Executive Compensation, 28441-28451 [2013-11215]

Agencies

• Federal Housing Enterprise Oversight Office
• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 78, Number 93 (Tuesday, May 14, 2013)]
[Rules and Regulations]
[Pages 28441-28451]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11215]



[[Page 28441]]

Vol. 78

Tuesday,

No. 93

May 14, 2013

Part IV





Federal Housing Finance Agency





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12 CFR Parts 1230 and 1231





Department of Housing and Urban Development





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Office of Federal Housing Enterprise Oversight





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12 CFR Part 1770





Executive Compensation and Golden Parachute and Indemnification 
Payments; Final Rule and Proposed Rule

Federal Register / Vol. 78, No. 93 / Tuesday, May 14, 2013 / Rules 
and Regulations

[[Page 28442]]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1230

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1770

RIN 2590-AA12


Executive Compensation

AGENCY: Federal Housing Finance Agency; Office of Federal Housing 
Enterprise Oversight.

ACTION: Interim final rule; request for comments.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing an 
interim final rule with request for comments that sets forth 
requirements and processes with respect to compensation provided to 
executive officers by the Federal National Mortgage Association, the 
Federal Home Loan Mortgage Corporation, the Federal Home Loan Banks, 
and the Federal Home Loan Bank System's Office of Finance, consistent 
with the safety and soundness responsibilities of FHFA under the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 
as amended by the Housing and Economic Recovery Act of 2008.

DATES: The interim final rule is effective on June 13, 2013. FHFA will 
accept written comments on this interim final rule on or before July 
15, 2013. For additional information see SUPPLEMENTARY INFORMATION.

ADDRESSES: You may submit your comments on this interim final rule, 
identified by regulatory identifier number ``RIN 2590-AA12,'' by any 
one of the following methods:
     Email: Comments to Alfred M. Pollard, General Counsel, may 
be sent by email at RegComments@fhfa.gov. Please include ``RIN 2590-
AA12'' in the subject line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by email 
to FHFA at RegComments@fhfa.gov to ensure timely receipt by the agency. 
Please include ``RIN 2590-AA12'' in the subject line of the message.
     Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel; Attention: Comments/RIN 2590-AA12, 
Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW., 
Washington, DC 20024. The package should be logged at the Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel; Attention: Comments/RIN 2590-AA12, Federal 
Housing Finance Agency, Eighth Floor, 400 Seventh Street SW., 
Washington, DC 20024.

FOR FURTHER INFORMATION CONTACT: Alfred M. Pollard, General Counsel, 
(202) 649-3050, Alfred.Pollard@fhfa.gov, or Lindsay Simmons, Assistant 
General Counsel, (202) 649-3066, Lindsay.Simmons@fhfa.gov, (not toll-
free numbers), Federal Housing Finance Agency, Eighth Floor, 400 
Seventh Street SW., Washington, DC 20024. The telephone number for the 
Telecommunications Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Comments

    FHFA invites comments on all aspects of the interim final rule and 
will take all comments into consideration before issuing the final 
regulation. Copies of all comments will be posted without change, 
including any personal information you provide, such as your name, 
address, email address, and telephone number, on the FHFA internet Web 
site at http://www.fhfa.gov. In addition, copies of all comments 
received will be available for examination by the public on business 
days between the hours of 10 a.m. and 3 p.m., at the Federal Housing 
Finance Agency, Eighth Floor, 400 Seventh Street SW., Washington, DC 
20024. To make an appointment to inspect comments, please call the 
Office of General Counsel at (202) 649-3804.

II. Background

    FHFA published a proposed rulemaking with request for comments on 
Executive Compensation on June 5, 2009 (74 FR 26989). The public notice 
and comment period closed on August 4, 2009. This interim final rule, 
when effective, will supersede the Office of Federal Housing Enterprise 
Oversight (OFHEO) Executive Compensation rule, 12 CFR part 1770.\1\
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    \1\ FHFA is continuing its work to merge existing regulations of 
its predecessor agencies (OFHEO and the Federal Housing Finance 
Board), and will consider the appropriate disposition of an OFHEO 
corporate governance provision related to compensation of directors, 
executive officers and employees (at 12 CFR 1710.13), and the 
relationship of that provision to this interim final rule, in 
conjunction with that project.
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    FHFA issued the proposed rule to implement sections 1113 and 1117 
of the Housing and Economic Recovery Act of 2008 (HERA), Public Law 
110-289, 122 Stat. 2654. Section 1113, which amended section 1318 of 
the Federal Housing Enterprises Financial Safety and Soundness Act 
(Safety and Soundness Act) (12 U.S.C. 4518), provides authority to the 
Director to prohibit and withhold compensation of executive officers of 
the Federal National Mortgage Association, the Federal Home Loan 
Mortgage Corporation (collectively, the Enterprises), and the Federal 
Home Loan Banks (Banks) (collectively, the regulated entities). Section 
1117, which amended the Enterprises' charter acts and the Federal Home 
Loan Bank Act, provided the Director with temporary authority to 
approve, disapprove, or modify the executive compensation of the 
regulated entities.\2\ This temporary authority expired on December 31, 
2009.
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    \2\ Section 1117 of HERA amended section 304 of the Federal 
National Mortgage Association Charter Act (12 U.S.C. 1719), section 
306 of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 
1455), and section 11 of the Federal Home Loan Bank Act (12 U.S.C. 
1431).
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    The proposed rule also was issued to continue the requirement under 
the charter acts of the Enterprises that the Director approve any 
agreements or contracts of executive officers that provide compensation 
in connection with termination of employment.\3\ As was noted in the 
Supplementary Information to the proposed rule, no similar prior 
approval authority for the Director of termination benefits of 
executive officers of the Banks is contained in the Federal Home Loan 
Bank Act or HERA, but the total payment or value derived from 
termination benefits is included in FHFA's review of compensation 
provided by the Banks to their executive officers to determine whether 
the overall compensation is reasonable and comparable. This is because 
FHFA considers the term ``compensation'' to include benefits to an 
executive officer that are derived from post-employment benefit plans 
or programs and other compensatory benefit arrangements containing 
termination benefits, which affect the executive officer individually 
or as part of a group. As a result, FHFA reviews the value of benefits 
provided under such plans, programs, and

[[Page 28443]]

