Financial Interests of Appointive Directors, 33637-33639 [E7-11749]

Agencies

• Federal Housing Finance Board

[Federal Register Volume 72, Number 117 (Tuesday, June 19, 2007)]
[Rules and Regulations]
[Pages 33637-33639]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-11749]



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Federal Register / Vol. 72, No. 117 / Tuesday, June 19, 2007 / Rules 
and Regulations

[[Page 33637]]



FEDERAL HOUSING FINANCE BOARD

12 CFR Part 915

[No. 2007-23]
RIN 3069-AB-34


Financial Interests of Appointive Directors

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is issuing a 
final regulation that is substantially the same as the proposed rule to 
clarify the types of financial interests an appointive Federal Home 
Loan Bank (Bank) director may maintain in a member of the Bank on whose 
board the director serves. The changes broaden the scope of financial 
interests an appointive director may have with a holding company that 
controls one or more members.

DATES: Effective Date: The final rule is effective July 19, 2007.

FOR FURTHER INFORMATION CONTACT: Neil R. Crowley, Acting General 
Counsel, crowleyn@fhfb.gov or 202-408-2990; or Thomas Hearn, Senior 
Attorney-Advisor, Office of General Counsel, hearnt@fhfb.gov or 202-
408-2512. You can send regular mail to the Federal Housing Finance 
Board, 1625 Eye Street NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 7(a) of the Federal Home Loan Bank Act (Bank Act) (12 
U.S.C. 1427(a)) authorizes the Finance Board to appoint directors to 
the board of each Bank. Under section 7(a), the individuals appointed 
to serve as Bank directors may not ``during such Bank director's term 
of office, serve as an officer of any Federal Home Loan Bank or a 
director or officer of any member of a Bank, or hold shares, or any 
other financial interest in, any member of a Bank.'' In the past, the 
Finance Board generally has applied this statutory restriction on a 
case-by-case basis. In order to ensure that this prohibition is applied 
consistently and to provide guidance to the Banks as they identify well 
qualified individuals as appointive director candidates, the Finance 
Board published a proposed rule intended to clarify the types of 
financial interests an appointive Bank director may maintain in a 
member of the Bank on whose board the director serves. See 72 FR 15627 
(Apr. 2, 2007). The Finance Board requested comments from the public 
and established a 45-day comment period, which expired on May 17, 2007.
    The key features of the proposed rule include:
     Incorporating long-standing policy that a financial 
interest in a Bank member acquired through ownership of shares of a 
diversified mutual fund is a permissible holding for an appointive 
director.
     Extending the rationale for permitting mutual funds 
investments to other types of vehicles and accounts that share certain 
of the same key features as mutual funds and thus are unlikely to pose 
a risk of conflict of interest for an appointive director.
     Establishing a threshold under which a financial interest 
in a holding company that controls one or more members of the Bank on 
whose board the director serves is a permissible interest if the assets 
of all such members constitute less than 25 percent of the assets of 
the holding company, on a consolidated basis.
     Asking whether the rule should extend this rationale to 
service as a director or officer of a holding company that controls one 
or more members of the Bank on whose board an appointive director 
serves.
     Incorporating long-standing policy that loans from or 
deposits in a member are not a financial interest in the member if the 
transaction occurs in the normal course of business and on terms that 
are no more favorable than those available under like circumstances to 
members of the public.
     Establishing a threshold under which a contractual 
relationship with a member is a permissible interest if the money paid 
to a director in a calendar year is 10 percent or less of the 
director's adjusted gross income in that year.\1\
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    \1\ In the preamble to the proposed rule, the Finance Board 
described how it intended to calculate the amount of income 
attributed to a director where the contract was with a director's 
spouse. See 72 FR at 15631.
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     Attributing the financial interests of an appointive 
director's spouse and minor children to the director for purposes of 
determining compliance.
     Making other technical and conforming changes to part 915.

