7(c)(2) of the final rule, 
the current OF board of directors, in consultation with the Banks, 
should nominate within 45 days of publication date of this final rule 
in the Federal Register a slate of at least five candidates for the 
Independent Directorships that FHFA can consider for appointment. This 
slate of candidates can include the private citizen member of the 
current OF board. This is a change from the proposed rule which 
provided that each Bank individually nominate one person and which did 
not give the current OF board a role in the nominating process. FHFA 
believes that the change will allow the current OF board and the Banks 
to propose a slate of candidates whose collective experience will be 
more appropriate and better suited to the duties of the board than if 
each Bank nominated a candidate individually. Overall, this should 
improve the chances that FHFA will find suitable candidates among the 
nominees. Under the final rule, FHFA will be able to appoint the 
Independent Directors from among the candidates nominated by the OF 
board, from among other persons identified by FHFA itself, or from some 
combination of these two groups.
    FHFA recognizes that at the time the current OF board will need to 
nominate a slate of candidates for consideration by FHFA as Independent 
Directors, the new board will not have had an opportunity to develop 
and approve the policy identifying additional criteria for 
``independence'' required by Sec.  1273.7(a)(2)(iii). Therefore, FHFA 
expects that the current board in choosing its slate of nominees for 
appointment as Independent Directors will assure that the candidates 
meet at least the minimum criteria for independence set forth in the 
final rule. In making its appointments, FHFA also will consider whether 
any relationships that a candidate may have with a Bank or the Bank 
System could, in its view, compromise the candidate's ability to act 
independently and will make its decisions accordingly.

[[Page 23158]]

    The final rule generally adopts the provisions dealing with 
election of independent directors as proposed. In this respect, the 
final rule requires the OF board to provide FHFA with relevant 
biographic and background information about an elected Independent 
Director at least 20 business days before that Director assumes any 
duties. This requirement applies whether the person is newly elected or 
is being re-elected; for directors that are re-elected, FHFA would 
expect to receive relevant biographic and background information at 
least 20 business days before the new term begins. The final rule also 
retains FHFA's right to object to a particular Independent Director and 
to appoint an Independent Director if FHFA believes in its judgment 
that the OF board failed to elect a qualified person. Some commenters 
objected to FHFA retaining the right of objection to, and appointment 
of, Independent Directors, but FHFA believes that this right of review 
is legitimate for the regulator and will help assure that the 
requirements and goals of this rule are met. In response to comments, 
the final rule does clarify, however, that FHFA will exercise its right 
to object to a particular Director prior to the time that the 
Independent Director is to assume his or her duties (or for a Director 
that has been re-elected, prior to when the new term is to begin). The 
rule also provides that in any notice of objection, FHFA will inform 
the OF board if FHFA will appoint someone to fill the seat in question 
or if the OF board should hold a new election to do so.
    In response to comments, the final rule modifies the proposed 
provisions subjecting the charters of any committees established by the 
board to FHFA's review and approval, although the final rule continues 
to provide that the by-laws of the board of directors and the charter 
of the Audit Committee shall be subject to review and approval by FHFA. 
The final rule also no longer specifically reserves to FHFA the right 
to require the OF board of directors to withdraw or change the scope of 
any delegation made by it. These changes, however, do not alter or 
diminish FHFA's general oversight, examination, or enforcement 
authority with regard to such actions by the OF board of directors.
    With regard to these proposed provisions, some commenters felt that 
it was inappropriate for FHFA to reserve to itself such direct 
involvement in the internal affairs of the OF board and that the 
provisions were contrary to the devolution of authority from the 
regulator to the Banks that began with the passage of the Gramm-Leach-
Bliley Act of 1999. Commenters pointed out that this was especially 
true because, even without these provisions, all aspects of the OF's 
activities would remain subject to FHFA's general oversight and 
examination authority. Similar comments were made with regard to the 
proposed provision reserving to FHFA the right to require the OF board 
to withdraw or change the scope of any delegation made by it.
    FHFA believes that, in light of the changes to duties and 
responsibilities of the board of directors and the Audit Committee made 
by this regulation, FHFA has a legitimate need to review and approve 
the by-laws of the board of directors and the charter of the Audit 
Committee to assure that these documents are consistent with, and meet, 
the goals and requirements of this rulemaking. FHFA also believes that 
such review and approval is a proper exercise of its supervisory 
authority. Thus, the final rule continues to provide that the by-laws 
of the board of directors and the charter of the Audit Committee shall 
be subject to review and approval by FHFA. FHFA believes that that 
supervisory need is less prominent with respect to the charters of 
other committees and delegations made by the board, and therefore has 
deleted the requirement that those charters and delegations also be 
subject to FHFA review and approval.
    FHFA also adopted as final the proposed provision that provided 
that the OF shall pay reasonable compensation and expenses to the 
Independent Directors in accordance with the payment of compensation 
and expenses to Bank directors. Commenters urged FHFA to change this 
provision so that the OF board could compensate and pay expenses of 
Independent Directors as would be reasonable under the circumstances 
rather than limiting compensation and reimbursement by reference to 
provision applicable to Bank directors. In fact, the rule provides that 
OF director compensation must comply with the same standard as that of 
Bank directors--a standard of reasonableness--and not that OF director 
compensation be the same as that of Bank directors.
    In response to urging by commenters, FHFA changed in the final rule 
the provision dealing with indemnification so that the OF board can 
choose the body of law that would govern corporate governance practice 
and procedure, including indemnification, from among the law of the 
jurisdiction in which the OF is located, Delaware Corporation law, or 
the Revised Model Business Corporation Act. As commenters pointed out, 
this approach would be similar to rules previously adopted by OFHEO 
with regard to the Enterprises.\10\ The change will allow the OF board 
to have more specific guidance as to what legal standards should apply 
to their corporate governance and indemnification practices than did 
the proposed provision, which was silent on this point. The final rule 
requires the OF board to make this choice of law decision within 90 
calendar days from the date of its initial organizational meeting 
required under Sec.  1273.10. The final rule also makes clear that the 
OF shall indemnify its directors, officers (including the Chief 
Executive Officer), and employees under such terms and conditions as 
are determined by the board, and that the board may maintain insurance 
with respect to such persons.
---------------------------------------------------------------------------

