Corporate Governance, 17303-17312 [05-6781]

Agencies

• Federal Housing Enterprise Oversight Office
• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
• Office of Federal Housing Enterprise Oversight

[Federal Register Volume 70, Number 65 (Wednesday, April 6, 2005)]
[Rules and Regulations]
[Pages 17303-17312]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-6781]



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Federal Register / Vol. 70, No. 65 / Wednesday, April 6, 2005 / Rules 
and Regulations

[[Page 17303]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1710

RIN 2550-AA24


Corporate Governance

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Final amendments.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is 
issuing amendments to its corporate governance regulation establishing 
corporate governance standards applicable to the Federal National 
Mortgage Association and the Federal Home Loan Mortgage Corporation in 
order to further promote the safety and soundness of their operations.

DATES: Effective June 6, 2005.

FOR FURTHER INFORMATION CONTACT: Isabella W. Sammons, Associate General 
Counsel, telephone (202) 414-3790 (not a toll-free number); Office of 
Federal Housing Enterprise Oversight, 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:

Background

    Title XIII of the Housing and Community Development Act of 1992, 
Pub. L. 102-550, titled the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (Act) (12 U.S.C. 4501 et seq.) 
established OFHEO as an independent office within the Department of 
Housing and Urban Development to ensure that the Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage 
Corporation (Freddie Mac) (collectively, the Enterprises or government 
sponsored enterprises) are adequately capitalized and operate safely 
and soundly in compliance with applicable laws, rules, and regulations.
    In furtherance of its supervisory responsibilities, in 2002, OFHEO 
published a final corporate governance regulation, taking into 
consideration comments filed in response to an earlier proposed 
regulation.\1\ The corporate governance regulation sets forth standards 
with respect to corporate governance practices and procedures of the 
Enterprises. It establishes a framework for corporate governance 
addressing applicable law, requirements and responsibilities of the 
board of directors and board committees, conflict-of-interest 
standards, and indemnification. As a result of findings and 
recommendations contained in the Report of the Special Examination of 
Freddie Mac \2\ (Report of Special Examination), and based on the 
experience of OFHEO supervising the activities of the Enterprises, as 
well as developments in law, OFHEO is amending the corporate governance 
regulation within this framework.
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    \1\ 12 CFR Part 1710, 67 FR 38361 (June 4, 2002).
    \2\ OFHEO, Report of the Special Examination of Freddie Mac 
(Dec. 2003) (Report of Special Examination), which may be found at 
https://www.ofheo.gov/media/pdf/specialreport122003.pdf.
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    On June 7, 2003, the Director of OFHEO ordered a special 
examination of the events leading to the public announcement by Freddie 
Mac of an audit of prior year financial statements and the termination, 
resignation, and retirement of three principal executive officers of 
Freddie Mac. The Report of Special Examination found that ``[t]he 
accounting and management problems of Freddie Mac were largely the 
product of a corporate culture that demanded steady but rapid growth in 
profits and focused on management of credit and interest rate risks but 
neglected key elements of the infrastructure of the enterprise needed 
to support growth.'' \3\ The Report of Special Examination, among other 
things, made specific recommendations with respect to practices in 
corporate governance that Freddie Mac should follow and that OFHEO 
should require.\4\ For example, included are recommendations that 
functions of the chief executive officer and the chairperson of the 
board of directors should be separated; board members should become 
more actively involved in the oversight of the Enterprise; adequate and 
appropriate information should be provided to the board of directors; 
financial incentives for board members, executive officers, and 
employees should be developed based on long-term goals, not short-term 
earnings; strict term limits should be placed on board members; firms 
that audit the Enterprises, not merely the audit partners, should be 
changed periodically; and formal compliance and risk management 
programs should be established. A Consent Order, issued by OFHEO to 
Freddie Mac on December 9, 2003, required Freddie Mac to implement 
certain corporate governance practices that were recommended in the 
Report of Special Examination, as well as other remedial steps.\5\
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    \3\ Id., at 4 (footnote omitted).
    \4\ Id., at 163-171.
    \5\ OFHEO Order No. 2003-02, ``Consent Order, In the Matter of 
the Federal Home Loan Mortgage Corporation'' (Dec. 9, 2003) (Consent 
Order), which may be found at https://www.ofheo.gov/media/pdf/
consentorder12903.pdf.
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    Through ongoing oversight and supervision of both Enterprises and 
its special examinations, OFHEO has gained insights as to the need for 
enhancements or adjustments in the existing corporate governance 
standards for both Enterprises. Thus, OFHEO proposed to add prudential 
requirements to its corporate governance regulation that would have 
general applicability consistent with the practices recommended or 
required by the Report of Special Examination or the Consent Order.
    OFHEO also notes that the Enterprises are privately owned but 
federally chartered companies. Created by Congress to facilitate 
liquidity and stability in mortgage markets and to advance affordable 
housing, they receive in exchange special benefits from their 
Government sponsorship which makes them unlike many other large 
financial institutions in some significant respects. Since their 
creation, the Enterprises have grown to become two of the largest and 
highly leveraged financial companies in the world in terms of assets, 
and together they control a majority share of the secondary market for 
conforming mortgages. Yet they are relatively small in terms of their 
total numbers of employees, and have a unique board

[[Page 17304]]