arrangements on an ongoing basis in exercising its compensation review 
authority. FHFA aggregates the benefits provided under such plans, 
programs, and arrangements with all other payments of money or any 
other thing of current or potential value to determine whether an 
officer's overall compensation is reasonable and comparable.\4\
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    \3\ See section 309(d)(3)(B) of the Federal National Mortgage 
Association Charter Act (12 U.S.C. 1723a (d)(3)(B)) and section 
303(h)(2) of the Federal Home Loan Mortgage Corporation Act (12 
U.S.C. 1452(h)(2)).
    \4\ See 74 FR at 26990 (June 5, 2009).
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    Additionally, the proposed rule was issued to ensure that the 
regulated entities and the Office of Finance (OF) comply with processes 
used by FHFA in its oversight of executive compensation. The processes 
require the submission of relevant information by the regulated 
entities and OF on a timely basis, in a format deemed appropriate by 
FHFA, to enable FHFA to efficiently carry out its executive 
compensation functions. For reasons noted above, as with the 
Enterprises, information required to be submitted to FHFA for its 
review and consideration by the Banks includes information relating to 
compensation for services during employment and to termination benefits 
for their executive officers.
    FHFA has determined to issue this rule as an interim final rule 
with request for comments for a number of reasons. This approach will 
allow provisions upon which FHFA has received and considered comments 
to become effective, while also providing an opportunity for additional 
comment in view of certain revisions to the proposed rule which, 
although they are a logical outgrowth of the proposed rule and are 
aligned with existing agency practice which the regulated entities are 
familiar with, may be of interest to potential commenters. Given the 
passage of time since the comment period closed (August 4, 2009), and 
the executive compensation review processes currently in place, FHFA 
also believes that publishing this interim final rule will promote 
clarity and transparency. Further details of the revisions in response 
to comments and other changes, can be found below.
    In addition to the Director's authority under section 1113 of HERA 
to prohibit and withhold compensation of executive officers of the 
regulated entities (as implemented in this interim final rule), section 
1114 of HERA further amended section 1318 of the Safety and Soundness 
Act (12 U.S.C. 4518) to authorize the Director to prohibit or limit 
golden parachute payments and indemnification payments by the 
Enterprises and the Banks to entity-affiliated parties. FHFA issued an 
interim final rule \5\ and a final rule \6\ on Golden Parachute 
Payments setting forth factors to be considered by the Director of FHFA 
in acting upon the Director's authority to limit golden parachute 
payments to entity-affiliated parties of a regulated entity or OF. 
Subsequently, FHFA issued a proposed amendment to the final Golden 
Parachute Payments rule to address in more detail prohibited and 
permissible golden parachute payments. FHFA believed it was useful to 
provide an opportunity to the public to read and comment on both the 
proposed golden parachute payments and indemnification payments 
amendments in context. Therefore, the proposed amendment re-proposed 
the indemnification payments amendment.\7\ Today, FHFA also published 
in this issue of the Federal Register a proposed rule (Re-proposal) 
that addresses content set forth in the proposed amendment, both in the 
Supplementary Information and the regulatory section, which relates to 
prohibited and permissible golden parachute payments. The Re-proposal 
solicits comments on the appropriate treatment of golden parachute 
arrangements entered into before the effective date of the rule. 
Additionally, the Re-proposal responds to public comments received to 
date by FHFA on the golden parachute provisions, and provides 
clarification regarding coverage of retirement plans.
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    \5\ Golden Parachute Payments and Indemnification Payments--
Interim Final Rule with Request for Comments, 73 FR 53356 (September 
16, 2008), with Correcting Amendments at 73 FR 54309 (September 19, 
2008) and 73 FR 54673 (September 23, 2008), codified at 12 CFR part 
1231. See also, Proposed Amendment for Golden Parachute and 
Indemnification Payments, 73 FR 67424 (November 14, 2008).
    \6\ Golden Parachute Payments, 74 FR 5101 (January 29, 2009), 
codified at 12 CFR part 1231.
    \7\ Golden Parachute and Indemnification Payments Proposed Rule, 
74 FR 30975 (June 29, 2009).
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III. Comments on and Changes to the Proposed Rule

A. Changes in Response to Comments Received

    FHFA received comments from a few individuals (consumers), private 
businesses, the 12 Banks, the Chairs of the 12 Banks, OF, a retirement 
service, a number of state bankers associations and state community 
bankers associations, several banks that are Bank members and 
stockholders, and the American Bankers Association.
    FHFA considered all of the comments submitted. Some of them, as 
described below, requested changes in the proposed rule that would 
conflict with the agency's statute. In response to the other comments, 
FHFA either made the requested or a similar change, or explains below 
why it is not doing so.
    In general, the consumers commented that executive compensation is 
too high. FHFA acknowledges widespread public concern that executive 
compensation is unreasonably high. Concerns about amounts and 
composition of executive compensation and their effect on safety and 
soundness underlie many recent legislative and regulatory initiatives. 
This regulation is a means for addressing that concern, as prescribed 
by Congress. Section 1318 of the Safety and Soundness Act, as amended 
by section 1113 of HERA, and this interim final rule prohibit executive 
compensation that is excessive, in that it is higher than is 
reasonable, or than is comparable to that paid by similar companies.
    One consumer stated that the proposed rule provides too much 
discretion on the part of the Director regarding oversight of an 
executive officer's compensation. He referred to language in regulatory 
provisions, e.g., the Director ``may review,'' and ``may take into 
consideration,'' and requested that the rule be revised to use language 
that imposes an affirmative duty, i.e., ``must'' instead of ``may.'' On 
these points, the language in the proposed rule is the same as the 
statutory authorizing language. It ensures that the Director, on a 
case-by-case basis, has the ability to take appropriate action with 
respect to an executive officer's compensation. Therefore, FHFA has 
determined to retain the language in the interim final rule.
    The same commenter stated that the proposed rule provides too 
little discretion to the Director with respect to setting compensation 
for an executive officer. He requested modifying the prohibition set 
forth in Sec.  1230.3(d) to provide the Director with the authority to 
prescribe or set a specific level or range of compensation. However, 
such a modification would be contrary to the statutory prohibition 
against setting of compensation by the Director (12 U.S.C. 4518(d)). A 
final comment by the consumer was that affirmative, not discretionary, 
language should be added to Sec.  1230.7 ``Compliance'' of the proposed 
rule in order to provide adequate consequences for failure to comply 
with the rule. For the reasons described below in response to other 
comments, FHFA has determined to remove that section of the proposed 
rule and therefore is not making the requested change.
    Except for the consumers, all commenters identified above requested 
that FHFA provide full consideration to

[[Page 28444]]