    \10\ See 12 CFR 1710.10.
---------------------------------------------------------------------------

Section 1273.8--General Duties of the OF Doard of Directors
    Proposed Sec.  1273.8 sets out the general duties of the OF board 
of directors. Most of the specific provisions in this section as 
proposed were carried over from existing Finance Board regulation Sec.  
985.8. Nevertheless, FHFA received a number of comments on this 
section.
    First, commenters urged FHFA not to describe the OF board's general 
duties by reference to the regulations in 12 CFR part 917, as such 
references could create confusion. Commenters noted that the part 917 
regulations address the duty of a Bank's board of directors to a Bank's 
members, and that the duties owed by the OF board of directors to the 
Banks and the Bank System may differ fundamentally from those owed by a 
Bank's board to its member institutions. FHFA agrees, and has changed 
proposed Sec.  1273.8(a) accordingly. As adopted, Sec.  1273.8(a) now 
provides that an OF director should carry out his or her duties in good 
faith in a manner that the director believes to be in the best 
interests of the OF and the Bank System, with such care, including a 
duty of reasonable inquiry, as an ordinary prudent person in a like 
position would use under similar circumstances. It also provides that 
the OF directors should administer the affairs of the OF fairly and 
impartially without discrimination in favor of or against any Bank. It 
also requires directors to develop a familiarity with the basic 
business, finance, and accounting practices of the Banks, to be able to 
understand the Banks' combined financial statements, and to make 
substantive inquiries of management and of the internal and external 
auditors with regard to the combined financial statements and the

[[Page 23159]]

OF's individual financial statement. FHFA also removed other references 
to the part 917 regulations where it felt the reference could be 
confusing or inappropriate.
    Commenters also suggested that FHFA alter the proposed quorum 
requirements so that the requirement for a quorum could be set in the 
OF by-laws rather than in the rule, or that the quorum be set at a 
majority of sitting directors rather than ten directors as proposed. 
FHFA has considered these comments but believes that the quorum 
requirements should be set in the rule to assure that there is adequate 
representation of all parties, including Independent Directors, at each 
meeting. Thus, FHFA has adopted a final provision that states that a 
quorum requires at least a majority of sitting directors, which must 
include a majority of Independent Directors.\11\ The OF board may adopt 
in its by-laws more stringent quorum requirements than those adopted in 
the rule.
---------------------------------------------------------------------------