structure, public mission and regulatory framework. In addition, due to 
their Government sponsorship, the Enterprises are not as susceptible to 
some forms of market and management discipline. These distinctive 
characteristics also played a large part in the determination that 
Fannie Mae and Freddie Mac should adhere to certain policies that may 
not be applicable to other companies.
    With respect to other developments, the New York Stock 
Exchange(NYSE) issued amendments to its corporate governance rules that 
are applicable to companies listed on the NYSE, including the listed 
Enterprises.\6\ In addition, Congress passed the Sarbanes-Oxley Act of 
2002 (SOA),\7\ which contains corporate governance requirements, and 
the U.S. Securities and Exchange Commission (Commission) issued 
regulations to implement the SOA. Fannie Mae voluntarily registered its 
common stock with the Commission effective March 31, 2003; Freddie Mac 
announced its intention to register.\8\
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    \6\ Final NYSE Corporate Governance Rules (Nov. 4, 2003), 
Section 303A. The NYSE final Corporate Governance Rules may be found 
at https://www.nyse.com. Note that except for final NYSE rule Section 
303A.08, which became effective June 30, 2003, listed companies have 
until the earlier of their first annual meeting after January 15, 
2004, or October 31, 2004, to comply with the new rules. The 
Enterprises are companies listed on the NYSE. As listed companies, 
the rules of the NYSE, including those addressing corporate 
governance, are applicable to the Enterprises.
    \7\ Pub. L. 107-204 (Jul. 30, 2002).
    \8\ See https://www.fanniemae.com/ir/sec/index.jtml?s=SEC+filings 
for Fannie Mae and https://www.freddiemac.com/news/archives/
investors/2003/restatement_112103.html for Freddie Mac.
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    Since registration, Fannie Mae files periodic financial disclosures 
with the Commission as required by the Securities Exchange Act of 1934 
and is subject to the requirements of the SOA and implementing rules 
and regulations of the Commission.\9\ Upon registration, Freddie Mac 
will be subject to the same requirements. To help meet its statutory 
responsibilities, OFHEO intends to ensure that such requirements and 
implementing rules and regulations are or remain applicable to the 
Enterprises even if Freddie Mac does not register with the Commission 
or if one or both Enterprises deregister. In connection with any 
conduct regulated by the Commission, OFHEO would look to any rules, 
regulations, and interpretations issued by the Commission and its 
requirements. OFHEO may initiate an enforcement action in the area of 
Enterprise corporate governance in response to a violation of its 
corporate governance regulation, including behavior that violates laws 
or requirements set forth therein.
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    \9\ The existing corporate governance regulation provides that 
the corporate governance practices and procedures of an Enterprise 
must comply with its respective chartering act and other Federal 
law, rules, and regulations, and that the practices and procedures 
must be consistent with the safe and sound operations of the 
Enterprise. 12 CFR 1710.10(a), 67 FR 38361, 38370 (Jun. 4, 2002).
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Comments Received

    The proposed amendments were published on April 12, 2004 (69 FR 
19126). OFHEO received comments from 19 commenters as follows: (1) An 
individual shareholder of an Enterprise; (2) an individual; (3) Ernst & 
Young, an accounting firm; (4) America's Community Bankers, a trade 
association representing community banks; (5) National Association of 
Corporate Directors, an educational, publishing, and research 
organization on board leadership and a membership association for 
boards, directors, director candidates, and board advisers; (6) 
PriceWaterhouseCoopers, an accounting firm; (7) Business Roundtable, an 
association of chief executive officers of corporations; (8) Chamber of 
Commerce, a business federation; (9) American Institute of Certified 
Public Accountants, a professional association of certified public 
accountants; (10) KPMG, an accounting firm; (11) Deloitte & Touche, an 
accounting firm; (12) Freddie Mac; (13) Consumer Mortgage Coalition, a 
trade association of national mortgage lenders, servicers, and service 
providers; (14) an individual, Dean's Professor of Financial Regulatory 
Policy, University of Massachusetts-Amherst; (15) Nominating and 
Corporate Governance Committee of Fannie Mae; (16) FM Policy Focus, a 
coalition of six financial services and housing related trade 
associations; (17) Independent Community Bankers of America, a trade 
association of community banks; (18) Mortgage Insurance Companies of 
America, a trade association representing the private mortgage 
insurance industry; and, (19) Fannie Mae.

Response to Comments

Board of Directors (Sec.  1710.11)

    OFHEO proposed a section that would add requirements and 
consolidate existing requirements relating to the board of directors of 
an Enterprise. OFHEO carefully considered the comments provided.

Separate Chairperson/Chief Executive Officer (Sec.  1710.11(a)(1))

    One provision would require an Enterprise to prohibit the 
chairperson of the board from also serving as chief executive officer 
of the Enterprise. Often drawing on the experience and circumstances of 
non-government sponsored companies, many commenters urged that OFHEO 
leave this matter to the determination of the board of directors or 
suggested that a separate chairperson and chief executive officer is 
not in the best interests of the shareholders. The commenters who urged 
such a result did not focus on the impact of the unique characteristics 
of the Enterprises, such as their size, public mission, insulation from 
full market discipline and distinct board structure--characteristics 
that counsel against the concentration of power in a single 
chairperson/chief executive officer. Likewise, commenters did not make 
a substantial case for disregarding the lessons learned in the special 
examination of Freddie Mac about the risks of consolidating the 
chairperson and chief executive officer positions.
    OFHEO believes that separating the functions of chairperson and 
chief executive officer is prudent for safe and sound operations of the 
Enterprises because it strengthens board independence and oversight of 
management on behalf of shareholders consistent with the public mission 
of the Enterprises. Separating the role of chief executive officer 
would similarly clarify the role and responsibility of the individual 
charged with leading each Enterprise's management team.\10\ OFHEO 
recognizes that this is a different standard than is required of many 
other private corporations but it is appropriate for the Enterprises 
not only because of their government sponsorship, but also in light of 
the recent experience at Freddie Mac and the experience of OFHEO 
supervising both Enterprises. In the case of Freddie Mac, an earlier 
separation of the two roles could have caused the board to provide 
stronger independent guidance to management and identify problems 
sooner. OFHEO believes that a separation of the chairperson and the

[[Page 17305]]

chief executive officer functions would enhance the effectiveness of 
changes being proposed in requirements for the boards of directors to 
meet their obligations and would promote the public interest in the 
safety and soundness of the Enterprises. Comments that this would limit 
the flexibility of the board to structure the company or limit 
corporate flexibility in general do not overcome the concern that OFHEO 
expressed for the benefits resulting from greater independence of the 
board and stronger oversight of these government sponsored enterprises.
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    \10\ See Report of Special Examination, supra note 2, at 164. 
The concept of a non-executive chairman has support in recent 
discussions on improvements to corporate governance. For example, 
see General Accounting Office, Testimony of Comptroller General 
Walker before Senate Banking Committee, Government-Sponsored 
Enterprises: A Framework for Strengthening GSE Governance and 
Oversight, GAO-04-269T (February 10, 2004) (calling for separation 
of Chairman and CEO positions at Fannie Mae and Freddie Mac).
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    OFHEO notes with approval that each Enterprise has now formally 
agreed to separate the positions of chairperson of the board and chief 
executive officer. Accordingly, the provision is not included in the 
final regulation at this time.

