Golden Parachute and Indemnification Payments, 65283-65292 [2018-27564]

Download as PDF 65283 Rules and Regulations Federal Register Vol. 83, No. 244 Thursday, December 20, 2018 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. The Code of Federal Regulations is sold by the Superintendent of Documents. NUCLEAR REGULATORY COMMISSION [NRC–2018–0038] 10 CFR Chapter I Clarification of the Requirements for Reactor Pressure Vessel Upper Head Bare Metal Visual Examinations Nuclear Regulatory Commission. ACTION: Regulatory issue summary; issuance. AGENCY: The U.S. Nuclear Regulatory Commission (NRC) is issuing Regulatory Issue Summary (RIS) 2018–06, ‘‘Clarification of the Requirements for Reactor Pressure Vessel Upper Head Bare Metal Visual Examinations.’’ This RIS is intended to clarify the requirements for bare-metal visual examination, which can be either a visual examination of the bare metal of the upper head or a visual testing (VT)– 2 examination under the insulation to meet the requirements of notes 1 and 4 in Table 1 of American Society of Mechanical Engineers (ASME) Code Case N–729–4, ‘‘Alternative Examination Requirements for PWR Reactor Vessel Upper Heads with Nozzles Having Pressure-Retaining Partial-Penetration Welds Section XI, Division 1.’’ This RIS requires no action or written response on the part of an addressee. SUMMARY: The RIS is available as of December 20, 2018. ADDRESSES: Please refer to Docket ID NRC–2018–0038 when contacting the NRC about the availability of information regarding this document. You may obtain publicly-available information related to this document using any of the following methods: • Federal Rulemaking Website: Go to http://www.regulations.gov and search for Docket ID NRC–2018–0038. Address questions about Docket IDs in Regulations.gov to Krupskaya Castellon; khammond on DSK30JT082PROD with RULES DATES: VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 telephone: 301–287–9221; email: Krupskaya.Castellon@nrc.gov. For technical questions, contact the individual(s) listed in the FOR FURTHER INFORMATION CONTACT section of this document. • NRC’s Agencywide Documents Access and Management System (ADAMS): You may obtain publiclyavailable documents online in the ADAMS Public Documents collection at http://www.nrc.gov/reading-rm/ adams.html. To begin the search, select ‘‘Begin Web-based ADAMS Search.’’ For problems with ADAMS, please contact the NRC’s Public Document Room (PDR) reference staff at 1–800–397–4209, 301– 415–4737, or by email to pdr.resource@ nrc.gov. The Clarification of the Requirements for Reactor Pressure Vessel Upper Head Bare Metal Visual Examinations and Response to Public Comments on Draft Regulatory Issue Summary 2018–XX, ‘‘Clarification of the Requirements for Reactor Pressure Vessel Upper Head Bare Metal Visual Examinations’’ are available in ADAMS under Accession Nos. ML18178A137 and ML18178A140. • NRC’s PDR: You may examine and purchase copies of public documents at the NRC’s PDR, Room O1–F21, One White Flint North, 11555 Rockville Pike, Rockville, Maryland 20852. • This RIS is also available on the NRC’s public website at http:// www.nrc.gov/reading-rm/doccollections/gen-comm/reg-issues/ (select ‘‘2018’’ and then select ‘‘RIS–18–06’’). FOR FURTHER INFORMATION CONTACT: Stephen Cumblidge, Office of Nuclear Reactor Regulation, U.S. Nuclear Regulatory Commission, Washington, DC 20555–0001; telephone: 301–415– 2823, email: Stephen.Cumblidge@ nrc.gov. SUPPLEMENTARY INFORMATION: The NRC published notification of opportunity for public comment on this RIS in the Federal Register (83 FR 10407) on March 9, 2018. The agency received comments from four commenters. The staff considered all comments, which resulted in minor clarifications to the RIS. The evaluation of these comments and the resulting changes to the RIS are discussed in a publicly available memorandum which is in ADAMS under Accession No. ML18178A140. As noted in 83 FR 20858 (May 8, 2018), this document is being published in the Rules section of the Federal PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 Register to comply with publication requirements under 1 CFR chapter I. Dated at Rockville, Maryland, this 17th day of December 2018. For the Nuclear Regulatory Commission. Brian J. Benney, Senior Project Manager, ROP Support and Generic Communications Branch, Division of Inspection and Regional Support, Office of Nuclear Reactor Regulation. [FR Doc. 2018–27517 Filed 12–19–18; 8:45 am] BILLING CODE 7590–01–P FEDERAL HOUSING FINANCE AGENCY 12 CFR Part 1231 RIN 2590–AA72 Golden Parachute and Indemnification Payments Federal Housing Finance Agency. ACTION: Final rule. AGENCY: The Federal Housing Finance Agency (FHFA) is amending its golden parachute payments regulation to better align it with areas of FHFA’s supervisory concern and reduce administrative and compliance burdens. This final rule amends a requirement that FHFA review and consent before a regulated entity or the Office of Finance (OF) enters certain agreements to make, or makes, certain payments that are contingent on the termination of an affiliated party, if the regulated entity or the OF is in a troubled condition, in conservatorship or receivership, or insolvent. FHFA’s experience implementing the regulation indicated that it required review of some agreements and payments where there was little risk of excess or abuse, and thus that it was too broad. As amended, the rule will reduce the number of agreements and payments that are subject to FHFA prior review by focusing on those agreements and payments where there is greater risk of an excessive or abusive payment (in general, payments to and agreements with executive officers, broad-based plans covering large numbers of employees (such as severance plans), and payments made to non-executiveofficer employees who may have engaged in certain types of wrongdoing). In addition, the rule as amended SUMMARY: E:\FR\FM\20DER1.SGM 20DER1 65284 Federal Register / Vol. 83, No. 244 / Thursday, December 20, 2018 / Rules and Regulations clarifies the inquiry into possible employee wrongdoing that a regulated entity is required to undertake prior to entering into an agreement to make or making a golden parachute payment. Amendments also revise and clarify other rule procedures, definitions, and exemptions. DATES: Effective date: January 22, 2019. FOR FURTHER INFORMATION CONTACT: Alfred Pollard, General Counsel, (202) 649–3050, Alfred.Pollard@fhfa.gov; Lindsay Simmons, Assistant General Counsel, (202) 649–3066, Lindsay.Simmons@fhfa.gov; or Mary Pat Fox, Manager for Compensation, Division of Enterprise Regulation, (202) 649–3215, MaryPat.Fox@fhfa.gov. These are not toll-free numbers. The mailing address is: Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 20219. The telephone number for the Telecommunications Device for the Hearing Impaired is (800) 877–8339. SUPPLEMENTARY INFORMATION: khammond on DSK30JT082PROD with RULES I. Background FHFA has broad discretionary authority to prohibit or limit any ‘‘golden parachute payment,’’ generally defined as any payment, or any agreement to make a payment, in the nature of compensation by a regulated entity for the benefit of an ‘‘affiliated party’’ that is contingent on the party’s termination, when the regulated entity is in troubled condition, in conservatorship or receivership, or insolvent (a ‘‘troubled institution’’).1 This provision, at 12 U.S.C. 4518(e) (Section 4518(e)), was added to the Federal Housing Enterprises Financial Safety and Soundness Act (the Safety and Soundness Act) in 2008. Legislative history suggests Section 4518(e) is intended to permit FHFA to prevent payments to departing employees and other affiliated parties that are excessive or abusive, could threaten (or further threaten) the financial condition of the troubled institution, or are inappropriate based on wrongdoing by the recipient. Section 4518(e) requires the Director to promulgate rules defining ‘‘troubled 1 The ‘‘regulated entities’’ are the Federal National Mortgage Association (Fannie Mae) and any affiliate, the Federal Home Loan Mortgage Corporation (Freddie Mac) and any affiliate, (collectively, the Enterprises), and the Federal Home Loan Banks (the Banks). 