the Banks' member-controlled, cooperative structure and financial 
performance as bases on which FHFA should provide a less prescriptive 
approach in its review of the executive compensation at the Banks than 
what they stated may be justified for FHFA review of executive 
compensation at the Enterprises, in view of their conservatorship 
status.
    Those commenters uniformly stated their belief that FHFA review, as 
proposed, would be unduly prescriptive for two reasons. First, they 
claimed that the proposed rule usurps to FHFA the authority and 
responsibilities for establishing Bank executive compensation from each 
Bank's compensation committee or board of directors. Second, they 
claimed that the proposal violates the statutory prohibition on FHFA 
setting Bank compensation noted above (12 U.S.C. 4518(d)).
    As bases for these concerns, the commenters noted that the 
Supplementary Information to the proposed rule contained a statement 
that ``FHFA may consider the Federal Reserve Banks and the Farm Credit 
Banks as examples of appropriate comparators to assess the 
reasonableness and comparability of executive compensation provided by 
the Banks.'' \8\ They also noted that proposed Sec.  1230.2, in 
defining the term ``reasonable and comparable,'' includes language 
under the definition of the term ``comparable,'' with regard to benefit 
levels, that states ``FHFA generally considers comparable to be at or 
below the median compensation for a given position at similar 
institutions.'' \9\
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    \8\ 74 FR at 26990 (June 5, 2009).
    \9\ Section 1230.2, definition of the term ``reasonable and 
comparable'' (2)(i). 74 FR at 26993 (June 5, 2009).
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    The commenters argued that the effect of FHFA's identifying 
particular comparator institutions is to impose a presumptive cap on 
compensation by reference to those institutions, which would prescribe 
or set a specific level or range of compensation. While HERA imposes 
certain limitations on compensation (e.g., that it be reasonable), they 
argued that HERA did not alter the fundamental authority of the board 
of directors of each Bank to set executive compensation. They claim 
that FHFA's proposed approach would impose uniform FHFA-mandated 
compensation outcomes on a widely divergent set of Banks, which, 
although they share the same mission, operate in different 
circumstances, under different strategies, and in different markets. By 
doing so, they argued, FHFA effectively would be dictating an outcome 
to the Banks' boards of directors, thereby assigning to FHFA the role 
that is properly assigned to the Banks' boards of directors.
    The commenters stated that the existing Executive Compensation rule 
does not include a specific presumptive percentage cap relative to 
comparator institution compensation that would apply to the 
Enterprises' executive compensation determinations. Nor does the 
existing rule, or the Federal Register notice accompanying its 
promulgation, specify particular comparator institutions for the 
Enterprises. They further argued that their comparator institutions 
should not include Federal Reserve Banks or Farm Credit Banks. They 
enumerated a number of reasons why those institutions should not be 
included in the Banks' comparator groups.
    The commenters argued that, under 12 U.S.C. 4518, FHFA may not 
mandate a specified benchmarking level for compensation by establishing 
a presumption that Banks must pay compensation at or below the median 
compensation. They also pointed out that, as reflected in the Form 10-
Ks filed by the Banks, although many of the Banks' boards of directors 
have chosen to utilize the median level, others look to the 65th 
percentile or the 75th percentile. They argued that the proposed rule 
ignores the reality of the benchmarking process and requested that FHFA 
delete the language under the definition of the term ``comparable,'' 
stating that ``comparable'' benefits are those at or below the median 
for similar institutions.
    FHFA agrees with the commenters that the board of directors has the 
responsibility to set compensation for an executive officer, which the 
Director will review for reasonableness and comparability, including 
whether the structure of such compensation encourages excessive risk-
taking or aligns management's incentives with those of safety and 
soundness.
    As is required by HERA,\10\ the Director, when promulgating 
regulations relating to the Banks, considers the differences between 
the Banks and the Enterprises with respect to the Banks' 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 considers 
any other differences that are deemed appropriate. In preparing the 
proposed rule and this interim final rule, the Director considered the 
differences between the Banks and the Enterprises as they relate to the 
above factors.
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    \10\ Section 1313(f) of the Safety and Soundness Act (12 U.S.C. 
4513(f)), as amended by section 1201 of HERA.
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    FHFA does not agree that calling attention to certain classes of 
institutions--the Farm Credit Banks and the Federal Reserve Banks--as 
relevant to assessing Federal Home Loan Bank compensation constitutes 
``set[ting] a specific level or range of compensation'' under the 
Safety and Soundness Act. FHFA continues to believe that those 
institutions are relevant points of reference in assessing the 
reasonableness and comparability of Federal Home Loan Bank 
compensation, because they have certain points in common with the 
Federal Home Loan Banks: They are government-sponsored financial 
institutions; they have some measure of government backing and 
therefore a potentially different risk profile than non-government-
sponsored institutions; \11\ and they do not issue publicly traded 
stock that can be used as an element of long-term compensation and 
therefore must structure their compensation differently from publicly 
traded companies. For these reasons it would be wrong to ignore the 
Farm Credit Banks and the Federal Reserve Banks.\12\ While the Banks' 
comment letters correctly point out differences between them and the 
Farm Credit Banks and the Federal Reserve Banks, there are also key 
differences between the Federal Home Loan Banks and the commercial 
banks and similar institutions that the Banks have identified as their 
comparators. The fact is that there are no institutions that are 
exactly comparable to the Federal Home Loan Banks. FHFA concludes that 
the Farm Credit Banks and Federal Reserve Banks should be included as 
points of reference in assessing the reasonableness and

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comparability of compensation at the Federal Home Loan Banks, and that 
doing so does not result in dictating any particular level or range of 
compensation.
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    \11\ For example, the financial crisis of 2008 caused Congress 
to enact, in HERA, a temporary liquidity facility for the Federal 
Home Loan Banks, 12 U.S.C. 1431(l). (That facility was never drawn 
upon.) Similarly, a crisis in the Farm Credit System in the 1980s 
caused Congress to intervene, see Agricultural Credit Act of 1987, 
101 Stat. 1568 (Jan. 6, 1988).
    \12\ While the statute refers to ``similar businesses (including 
other publicly held financial institutions or major financial 
services companies),'' that language was originally included in the 
Safety and Soundness Act when the only regulated entities were the 
Enterprises, major publicly held financial institutions. The 
inclusion of the Federal Home Loan Banks as regulated entities 
occurred subsequently, in the amendments made by HERA in 2008. They 
are not publicly held institutions, and supervisory judgments made 
with respect to them must reflect their unusual status as 
cooperatives. In fact, the statute requires FHFA to do so, 12 U.S.C. 
4513(f).
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    In order to address the commenters' expressed concerns that the 
language in the proposed rule results in a presumptive cap with respect 
to benefit levels, and after further consideration of the need to 
describe comparable ``benefit levels'' and ``similar institutions,'' 
FHFA has determined to delete paragraphs (i) and (ii) under the 
definition of ``comparable,'' which were the paragraphs addressing the 
relationship between ``comparable'' benefits and median levels at other 
institutions, and providing that FHFA may communicate particular 
comparable institutions or types of institutions to the regulated 
entities from time to time. Instead, FHFA is replacing the term 
``similar institutions'' in the first paragraph of the definition of 
``comparable'' with ``institutions of similar size and function.''
    Second, in response to concerns regarding FHFA oversight of Banks' 
executive compensation, as was noted in the proposed rule, FHFA will 
address differences in aspects of executive compensation between the 
Enterprises and the Banks by establishing policies for appropriate 
compensation packages and termination benefits, and will provide 
routine guidance to the regulated entities.\13\ FHFA recognizes that 
executive compensation oversight mandated by HERA has resulted in a new 
area of regulatory compliance for the Banks. For that reason, in 
addition to guidance, FHFA staff will continue to work directly with 
the relevant staff, committees, and boards of the Banks to ensure a 
structured, well-understood review process. FHFA guidance and dialogue 
between staffs will, among other things, address concerns raised by the 
Banks regarding how the provisions of the rule will operate under 
specific circumstances.
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    \13\ See 74 FR at 26990 (June 5, 2009).
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    FHFA has considered, and will continue to consider, by guidance and 
discussion with the Banks, the differences related to the factors set 
forth in 12 U.S.C. 4513(f). However, both the Enterprises and the 
Banks, as ``regulated entities,'' are subject to the same statutory 
requirements with respect to oversight of their executive compensation 
by the Director, and FHFA believes that that mandate is fairly and 
reasonably implemented by establishing an equivalent process and the 
same high-level concept of reasonableness and comparability for the 
Banks as for the Enterprises.
    FHFA received additional comment from the Banks expressing concern 
that the definition of ``reasonable and comparable'' in the proposed 
rule refers to compensation taken ``in whole or in part.'' The Banks 
stated their belief that if an executive's compensation package taken 
as a whole is reasonable and comparable to compensation at similar 
institutions for similar duties, FHFA should not be permitted to reject 
a discrete element of an executive's compensation as excessive. They 
requested that the wording ``in whole or in part'' be replaced with 
``taken as a whole'' in the interim final rule.
    In its ongoing oversight of an executive's overall compensation, 
FHFA reviews all components that compose the broadly defined term 
``compensation.'' If any component's value is determined to be an 
outlier, it may still be acceptable given the compensation taken as a 
whole. On the other hand, it may also be deemed excessive by itself if 
it creates questionable incentives. FHFA will advise the entity if it 
finds the aggregate compensation package to be excessive. FHFA may 
specifically note that a particular component appears to be the source 
of the problem and should be reassessed by the entity in order to align 
the total package with the reasonable and comparable standard. For 
these reasons, FHFA has determined to retain the language in the 
interim final rule.
    The Banks requested that FHFA revise paragraph (1)(iv) of the 
definition of ``reasonable'' compensation to clarify that the factors 
being reviewed by FHFA include not only corporate and individual 
performance, but also the performance of a division, department, or 
unit of a regulated entity. FHFA considers this request to be well 
founded, and has determined to revise the paragraph to add the language 
``or one of the entity's significant components.''
    The Banks also requested that FHFA revise paragraph (1)(iv) noted 
above to delete the reference to ``guidance.'' They stated that, while 
compliance with FHFA regulations and orders, and written agreements is 
mandatory and subject to enforcement action by FHFA, ``guidelines'' 
issued by FHFA do not constitute the basis for an FHFA enforcement 
action. They also stated that the advisory status of ``guidance'' or 
``guidelines'' should not form the basis for an evaluation of executive 
compensation.
    The Banks are correct that guidance, because it is often not 
adopted through notice-and-comment rulemaking, occupies a lesser status 
than regulations as a supervisory tool. Failure to follow guidance 
cannot per se be grounds for an enforcement action. Therefore, FHFA has 
revised the paragraph (1)(iv) to reference the ``performance of the 
regulated entity, the specific employee, or one of the entity's 
significant components with respect to achievement of goals, 
consistency with guidance and internal rules of the entity, and 
compliance with applicable law and regulation.'' Guidance does 
represent the agency's considered view on the subjects that it 
addresses, and failure to follow it may be taken as evidence that an 
entity is not engaging in best practices or is not managing itself 
safely and soundly in all respects. Failure to follow guidance may 
expose an entity to unnecessary risk and is likely to subject an entity 
to criticism when discovered in an examination. For these reasons, FHFA 
believes that consistency with agency guidance is an expected element 
of executive performance and, therefore, consistency with guidance is 
an appropriate element in assessing compensation.
    FHFA has also determined that the substance of paragraphs (1)(i) 
and (1)(ii) of the definition of ``reasonable'' in the proposed rule 
can be combined into one paragraph. In addition, FHFA has removed 
references to comparability from the definition of ``reasonable,'' 
leaving these concepts to be covered by the definition of 
``comparable.'' As a result of these amendments, paragraph (1)(iii) of 
the proposed rule's definition of ``reasonable'' now appears as 
paragraph (1)(ii); and the preceding changes discussed with regard to 
paragraph (1)(iv) of that definition are set forth in paragraph 
(1)(iii) of the interim final rule.
    The Banks expressed concerns that the proposal would put a Bank 
executive officer at risk with respect to all compensation the officer 
may have received or earned, thereby making it difficult for the Banks 
to attract or retain highly qualified executive officers. As the bases 
for these concerns, they cited proposed Sec.  1230.3, ``Prohibition and 
withholding of executive compensation,'' and proposed Sec.  1230.7, 
``Compliance.'' Specifically, they referred to the Director's authority 
to withhold compensation of an executive officer during the Director's 
review of its reasonableness and comparability under Sec.  1230.3, and 
the possibility that FHFA could take corrective or remedial action, 
including an enforcement action, to require a Bank executive officer to 
make restitution or reimbursement of ``excessive compensation'' under 
Sec.  1230.7. Under these provisions, the