Term and Age Limits (Sec.  1710.11(a)(2))

    A requirement that would limit the service of a board member to no 
more than 10 years or past the age of 72, whichever comes first, was 
proposed by OFHEO. One commenter approved of the limits, some 
commenters disapproved of the limits as undermining board leadership, 
and other commenters recommended transition periods or the ability to 
seek a waiver. Another commenter requested clarification that the age 
and term limits be applied as of the date of the meeting of the 
shareholders.
    OFHEO found that a limit on years of service and age for the board 
members promotes an appropriate level of functioning of the board, 
strengthens the diversity and expertise of the board, and enhances its 
ability to respond to the unique, but constantly evolving business 
environment in which each Enterprise operates.\11\ Overall, OFHEO 
determined that the potential loss of familiarity with the company and 
the possibility of having an experienced board member leave due to a 
fixed term based on age or years of service were outweighed by the 
experience of OFHEO supervising both Enterprises and the possibility of 
an entrenched board's failing to oversee adequately the company.
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    \11\ Report of Special Examination, supra note 2, at 166. An age 
limit and term limit will work well in tandem and have been part of 
Enterprise bylaws in one form or another.
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    In response to comments, OFHEO is making changes to the provision 
to clarify that a board member who meets the age and term limits as of 
the date of his or her election or appointment may serve his or her 
full term. In addition, express language has been added to provide for 
a waiver by the Director, for good cause consistent with the 
supervisory responsibilities of OFHEO.

Independence of Board Members (Sec.  1710.11(a)(3))

    OFHEO proposed that a majority of the seated board members of an 
Enterprise be independent under the rules of the NYSE.\12\ OFHEO makes 
no distinction between those board members who are elected by 
shareholders and those who are appointed by the President. Thus, if one 
or more vacancies exist on a board among either elected or appointed 
shareholders, a majority of seated board members is required.
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    \12\ Final NYSE rule Section 303A.
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    One commenter recommended that OFHEO should supplement the NYSE 
standards with additional standards. OFHEO determined that the NYSE 
rule appropriately covers what constitutes independence. As expressly 
provided by proposed Sec.  1710.30, discussed below, OFHEO has the 
authority to provide for a different definition of the term 
``independent board member'' or to provide additional guidance covering 
general or specific circumstances, if necessary in light of the special 
characteristics of the two Enterprises, including but not limited to 
circumstances where a board member has prior affiliation with an 
accounting firm currently serving as auditor of the Enterprise.
    Another commenter recommended that the independence standard apply 
to all board members. Section 1710.11(a)(3), as proposed, does not 
differentiate between elected and presidentially-appointed board 
members. It was also requested that the provision reflect that the NYSE 
rules apply as changed from time to time by the NYSE. A technical 
revision has been made to the provision expressly to address this 
point. Finally, one commenter recommended that the term ``seated'' be 
defined. The term is intended to encompass those elected or appointed 
board members who serve on the board; OFHEO, however, does not believe 
it useful at this time to define further the term in the regulation.

Frequency of Meetings (Sec.  1710.11(b)(1))

    The proposal would require that the board of directors of an 
Enterprise meet at least twice a quarter to carry out its obligations 
and duties under applicable laws, rules, regulations, and guidelines. 
One commenter supported the frequency requirement while another 
commenter suggested that this requirement amounts to micromanagement of 
the Enterprises. Other commenters suggested that requiring eight 
meetings a year, with at least one each calendar quarter was more 
appropriate. Another commenter suggested that the number of meetings be 
set in the aggregate, but the board be permitted to schedule meetings 
in such quarters as the board would determine. OFHEO determined that 
the number of meetings is reasonable and that spreading them over the 
course of the fiscal year is prudent.
    Given the special nature of the Enterprises and the oversight 
required, OFHEO disagrees that the frequency requirement amounts to 
micromanagement or that requiring eight meetings a year is 
inappropriate. Meetings must be frequent enough to ensure that the 
board of directors can exercise adequate oversight of management. OFHEO 
determined in its review of Freddie Mac that the meetings of the board 
of directors were too infrequent to address the issues presented by the 
company, given its status, size, and complexity. OFHEO determined that 
to provide flexibility and to avoid practical issues such as requests 
for waivers and related procedural matters, the proposal would be 
adopted with the deletion of the requirement that two meetings occur 
per quarter. OFHEO has determined that the board of directors should 
meet no less than eight times a year and no less than once a calendar 
quarter.

Non-Management Board Meetings, Quorum of Board of Directors, Proxies 
(Sec.  1710.11(b)(2) and (3))

    OFHEO received supporting comments on the provisions of Sec.  
1710.11(b)(2) and (3) and has issued them without change. The 
provisions require that the non-management directors of an Enterprise 
meet at regularly scheduled executive sessions without management 
participation in order to promote open discussion.\13\ They also 
consolidate without substantive change the existing requirements of the 
current OFHEO corporate governance regulation with respect to the 
constitution of a quorum of the board of directors and the prohibition 
against a board member voting by proxy.
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    \13\ For reference, see final NYSE rule Section 303A.03.
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Information (Sec.  1710.11(b)(4))

    As proposed, Sec.  1710.11(b)(4) would require that management of 
an Enterprise provide board members with information that is adequate 
and appropriate considering what a

[[Page 17306]]

reasonable board member would find important to the fulfillment of his 
or her fiduciary duties and obligations to the Enterprise.\14\ One 
commenter supported this requirement, while another recommended that it 
be limited to that information consistent with the requirements of the 
selected corporate governance law of the Enterprise. It would not be 
useful to limit information required by the selected corporate 
governance law because, unlike board members of state-chartered 
corporations, board members of the Enterprises have specific 
obligations set forth in the corporate governance regulation that may 
require additional information to fulfill such obligations. Therefore, 
OFHEO has determined not to limit the provision as requested and is 
adopting the provision as proposed.
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    \14\ See Report of Special Examination, supra note 2 at 166.
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Annual Review (Sec.  1710.11(b)(5))

    The proposal would require, at least annually, that the Enterprise 
board of directors review requirements of laws, rules, regulations, and 
guidelines that are applicable to its activities and duties, with 
appropriate professional assistance.\15\ One commenter recommended that 
the annual review be expanded to include an annual review of the 
effectiveness of the corporate governance system. OFHEO has determined 
not to adopt that recommendation in the context of review of the 
Enterprise board of director activities and duties. The provision is 
being adopted as proposed.
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    \15\ See Consent Order, supra note 5 at Art. II, Para. 10.
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Committees of Board of Directors (Sec.  1710.12)