12 U.S.C. 4502(20). The OF is a joint office of the Banks, to which FHFA extends the Golden Parachute Payments rule through its general regulatory authority. See id. sec. 4511(b)(2); see also 78 FR 28452, 28456 (May 14, 2013) and 79 FR 4394 (Jan. 28, 2014). In this notice, the terms ‘‘regulated entity’’ and ‘‘troubled institution’’ include the Enterprises, Banks, and the OF, unless the OF is otherwise expressly addressed. VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 condition’’ and prescribing factors to be considered when prohibiting or limiting any ‘‘golden parachute payment,’’ and suggests some factors the Director may consider. To ensure that FHFA had an opportunity to review and, if necessary, prohibit or limit golden parachute payments and agreements before they are made, the golden parachute payments final rule published in January 2014 (‘‘the 2014 rule’’) prohibited all golden parachute payments and agreements that were not exempt from or permitted by operation of the rule. Prohibited agreements or payments could be permitted by the Director after review. Because the 2014 rule applied equally to golden parachute payments and agreements, it required FHFA to determine the permissibility of prohibited agreements before they were entered into and of prohibited payments before they were made. In most cases, this meant that a troubled institution was required to request FHFA’s prior review and consent to a payment that would be made in accordance with an agreement to which FHFA had already consented. This ‘‘double approval’’ requirement was recognized by FHFA and commenters when the rule was proposed in 2013 and finalized in 2014.2 FHFA noted then that it was an appropriate supervisory approach because conditions could change after an agreement was approved but before a payment was made (for example, the condition of a troubled institution could further deteriorate, or an intended recipient could be found to have contributed to the deterioration or engaged in wrongdoing with a material adverse effect on the regulated entity). In practice, that approach resulted in FHFA’s receiving numerous requests for review of golden parachute payments and agreements. Narrowly drafted exemptions from the 2014 rule also gave rise to numerous requests for review. For example, because severance pay plans of the regulated entities do not meet an exemption for ‘‘nondiscriminatory’’ plans, troubled institutions were not permitted to make severance payments to any employees—even small payments to lower-level employees—without FHFA review and consent. Likewise, an exemption for payments pursuant to a ‘‘bona fide deferred compensation plan or arrangement’’ did not apply or was lost if the plan was established or amended after the date that was one year prior to the time the regulated entity became a troubled institution, meaning such plans and any plan payments required FHFA prior review. Based on experience reviewing proposed agreements and payments, FHFA determined that the scope of the 2014 rule was too broad because it required a troubled institution to submit and FHFA to review agreements and payments where there was very little risk of an abusive or excessive payment or threat to the financial condition of the paying regulated entity, and little likelihood that the employee or other affiliated party receiving payment could have engaged in the type of wrongdoing that FHFA would consider as the basis for prohibiting or limiting an agreement or payment. Separately, FHFA also determined that the 2014 rule could be harmonized with other requirements related to the compensation of executive officers of the regulated entities, including termination payments, avoiding the need to request or engage in separate reviews.3 On those bases, FHFA proposed amendments to the 2014 rule, which it fully described and on which it requested comments in an earlier Federal Register Notice.4 2 See 78 FR 28452, 28545 (May 14, 2013) (Notice of Proposed Rulemaking) and 79 FR 4394, 4396 (Jan. 28, 2014) (Final Rule). 3 See generally, 12 U.S.C. 1452(h), 1723a(d)(3), and 4518(a); see also 12 CFR part 1230. 4 83 FR 43802 (Aug. 28, 2018). PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 II. Comments During a 45-day comment period that ended on October 12, 2018, FHFA received a joint letter from ten of the eleven Federal Home Loan Banks (Banks) and the OF (collectively, the Banks), and a letter from Freddie Mac. Commenters generally expressed support for the reduction of burdens embodied in the proposed amendments and requested changes to reduce burden further. Some comments also requested or suggested clarifications of rule provisions or topics not addressed by the rule, such as grandfathering. For organizational purposes, comments are addressed in the order of the rule provision to which they relate. Section 1231.2, Definition of ‘‘Golden Parachute Payment’’ FHFA proposed to remove the phrase ‘‘pursuant to an obligation of the regulated entity’’ from the regulatory ‘‘golden parachute payment’’ definition, to clarify that the definition covers gifts and the process by which FHFA reviews gifts by a troubled institution to a terminating employee (or other affiliated party). FHFA has general authority to prohibit an improper gift, and interprets the statutory definition of ‘‘golden parachute payment,’’ which references ‘‘an obligation,’’ as clarifying that E:\FR\FM\20DER1.SGM 20DER1 Federal Register / Vol. 83, No. 244 / Thursday, December 20, 2018 / Rules and Regulations khammond on DSK30JT082PROD with RULES FHFA’s authority to prohibit or limit golden parachute payments includes those made pursuant to an obligation.5 FHFA was concerned that including the phrase ‘‘pursuant to an obligation’’ within the regulatory definition could be read to imply that the rule does not extend to excessive or abusive payments that are made gratuitously, which would be inconsistent with the policy of Section 4518(e). FHFA also noted that it had applied the 2014 rule to gifts, and that troubled institutions had requested FHFA’s review of and consent to proposed retirement gifts. Thus, the proposed change in regulatory text would align the rule with FHFA’s interpretation and application of it. Although the Banks agreed that FHFA has authority to prohibit an improper gift, they commented that the phrase ‘‘pursuant to an obligation of the regulated entity’’ should remain in the rule definition. In contrast to FHFA’s interpretation, the Banks stated that they believe reference to ‘‘an obligation’’ in the statutory definition meant that Congress intended FHFA’s authority to prohibit or limit golden parachute payments to extend only to payments that an institution is contractually obligated to make. The Banks opined that payments not pursuant to an obligation, such as improper voluntary gifts, should be regulated only to the extent that FHFA found such payments to be excessive or an unsafe and 5 Under this interpretation, including the phrase ‘‘pursuant to an obligation of the regulated entity’’ in federal law clarifies the primacy of the federal supervisor to prohibit or limit obligatory payments, despite state laws otherwise upholding the enforceability of contracts. In fact, recent court decisions have confirmed that a taking does not occur for purposes of the Tucker Act, 28 U.S.C. 1491, when FHFA prohibits a golden parachute payment, even one made pursuant to an agreement entered into before the enactment of Section 4518(e) in 2008. In Piszel v. U.S., 833 F.3d 1366 (Fed. Cir. 2016), the Court of Appeals for the Federal Circuit held that no taking occurred because the affiliated party retained the ability to pursue