[[Page 28446]]

Banks stated that FHFA appears to suggest that it can not only prohibit 
earned compensation from being paid to a Bank executive officer, but 
also can require a Bank executive officer to repay compensation the 
officer has already received under the claim that such compensation was 
``excessive compensation.'' They requested that FHFA modify the rule to 
provide reasonable and appropriate limitations on FHFA's exercise of 
any authority under proposed Sec. Sec.  1230.3 and 1230.7.
    FHFA's authority to withhold compensation to an executive officer, 
or to place such compensation in an escrow account during its review 
under the reasonable and comparable standard under Sec.  1230.3, was 
mandated by Congress in section 1113 of HERA. A description of how that 
authority would be exercised is provided below. With respect to FHFA's 
compliance authority under Sec.  1230.7, FHFA has considered the merits 
of the commenters' arguments and has removed proposed Sec.  1230.7 from 
the interim final rule. Proposed Sec.  1230.7 was derived from 
statutory enforcement provisions not specific to executive 
compensation. Those enforcement provisions authorize FHFA to obtain 
restitution or reimbursement from entity-affiliated parties who have 
been unjustly enriched by a regulatory violation,\14\ and those 
provisions are available, with or without Sec.  1230.7 of the proposed 
rule, as a remedy for violations of Sec.  1230.3(a) of the rule 
prohibiting regulated entities from paying compensation that is not 
reasonable or comparable. FHFA will use that authority where it 
determines that a case requires it. At the same time, however, FHFA is 
aware of the potential impact that uncertainty about the finality of 
compensation may have on recruitment and retention. Therefore, as a 
next step, FHFA plans to publish for comment a proposal to require the 
regulated entities to develop and adopt policies to provide for 
recapture of improvidently or improperly paid compensation in 
appropriate circumstances.
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    \14\ Safety and Soundness Act section 1371(d), 12 U.S.C. 
4631(d).
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    The Banks commented extensively on proposed Sec.  1230.3(c) 
``Withholding of compensation'' and Sec.  1230.3(e) ``Prohibition of 
payment or agreement by regulated entity.'' They sought clarification 
as to the relationship between the two paragraphs and the circumstances 
in which they would apply. They also questioned the relationship 
between subsections of paragraph (e). The Banks recommended that 
paragraphs (c) and (e) be combined to eliminate any potential conflict 
or ambiguity.
    After considering the comments received, and further reflecting on 
the appropriate interaction between FHFA and the regulated entities and 
OF with respect to review of executive compensation actions, FHFA has 
reorganized paragraphs (c) and (e) which appear as paragraphs (d) and 
(e) of the interim final rule, and has revised their substantive 
content. Rather than identify a set of compensation actions that cannot 
be taken while under FHFA review, regardless of how long that review 
takes, FHFA has identified sets of compensation actions that require 
prescribed advance notice to FHFA, and which cannot be executed until 
that review period, or any extension thereof, has passed, unless the 
regulated entity or OF receives notice of approval or non-objection by 
the Director earlier.
    Specifically, paragraph (d) of Sec.  1230.3 of the interim final 
rule requires 60 days' advance notice of incentive compensation plans; 
30 days' advance notice of term employment agreements, termination 
arrangements (except that, because of a pre-existing statutory 
requirement, termination arrangements of the Enterprises must be 
approved in advance), and changes to annual compensation, payments 
under pay for performance or other incentive plan, or any other element 
of compensation; and five business days' advance notice of compensation 
commitments being made to executive officers who are being newly hired. 
In the interim final rule, FHFA reserves the right to extend the review 
period as necessary, in its discretion, which it may exercise if, for 
example, it has questions about a proposed compensation arrangement or 
proposed incentive plan goals. The Director may also require that the 
compensation be withheld or paid into escrow pending further review, 
with respect to the types of actions specifically identified in this 
section of the rule or any other executive compensation actions.
    FHFA has adopted this regime as balancing the importance of 
appropriate review for important executive compensation actions, while 
recognizing the need of business organizations to be able to move 
forward with compensation decisions without being restrained by a 
review period that could be indefinite. At the same time, in situations 
where more review is required, the Director retains the ability to 
extend the review period and, if necessary, under paragraph (e) to 
require that compensation be withheld or paid into escrow even beyond 
the periods prescribed, as well as with respect to compensation actions 
other than those specified in paragraph (d).
    The Banks requested that FHFA modify the definition of the term 
``executive officer'' with respect to a Bank to correspond more closely 
to the definition of ``executive officer'' as defined in Exchange Act 
Rule 3b-7 (17 CFR 240.3b-7), which covers the president, any vice 
president in charge of a principal business unit, division or function, 
any other officer who performs a policy-making function or any other 
person who performs similar policy-making functions. They noted that 
the definition seems to provide the basis for the definition of an 
``executive officer'' for the Enterprises under the section. Because 
the Banks are SEC registrants, they stated their belief that a similar 
definition would be appropriate. They further stated that, given the 
nature of Bank boards of directors, the positions of chairman and vice 
chairman should not be included in the definition of executive officer 
for the Banks. Also, they commented that the definition of ``executive 
officer'' should not be based solely on an officer's reporting 
relationship, such as a senior vice president that reports to the 
president or chief operating officer, but instead, should be based only 
on whether such officer is in charge of a principal business unit, 
division or function. Moreover, the Banks stated that the Director 
should be required to inform the Banks of those officers covered by the 
definition of executive officer as he is required to notify the 
Enterprises under the proposal.
    As noted earlier, the Director recognizes that there are 
differences between the Enterprises and the Banks in size, complexity, 
and function. Therefore, as was stated in the proposed rule, the 
approach by FHFA to oversight of executive compensation may differ in 
certain aspects between the Enterprises and the Banks. For example, it 
was noted that ``in consideration of the Banks' size and structure, the 
Director's oversight of compensation may cover a smaller number of 
positions in comparison to covered executive officer positions for the 
Enterprises.'' \15\
---------------------------------------------------------------------------