    OFHEO proposed to add a requirement to Sec.  1710.11, redesignated 
as Sec.  1710.12, that a committee of the board of directors of an 
Enterprise meet as frequently as necessary to carry out its obligations 
and duties and to exercise adequate oversight of management.\16\
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    \16\ See Report of Special Examination, supra note 2 at 166, 
(discussing frequency of meetings).
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    The current corporate governance regulation requires that an 
Enterprise establish audit and compensation committees of the board of 
directors. OFHEO proposed to add a requirement that an Enterprise 
establish a nominating/corporate governance committee consistent with 
appropriate application of the final NYSE rules \17\ and that the 
committees of the board of directors comply with NYSE rules.\18\ The 
NYSE rules address, among other things, the independence of audit 
committee members; the responsibility of the audit committee to select 
and oversee the issuer's independent accountant; procedures for 
handling complaints regarding the issuer's accounting practices; the 
authority of the audit committee to engage advisors; and, funding for 
the independent auditor and any outside advisors engaged by the audit 
committee.
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    \17\ Final NYSE rule Section 303A.04.
    \18\ See final NYSE rules Section 303A.06 and .07. The final 
NYSE rule Section 303A.06 requires with respect to the audit 
committee that listed companies must have an audit committee that 
satisfies the requirements of Rule 10A-3 under the Securities 
ExchangeAct of 1934.
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    As proposed, the amended section also would require that Enterprise 
audit committees comply with the requirements set forth in section 301 
of the SOA, which address, among other things, audit committee 
responsibilities, independence, establishment of complaint procedures, 
and authority to engage advisers, as well as adequate funding of the 
committee. The reference to the SOA and the final NYSE rules would not 
restrict the authority of OFHEO to mandate additional requirements 
appropriate to the Enterprises'' situations and their oversight, as 
provided under Sec.  1710.30.
    OFHEO received one comment on this section that recommended that 
the provision should be made co-extensive with the corresponding NYSE 
rules issued pursuant to the SOA, which are incorporated by reference, 
as those rules may be interpreted or changed from time to time by the 
responsible bodies. OFHEO has determined that the section, as proposed, 
has incorporated by reference the appropriate NYSE and SOA section and 
that, as appropriate, OFHEO would look to the NYSE interpretation of 
the NYSE rules in determining whether an Enterprise was in compliance 
with this section. OFHEO has determined that it is unnecessary to state 
this in the section and Sec.  1710.12 is adopted as proposed.

Compensation of Board Members, Executive Officers, and Employees (Sec.  
1710.13)

    OFHEO proposed to amend Sec.  1710.12, redesignated as Sec.  
1710.13, by adding language that would prohibit compensation in excess 
of what is appropriate for these government sponsored enterprises, in 
addition to what is reasonable (as the section currently reads) and 
consistent with long-term goals that are addressed in the proposed 
language of the section.
    Two commenters objected to the word ``appropriate'' in that it is 
not contained in 12 U.S.C. 4518, the statutory provision that requires 
the Director to prohibit an Enterprise from providing compensation to 
any executive officer that is not reasonable and comparable with 
compensation for employment in other similar businesses. The proposed 
provision is not intended to implement Section 4518, which is 
implemented by the OFHEO executive compensation regulation at 12 CFR 
part 1770. Section 1710.13 addresses not only certain covered executive 
officers, but as well board members and employees, and has as its 
primary focus the Enterprises--safety and soundness. Although 
compensation may be reasonable from some perspectives, as in not 
generally excessive or extreme, it may not be appropriate or suitable 
under specific circumstances. Thus, OFHEO has determined not to delete 
the word ``appropriate.''
    While the circumstances involved and the foundation for addressing 
compensation in the corporate governance regulation may differ from 
those found in the area of executive compensation, the standards used 
by OFHEO for determining unreasonable, excessive, or inappropriate 
compensation are the same. In looking to reasonable compensation, OFHEO 
must consider the totality of circumstances for an Enterprise. This 
includes inquiry into compensation for comparable positions at other 
firms, to the degree they exist, along with less formulaic items such 
as the unique nature of the Enterprises, the responsibilities and 
duties of the individual involved, and the environment and 
circumstances that exist when the compensation is provided to the 
individual. Thus a numerical comparison alone might be inadequate for 
OFHEO to discharge its obligations in considering compensation. Factors 
such as an Enterprise's conduct, business challenges, compliance with 
the mission of the Enterprise, compliance with law and regulation, 
creation of profit or loss, leadership, suitability of incentive 
structures, and other relevant matters would be important to making a 
compensation determination under either the corporate governance rules 
or the executive compensation rules. In both instances, safety and 
soundness underlies the goals of Congress expressed in the enabling 
statute of OFHEO and Congress has clearly indicated that compensation 
may represent a safety and soundness

[[Page 17307]]