a claim for damages from the regulated entity for breach of contract. FHFA agrees that there was no taking, but also observes that awarding damages for breach of contract would clearly defeat the purpose of Section 4518(e), which is to prevent the affiliated party from receiving such a payment. The Court of Federal Claims had held in that case that no taking occurred (see Piszel v. U.S., 121 Fed. Cl. 793 (2015)) because of an insufficiently cognizable property interest, considering the contract in the context of the regulatory and statutory scheme (‘‘a heavily regulated environment;’’ and statutory provisions expressly authorized FHFA’s predecessor agency to prohibit compensation it deemed to be unreasonable at any time and did not ‘‘guarantee [ ] that the government could not later change its mind’’ after approving compensation as reasonable). That conclusion would be even stronger with respect to a payment made subject to an agreement entered into after Section 4518(e)’s enactment, a proposition with which the Federal Circuit may have agreed, see 833 F.3d at 1374. VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 unsound practice, but not under its golden parachute payments authority. The Banks and FHFA agree that FHFA has authority to prohibit or limit any improper voluntary gift, through its general supervisory authority.6 FHFA believes it is important to review payments, including gifts, to terminating employees by a troubled institution, as it is more likely that a voluntary gift would be deemed improper (for example, excessive, abusive, or the result of an unsafe and unsound practice) when made by a troubled institution. By removing the phrase ‘‘pursuant to an obligation of the regulated entity’’ from the regulatory ‘‘golden parachute payment’’ definition, FHFA is clarifying the process for its review of voluntary payments to terminating employees by a troubled institution before such payments are made, to determine their propriety in accordance with transparent regulatory considerations. FHFA also notes that other amendments should limit the number of gifts subject to its review, including rule provisions permitting a small value gift to an executive officer of a troubled institution on a significant life event such as retirement, permitting de minimis payments to other affiliated parties, and exempting payments provided through a ‘‘nondiscriminatory benefit plan.’’ 7 Together, these provisions are intended to balance FHFA’s supervisory concern for gifts by troubled institutions with the burden of a prior review process. For these reasons, FHFA is amending the rule as proposed, by removing the phrase ‘‘pursuant to an obligation of a regulated entity’’ from the ‘‘golden parachute payment’’ definition. Section 1231.3(a), Golden Parachute Payments and Agreements Requiring FHFA Consent FHFA proposed to retain the general construct of the 2014 rule and will continue to prohibit all golden parachute payments and agreements that are not exempt from or permitted by the rule. Prohibited agreements or payments may still be permitted by the Director after review. The Banks commented that this approach can result in a ‘‘double approval’’ requirement, which ‘‘creates uncertainty for executives that the compensation 6 See generally, 12 U.S.C. 4511, 4513, and 4526, citations to which are included in the rule’s ‘‘authority’’ provision. 7 FHFA intends to interpret ‘‘agreement,’’ as defined in the rule, broadly where appropriate. For example, FHFA may consider a written policy governing a common practice to be an ‘‘agreement’’ for purposes of the rule. PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 65285 agreements they negotiated at the start of employment may not be honored.’’ The Banks suggested that ‘‘double approval’’ be entirely removed from the rule. The Banks made a similar comment in response to the 2013 Notice of Proposed Rulemaking that resulted in the 2014 rule.8 As FHFA then responded, Section 4518(e) clearly permits FHFA to prohibit or limit golden parachute agreements and payments when a regulated entity is a troubled institution, and many policy reasons support the approach of reviewing both agreements (including plans) and associated payments (e.g., a plan may be designed to cover a class of employees, where neither the regulated entity requesting review nor FHFA knows the specific employees who may, or will, ultimately receive a termination payment; or the financial condition of a troubled institution may deteriorate after FHFA consents to a plan as a golden parachute agreement, but before payments are made).9 It is also not clear that removing ‘‘double approval’’ would create the certainty desired: If an executive officer entered into a compensation arrangement prior to a Bank’s becoming a troubled institution, but terminated employment when the Bank was troubled, even under a ‘‘single approval’’ approach, FHFA review of either the agreement (as entered into) or the payment (as proposed to be made) would be required. The Banks do not suggest that FHFA could not prohibit or limit either the agreement or the payment at that time, although such a prohibition or a limitation would clearly disrupt the agreement the executive officer reached with the Bank when hired. FHFA also notes that its approach is consistent with that taken by the FDIC and the other federal banking agencies, and thus may be familiar to prospective employees of FHFA’s regulated entities.10 For these reasons, FHFA is retaining the construct of the 2014 rule and will require a troubled institution to submit agreements and payments that are not exempt from or permitted by operation of the rule to FHFA for prior review and consent. Section 1231.3(b), Exempt Golden Parachute Payments and Agreements 1. Qualified Pension or Retirement Plans FHFA did not propose any change to an exemption in the 2014 rule for payments pursuant to any pension or 8 79 FR at 4396. at 4396–97. 10 See 12 CFR 359.4(a)(1). 9 Id. E:\FR\FM\20DER1.SGM 20DER1 65286 Federal Register / Vol. 83, No. 244 / Thursday, December 20, 2018 / Rules and Regulations retirement plan that is ‘‘qualified (or intended within a reasonable period of time to be qualified) under section 401 of the Internal Revenue Code of 1986 (26 U.S.C. 401).’’ That language implements a statutory exemption and was derived from a similar rule adopted by the Federal Deposit Insurance Corporation in 1996.11 Freddie Mac commented, however, that although employers previously were able to obtain periodic Section 401 qualification determinations from the Internal Revenue Service (IRS), the IRS has curtailed its issuance of such determinations. Now, certain plans may not receive an IRS determination for quite some time, if ever.12 Consequently, the phrase ‘‘within a reasonable period of time’’ could limit application of the exemption in an unforeseen and unintended manner. Freddie Mac requested FHFA clarification that, in cases where a plan that is intended to be qualified does not have an associated IRS determination, it will nonetheless be exempt from the ‘‘golden parachute payment’’ definition. The statutory exemption that the 2014 rule implements is not conditioned on an IRS determination of qualification, but applies to a plan that ‘‘is qualified (or is intended to be qualified).’’ 13 The statutory exemption does not include any timing constraint on any such determination. On that basis, FHFA believes ‘‘is intended to be’’ is best read as referring to the employer’s intention regarding the plan’s legal status, as opposed to the employer’s intention to obtain an IRS determination about the plan’s legal status. Thus, the statutory exemption covers both a plan that is qualified and has received an IRS determination and a plan that the employer intends to be qualified under section 401 (even without an IRS determination). To reflect that scope, FHFA has removed the phrase ‘‘within a reasonable period of time’’ from the rule, so that it now mirrors the statutory exemption.14 khammond on DSK30JT082PROD with RULES 2. Nondiscriminatory Benefit Plans Nondiscriminatory employee plans and programs. To implement a statutory exemption for ‘‘other nondiscriminatory 11 Compare 12 U.S.C. 1828(k)(4)(C)(i) and 4518(e)(4)(C)(i); see also 61 FR 5,926, 5931 (Feb. 15, 1996). 