    \15\ 74 FR at 26990 (June 5, 2009).
---------------------------------------------------------------------------

    Based on comments received and after further consideration, FHFA 
has determined to revise the definition of the term ``executive 
officer'' for the Enterprises, Banks, and OF in the interim final rule. 
FHFA believes that the revised definition is more appropriate to their 
organizational structure, position responsibilities, and other relevant 
factors. An ``executive officer'' of an Enterprise continues to

[[Page 28447]]

follow the definition set forth in the Safety and Soundness Act. The 
definition tracks the current concept of SEC ``Section 16 Officers'' 
plus any position designated by the Director. FHFA has determined to 
delete the reporting function from the definition. With respect to the 
Banks, the definition of ``executive officer'' adopts the language of 
the SEC's Regulation S-K, 17 CFR 229.402(a)(3), and therefore covers a 
Bank's most highly compensated officers (generally referred to as the 
``Top 5'') who are designated under SEC disclosure requirements as 
``Named Executive Officers'' (NEOs). An executive officer for purposes 
of this regulation would cover officers who were NEOs at the Bank's 
last filing, who would be NEOs if filing occurred today, and those 
expected to be NEOs in the future based on current title, duties, or 
pay. (Consequently, the total number of NEOs at any time may be more 
than five.) In addition to the NEOs, an ``executive officer'' of a Bank 
would include any officer designated by the Director. With respect to 
OF, an ``executive officer'' is defined to cover the chief executive 
officer, chief financial officer, chief operating officer, and any 
other officer designated by the Director.
    Because the Banks are much smaller than the Enterprises, and 
because the rule states clearly who is an executive officer, it is not 
necessary for the Director to tell the Banks who their NEOs are, 
although the Director retains the ability to identify additional 
executive officers.
    The Banks observed that proposed Sec.  1230.3(b) provides that, in 
determining whether compensation provided by a Bank to an executive 
officer is not reasonable and comparable, the Director may take into 
consideration any factors that the FHFA Director considers relevant, 
but that the section specifies only one factor that the FHFA Director 
might consider relevant to such a determination: ``any wrongdoing on 
the part of the executive officer, such as any fraudulent act or 
omission, breach of trust or fiduciary duty, violation of law, rule, 
regulation, order, or written agreement, and insider abuse with respect 
to the regulated entity or the Office of Finance.'' The Banks requested 
that FHFA modify the rule to provide more specificity as to the types 
of factors that would be deemed relevant in supporting a determination 
by the FHFA Director that an executive officer's compensation is not 
reasonable and comparable.
    In response, FHFA notes that HERA amended the Director's 
authorities under section 1318 of the Safety and Soundness Act to 
prohibit and withhold executive compensation by adding paragraph (b) of 
that section, and the language of the regulation is taken directly from 
that statutory language. Congress recognized the need to provide the 
Director with the broad ability to consider any factor relevant to the 
position under review, based on the case-specific facts and 
circumstances, to determine whether the prohibition or withholding of 
the executive officer's compensation is warranted. FHFA believes that 
the Director may need sufficient flexibility in consideration of 
factors and that it would be unwise to establish a specific list in 
this regulation. In determining whether compensation is excessive, the 
Director may consider a number of factors, such as the appropriateness 
of comparator groups, geography, level of complexity of the institution 
and its business model as well as of the executive's own 
responsibilities, the level and types of risk that must be managed, the 
appropriate balance between short- and long-term risks and rewards, the 
executive's years of experience and tenure at the entity (including 
past performance), and other customary factors used to determine 
compensation.
    The Banks commented that proposed Sec.  1230.3(b) would not offer 
an executive officer who is the subject of a compensation review based 
on, among other things, a potential claim of wrongdoing, any notice and 
opportunity to present his or her views or defenses with respect to 
either the factors that the Director is considering or the amount and 
form of compensation that may be potentially withheld. They further 
stated that Sec.  1230.3(b) does not provide any standard as to the 
degree of proof of a claim of wrongdoing or other conduct that would be 
required to support a decision by the Director to order a Bank to 
permanently withhold compensation that had been earned by an executive 
officer. The Banks argued that Sec.  1230.3(b), as proposed, raises 
significant due process concerns.
    The Banks argued that the importance of protecting due process 
rights was recognized by the Federal Housing Finance Board (Finance 
Board) when it issued an order that established a process for the 
suspension or removal of a Bank director or officer.\16\ They requested 
that FHFA incorporate the notice, hearing, and decision principles that 
the Finance Board included in the Order into any final rule.
---------------------------------------------------------------------------

    \16\ See Finance Board Order No. 2005-12 (June 16, 2005).
---------------------------------------------------------------------------

    The Director's authorities with respect to oversight of executive 
compensation resulted from Congressional concern, both at the time of 
original enactment of the Safety and Soundness Act and at the time of 
HERA, that compensation provided by the regulated entities to an 
executive officer be reasonable and comparable. To that end, Congress 
mandated that the Director review the compensation arrangements for any 
executive officer and prohibit the entity from providing compensation 
to any such executive that is excessive, based on the factors deemed 
relevant by the Director. Under the statutory mandate, the process is 
between the Director and the entity, not between the Director and the 
executive officer, because it is the entity's decisions with respect to 
compensation that are being reviewed. FHFA anticipates that, under that 
process, decisions that compensation is excessive will be communicated 
in writing, with an opportunity for the entity to respond by letter or 
to request a meeting.
    FHFA appreciates that its directive to a regulated entity 
prohibiting or to withhold compensation of an executive officer impacts 
the executive financially. For that reason, any such decision is made 
only after thorough review and full understanding of the facts on a 
case-by-case basis, and the application to the facts of its authorities 
mandated by Congress. FHFA's decision regarding compensation does not 
result in either the suspension or removal of the executive officer, 
unlike the Finance Board Order referenced by the Banks, and therefore 
does not implicate the due process considerations that the Finance 
Board addressed in that Order. FHFA believes implementing a process 
incorporating notice and a hearing is unnecessary in light of the 
extent of communication that will occur before making a decision that 
executive compensation is excessive, and would unduly delay corrective 
action. Accordingly, FHFA has determined to retain proposed Sec.  
1230.3(b) in the interim final rule.
    FHFA received a number of comments on the information-submission 
requirements of proposed Sec.  1230.5(b). After considering that 
subject, FHFA has determined that the level of detail appropriate to 
it, combined with the possible need for flexibility with respect to 
changing compensation practices, makes the subject of information-
submission requirements more appropriate to a data collection order 
under section 1314 of the Safety and Soundness Act than to a 
regulation, which can be modified only through notice-and-comment 
rulemaking. Consequently, FHFA is not including proposed Sec.  1230.5 
in the

