Executive Compensation, 28441-28451 [2013-11215]
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Vol. 78
Tuesday,
No. 93
May 14, 2013
Part IV
Federal Housing Finance Agency
12 CFR Parts 1230 and 1231
Department of Housing and Urban
Development
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
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Federal Register / Vol. 78, No. 93 / Tuesday, May 14, 2013 / Rules and Regulations
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
Federal Housing Finance
Agency; Office of Federal Housing
Enterprise Oversight.
ACTION: Interim final rule; request for
comments.
AGENCY:
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/
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SUMMARY:
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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 tollfree 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
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
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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.
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
of that provision to this interim final rule, in
conjunction with that project.
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).
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)).
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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
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 entityaffiliated parties. FHFA issued an
4 See
74 FR at 26990 (June 5, 2009).
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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.
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
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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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 § 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 § 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
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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
§ 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
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
FR at 26990 (June 5, 2009).
1230.2, definition of the term
‘‘reasonable and comparable’’ (2)(i). 74 FR at 26993
(June 5, 2009).
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
8 74
9 Section
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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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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.
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
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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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.
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.
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
13 See
74 FR at 26990 (June 5, 2009).
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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,
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28445
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 § 1230.3, ‘‘Prohibition and
withholding of executive
compensation,’’ and proposed § 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
§ 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
§ 1230.7. Under these provisions, the
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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 §§ 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 § 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 § 1230.7, FHFA has considered
the merits of the commenters’
arguments and has removed proposed
§ 1230.7 from the interim final rule.
Proposed § 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
§ 1230.7 of the proposed rule, as a
remedy for violations of § 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.
The Banks commented extensively on
proposed § 1230.3(c) ‘‘Withholding of
compensation’’ and § 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
14 Safety and Soundness Act section 1371(d), 12
U.S.C. 4631(d).
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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 § 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
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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 policymaking 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
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
15 74
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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
§ 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
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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
§ 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 § 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 § 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.
The Director’s authorities with respect
to oversight of executive compensation
16 See Finance Board Order No. 2005–12 (June 16,
2005).
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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 § 1230.3(b) in the
interim final rule.
FHFA received a number of
comments on the informationsubmission requirements of proposed
§ 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 § 1230.5 in the
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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 § 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 § 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 § 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
The Banks objected to the
requirement in proposed § 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
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,
§ 1230.3(d) prescribes specific advance notice
periods for particular types of compensation
actions.
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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
§ 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
§ 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
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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
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 preexisting 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,
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.
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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 § 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
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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
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,
§ 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
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.
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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
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.
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.
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Federal Register / Vol. 78, No. 93 / Tuesday, May 14, 2013 / Rules and Regulations
List of Subjects
12 CFR Part 1230
Administrative practice and
procedure, Compensation, Confidential
business information, Governmentsponsored 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
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).
§ 1230.1
Purpose.
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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.
§ 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
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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, postemployment 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
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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).
§ 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
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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
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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 nonobjection. 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.
§ 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 § 1230.3(b);
and
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28451
(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.
§ 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]
■
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
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Agencies
[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
[[Page 28445]]
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\
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\15\ 74 FR at 26990 (June 5, 2009).
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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.
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\16\ See Finance Board Order No. 2005-12 (June 16, 2005).
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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