II. Analysis of Public Comments

    In response to the proposed rule, the Finance Board received three 
comments--two from Banks and one from a trade association. One Bank 
recommended against finalizing the rule because pending legislation 
would delete the provision prohibiting an appointive director from 
holding a financial interest in a member. The other Bank urged the 
Finance Board to increase the threshold for permissible financial 
interests in a holding company that controls Bank members from 25 to 50 
percent and to apply the same standard to service as an officer or 
director of such a holding company. The trade association supported 
finalizing the proposed rule as written.
    As stated in the proposed rule, the Finance Board believes that the 
changes to the regulations are warranted because they provide needed 
guidance to the Banks and to prospective appointive directors as to the 
types of relationships with members that are permissible under the 
current law. The possibility that the law may be amended at some point 
in the future is not a sufficient reason to decline to proceed with a 
rule that provides additional clarity to the persons most directly 
affected by the current law. The final rule also responds to the 
comments relating to the use of the 25 percent threshold by increasing 
that percentage, although not as much as suggested by the comment, and 
by applying it to determine whether service as an officer or director 
of a holding company is permissible. Other issues raised by the comment 
letters are described in the discussion of the final rule.

III. Analysis of the Final Rule

    With the exception of the provisions concerning holding companies, 
discussed in detail below, the Finance Board is adopting the proposed 
rule as

[[Page 33638]]

written, with minor technical changes. The Finance Board also is 
designating the new text as Sec.  915.10(e), rather than Sec.  
915.10(f), in order to replace the temporary provision concerning 
appointments to director positions that were vacant as of January 1, 
2007.
    One of the commenters urged the Finance Board not to extend these 
prohibitions to securities issued by a holding company or to persons 
who serve solely as an officer or director of the holding company, and 
who do not serve as an officer or director of the member institution, 
noting that the statute does not refer to holding companies. 
Alternatively, the commenter suggested that the Finance Board apply 
these prohibitions only to those holding companies whose subsidiary 
members constituted 50 percent or more of the consolidated assets of 
the holding company. This commenter also suggested that the Finance 
Board use a single standard for evaluating both investments in 
securities issued by a holding company and service as an officer or 
director of a holding company.
    As was discussed in the preamble to the proposed rule, the Finance 
Board has long applied these provisions to holding companies of at 
least some members, and the current practice is to bar any person who 
serves as an officer or director of a holding company from also serving 
as an appointive director. The intent of the proposed rule was to adopt 
a workable standard that would distinguish those holding companies that 
are very closely associated with their member (such as a one bank 
holding company), and thus should be subject to the prohibitions in 
section 7(a), from those where the connection is considerably more 
remote, which should not be subject to those prohibitions. Accordingly, 
the Finance Board has declined to adopt the suggestion that the rule 
apply only to financial interests in, or service with, the members of a 
Bank.
    The proposed rule would have established a safe harbor for 
ownership of securities issued by a holding company that controls 
members if the assets of all members of the Bank the holding company 
controls constitute less than 25 percent of the total assets of the 
holding company, on a consolidated basis. The Finance Board has 
considered the comment suggesting that the threshold be raised and has 
decided to increase the proposed threshold from 25 to 35 percent of the 
consolidated assets of the holding company. The Finance Board believes 
that a limit of 35 percent remains consistent with the previously 
stated rationale that an investment in such a holding company is 
predominantly an investment in something other than a member of the 
Bank. The Finance Board is not prepared, however, to increase the 
threshold to the 50 percent of assets limit suggested by the commenter, 
principally because such a high threshold would not be consistent with 
the above stated rationale.
    In the proposed rule, the Finance Board also sought comments with 
respect to application of these prohibitions to an appointive 
director's service as an officer or director of a holding company that 
controls a member of the director's Bank. At the time of the proposed 
rule, the Finance Board's policy was to prohibit an appointive director 
from serving as a director or officer of a holding company that 
controls a member of the director's Bank. The Finance Board proposed no 
regulatory amendments on this matter, but sought comment on whether it 
should apply a single standard for both investments in holding company 
securities and for other types of relationships, such as service as a 
director or officer of a holding company or contractual relationships 
with, or receipt of income from, such a company. The only comment 
received on this issue urged the Finance Board to apply a single 
standard for assessing all relationships that an appointive director 
may have with the holding company for a member. The Finance Board is 
persuaded that a single standard is the better approach and thus has 
revised the final rule to apply the same 35 percent of assets test in 
determining whether an appointive director's service as an officer or 
director of a holding company is permissible, as is used in determining 
whether a director's investments in securities issued by a holding 
company are permissible.
    With respect to the 35 percent of assets test, the Finance Board 
emphasizes that this is an ongoing requirement for any appointive 
director, and is not simply to be applied on a ``snapshot basis'' at a 
particular point in time. Accordingly, it is possible that during the 
course of a person's service as an appointive director an investment in 
securities issued by a holding company that had been permissible at the 
outset may cease to be permissible if the assets of the members grow 
beyond the 35 percent threshold. The same also would be true with 
respect to a person's service as an officer or director of a holding 
company. The Finance Board expects that the individual appointive 
directors and their respective Banks will monitor the assets of the 
particular members and holding companies to ensure that the directors 
remain in compliance with this requirement. In a similar fashion, the 
Finance Board expects that any appointive directors with any such 
financial interests, i.e., investments in members or their holding 
companies, whether directly or through various vehicles or accounts 
permitted under this rule, service as an officer or director of a 
holding company, or contractual relationships with a member or its 
holding company, will fully disclose those interests to the Finance 
Board prior to their initial appointment and as part of the annual 
certification process, as well as to their respective boards of 
directors. That disclosure requirement is embodied in the final rule 
through Sec.  915.10(e) (with respect to the Finance Board) and in 
Sec.  915.11(a)(4) (with respect to the board).