[[Page 28448]]

interim final rule and is instead replacing it with the Director's 
authority to issue notices, orders, and guidance on the subject of 
information submissions. FHFA plans to publish such an order shortly 
after the publication of this interim final rule.
    FHFA here responds to comments it received on proposed Sec.  
1230.5, and gives an indication of how the issues presented would be 
expected to be addressed in the anticipated order on the same subject.
    First, the Banks commented that the one-week timeframe for 
submissions set forth in proposed Sec.  1230.5(b) is inadequate. They 
stated that, as a matter of corporate practice, board minutes and 
resolutions often are not officially approved until the next board or 
committee meeting, which typically does not occur until well after one 
week following a board or committee meeting. They requested that the 
proposed rule should be revised to recognize this factor.
    Proposed Sec.  1230.5(b) provided for submission of materials after 
they have received final, official approval. The intent of the section 
was to ensure that the materials were received promptly after official 
action, which normally means within five business days. In its 
forthcoming order, FHFA plans to direct that materials be submitted 
promptly after official action. With respect to submission of any 
proposed compensation action that is subject to FHFA review, all 
compensation-related information should be submitted to FHFA well in 
advance of any planned board decision on it.\17\
---------------------------------------------------------------------------

    \17\ The memorandum to the Banks from Acting Deputy Director 
Ronald A. Rosenfeld of October 1, 2008, (the Rosenfeld memo) 
requested that compensation matters be submitted for review four 
weeks in advance of board decision. That period remains a useful 
rule of thumb. As described above, Sec.  1230.3(d) prescribes 
specific advance notice periods for particular types of compensation 
actions.
---------------------------------------------------------------------------

    The Banks objected to the requirement in proposed Sec.  1230.5(b) 
that there be no redactions in materials that are submitted to FHFA for 
the Director's review of executive compensation for reasonableness and 
comparability. They requested that the requirement should be deleted, 
as they asserted there would be bona fide reasons for redactions. For 
example, they stated that redactions may relate to information that is 
subject to the attorney-client privilege.
    To be fully informative and useful to FHFA, and to ensure that key 
information is not omitted, these materials need to be complete. The 
anticipated order will likely require that resolutions and minutes and 
all supporting materials relating to executive compensation be 
submitted to FHFA without redactions or omissions, except as necessary 
to preserve particularized claims of attorney-client communication 
privilege. FHFA expects that each particularized redaction or omission 
and the assertion of privilege supporting it will be identified on a 
privilege log submitted simultaneously with the non-privileged 
material. FHFA believes that these requirements strike the proper 
balance between preserving the regulated entities' legal privileges and 
FHFA's need for complete and reliable information in performing its 
responsibilities to supervise and regulate the regulated entities. This 
approach leaves open the possibility FHFA may require the production of 
particularized information that is asserted to be privileged, should a 
need arise or the assertion of privilege be found lacking. Consequently 
any such privilege log should describe each separate redaction and 
omission and assertion of privilege in sufficient detail to allow FHFA 
to determine whether a further need for the information justifies 
demanding its production and whether the assertion of privilege is well 
founded.
    The Banks observed that proposed Sec.  1230.5(b)(4) required the 
submission of general benefit plans applicable to executive officers to 
FHFA. They sought clarification as to whether ``general benefit plans 
applicable to executive officers'' included all benefits applicable to 
all employees (including executive officers) or only those benefit 
plans meant to apply primarily to executive officers. FHFA intends that 
any plan that provides compensation to an executive officer should be 
submitted, as it is not possible to evaluate whether compensation is 
excessive without understanding all of its components. This would 
include general benefit plans applicable to all employees, as well as 
so-called ``top hat'' plans that provide special benefits to executive 
officers.
    The Banks observed that proposed Sec.  1230.5(b)(5) required 
submission to FHFA of any study conducted by or on behalf of a Bank 
with respect to compensation of executive officers, when delivered. 
They stated that this requirement could result in a Bank having to 
submit such studies to FHFA before the board of directors has had an 
opportunity to review or approve the study. They requested that the 
board of directors have the opportunity to review and comment on such a 
study prior to submission to FHFA. FHFA's expectation is that 
submission would apply at the time the study has been finalized. If the 
Bank (such as its compensation committee or board of directors) plans 
to review and comment on the study, submission would be required 
subsequent thereto.\18\
---------------------------------------------------------------------------

    \18\ In appropriate circumstances, FHFA might also request any 
of the prior drafts, and might also request to speak directly with 
the consultants who prepared the study.
---------------------------------------------------------------------------

    The Banks argued that compensation arrangements with their 
executive officers that are in effect prior to the effective date of 
the final rule should not be subject to action by FHFA under 12 U.S.C. 
4518 or under the final rule; that existing arrangements should be 
grandfathered. In this regard, they noted that Congress, in amending 
the charter acts of the Enterprises to include certain restrictions on 
the payment of termination benefits by the Enterprises to their 
executive officers, provided that such restrictions should be applied 
prospectively only to agreements entered into after the date of the 
enactment of the Safety and Soundness Act. The Banks requested that 
FHFA not apply its oversight of executive compensation to compensation 
arrangements with Bank executive officers that were entered into prior 
to the date that the final rule becomes effective. They argued that 
such an approach would help avoid possible legal issues or challenges 
that might arise if the rule were applied to pre-existing compensation 
arrangements.
    The grandfathering requested by the Banks is much broader than that 
ever provided by Congress. Section 1318 of the Safety and Soundness 
Act, as originally enacted by Congress in 1992, did not contain any 
language imposing a grandfathering restriction on agency oversight of 
the reasonableness and comparability of executive compensation provided 
by the Enterprises to their executive officers. If Congress had 
intended to limit oversight under section 1318 to compensation 
arrangements entered into after the effective date of the legislation, 
it would have included such language in the statute. This is confirmed 
by the fact that, with respect to agency authority over termination 
benefits, Congress expressly stated in the statutory amendments to the 
Enterprises' charter acts that such benefits entered into before 
enactment of the Safety and Soundness Act are not retroactively subject 
to approval or disapproval by the Director. When amending the Safety 
and Soundness Act in HERA, Congress expanded agency oversight authority 
over executive compensation under section 1318, but, for the second 
time,

[[Page 28449]]

chose not to impose any grandfather restriction on such oversight. 
Congress did determine to continue the grandfather restriction with 
respect to Enterprise executive officers' termination benefits.
    Nevertheless, FHFA recognizes that compensation agreements in place 
prior to HERA's enactment deserve consideration, and it is FHFA's 
intention to consider all the facts and circumstances in reviewing 
existing agreements.
    Proposed Sec.  1230.6, which addressed certain powers provided by 
section 1117 of HERA to the Director in connection with executive 
compensation, has been deleted from the interim final rule. The powers 
were temporary in nature and are no longer effective.
    The OF argued that the final rule should not apply to it, asserting 
that Congress intended that the executive compensation provisions in 
section 1318 (12 U.S.C. 4518) of the Safety and Soundness Act, as 
amended by section 1113 of HERA, apply only to a ``regulated entity'' 
or ``regulated entities'' and not to OF. The OF asserted that the clear 
intent of Congress was to exclude OF from the reach of these 
provisions.
    FHFA acknowledges, as it did when proposing this rule, that OF is 
not directly covered by section 1318 of the Safety and Soundness Act. 
However, OF is subject to the Director's ``general regulatory 
authority'' under section 1311(b)(2) of the Safety and Soundness Act 
(12 U.S.C. 4511(b)(2)), as amended by HERA. Excessive compensation is a 
threat to safety and soundness and is appropriately within the agency's 
general regulatory authority. Therefore, in order to ensure safety and 
soundness, the Director's authority to prohibit excessive compensation 
continues to apply to OF in the interim final rule.