    \11\ Thus, if all board seats were filled, a quorum would 
require the presence of at least nine board members, of whom at 
least three would have to be Independent Directors.
---------------------------------------------------------------------------

    Commenters argued that the requirement for at least six in-person 
board meetings per year should be dropped, and that the number of 
required meetings should instead be established in the by-laws. FHFA 
believes that, given the duties assigned to the OF board, a requirement 
of six in-person board meetings is reasonable and necessary to assure 
that those duties are carried out. Thus, it has not changed this 
requirement.
    FHFA also received comments asking that the proposal be changed to 
allow the OF board, rather than FHFA, to assign additional duties to 
the Chief Executive Officer of the OF. Proposed Sec.  1273.8(d)(4), 
however, already clearly provided that the OF board (and not FHFA) 
select, employ, determine the compensation for, and assign the duties 
and functions of the Chief Executive Officer, subject to certain 
minimum responsibilities.\12\ Thus, no change was made in the final 
rule in response to this comment.
---------------------------------------------------------------------------

    \12\ By contrast, the proposed rule also provided that the OF 
board of directors should assume such additional duties as might be 
assigned to it by FHFA. This provision was proposed and adopted as 
Sec.  1273.8(d)(6).
---------------------------------------------------------------------------

Section 1273.9--Audit Committee
    Proposed Sec.  1273.9 set out the duties and function of the OF 
Audit Committee. Under the proposed rule, the Audit Committee would 
assume the OF board's previous responsibility for overseeing the OF's 
preparation of the combined financial reports, and duties related to 
overseeing the audit of these reports and of the OF itself. As part of 
these responsibilities, the proposed rule would have required the Audit 
Committee to ensure that the Banks adopt consistent accounting policies 
and procedures so that the combined financial reports continue to be 
accurate and meaningful. Where the Banks were unable to agree to such 
policies, the proposed rule would have authorized the Audit Committee, 
in consultation with FHFA, to prescribe them.
    A large number of the comments made on the proposed rule addressed 
Sec.  1273.9. In particular, commenters addressed the proposed 
provisions assigning to the Audit Committee the duty and authority to 
require the Banks to adopt consistent accounting policies and 
procedures so that information submitted by them may be combined to 
create accurate and meaningful combined financial reports. In general, 
commenters felt these provisions were inappropriate in that the power 
to adopt accounting policies and procedures should be vested in the 
board of directors or audit committees of the individual Banks. They 
also felt that the rule failed to recognize the role of the individual 
Banks in establishing their own accounting policies, and felt that 
consistency can only be achieved through cooperation, not by mandate of 
the OF's Audit Committee.
    Alternatively, commenters suggested that the Audit Committee's role 
be that of making recommendations to the full OF board of directors. 
One commenter suggested that the Audit Committee be required only to 
assure that Banks' accounting policies and procedures be only 
``sufficiently'' consistent to assure that information can be combined 
in an accurate and meaningful way. Some commenters also questioned 
whether the regulator-imposed limitation under the rule on a Bank's 
right to make accounting policy choices otherwise acceptable under 
generally accepted accounting principles (GAAP) would itself be a 
violation of GAAP. Other commenters urged that the proposed rule be 
refined to reflect the appropriate discretion that is accorded to the 
Banks as independent entities to apply GAAP.
    Commenters also questioned the use of the phrase ``accurate and 
meaningful'' stating that it had no well-understood meaning in law. 
Commenters said the proposed provision also appeared to impose on the 
OF Audit Committee the duty to ensure accuracy of the underlying 
financial information submitted by the Banks, a task that they did not 
believe could be accomplished by the Audit Committee. They urged that 
the rule be recast to make clear that the OF Audit Committee was only 
responsible for the acts related to the combining of information and 
not for the accuracy of the information reported by the Banks.
    FHFA has carefully considered these comments. It continues to 
believe that the OF Audit Committee, made up of the Independent 
Directors, remains the appropriate body for overseeing the preparation 
of the combined financial reports, and it must have all appropriate 
authority needed to be successful in this task. As Independent 
Directors, members of the Audit Committee will have a lesser incentive 
and less of a vested interest than any Bank president to represent the 
view of any particular Bank or Banks, and will be in the best position 
to ensure that, given the information presented by the Banks, the 
combined financial reports presents an accurate and meaningful picture 
of the Bank System's financial condition. FHFA agrees that as an 
initial matter, it is the duty of the Banks themselves to coordinate 
accounting policies and procedures to assure that information is 
presented in a uniform manner so that it can be combined in an accurate 
and meaningful fashion. FHFA also recognizes, however, that the Banks 
have not always been able to agree on such presentation and that it is 
appropriate to give the Audit Committee authority, in consultation with 
FHFA, to require consistent accounting policies and procedures where 
needed so that it can carry out its duties with regard to the 
preparation of the combined financial reports. FHFA does not believe 
that it is inconsistent with GAAP for the Audit Committee to require 
particular accounting principles to be used in submitting information 
for the combined reports from among the range of principles that may be 
available under GAAP; nor does FHFA believe that this is inconsistent 
with the independent identities and reporting responsibilities of the 
twelve Banks, given that they retain their authority to issue their own 
separate financial statements, which are not required to be consistent 
across all twelve Banks, in their SEC filings.
    FHFA also believes that its overall approach is consistent with its 
authority to supervise the safety and soundness of the Bank System. The 
goal of the rule is to improve the disclosure now provided by the 
combined financial reports. Combined financial reports are necessary 
and useful to the market because a Bank does not issue debt in its own 
name but as a Bank System. Thus, the need for the rule is driven by the 
unique funding mechanism of the