IV. Paperwork Reduction Act

    The appointive director application form is part of the information 
collection entitled ``Federal Home Loan Bank Directors.'' Under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Office of 
Management and Budget (OMB) has assigned control number 3069-0002, 
which is due to expire on November 30, 2007. The Finance Board and the 
Banks use the information contained in the application form to 
determine whether prospective appointive Bank directors satisfy the 
statutory and regulatory eligibility requirements and are well 
qualified to serve as a Bank director. Only individuals meeting these 
requirements may serve as Bank directors. See 12 U.S.C. 1427. This rule 
does not make substantive or material modifications to the ``Federal 
Home Loan Bank Directors'' information collection. Consequently, the 
Finance Board has not submitted any information to OMB for review.

V. Regulatory Flexibility Act

    The rule applies only to the Banks and to individuals who may be 
willing to serve as Bank appointive directors. Neither the Banks nor 
individuals come within the meaning of ``small entities'' as defined in 
the Regulatory Flexibility Act (RFA). See 5 U.S.C. 601(6). Thus, in 
accordance with section 605(b) of the RFA, 5 U.S.C. 605(b), the Finance 
Board hereby certifies that this final rule will not have a significant 
economic impact on a substantial number of small entities.

List of Subjects in 12 CFR Part 915

    Banks, Banking, Conflict of interests, Elections, Ethical conduct, 
Federal home loan banks, Financial disclosure,

[[Page 33639]]

Reporting and recordkeeping requirements.

0
For the reasons stated in the preamble, the Finance Board amends 12 CFR 
part 915 as follows:

PART 915--BANK DIRECTOR ELIGIBILITY, APPOINTMENT, AND ELECTIONS

0
1. The authority citation for part 915 continues to read as follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1427, and 
1432.


0
2. Revise Sec.  915.10(e) to read as follows:


Sec.  915.10  Selection of appointive directors.