B. Other Changes

    Subsequent to FHFA's issuance of its proposed rule on Executive 
Compensation, the Stop Trading on Congressional Knowledge Act (the 
``STOCK Act'') was enacted. See Public Law No. 112-105, 126 Stat. 291 
(April 4, 2012) (codified at 12 U.S.C. 4518a). Section 16 of the STOCK 
Act prohibits senior executives of any Enterprise in conservatorship 
from receiving bonuses during any period of conservatorship on or after 
the date of enactment. Section 1230.3(a) of the interim final rule has 
been amended to include this statutory prohibition.
    On March 9, 2012, FHFA announced new executive compensation 
programs for the Enterprises, in its capacity as conservator. See News 
Release dated March 9, 2012, at http://www.fhfa.gov/webfiles/23438/ExecComp3912F.pdf. These programs eliminate bonuses for Enterprise 
senior executives (and other executives) and thus comply with Section 
16 of the STOCK Act. FHFA developed the new compensation programs as 
``reasonable and comparable'' (though there are no companies truly 
comparable to the Enterprises in their current situation) in light of 
the Enterprises' status in conservatorship; their continuing support 
from the U.S. Treasury through the Senior Preferred Stock Purchase 
Agreements; and related objectives that the Enterprises reduce their 
portfolios, shrink their dominant position in the U.S. mortgage finance 
market, focus on their core mission activities, and avoid ``new 
products'' as contemplated by the Safety and Soundness Act.\19\
---------------------------------------------------------------------------

    \19\ See 12 U.S.C. 4541; see also Letter from Edward J. DeMarco, 
Acting Director, FHFA, to the Honorable Christopher Dodd, Chairman, 
and the Honorable Richard C. Shelby, Ranking Minority Member, 
Committee on Banking, Housing and Urban Affairs, United States 
Senate; and the Honorable Barney Frank, Chairman, and the Honorable 
Spencer Bachus, Ranking Minority Member, Committee on Financial 
Services, United States House of Representatives (February 2, 2010), 
pp. 6-7, at http://www.fhfa.gov/webfiles/15393/Conservatorship_Letter_2_2_10%5b1%5d.pdf; and FHFA Strategic Plan for Enterprise 
Conservatorships: The Next Chapter in a Story That Needs an Ending 
(February 21, 2012), at http://www.fhfa.gov/webfiles/23344/StrategicPlanConservatorshipsFINAL.pdf.
---------------------------------------------------------------------------

    FHFA made additional changes to the proposed rule based on findings 
from current practice. Section 1230.3(e)(2) of the proposed rule 
required prior review and non-objection for certain types of 
compensation for the president at the Banks, and the chief executive 
officer at each of the Enterprises. The correlated provision of this 
interim final rule expands this requirement of prior review both in 
scope of compensation and in the number of executives to which it 
applies. Specifically, Sec.  1230.3(d)(3) of the interim final rule 
states that a regulated entity or OF shall not, without providing the 
Director at least 30 days' advance written notice, pay, disburse, or 
transfer to any executive officer, annual compensation (where the 
annual amount has changed), pay for performance or other incentive pay, 
or any other element of compensation.
    FHFA has concluded that it is beneficial to provide prior review of 
all compensation arrangements for all executive officers for several 
reasons. First, prior approval promotes clarity in pay practices for 
the regulated entities and OF. In view of FHFA's statutory obligation 
to prohibit compensation to any executive officer that is not 
reasonable and comparable, prior review and non-objection rather than 
review after-the-fact can help set expectations and avoid the need for 
later remedial action. Prior review provides the regulated entities and 
OF before-the-fact notice of any objections and an opportunity to 
address FHFA's concerns and obtain its non-objection. Additionally, 
prior approval for all executive officers of each Bank was the original 
design for incentive compensation review by FHFA, and is a practice 
FHFA has consistently followed since 2008.\20\
---------------------------------------------------------------------------

    \20\ The Rosenfeld memo notified the Banks that FHFA would 
provide prior review of all compensation actions relating to the 
five most highly compensated officers at each of the Banks. The 
Rosenfeld memo's approach to the scope and application of prior 
review is reflected in this regulation.
---------------------------------------------------------------------------

    Given that prior review of all compensation actions for all 
executive officers has been FHFA's consistent practice, FHFA also 
believes that this change from the language of the proposed rule will 
not impose any new or additional burden on the regulated entities or 
their executive officers. Nonetheless, FHFA is specifically requesting 
comment on these changes to the scope of the advance notice 
requirement.

Regulatory Impact

Paperwork Reduction Act

    The interim final rule does not contain any information collection 
requirement that requires the approval of OMB under the Paperwork 
Reduction Act (44 U.S.C. 3501 et seq.).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a rule that has a significant economic impact on a substantial number 
of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
rule's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the rule will not have a 
significant economic impact on a substantial number of small entities. 
5 U.S.C. 605(b). FHFA has considered the impact of the interim final 
rule under the Regulatory Flexibility Act. FHFA certifies that the 
interim final rule is not likely to have a significant economic impact 
on a substantial number of small business entities because the rule is 
applicable only to the regulated entities, which are not small entities 
for purposes of the Regulatory Flexibility Act.

[[Page 28450]]

List of Subjects

12 CFR Part 1230

    Administrative practice and procedure, Compensation, Confidential 
business information, Government-sponsored enterprises, Reporting and 
recordkeeping requirements.

12 CFR Part 1770

    Administrative practice and procedure, Confidential business 
information, Reporting and recordkeeping requirements.

Authority and Issuance

    Accordingly, for the reasons stated in the SUPPLEMENTARY 
INFORMATION, under the authority of 12 U.S.C. 4526, the Federal Housing 
Finance Agency amends Chapters XII and XVII of Title 12 of the Code of 
Federal Regulations, as follows:

Chapter XII--Federal Housing Finance Agency

Subchapter B--Entity Regulations

0
1. Add part 1230 to Subchapter B to read as follows:

PART 1230--EXECUTIVE COMPENSATION

Sec.
1230.1 Purpose.
1230.2 Definitions.
1230.3 Prohibition and withholding of executive compensation.
1230.4 Prior approval of termination agreements of Enterprises.
1230.5 Submission of supporting information.

    Authority:  12 U.S.C. 1427, 1431(l)(5), 1452(h), 1455(l)(5), 
4502(6), 4502(12), 4513, 4514, 4517, 4518, 4518a, 4526, 4631, 4632, 
4636, 1719(g)(5), and 1723a(d).


Sec.  1230.1  Purpose.

    The purpose of this part is to implement requirements relating to 
the supervisory authority of FHFA under the Safety and Soundness Act 
with respect to compensation provided by the regulated entities and the 
Office of Finance to their executive officers. This part also 
establishes a structured process for submission of relevant information 
by the regulated entities and the Office of Finance, in order to 
facilitate and enhance the efficiency of FHFA's oversight of executive 
compensation.


Sec.  1230.2  Definitions.