problem should it provide perverse incentives.
    Section 1710.13(a), as proposed, is further intended to underscore 
the impropriety of compensation incentives that excessively focus the 
attention of management and employees on an Enterprise's short-term 
earnings performance. Incentives focused primarily on short-term 
earnings may lead to improper conduct at an Enterprise, as OFHEO 
discovered in its investigation of Freddie Mac.\19\ Financial 
incentives at the Enterprises should foster a management culture in 
which primary consideration is given to risk management, operational 
stability and legal and regulatory compliance.\20\ As noted above, 
OFHEO has determined, in light of its experience with Freddie Mac, its 
ongoing supervision of both Enterprises, and given their Federal 
charters, board structure, public mission, regulatory framework and 
status, size and role in capital markets, that Fannie Mae and Freddie 
Mac should be required to adhere to certain policies that may not be 
applicable to other companies. The compensation requirement in no way 
detracts from the obligations of Enterprise board members and 
management to meet their responsibilities to shareholders, but reflects 
the special attention that needs to be paid as well to other important 
public mission considerations in directing the course and conduct of an 
Enterprise.
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    \19\ See Report of Special Examination, supra note 2 at 164.
    \20\ Consent Order, supra note 5 at Art. II, Para. 14.
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    One commenter recommended that executive incentives should 
expressly include no rewards for undue reliance on the Enterprise 
subsidy or any activity that would enlarge it. OFHEO has determined not 
to adopt that recommendation.
    Section 1710.13(b) proposed to require the chief executive officer 
and chief financial officer to reimburse the Enterprise if the 
Enterprise is required to prepare an accounting restatement due to the 
material noncompliance of the Enterprise, as a result of misconduct, 
with any financial reporting requirement. Reimbursement would be made 
in accordance with section 304 of the SOA. Section 304 of the SOA would 
require reimbursement of (1) any bonus or other incentive-based, equity 
or option-based compensation received by such person from the 
Enterprise during the 12-month period following the first public 
issuance of the financial document embodying such financial reporting 
requirement; and (2) any profits realized from the sale or disposition 
of securities of the Enterprise that such person owned or controlled 
during that 12-month period. The provisions of the proposed paragraph 
would in no manner limit the authority of OFHEO to take any other 
appropriate supervisory action against an Enterprise or any of its 
board members or executive officers pursuant to its enforcement 
authorities. Enforcement authorities of OFHEO include restitution that 
may be applied to situations involving conduct subject to 
reimbursement.
    One commenter asked that the reimbursement requirement be clarified 
to apply to restatement of financial reporting under the securities 
laws. OFHEO has clarified the language to state so expressly and to 
note that this section does not limit other OFHEO remedial powers that 
may be brought to bear for failures to make adequate disclosures. 
Another commenter suggested that the reimbursement provision is not 
necessary in view of the broad remedial and civil money penalty powers 
of OFHEO. If it is retained, the commenter requested that the 
requirement should apply to Freddie Mac after it has returned to the 
timely filing of financial statements and completed the voluntary 
registration of its securities. OFHEO has determined to retain the 
reimbursement provision as proposed with certain clarifying and 
technical changes.\21\
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    \21\ Freddie Mac will be subject to the requirements of this 
section once it has filed documents that are covered by the 
reimbursement provisions of section 304 of the SOA. The final 
language of Sec.  1710.13 uses the term ``reimbursement'' rather 
than ``disgorgement'' to be consistent with the language of section 
304.
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Code of Conduct and Ethics (Sec.  1710.14)

    OFHEO proposed to amend Sec.  1710.14 by revising the section 
heading to read ``Code of Conduct and Ethics,'' and by referencing the 
standards set forth under section 406 of the SOA. Section 406 provides 
that the ``code of conduct and ethics'' include standards as are 
reasonably necessary to promote (1) honest and ethical conduct, 
including the ethical handling of actual or apparent conflicts of 
interest between personal and professional relationships; (2) full, 
fair, accurate, timely, and understandable disclosure in the periodic 
reports required to be filed by the issuer of the report; and (3) 
compliance with applicable governmental rules and regulations. In 
conducting its supervisory examination process, OFHEO would ensure the 
adequacy and appropriateness of the code of conduct and ethics of an 
Enterprise. In addition, OFHEO proposed that, at least every three 
years, an Enterprise must review the adequacy of its code of conduct 
and ethics to ensure that it is consistent with practices appropriate 
for the Enterprise.
    A few commenters recommended that OFHEO should require the code of 
conduct and ethics to include the public mission of the Enterprises, 
charter compliance, and adherence to new program prior approval 
standards and affordable housing goals. OFHEO has determined compliance 
with law, regulation, and rules are appropriately addressed in other 
sections of the regulation.
    Another commenter urged that OFHEO address situations where an 
Enterprise may use its unique characteristics to exact terms and 
conditions from service providers. That commenter also urged that the 
code should bar retaliation against entities for political purposes. 
OFHEO has determined not to adopt these recommendations. OFHEO notes 
that such conduct could be determined to violate existing safety and 
soundness rules and need not be subject to a special rule that could 
have unintended consequences that may result from unnecessary 
definition.
    One commenter recommended a reference to the NYSE rules requiring a 
code of conduct and NASDAQ rules relating to review and approval of 
related party transactions; another commenter recommended express 
reference to regulations issued by the Commission implementing section 
406 of the SOA. After considering these comments, OFHEO determined to 
clarify the section by adding language requiring the code of conduct 
and ethics to include standards that comply with applicable law, rules, 
and regulations, in addition to the express reference to section 406 of 
the SOA. OFHEO is adding language that expressly incorporates section 
406 along with any amendments that may be made from time to time.
    Another recommendation was that OFHEO should require more frequent 
reviews and that OFHEO require the codes to be revised whenever a new 
market practice or a substantive change in law or rule defines new 
standards. These recommendations are addressed by the provision, as 
modified, in that the code of conduct and ethics must include standards 
that comply with applicable law, rules, and regulations. In addition, 
OFHEO has clarified the language concerning review of the code to state 
expressly that after review of the code for consistency with practices 
appropriate for the Enterprise, the code

[[Page 17308]]

should be appropriately revised. In addition, it was recommended by one 
commenter that OFHEO change the language concerning review of the code 
of conduct and ethics from that of ensuring that the code is 
``consistent'' with best practices to ``reviewing in light of'' best 
practices. Recognizing a range of appropriate practices may exist for a 
given matter, OFHEO has modified the language to clarify that the 
review of the code is to be for consistency with practices appropriate 
for the Enterprise.

Conduct and Responsibilities of Board of Directors (Sec.  1710.15)

    Section 1710.15 of the current corporate governance regulation 
establishes appropriate standards for the conduct and responsibilities 
of the board of directors of an Enterprise. Given the special situation 
of the Enterprises, OFHEO proposed to amend Sec.  1710.15 by adding a 
requirement with respect to the conduct and responsibilities of the 
board of directors. The proposal would require that the Enterprise 
board of directors must remain reasonably informed of the condition, 
activities, and operations of the Enterprise. The proposal would also 
describe the responsibility of the board of directors to have in place 
policies and procedures to assure its oversight of corporate strategy, 
major plans of action, risk policy, programs for legal and regulatory 
compliance, and corporate performance to include prudent plans for 
growth and allocation of adequate resources to manage operations risk, 
so as to promote safety and soundness.
    One commenter recommended that OFHEO expressly provide that risk 
policy mean not only consideration of written policies and procedures 
but also that the Enterprises comply with such policies and that the 
board of directors has an affirmative duty to ensure that risk policies 
are enforced. OFHEO has determined not to adopt this recommendation 
because the focus of Sec.  1710.15 is on policies and procedures 
designed to assure compliance. Risk management compliance is 
appropriately addressed in Sec.  1710.19, discussed below.
    Proposed Sec.  1710.15 adds a provision expressly addressing the 
oversight responsibility related to extensions of credit to board 
members and executive officers, consistent with the proposed Sec.  
1710.16, discussed below. In conducting its supervisory examination 
process, OFHEO would ensure that adequate policies and procedures are 
in place. One commenter recommended that this provision be deleted 
because it is purportedly a narrower substantive obligation than the 
other oversight requirements and is otherwise addressed elsewhere in 
the regulation. OFHEO disagrees that it is inappropriate to list the 
board's oversight responsibility of limits on extensions of credit. 
Although Sec.  1710.16 prohibits certain extensions of credit, 
responsibility for oversight is not addressed in that section. OFHEO 
has determined to adopt the provision as proposed.