12 See IRS Rev. Proc. 2016–37 (July 18, 2016). 13 12 U.S.C. 4518(e)(4)(C)(i). 14 In the case that a plan that is intended to be qualified is discovered to have failed to meet the requirements for qualification, such as by receiving such a determination from the IRS, then in order to keep the exemption under the rule, the employer would need to amend the plan to correct the error and meet the requirements for qualification as soon as reasonably practicable. VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 benefit plans,’’ FHFA proposed to include an exemption for any benefit plan that is a ‘‘nondiscriminatory employee plan or program’’ in accordance with IRS rules and published guidance interpreting 26 U.S.C. 280G (Section 280G). Section 280G generally addresses the calculation of an ‘‘excess’’ parachute payment and exempts any ‘‘nondiscriminatory employee plan or program’’ from that calculation. In response to a question received, FHFA wishes to clarify that requirements necessary in order for a plan to qualify as ‘‘nondiscriminatory’’ for purposes of Section 280G must be met in order for the plan to be exempt from the ‘‘golden parachute payment’’ definition. In other words, it is not solely the type of plan (e.g., a tuition assistance plan) that triggers the exemption, but the fact that the plan meets the IRS conditions and requirements to be considered ‘‘nondiscriminatory.’’ 15 Severance pay plans. FHFA also proposed to remove an exemption for severance pay plans that met a rule definition of ‘‘nondiscriminatory’’ (and other conditions), based on its experience implementing the 2014 rule. Specifically, FHFA observed that the market-based severance pay plans of its regulated entities did not meet that regulatory standard, and the failure to meet it required FHFA to review all the severance pay plans and payments of its troubled institutions. Based on that review, FHFA determined as a matter of policy that severance pay plans and payments should be subject to prior review. FHFA also noted, however, that a regulated entity could request an exemption for any severance pay plan it believes is in fact nondiscriminatory, as Section 4518(e) provides a statutory exemption for ‘‘nondiscriminatory benefit plans.’’ Thus, removal of the regulatory ‘‘nondiscriminatory’’ definition would not eliminate the possibility of an exemption for a nondiscriminatory severance pay plan; rather, it would remove a regulatory definition that the plans reviewed by FHFA did not meet. The Banks commented on the value of severance pay plans generally and opposed removal of the definition of 15 For example, to be an exempt cafeteria plan under 26 CFR 280G–1, the plan must not increase benefits for officers or other highly compensated participants. See 26 U.S.C. 125. Generally, nondiscriminatory benefit plans would offer similar benefits to all participants. FHFA intends the exemption for any ‘‘nondiscriminatory employee plan or program’’ to be self-executing, meaning the regulated entities must determine whether their benefit plans meet any conditions imposed by the Internal Revenue Code or the IRS, in order for the exemption to apply. PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 ‘‘nondiscriminatory.’’ They suggested instead that FHFA retain a ‘‘nondiscriminatory’’ definition but amend it to include the types of severance plans currently used at the Banks or, as an alternative, exempt severance for ‘‘rank-and-file’’ employees. The Banks also requested that severance pay plans (among other types of plans and agreements) in effect as of the date the rule is amended be grandfathered, expressing the view that Section 4518(e) does not support ‘‘retroactive’’ review. FHFA agrees with the Banks that severance plans are an important benefit for retaining employees, and that employee retention can be an appropriate consideration for a troubled institution.16 FHFA considered amending the regulatory definition of ‘‘nondiscriminatory’’ when developing its proposed rule but was not able to design a definition that both plausibly expressed the ‘‘nondiscriminatory’’ requirement and would operate to exempt a current, market-based, severance pay plan. As a practical matter, these plans are intended to provide greater benefits to higherranking employees than to lowerranking ones, and thus are intended to discriminate.17 Thus, FHFA does not believe the Banks’ suggestion (expanding the regulatory definition of ‘‘nondiscriminatory’’ to include the severance plans used by the regulated entities) is workable. FHFA also considered exempting severance pay plans and payments as they relate to lower-ranking employees when developing the proposed rule. Based on a number of policy considerations (some of which are also set forth in the proposal), FHFA determined that a better approach would be to require FHFA review of severance pay plans and, if FHFA consents to the plan, permit payments to be made to employees other than executive officers without FHFA review, provided the regulated entity determines, after appropriate due diligence, that it is reasonably assured the employee has not engaged in the types of wrongdoing described in the 16 FHFA stated in the preamble to the proposal, for example, that ‘‘an appropriately structured severance pay plan could have a retentive effect on employees that could be stabilizing as a troubled institution works to improve its financial condition.’’ 83 FR at 43808. 17 FHFA also observes that no regulated entity amended its severance plan to meet the 2014 rule’s ‘‘nondiscriminatory’’ definition. That could demonstrate that even a troubled institution believed having a market-based severance pay plan was a more important business consideration than obtaining the regulatory exemption that would have applied. E:\FR\FM\20DER1.SGM 20DER1 khammond on DSK30JT082PROD with RULES Federal Register / Vol. 83, No. 244 / Thursday, December 20, 2018 / Rules and Regulations rule. This approach will reduce burdens imposed on a troubled institution by the 2014 rule: It eliminates the requirement to make a certification about employee wrongdoing when submitting a plan for review and eliminates the requirement to submit a request for FHFA consent to payment provided the regulated entity meets the ‘‘reasonably assured’’ standard, following appropriate due diligence. FHFA also believes that amendments to the 2014 rule related to assessing possible wrongdoing by employees will further reduce burden. Specifically, FHFA is clarifying both the standard that must be met (‘‘reasonably assured’’) and the type of inquiry expected (appropriate due diligence, considering the level and responsibilities of the employee). FHFA recognizes that minimal due diligence may be appropriate in some cases, considering the types of wrongdoing set forth in the rule and the responsibilities of some employees who may be eligible for severance pay. FHFA also clarifies that it does not object to the 2014 rule’s definition of ‘‘nondiscriminatory’’ as a standard for nondiscrimination in a severance pay plan. If a severance pay plan of a troubled institution is structured to meet that definition—or any other plausible standard for ‘‘nondiscriminatory’’—that regulated entity may request an exemption for the plan based on its ‘‘nondiscriminatory’’ nature. Because there is a statutory exemption for ‘‘nondiscriminatory benefit plans,’’ the rule as amended acknowledges that a troubled institution may request an exemption for any benefit plan on the basis that it is ‘‘nondiscriminatory.’’ If FHFA agrees with the regulated entity’s supported assertion that a benefit plan, including a severance pay plan, is ‘‘nondiscriminatory,’’ that plan, and payments pursuant to it, will be exempt. Finally, FHFA does not agree that Section 4518(e) does not support review of plans and agreements in effect when a regulation is adopted or amended. The Banks made a similar comment in 2013, prior to FHFA’s adoption of the 2014 rule, which FHFA addressed at that time.18 FHFA’s view on the statutory authority and responsibility it was given by Congress has not changed. Where a rule providing for FHFA review of and consent to golden parachute payments and agreements has been in place since early 2014, and FHFA is not now establishing a stricter standard for review of such plans or agreements, it is particularly difficult to see how a ‘‘retroactive’’ analysis would be applied. 18 79 FR at 4395–6. VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 Consequently, plans and agreements in place as of the effective date of the rule amendments are not grandfathered and will be subject to the rule provisions. Section 1231.3(c), Agreements for Which FHFA Consent Is Not Required Plans directed by the Director. FHFA proposed to amend the 2014 rule to permit plans or agreements that provide for termination payments to affiliated parties of a troubled institution without FHFA review, when such arrangements are established or directed by FHFA acting as conservator or receiver or otherwise pursuant to authority conferred by 12 U.S.C. 4617. FHFA received a question about application of that provision, specifically, whether it was intended to permit every arrangement established after FHFA was appointed conservator or receiver. The questioner noted that any arrangement of the regulated entity established after FHFA was appointed conservator or receiver could be construed as ‘‘established or directed by FHFA acting as conservator or receiver’’ because, pursuant to 12 U.S.C. 4617, when appointed conservator or receiver, FHFA succeeds to all rights, titles, powers and privileges of the regulated entity, with all the powers of its shareholders, officers, and directors, and to all of the assets of the regulated entity. That construction was not intended (nor, FHFA believes, is it a fair interpretation of the rulemaking as a whole, since such a construction would result in the rule applying almost exclusively to a regulated entity in troubled condition but not to a regulated entity for which a conservator or receiver has been appointed, and would have been discussed in that context; nor is it a fully accurate interpretation of the relationship between the conservator and the Enterprises’ boards and management.19) To avoid any future confusion, however, FHFA has added the word ‘‘expressly,’’ which it always viewed as implied, to provisions permitting the arrangements established or directed by the Director acting pursuant to authority conferred by 12 U.S.C. 4617, without FHFA prior review or consent. De minimis amount. FHFA proposed to permit a troubled institution to enter into an agreement to make a golden parachute payment to an affiliated party other than an executive officer without FHFA review and consent, and without the due diligence otherwise required, where the amount of the payment, when 19 See Responsibilities of Boards of Directors, Corporate Practices and Corporate Governance Matters, 80 FR 72328 n.2 (Nov. 19, 2015). PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 65287 aggregated with other golden parachute payments, does not exceed $2,500. FHFA also noted that a higher or lower amount than the proposal’s cap of $2,500 could be supported. Freddie Mac and the Banks each commented on this proposal, generally supporting the concept of permitting de minimis payments while requesting that the de minimis amount be increased from $2,500 to $5,000. As an alternative to increasing the de minimis amount, Freddie Mac suggested exempting all golden parachute payments paid to employees of a certain level and below. Freddie Mac suggested a level of employee, based on its employment structure, to whom it believed payments would not be subject to FHFA review, but also acknowledged that different regulated entities would have different employee structures. Freddie Mac suggested that FHFA could determine the appropriate level of employee for such an exemption at the time the regulated entity becomes a troubled institution. When developing the proposed rule, FHFA staff considered a de minimis amount of $5,000, which is the amount of a de minimis exemption provided by the FDIC in guidance on application of its similar rule.20 FHFA staff selected $2,500 because, should one of FHFA’s regulated entities become troubled, FHFA does not have access to a privately funded, FHFA-administered insurance fund, in contrast to the FDIC with regard to insured depository institutions. On further consideration, however, FHFA believes that increasing the amount to $5,000 will not materially change the presumption stated in the preamble to the proposed rule, that a non-executive-officer affiliated party receiving such a de minimis amount upon separation either was not in a position to materially affect the financial condition of the regulated entity or engage in certain types of wrongdoing listed in the rule or, if the affiliated party was in such a position, the payment does not settle a claim involving such wrongdoing. For this reason, FHFA has increased the de minimis cap in the final rule to $5,000. In contrast, FHFA believes Freddie Mac’s suggestion to exempt all golden parachute payments to all employees below a certain level would not be appropriate. It would be difficult for FHFA to establish, by rule, a level of employee for which there is no value in reviewing golden parachute payments, regardless of the size of the payment. To do so would require reasonable 20 See FDIC Guidance on Golden Parachute Applications, FIL Letter 66–2010 (Oct. 14, 2010). E:\FR\FM\20DER1.SGM 20DER1 65288 Federal Register / Vol. 83, No. 244 / Thursday, December 20, 2018 / Rules and Regulations khammond on DSK30JT082PROD with RULES confidence that, among other things, an employee at or below that level could not engage in the types of wrongdoing set forth in the rule. While as a general matter the level of an employee can be an indicator of the extent of the employee’s ability to affect a company, due diligence to determine whether the types of wrongdoing listed in the rule have occurred can still be important. For example, lower-level employees still have the ability to cause material harm to a company (such as reputational harm and technological sabotage) and may still receive substantial settlement payments. For those reasons, FHFA believes that the amount of the payment, rather than the level of the employee, serves as a better proxy for identifying instances where the burden of review, including due diligence, is not warranted. FHFA believes that the proposed approach, which would reduce burden by permitting smaller value payments to employees (and other affiliated parties) who are not executive officers, strikes the appropriate balance of administrative and policy considerations. institution believes the affiliated party may have engaged. FHFA did not intend the notice to include communications to or from lawyers, and thus does not believe it will implicate any attorneyclient privilege. If FHFA has additional questions about a specific situation that may implicate any attorney-client privileged communications, FHFA expects to work with the troubled institution to avoid any possible waiver, based on the particular facts and circumstances of the matter at hand. Section 1231.3(d), Payments for Which FHFA Consent Is Not Required FHFA proposed to permit some golden parachute payments to be made to an affiliated party other than an executive officer without FHFA prior review and consent. The Banks suggested a change to the proposed rule text for clarity and readability (to modify an introductory phrase to read ‘‘To an affiliated party who is not an executive officer, where:’’). FHFA agrees that this change improves clarity of the rule, and has changed the text as suggested. Section 1231.3(f), Factors for Director Consideration. Based on the legislative history of Section 4518(e) and FHFA’s experience administering the 2014 rule, FHFA proposed adding whether a golden parachute payment or agreement is ‘‘excessive or abusive or threatens the financial condition of the troubled institution’’ to listed factors for the Director’s consideration. The Banks requested that FHFA clarify the terms ‘‘excessive’’ and ‘‘abusive.’’ What constitutes ‘‘excessive’’ or ‘‘abusive’’ will depend on the circumstances of the agreement or payment, considering the particular troubled institution, its condition, the affiliated party to whom payment would be made, the amount of any payment proposed to be made, and the circumstances surrounding any agreement or plan governing payment. For that reason, FHFA does not believe it is possible to define those terms by rule in a manner that would expand on or illuminate their plain meaning. FHFA notes that this is only one factor among others for the Director to consider when determining whether to prohibit or limit a golden parachute payment. Section 1231.3(e), Required Due Diligence Review and Standard FHFA proposed to require a troubled institution that concludes, after appropriate due diligence, that it is not ‘‘reasonably assured’’ the affiliated party has not engaged in the listed types of wrongdoing to provide notice of its concerns to FHFA, even if the regulated entity does not enter into an agreement or make a payment to the affiliated party. The Banks objected to the proposed notice requirement as unnecessary, possibly jeopardizing the attorney-client privilege of the regulated entity, and possibly ‘‘chilling’’ the regulated entity’s ability to enter into individually negotiated settlement agreements and other types of severance arrangements. FHFA intends the notice to provide factual information about the possible wrongdoing in which the troubled Impact of Rule Amendments on Existing Plans FHFA also wishes to clarify that plans of a troubled institution to which FHFA consented under the 2014 rule do not need to be submitted again due to the amendment of the rule, provided the regulated entity is in the same condition that caused it to be a troubled institution when FHFA previously consented to the plan. For example, if one of the Enterprises is currently operating a benefit plan to which FHFA consented, or that FHFA has notified the Enterprise was otherwise able to continue in operation under the 2014 rule, that plan does not need to be resubmitted simply because the rule is being amended. The amendments adopted do not suggest that consent it has previously provided should now be reconsidered, and avoiding unnecessary resubmission of plans furthers FHFA’s VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 desire to reduce regulatory burden. On the other hand, payments to be made after the effective date of the rule amendments are subject to the rule as amended, and must be submitted for review if review is required by the rule. III. Consideration of Differences Between the Banks and the Enterprises Section 1313(f) of the Safety and Soundness Act (12 U.S.C. 4513(f)), as amended by section 1201 of HERA, requires the Director, when promulgating regulations relating to the Banks, to consider 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 may also consider any other differences that are deemed appropriate. In preparing this final rule, the Director considered the differences between the Banks and the Enterprises as they relate to the above factors, and determined that the amendments in the final rule are neutral regarding the statutory factors. In the proposed rule, FHFA requested comments from the public regarding whether differences related to these factors should result in any revisions to the proposed rule. No significant relevant comments were received. IV. Paperwork Reduction Act The final rule does not contain any information collection requirement that requires the approval of the Office of Management and Budget (OMB) under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.). Therefore, FHFA has not submitted any information to OMB for review. V. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that a regulation that has a significant economic impact on a substantial number of small entities, small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation’s impact on small entities. Such an analysis need not be undertaken if the agency has certified that the regulation will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b). FHFA has considered the impact of this final rule under the Regulatory Flexibility Act. The General Counsel of FHFA certifies that this final rule will not have a significant economic impact on a substantial number of small entities E:\FR\FM\20DER1.SGM 20DER1 Federal Register / Vol. 83, No. 244 / Thursday, December 20, 2018 / Rules and Regulations because the regulation applies only to the regulated entities, which are not small entities for purposes of the Regulatory Flexibility Act. VI. Congressional Review Act In accordance with the Congressional Review Act,21 FHFA has determined that this final rule is not a major rule and has verified this determination with the OMB. See 5 U.S.C. 504(2). List of Subjects in 12 CFR Part 1231 Golden parachutes, Government sponsored enterprises, Indemnification payments. Accordingly, for the reasons stated in the SUPPLEMENTARY INFORMATION, and under the authority of 12 U.S.C. 4511, 4513, 4517, 4518, 4518a, and 4526, FHFA amends part 1231 of subchapter B of chapter XII of Title 12 of the Code of Federal Regulations as follows: PART 1231—GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS 1. The authority citation for part 1231 is revised to read as follows: ■ Authority: 12 U.S.C. 4511, 4513, 4517, 4518, 4518a, 4526, and 4617. ■ 2. Revise § 1231.1 to read as follows: § 1231.1 Purpose. The purpose of this part is to implement section 1318(e) of the Safety and Soundness Act (12 U.S.C. 4518(e)) by setting forth the factors that the Director will take into consideration in determining whether to limit or prohibit golden parachute payments and agreements and by setting forth conditions for prohibited and permissible indemnification payments that regulated entities and the Office of Finance (OF) may make to affiliated parties. ■ 3. Revise § 1231.2 to read as follows: khammond on DSK30JT082PROD with RULES § 1231.2 Definitions. The following definitions apply to the terms used in this part: Affiliated party means: (1) With respect to a golden parachute payment: (i) Any director, officer, or employee of a regulated entity or the OF; and (ii) Any other person as determined by the Director (by regulation or on a case-by-case basis) who participates or participated in the conduct of the affairs of the regulated entity or the OF, provided that a member of a Federal Home Loan Bank shall not be deemed to have participated in the affairs of that Federal Home Loan Bank solely by virtue of being a shareholder of, and 21 See 5 U.S.C. 804(2). VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 obtaining advances from, that Federal Home Loan Bank; and (2) With respect to an indemnification payment: (i) By the OF, any director, officer, or manager of the OF; and (ii) By a regulated entity: (A) Any director, officer, employee, or controlling stockholder of, or agent for, a regulated entity; (B) Any shareholder, affiliate, consultant, or joint venture partner of a regulated entity, and any other person as determined by the Director (by regulation or on a case-by-case basis) that participates in the conduct of the affairs of a regulated entity, provided that a member of a Federal Home Loan Bank shall not be deemed to have