    The following definitions apply to the terms used in this part:
    Charter acts mean the Federal National Mortgage Association Charter 
Act and the Federal Home Loan Mortgage Corporation Act, which are 
codified at 12 U.S.C. 1716 through 1723i and 12 U.S.C. 1451 through 
1459, respectively.
    Compensation means any payment of money or the provision of any 
other thing of current or potential value in connection with 
employment. Compensation includes all direct and indirect payments of 
benefits, both cash and non-cash, granted to or for the benefit of any 
executive officer, including, but not limited to, payments and benefits 
derived from an employment contract, compensation or benefit agreement, 
fee arrangement, perquisite, stock option plan, post-employment benefit 
or other compensatory arrangement.
    Director means the Director of FHFA, or his or her designee.
    Enterprise means the Federal National Mortgage Association and the 
Federal Home Loan Mortgage Corporation (collectively, Enterprises) and, 
except as provided by the Director, any affiliate thereof.
    Executive officer means:
    (1) With respect to an Enterprise:
    (i) The chairman of the board of directors, chief executive 
officer, chief financial officer, chief operating officer, president, 
vice chairman, any executive vice president, any senior vice president, 
any individual in charge of a principal business unit, division, or 
function, and any individual who performs functions similar to such 
positions whether or not the individual has an official title; and
    (ii) Any other officer as identified by the Director;
    (2) With respect to a Bank:
    (i) The president, the chief financial officer, and the three other 
most highly compensated officers; and
    (ii) Any other officer as identified by the Director.
    (3) With respect to the Office of Finance:
    (i) The chief executive officer, chief financial officer, and chief 
operating officer; and
    (ii) Any other officer identified by the Director.
    Federal Home Loan Bank or Bank means a bank established under the 
Federal Home Loan Bank Act; the term ``Federal Home Loan Banks'' or 
``Banks'' means, collectively, all the Federal Home Loan Banks.
    FHFA means the Federal Housing Finance Agency.
    Office of Finance means the Office of Finance of the Federal Home 
Loan Bank System (or any successor thereto).
    Reasonable and comparable means compensation that is:
    (1) Reasonable--compensation, taken in whole or in part, that would 
be appropriate for the position and based on a review of relevant 
factors including, but not limited to:
    (i) The duties and responsibilities of the position;
    (ii) Compensation factors that indicate added or diminished risks, 
constraints, or aids in carrying out the responsibilities of the 
position; and
    (iii) Performance of the regulated entity, the specific employee, 
or one of the entity's significant components with respect to 
achievement of goals, consistency with guidance and internal rules of 
the entity, and compliance with applicable law and regulation.
    (2) Comparable--compensation that, taken in whole or in part, does 
not materially exceed compensation paid at institutions of similar size 
and function for similar duties and responsibilities.
    Regulated entity means the Federal National Mortgage Association 
and any affiliate thereof; the Federal Home Loan Mortgage Corporation 
and any affiliate thereof; or any Federal Home Loan Bank; the term 
``regulated entities'' means, collectively, the Federal National 
Mortgage Association and any affiliate thereof; the Federal Home Loan 
Mortgage Corporation and any affiliate thereof; and any Federal Home 
Loan Bank.
    Safety and Soundness Act means the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992, (12 U.S.C. 4501 et seq.), 
as amended by the Housing and Economic Recovery Act of 2008 (HERA), 
Public Law No. 110-289, 122 Stat. 2654 (2008).


Sec.  1230.3  Prohibition and withholding of executive compensation.

    (a) In general. The Director may review the compensation 
arrangements for any executive officer of a regulated entity or the 
Office of Finance at any time, and shall prohibit the regulated entity 
or the Office of Finance from providing compensation to any such 
executive officer that the Director determines is not reasonable and 
comparable with compensation for employment in other similar businesses 
involving similar duties and responsibilities. No regulated entity or 
the Office of Finance shall pay compensation to an executive officer 
that is not reasonable and comparable with compensation paid by such 
similar businesses involving similar duties and responsibilities. No 
Enterprise in conservatorship shall pay a bonus to any senior executive 
during the period of that conservatorship.
    (b) Factors to be taken into account. In determining whether 
compensation provided by a regulated entity or the Office of Finance to 
an executive officer is not reasonable and comparable, the

[[Page 28451]]

Director may take into consideration any factors the Director considers 
relevant, including any wrongdoing on the part of the executive 
officer, such as any fraudulent act or omission, breach of trust or 
fiduciary duty, violation of law, rule, regulation, order, or written 
agreement, and insider abuse with respect to the regulated entity or 
the Office of Finance.
    (c) Prohibition on setting compensation by Director. In carrying 
out paragraph (a) of this section, the Director may not prescribe or 
set a specific level or range of compensation.
    (d) Advance notice to Director of certain compensation actions. (1) 
A regulated entity or the Office of Finance shall not, without 
providing the Director at least 60 days' advance written notice, enter 
into any written arrangement that provides incentive awards to any 
executive officer or officers.
    (2) A regulated entity or the Office of Finance shall not, without 
providing the Director at least 30 days' advance written notice, enter 
into any written arrangement that:
    (i) Provides an executive officer a term of employment for a term 
of six months or more; or
    (ii) In the case of a Bank or the Office of Finance, provides 
compensation to any executive officer in connection with the 
termination of employment, or establishes a policy of compensation in 
connection with the termination of employment.
    (3) A regulated entity or the Office of Finance shall not, without 
providing the Director at least 30 days' advance written notice, pay, 
disburse, or transfer to any executive officer, annual compensation 
(where the annual amount has changed), pay for performance or other 
incentive pay, or any other element of compensation.
    (4) Notwithstanding the foregoing review periods, a regulated 
entity or the Office of Finance shall provide five business days' 
advance written notice to the Director before committing to pay 
compensation of any amount or type to an executive officer who is being 
newly hired.
    (5) The Director reserves the right to extend any of the foregoing 
review periods, and may do so in the Director's discretion, upon notice 
to the regulated entity or the Office of Finance. Any such notice shall 
set forth the number of business or calendar days by which the review 
period is being extended.
    (e) Withholding, escrow, prohibition. During the review period 
required by paragraph (d) of this section, or any extension thereof, a 
regulated entity or the Office of Finance shall not execute the 
compensation action that is under review unless the Director provides 
written notice of approval or non-objection. During a review under 
paragraph (a) or (d) of this section, or at any time before an 
executive compensation action has been taken, the Director may, by 
written notice, require a regulated entity or the Office of Finance to 
withhold any payment, transfer, or disbursement of compensation to an 
executive officer, or to place such compensation in an escrow account; 
or may prohibit the action.


Sec.  1230.4  Prior approval of termination agreements of Enterprises.

    (a) In general. An Enterprise may not enter into any agreement or 
contract to provide any payment of money or other thing of current or 
potential value in connection with the termination of employment of an 
executive officer unless the agreement or contract is approved in 
advance by the Director.
    (b) Covered agreements or contracts. An agreement or contract that 
provides for termination payments to an executive officer of an 
Enterprise that was entered into before October 28, 1992, is not 
retroactively subject to approval or disapproval by the Director. 
However, any renegotiation, amendment, or change to such an agreement 
or contract shall be considered as entering into an agreement or 
contract that is subject to approval by the Director.
    (c) Factors to be taken into account. In making the determination 
whether to approve or disapprove termination benefits, the Director may 
consider:
    (1) Whether the benefits provided under the agreement or contract 
are comparable to benefits provided under such agreements or contracts 
for officers of other public or private entities involved in financial 
services and housing interests who have comparable duties and 
responsibilities;
    (2) The factors set forth in Sec.  1230.3(b); and
    (3) Such other information as deemed appropriate by the Director.
    (d) Exception to prior approval. An employment agreement or 
contract subject to prior approval of the Director under this section 
may be entered into prior to that approval, provided that such 
agreement or contract specifically provides notice that termination 
benefits under the agreement or contract shall not be effective and no 
payments shall be made under such agreement or contract unless and 
until approved by the Director. Such notice should make clear that 
alteration of benefit plans subsequent to FHFA approval under this 
section, which affect final termination benefits of an executive 
officer, requires review at the time of the individual's termination 
from the Enterprise and prior to the payment of any benefits.
    (e) Effect of prior approval of an agreement or contract. The 
Director's approval of an executive officer's termination of employment 
benefits shall not preclude the Director from making any subsequent 
determination under this section to prohibit and withhold executive 
compensation.
    (f) Form of approval. The Director's approval pursuant to this 
section may occur in such form and manner as the Director shall provide 
through written notice to the regulated entities or the Office of 
Finance.


Sec.  1230.5  Submission of supporting information.

    In support of the reviews and decisions provided for in this part, 
the Director may issue guidance, orders, or notices on the subject of 
information submissions by the regulated entities and the Office of 
Finance.

Chapter XVII--Office of Federal Housing Enterprise Oversight, 
Department of Housing and Urban Development

PART 1770--[REMOVED]

0
2. Remove part 1770.

    Dated: May 6, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2013-11215 Filed 5-13-13; 8:45 am]
BILLING CODE 8070-01-P