[[Page 23160]]

Bank System, including the joint and several nature of Bank COs.
    Given the comments just discussed, FHFA also realizes that the 
wording of the proposed provisions may not have fully reflected its 
intent and thus has made some changes to the language of the final 
rule. First, it has changed the language in Sec.  1273.9(b)(1) to state 
that the Audit Committee will be responsible for ``overseeing the audit 
function of the OF and the preparation and the accurate and meaningful 
combination of the information submitted by the Banks in the Bank 
System's combined financial reports.'' FHFA believes that this wording 
more accurately reflects the Audit Committee's oversight of the 
preparation of the combined financial reports especially, with regard 
to the basis and approach to combining information received from the 
Banks, but that the OF Audit Committee is not responsible for 
overseeing the reliability and integrity of the accounting policies and 
financial reporting and disclosure policies of the individual Banks, or 
the accuracy of the information that they submit. FHFA has also adopted 
new language in Sec.  1273.9(b)(2) which now states that the ``Audit 
Committee shall ensure that the Banks adopt consistent accounting 
policies and procedures to the extent necessary for information 
submitted by the Banks to the OF to be combined to create accurate and 
meaningful combined financial reports.'' This change makes it clear 
that the Audit Committee's authority to require consistent accounting 
policies and procedures is not meant to be unlimited in nature, but to 
assure it can fulfill its duties with regard to the combined financial 
reports.
    While FHFA has made some changes, it has kept the phrase ``accurate 
and meaningful'' even though some commenters felt it lacked precision 
and had no clear meaning under law. FHFA believes the words themselves 
have a well understood plain meaning and can be applied accordingly. In 
using the term ``accurate'', FHFA contemplates that the combination of 
the several Banks' financial statements and quantitative disclosures is 
correctly presented, that the overall presentation complies with GAAP, 
relevant interpretative materials put forth by accounting and audit 
standard setters, and with this and other applicable regulations and 
guidance issued by FHFA. In using the term ``meaningful'', FHFA 
contemplates that the combined statements will present, in an 
understandable and transparent manner, robust disclosures and 
discussion that will enhance the readers' understanding of the Banks' 
combined financial conditions, changes in this financial condition, and 
the combined results of their operations.
    FHFA also notes that under this rule both as proposed and adopted, 
the Audit Committee is responsible for selecting the external auditor 
for the combined financial statements. Historically, the Banks have 
selected a common auditor for the individual Bank and combined 
financial statements audits. Engaging a common external auditor may 
promote more consistent accounting practices, would avoid subjecting 
the Banks and the OF to inter-firm disagreements on accounting matters, 
and has been found by the Banks to be more cost-effective than using 
multiple auditors. FHFA recognizes that as a practical matter the 
auditor for the combined financial reports is likely to be the same 
firm that audits the individual Banks.
    Based on comments, the final rule does not define the Audit 
Committee duties in Sec.  1273.9(c) by reference to Sec.  917.7 of this 
title, which addresses the duties of a Bank's audit committee. FHFA 
agrees that this reference is confusing given the differences between 
the Banks