Section 1710.16 Prohibition of Extensions of Credit to Board Members 
and Executive Officers

    OFHEO proposed to add Sec.  1710.16, which would limit extensions 
of credit to Enterprise board members and executive officers as 
provided generally by section 402 of the SOA. As adopted here, section 
402 of the SOA would prohibit an Enterprise from directly or 
indirectly, including through any subsidiary, extending credit or 
arranging for the extension of credit in the form of a personal loan to 
or for any board member or executive officer of the Enterprise. OFHEO 
believes that it is appropriate to conform the OFHEO regulation to that 
of other financial institution regulators in addressing extensions of 
credit by companies they supervise, as the proposed section does.
    Two commenters requested that OFHEO delete the reference to any 
subsidiary of an Enterprise because such reference implies that OFHEO 
intends that the Enterprises establish subsidiaries. OFHEO sees no such 
implication in the proposed language. OFHEO has determined not to adopt 
this recommendation; the intent of the language is to apply to the 
Enterprises the provisions of section 402 of the SOA.
    Another commenter requested an express reference to interpretations 
of section 402 of the SOA by the Commission. OFHEO will look to the 
interpretations of the Commission but has determined that a 
modification of the proposed language is unnecessary; language has been 
added, however, to clarify that the reference to section 402 of the SOA 
includes amendments as made from time to time. With this technical 
modification, OFHEO has issued Sec.  1710.16 as proposed.

Certification of Disclosures by Chief Executive Officer and Chief 
Financial Officer (Sec.  1710.17)

    OFHEO proposed to add Sec.  1710.17, which would require Enterprise 
compliance with section 302 of the SOA that mandates certain 
certifications of quarterly and annual reports by the chief executive 
officer and chief financial officer of an Enterprise. The proposed 
section would conform the OFHEO supervisory regime to those of other 
financial regulators, as OFHEO has determined is appropriate. The 
proposal would assure review, endorsement, and undertaking of 
responsibility by individuals required to certify public disclosures. 
It would not limit OFHEO from requiring certifications by additional 
parties or additional disclosures.
    One commenter expressly supported the proposal. Another commenter 
requested that OFHEO clarify that the proposed provision would not 
require Freddie Mac to submit certifications under section 302 of the 
SOA until Freddie Mac completes the voluntary registration process. 
OFHEO has determined to retain the provision as proposed.\22\ OFHEO has 
published Sec.  1710.17 as proposed, with a technical correction and 
the addition of language to clarify that the reference to SOA section 
302 includes amendments to that section as made from time to time.
---------------------------------------------------------------------------

    \22\ The provision would apply to documents filed by Freddie Mac 
that meet the certification requirements under section 302 of the 
SOA.
---------------------------------------------------------------------------

Change of External Audit Partner and External Auditing Firm (Sec.  
1710.18)

    OFHEO proposed to add Sec.  1710.18, which would prohibit an 
Enterprise from accepting audit services from an external auditor if 
either the lead (or coordinating) external audit partner, who has 
primary responsibility for the external audit of the Enterprise, or the 
external audit partner, who has responsibility for reviewing the 
external audit, has performed audit services for the Enterprise in each 
of the five previous fiscal years. This prohibition relates to section 
203 of the SOA that makes it unlawful for a registered public 
accounting firm to provide audit services to a public company by such 
audit partners in excess of five previous fiscal years.
    One commenter recommended that OFHEO incorporate section 203 of the 
SOA, as interpreted by the Commission, in the provision. OFHEO has 
determined not to adopt that recommendation at this time. OFHEO looks 
to its existing safety and soundness requirements and its supervisory 
program to assure that the Enterprises mitigate risk by the use of 
service vendors that meet standards for reliability and recourse.
    Another commenter recommended that the provision require rotation 
of other audit partners involved in audits of an Enterprise after seven 
years. OFHEO has determined not to adopt this recommendation, but notes 
that in

[[Page 17309]]