participated in the affairs of that Federal Home Loan Bank solely by virtue of being a shareholder of, and obtaining advances from, that Federal Home Loan Bank; (C) Any independent contractor for a regulated entity (including any attorney, appraiser, or accountant) if: (1) The independent contractor knowingly or recklessly participates in any violation of any law or regulation, any breach of fiduciary duty, or any unsafe or unsound practice; and (2) Such violation, breach, or practice caused, or is likely to cause, more than a minimal financial loss to, or a significant adverse effect on, the regulated entity; or (D) Any not-for-profit corporation that receives its principal funding, on an ongoing basis, from any regulated entity. Agreement means, with respect to a golden parachute payment, any plan, contract, arrangement, or other statement setting forth conditions for any payment by a regulated entity or the OF to an affiliated party. Bona fide deferred compensation plan or arrangement means any plan, contract, agreement, or other arrangement: (1) Whereby an affiliated party voluntarily elects to defer all or a portion of the reasonable compensation, wages, or fees paid for services rendered which otherwise would have been paid to such party at the time the services were rendered (including a plan that provides for the crediting of a reasonable investment return on such elective deferrals); or (2) That is established as a nonqualified deferred compensation or supplemental retirement plan, other than an elective deferral plan described in paragraph (1) of this definition: (i) Primarily for the purpose of providing benefits for certain affiliated parties in excess of the limitations on contributions and benefits imposed by PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 65289 sections 401(a)(17), 402(g), 415, or any other applicable provision of the Internal Revenue Code of 1986 (26 U.S.C. 401(a)(17), 402(g), 415); or (ii) Primarily for the purpose of providing supplemental retirement benefits or other deferred compensation for a select group of directors, management, or highly compensated employees; and (3) In the case of any plans as described in paragraphs (1) and (2) of this definition, the following requirements shall apply: (i) The affiliated party has a vested right, as defined under the applicable plan document, at the time of termination of employment to payments under such plan; (ii) Benefits under such plan are accrued each period only for current or prior service rendered to the employer (except that an allowance may be made for service with a predecessor employer); (iii) Any payment made pursuant to such plan is not based on any discretionary acceleration of vesting or accrual of benefits which occurs at any time later than one year prior to the regulated entity or the OF becoming a troubled institution; (iv) The regulated entity or the OF has previously recognized compensation expense and accrued a liability for the benefit payments according to GAAP, or segregated or otherwise set aside assets in a trust which may only be used to pay plan benefits and related expenses, except that the assets of such trust may be available to satisfy claims of the troubled institution’s creditors in the case of insolvency; and (v) Payments pursuant to such plans shall not be in excess of the accrued liability computed in accordance with GAAP. Executive officer means an ‘‘executive officer’’ as defined in 12 CFR 1230.2, and includes any director, officer, employee or other affiliated party whose participation in the conduct of the business of the regulated entity or the OF has been determined by the Director to be so substantial as to justify treatment as an ‘‘executive officer.’’ Golden parachute payment means any payment in the nature of compensation made by a troubled institution for the benefit of any current or former affiliated party that is contingent on or provided in connection with the termination of such party’s primary employment or affiliation with the troubled institution. Indemnification payment means any payment (or any agreement to make any payment) by any regulated entity or the OF for the benefit of any current or E:\FR\FM\20DER1.SGM 20DER1 khammond on DSK30JT082PROD with RULES 65290 Federal Register / Vol. 83, No. 244 / Thursday, December 20, 2018 / Rules and Regulations former affiliated party, to pay or reimburse such person for any liability or legal expense. Individually negotiated settlement agreement means an agreement that settles a claim, or avoids a claim reasonably anticipated to be brought, against a troubled institution by an affiliated party and involves a payment in association with termination to, and a release of claims by, the affiliated party. Liability or legal expense means— (1) Any legal or other professional expense incurred in connection with any claim, proceeding, or action; (2) The amount of, and any cost incurred in connection with, any settlement of any claim, proceeding, or action; and (3) The amount of, and any cost incurred in connection with, any judgment or penalty imposed with respect to any claim, proceeding, or action. Payment means: (1) Any direct or indirect transfer of any funds or any asset; (2) Any forgiveness of any debt or other obligation; (3) The conferring of any benefit, including but not limited to stock options and stock appreciation rights; and (4) Any segregation of any funds or assets, the establishment or funding of any trust or the purchase of or arrangement for any letter of credit or other instrument, for the purpose of making, or pursuant to any agreement to make, any payment on or after the date on which such funds or assets are segregated, or at the time of or after such trust is established or letter of credit or other instrument is made available, without regard to whether the obligation to make such payment is contingent on: (i) The determination, after such date, of the liability for the payment of such amount; or (ii) The liquidation, after such date, of the amount of such payment. Permitted means, with regard to any agreement, that the agreement either does not require the Director’s consent under this part or has received the Director’s consent in accordance with this part. Troubled institution means a regulated entity or the OF that is: (1) Insolvent; (2) In conservatorship or receivership; (3) Subject to a cease-and-desist order or written agreement issued by FHFA that requires action to improve its financial condition or is subject to a proceeding initiated by the Director, which contemplates the issuance of an order that requires action to improve its VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 financial condition, unless otherwise informed in writing by FHFA; (4) Assigned a composite rating of 4 or 5 by FHFA under its CAMELSO examination rating system as it may be revised from time to time; (5) Informed in writing by the Director that it is a troubled institution for purposes of the requirements of this part on the basis of the most recent report of examination or other information available to FHFA, on account of its financial condition, risk profile, or management deficiencies; or (6) In contemplation of the occurrence of an event described in paragraphs (1) through (5) of this definition. A regulated entity or the OF is subject to a rebuttable presumption that it is in contemplation of the occurrence of such an event during the 90 day period preceding such occurrence. ■ 4. Revise § 1231.3 to read as follows: § 1231.3 Golden parachute payments and agreements. (a) In general, FHFA consent is required. No troubled institution shall make or agree to make any golden parachute payment without the Director’s consent, except as provided in this part. (b) Exempt agreements and payments. The following agreements and payments, including payments associated with an agreement, are not golden parachute agreements or payments for purposes of this