* * * * *
    (e) Financial interests. Except as otherwise provided in this 
section, an appointive director may not: own any debt or equity 
securities issued by, or have any other financial interest in, a member 
of the Bank on whose board the director serves; serve as an officer or 
director of any member of the Bank on whose board the director serves; 
or serve as an officer of any Bank. An appointive director or 
appointive director candidate must disclose all financial interests to 
the Finance Board.
    (1) Investment vehicles. An appointive director's investment in a 
legally recognized entity that owns debt or equity securities issued by 
a member is not deemed to be shares or other financial interests in a 
member if the appointive director neither controls the entity nor plays 
any role in the purchase or sale of the securities owned by the entity.
    (2) Investment accounts. Debt or equity securities an appointive 
director owns through an account managed by an investment adviser 
registered under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 
et seq.), for which the director pays a fee for advisory services and 
with respect to which the director has given the investment adviser 
complete investment discretion to buy and sell all securities in the 
account, are not deemed to be shares or other financial interests in a 
member if the director is not affiliated with the investment adviser 
and has no control over the selection of securities acquired for the 
account.
    (3) Holding companies. Debt or equity securities issued by a 
holding company that controls one or more members of the Bank on whose 
board an appointive director serves are not deemed to be shares or 
other financial interest in a member if the assets of all such members 
constitute less than 35 percent of the assets of the holding company, 
on a consolidated basis. Service as a director or officer of a holding 
company that controls one or more members of the Bank on whose board an 
appointive director serves is not deemed to be service as a director or 
officer of a member of the Bank if the assets of all such members 
constitute less than 35 percent of the assets of the holding company, 
on a consolidated basis.
    (4) Loans and deposits. Loans obtained from a member and money 
placed on deposit with a member are not deemed to be a financial 
interest in a member if the transactions occur in the normal course of 
business of the member and are on terms that are no more favorable than 
those that would be available under like circumstances to members of 
the public.
    (5) Contractual relationships. Any contractual relationship between 
an appointive director and one or more members of the Bank on whose 
board the director serves that includes a contractual right to the 
payment of money, is presumed not to constitute a financial interest in 
a member if the amount due to the director under such contracts in any 
calendar year is less than 10 percent of the director's adjusted gross 
income for that calendar year. The Finance Board will determine on a 
case-by-case basis whether a contractual relationship that exceeds the 
10 percent threshold constitutes a financial interest in a member.
    (6) Attribution. The Finance Board will attribute to the appointive 
director any debt or equity securities owned by the director's spouse 
or minor children and any contractual relationships between a member 
and the director's spouse for purposes of determining compliance with 
this section.

0
3. Revise Sec.  915.11(a) to read as follows:


Sec.  915.11  Conflict of interests policy for Bank directors.

    (a) Adoption of conflict of interests policy. Each Bank shall adopt 
a written conflict of interests policy that applies to all Bank 
directors. At a minimum, the conflict of interests policy of each Bank 
shall:
    (1) Require the directors to administer the affairs of the Bank 
fairly and impartially and without discrimination in favor of or 
against any member or nonmember borrower;
    (2) Require appointive directors to comply with Sec.  915.10(e) of 
this part;
    (3) Prohibit the use of a director's official position for personal 
gain;
    (4) Require directors to disclose actual or apparent conflicts of 
interest and establish procedures for addressing such conflicts;
    (5) Provide internal controls to ensure that reports are filed and 
that conflicts are disclosed and resolved in accordance with this 
section; and
    (6) Establish procedures to monitor compliance with the conflict of 
interests policy.
* * * * *


Sec.  915.16  [Removed]

0
4. Remove Sec.  915.16.


Sec.  915.17  [Removed]

0
5. Remove Sec.  915.17.

Appendix A to Part 915--[Removed]

0
6. Remove Appendix A to part 915.

    Dated: June 13, 2007.

    By the Board of Directors of the Federal Housing Finance Board.
Ronald A. Rosenfeld,
Chairman.
 [FR Doc. E7-11749 Filed 6-18-07; 8:45 am]
BILLING CODE 6725-01-P