the matter of non-lead audit partners, OFHEO expects that the 
Enterprises engage auditing firms that comply with appropriate 
practices.
    OFHEO also proposed a requirement that, at least every ten years, 
an Enterprise must change its external auditing firm. Many commenters 
objected to the proposed requirement to change the external auditing 
firm every ten years on the basis that such a change would be 
counterproductive because of loss of expertise and associated increased 
risk of error and fraud, lack of support for such a regulation in 
current literature or Federal statute, and impracticality in light of 
the existence of only four large accounting firms available for the 
work attendant to a government sponsored enterprise. The commenters 
opined that the safeguards of the SOA, in terms of audit partner 
rotations and the oversight and audit role of the Public Company 
Accounting Oversight Board, are adequate.
    OFHEO disagrees with these commenters with respect to the 
Enterprises. In light of its special examination of Freddie Mac and its 
ongoing supervision of both Enterprises, OFHEO has determined to 
require Fannie Mae and Freddie Mac to adhere to certain standards to 
assure safe and sound operations, even though they may represent 
different standards than those generally applied to non-government 
sponsored companies or other large regulated companies. Created by 
Congress to facilitate liquidity and stability in mortgage markets and 
to advance affordable housing, the Enterprises receive special benefits 
from government sponsorship making them unlike other large companies in 
significant respects. The business of the Enterprises is limited by 
statute; their hedge accounts require intensive and complicated 
accounting; they have a unique mission; they must undertake specialized 
tasks by law; and, they are regulated apart from other companies due to 
their unique structure, that is, a single regulator for only two 
entities. Further, the Enterprises have grown to become two of the 
largest and highly leveraged financial companies in the world in terms 
of assets, controlling together a majority share of the secondary 
market for conforming mortgages. In addition, due to the government 
sponsorship, the Enterprises are not as susceptible to certain forms of 
market discipline. All of these differences and unique features demand 
full and accurate accounting, accounting that is essential for safe and 
sound operations and disclosures that assure access to capital markets. 
These distinctive characteristics would support the determination that 
Fannie Mae and Freddie Mac should adhere to certain policies that may 
not be applicable to other companies, including large regulated 
companies.
    The existence of long term accounting relationships has been 
demonstrated, in the review of the Enterprises by OFHEO, to pose 
specific risks. The difficulty of changing auditing firms would not 
outweigh the finding of threatened harm that may be occasioned by 
certain long term audit relationships. Freddie Mac maintained the same 
accounting relationship for over 32 years and its accounting problems 
were only uncovered after it changed auditors in 2002. In 2005, Fannie 
Mae has announced that it will replace its auditor with which it has 
had a relationship for over 36 years.
    A central argument of commenters was that the required change 
undermines the pressure on an audit firm, that is, if a firm has a 
contract and produces less than satisfactory work, then a termination 
of that contract brings the firm into the public eye. Also, the 
requirement to change firms, it is argued, removes the incentive to 
move against a firm as the requirement would change the firm at a set 
point. This, the argument goes, would remove positive pressures on the 
engaging company and the auditing firm. OFHEO disagrees with respect to 
the Enterprises. Further, in the case of the Enterprises, Congress saw 
fit to create a regulator to oversee the operations of the firms, 
including accounting standards and external audit relationships. OFHEO 
has the ability to act in the case of a poorly performing Enterprise 
auditor at any time, not just at the time of a planned change.
    Further, it should be noted that OFHEO does not consider the 
existence at present of four major auditing firms to be an 
insurmountable impediment. With the proper safeguards, OFHEO would 
consider appropriate both Enterprises using the same auditing firm 
concurrently, thereby contributing to the options open to an 
Enterprise.
    However, because both Enterprises have now changed audit firms, the 
provision is not included in this final regulation.

Compliance and Risk Management Programs (Sec.  1710.19(a) and (b))

    Proposed Sec.  1710.19 would require an Enterprise to establish and 
maintain a compliance program and a risk management program. OFHEO 
believes that the establishment and maintenance of compliance and risk 
management programs are essential for the continued safe and sound 
operations of the Enterprises.\23\ The establishment of such programs, 
with a view to best practices appropriate for the Enterprises, will 
assist the boards of directors in managing their responsibilities to 
oversee the adequacy of policies and procedures for compliance and risk 
management.
---------------------------------------------------------------------------

    \23\ See Report of Special Examination, Recommended Actions, 
Nos. 9 and 10, supra note 2 at 167-168, and Consent Order, supra 
note 5.
---------------------------------------------------------------------------

    Commenters generally supported the proposal. One commenter 
suggested that OFHEO consider whether there should be a direct 
reporting relationship to the board; others recommended more 
flexibility with respect to the structure and reporting scheme of the 
compliance and risk management programs. OFHEO has determined to retain 
the requirement that the chief compliance officer and chief risk 
officer report directly to the chief executive officer of the 
Enterprise, but has clarified that the regular reporting of such 
officers may be made to the board of directors or to an appropriate 
committee thereof. OFHEO has made other clarifying and technical 
changes to make the section easier to read.

Compliance With Other Laws (Sec.  1710.19(c))

    OFHEO also proposed that if an Enterprise deregisters or does not 
register its common stock with the Commission, the Enterprise must 
comply with sections 301, 302, 304, 402, and 406 of the SOA, subject to 
such additional requirements as provided by Sec.  1710.30.\24\ It would 
also require that a registered Enterprise maintain its registered 
status, unless it provides 60 days prior written notice to the Director 
stating its intent to deregister and its understanding that it will 
remain subject to certain requirements of the SOA, as provided above.
---------------------------------------------------------------------------

    \24\ This provision would apply to Freddie Mac as will 
provisions of sections 1710.13(b) and 1710.17 for reports that are 
filed subject to section 302 and 304 of SOA.
---------------------------------------------------------------------------

    One commenter requested that OFHEO clarify that this provision 
would not apply to a situation in which an Enterprise deregisters its 
securities and that Sec.  1710.30 should not be referenced in Sec.  
1710.19. OFHEO disagrees and has determined to adopt Sec.  1710.19(c) 
as proposed, with minor clarifying and technical changes.

Modification of Certain Provisions (Sec.  1710.30)

    OFHEO proposed to move provisions of its existing regulation and to 
maintain similar treatment for new provisions in Sec.  1710.30 to make 
clear that OFHEO, in referencing and employing other

[[Page 17310]]

sources for corporate governance standards, may modify its requirements 
to meet its statutory responsibilities for oversight of the 
Enterprises. References to standards of Federal or state law (including 
the Revised Model Corporation Act), or NYSE rules in Sec. Sec.  
1710.10, 1710.11, 1710.12, 1710.17, and 1710.19 do not limit the 
ability of OFHEO to modify OFHEO standards as necessary to meet its 
statutory responsibilities.\25\ The proposal would require that notice 
be provided to the Enterprises of any modifications.
---------------------------------------------------------------------------

    \25\ Section 1710.10 provides generally that an Enterprise must 
follow the corporate governance practices and procedures of the law 
of the jurisdiction in which the principal office of the Enterprise 
is located, Delaware General Corporation Law, or the Revised Model 
Business Corporation Act.
---------------------------------------------------------------------------

    Some commenters noted that OFHEO would be required to publish any 
modifications for notice and comment under the Administrative Procedure 
Act. OFHEO is clarifying the provision by adding language that would 
make clear that OFHEO would make modifications to its requirements 
pursuant to 5 U.S.C. 553. Section 553 requires notice and comment of a 
substantive regulation with certain exceptions, including where the 
regulation would grant or recognize an exemption or relieve a 
restriction, or for good cause found by the agency.

Issuance of Final Amendments to Regulation

    OFHEO has determined to issue the final amendments to its corporate 
governance regulation at 12 CFR 1710. The final regulation incorporates 
provisions adopted as proposed as well as modifications that enhance 
clarity or craft a more workable regulation, many of the modifications 
result from comments that provided useful legal and operational 
insights. The final regulation continues to build the OFHEO supervisory 
infrastructure and to meet the ongoing efforts of OFHEO to operate in a 
transparent manner. The final regulation should provide greater 
certainty for the Enterprises regarding regulatory expectations. 
Appropriate corporate governance and appropriate corporate governance 
supervision help ensure the continued safe and sound operation of the 
Enterprises as directed by Congress.

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

    The amendments to the corporate governance regulation are not 
classified as an economically significant rule under Executive Order 
12866 because they would not result in an annual effect on the economy 
of $100 million or more or a major increase in costs or prices for 
consumers, individual industries, Federal, state, or local government 
agencies, or geographic regions; or have significant adverse effects on 
competition, employment, investment, productivity, innovation, or on 
the ability of United States-based enterprises to compete with foreign-
based enterprises in domestic or foreign markets. Accordingly, no 
regulatory impact assessment is required. Nevertheless, the final 
amendments were submitted to the Office of Management and Budget for 
review under other provisions of Executive Order 12866 as a significant 
regulatory action.

Executive Order 13132, Federalism

    Executive Order 13132 requires that Executive departments and 
agencies identify regulatory actions that have significant federalism 
implications. A regulation has federalism implications if it has 
substantial direct effects on the states, on the relationship or 
distribution of power between the Federal Government and the states, or 
on the distribution of power and responsibilities among various levels 
of government. The Enterprises are federally chartered corporations 
supervised by OFHEO. The corporate governance regulation and the 
amendments thereto set forth minimum corporate governance standards 
with which the Enterprises must comply for Federal supervisory 
purposes. The corporate governance regulation requires that an 
Enterprise elect a body of state corporate law or the Revised Model 
Corporation Act to follow in terms of its corporate practices and 
procedures. The corporate governance regulation and the amendments 
thereto do not affect in any manner the powers and authorities of any 
state with respect to the Enterprises or alter the distribution of 
power and responsibilities between Federal and state levels of 
government. Therefore, OFHEO has determined that the corporate 
governance regulation and the amendments thereto have no federalism 
implications that warrant the preparation of a Federalism Assessment in 
accordance with Executive Order 13132.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the 
amendments to the corporate governance regulation under the Regulatory 
Flexibility Act. The General Counsel of OFHEO certifies that the 
corporate governance regulation and the amendments thereto are not 
likely to have a significant economic impact on a substantial number of 
small business entities because it is applicable only to the 
Enterprises, which are not small entities for purposes of the 
Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1710

    Administrative practice and procedure, Government Sponsored 
Enterprises.

0
Accordingly, for the reasons stated in the preamble, OFHEO amends 12 
CFR part 1710 to subchapter C of chapter XVII to read as follows:

PART 1710--CORPORATE GOVERNANCE

0
1. The authority citation for part 1710 continues to read as follows:

    Authority: 12 U.S.C. 4513(a) and 4513(b)(1).


Sec.  1710.13  [Removed]

0
2. Remove Sec.  1710.13.


Sec. Sec.  1710.11 and 1710.12  [Redesignated as Sec. Sec.  1710.12 and 
1710.13]

0
3. Redesignate Sec. Sec.  1710.11 and 1710.12 as new Sec. Sec.  1710.12 
and 1710.13, respectively.
0
4. Add a new Sec.  1710.11 to read as follows:


Sec.  1710.11  Board of directors.

    (a) Membership--(1) Limits on service of board members--(i) General 
requirement. No board member of an Enterprise may serve on the board of 
directors for more than 10 years or past the age of 72, whichever comes 
first; provided, however, a board member may serve his or her full term 
if he or she has served less than 10 years or is 72 years on the date 
of his or her election or appointment to the board.
    (ii) Waiver. Upon written request of an Enterprise, the Director 
may waive, in his or her sole discretion and for good cause, the limits 
on the service of a board member under paragraph (a)(1)(i) of this 
section.
    (2) Independence of board members. A majority of seated members of 
the

[[Page 17311]]

board of directors of an Enterprise shall be independent board members, 
as defined under rules set forth by the NYSE, as amended from time to 
time.
    (b) Meetings, quorum and proxies, information, and annual review--
(1) Frequency of meetings. The board of directors of an Enterprise 
shall meet at least eight times a year and no less than once a calendar 
quarter to carry out its obligations and duties under applicable laws, 
rules, regulations, and guidelines.
    (2) Non-management board member meetings. Non-management directors 
of an Enterprise shall meet at regularly scheduled executive sessions 
without management participation.
    (3) Quorum of board of directors; proxies not permissible. For the 
transaction of business, a quorum of the board of directors of an 
Enterprise is at least a majority of the seated board of directors and 
a board member may not vote by proxy.
    (4) Information. Management of an Enterprise shall provide a board 
member of the Enterprise with such adequate and appropriate information 
that a reasonable board member would find important to the fulfillment 
of his or her fiduciary duties and obligations.
    (5) Annual review. At least annually, the board of directors of an 
Enterprise shall review, with appropriate professional assistance, the 
requirements of laws, rules, regulations, and guidelines that are 
applicable to its activities and duties.
0
5. Amend newly designated Sec.  1710.12 by revising paragraph (b) and 
by adding new paragraph (c) to read as follows:


Sec.  1710.12  Committees of board of directors.

* * * * *
    (b) Frequency of meetings. A committee of the board of directors of 
an Enterprise shall meet with sufficient frequency to carry out its 
obligations and duties under applicable laws, rules, regulations, and 
guidelines.
    (c) Required committees. An Enterprise shall provide for the 
establishment of, however styled, the following committees of the board 
of directors, which committees shall be in compliance with the charter, 
independence, composition, expertise, duties, responsibilities, and 
other requirements set forth under section 301 of the Sarbanes-Oxley 
Act of 2002, Pub. L. 107-204 (Jul. 30, 2002) (SOA), as amended from 
time to time, with respect to the audit committee, and under rules 
issued by the NYSE, as amended from time to time--
    (1) Audit committee;
    (2) Compensation committee; and
    (3) Nominating/corporate governance committee.

0
6. Amend newly designated Sec.  1710.13 by revising newly designated 
paragraph (a) and by adding a new paragraph (b) to read as follows:


Sec.  1710.13  Compensation of board members, executive officers, and 
employees.

    (a) General. Compensation of board members, executive officers, and 
employees of an Enterprise shall not be in excess of that which is 
reasonable and appropriate, shall be commensurate with the duties and 
responsibilities of such persons, shall be consistent with the long-
term goals of the Enterprise, shall not focus solely on earnings 
performance, but shall take into account