part and, for that reason, may be made without the Director’s consent: (1) Any pension or retirement plan that is qualified (or is intended to be qualified) under section 401 of the Internal Revenue Code of 1986 (26 U.S.C. 401); (2) Any ‘‘employee welfare benefit plan’’ as that term is defined in section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (29 U.S.C. 1002(1)), other than: (i) Any deferred compensation plan or arrangement; and (ii) Any severance pay plan or agreement; (3) Any benefit plan that: (i) Is a ‘‘nondiscriminatory employee plan or program’’ for the purposes of section 280G of the Internal Revenue Code of 1986 (26 U.S.C. 280G) and applicable regulations; or (ii) Has been submitted to the Director for review in accordance with this part and that the Director has determined to be nondiscriminatory, unless such a plan is otherwise specifically addressed by this part; (4) Any ‘‘bona fide deferred compensation plan or arrangement’’ as PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 defined in this part provided that the plan: (i) Was in effect for, and not materially amended to increase benefits payable thereunder (except for changes required by law) within, the one-year period prior to the regulated entity or the OF becoming a troubled institution; or (ii) Has been determined to be permissible by the Director; (5) Any payment made by reason of: (i) Death; or (ii) Termination caused by disability of the affiliated party; and (6) Any severance or similar payment that is required to be made pursuant to a state statute that is applicable to all employers within the appropriate jurisdiction (with the exception of employers that are exempt due to their small number of employees or other similar criteria). (c) Golden parachute payment agreements for which FHFA consent is not required. A troubled institution may enter into the following agreements to make a golden parachute payment without the Director’s consent: (1) With any affiliated party where the agreement is expressly directed or established by the Director exercising authority conferred by 12 U.S.C. 4617. (2) With an affiliated party who is not an executive officer where the agreement: (i) Is an individually negotiated settlement agreement, and the conditions of paragraph (e)(2) of this section are met; or (ii) Provides for a golden parachute payment that, when aggregated with all other golden parachute payments to the affiliated party, does not exceed $5,000 (subject to any adjustment for inflation pursuant to paragraph (g) of this section). (d) Golden parachute payments for which FHFA consent is not required. A troubled institution may make the following golden parachute payments without the Director’s consent: (1) To any affiliated party where: (i) The payment is required to be made pursuant to a permitted individually negotiated settlement agreement; or (ii) The Director previously consented to such payment in a written notice to the troubled institution (which may be included in the Director’s consent to the agreement), the payment is made in accordance with a permitted agreement, and the troubled institution has met any conditions established by the Director for making the payment. (2) To an executive officer where the payment recognizes a significant life event and does not exceed $500 in value E:\FR\FM\20DER1.SGM 20DER1 khammond on DSK30JT082PROD with RULES Federal Register / Vol. 83, No. 244 / Thursday, December 20, 2018 / Rules and Regulations (subject to any adjustment for inflation pursuant to paragraph (g) of this section). (3) To an affiliated party who is not an executive officer, where: (i) The payment is made in accordance with a permitted agreement and the conditions of paragraph (e)(2) of this section are met; or (ii) The payment when aggregated with other golden parachute payments to the affiliated party does not exceed $5,000 (subject to any adjustment for inflation pursuant to paragraph (g) of this section). (e) Required due diligence review; due diligence standard—(1) Agreements and payments where consent is requested. A troubled institution making a request for consent to enter into a golden parachute payment agreement with, or to make a golden parachute payment to, an individual affiliated party shall conduct due diligence appropriate to the level and responsibility of the affiliated party covered by the agreement or to whom payment would be made, to determine whether there is information, evidence, documents, or other materials that indicate there is a reasonable basis to believe, at the time the request is submitted, that the affiliated party: (i) Has committed any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the regulated entity or the OF that is likely to have a material adverse effect on the regulated entity or the OF; (ii) Is substantially responsible for the regulated entity or the OF being a troubled institution; (iii) Has materially violated any applicable Federal or State law or regulation that has had or is likely to have a material effect on the regulated entity or the OF; or (iv) Has violated or conspired to violate sections 215, 657, 1006, 1014, or 1344 of title 18 of the United States Code, or section 1341 or 1343 of such title affecting a ‘‘financial institution’’ as the term is defined in title 18 of the United States Code (18 U.S.C. 20). (2) Agreements and payments permitted without the Director’s consent. No troubled institution shall enter into an agreement pursuant to paragraph (c)(2)(i) of this section or make a payment pursuant to paragraph (d)(3)(i) of this section unless it is reasonably assured, following due diligence in accordance with paragraph (e)(1) of this section, that the affiliated party to whom payment would be made has not engaged in any of the actions listed in paragraphs (e)(1)(i) through (iv) of this section. (3) Required notice to FHFA. If a troubled institution determines it is VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 unable to enter into an agreement pursuant to paragraph (c)(2)(i) of this section or make a payment pursuant to (d)(3)(i) of this section without the Director’s consent because it cannot meet the standard set forth in paragraph (e)(2) of this section, and thereafter does not request the Director’s consent to make the payment, then the troubled institution shall provide notice to FHFA of each reason for which it cannot meet the standard set forth in paragraph (e)(2) of this section, within 15 business days of its determination. (f) Factors for Director consideration. In making a determination under this section, the Director may consider: (1) Whether, and to what degree, the affiliated party was in a position of managerial or fiduciary responsibility; (2) The length of time the affiliated party was affiliated with the regulated entity or the OF, and the degree to which the proposed payment represents a reasonable payment for services rendered over the period of affiliation; (3) Whether the golden parachute payment would be made pursuant to an employee benefit plan that is usual and customary; (4) Whether the golden parachute payment or agreement is excessive or abusive or threatens the financial condition of the troubled institution; and (5) Any other factor the Director determines relevant to the facts and circumstances surrounding the golden parachute payment or agreement, including any fraudulent act or omission, breach of fiduciary duty, violation of law, rule, regulation, order, or written agreement, and the level of willful misconduct, breach of fiduciary duty, and malfeasance on the part of the affiliated party. (g) Adjustment for inflation. Monetary amounts set forth in this part may be adjusted for inflation by increasing the dollar amount set forth in this part by the percentage, if any, by which the Consumer Price Index for all-urban consumers published by the Department of Labor (‘‘CPI–U’’) for December of the calendar year preceding payment exceeds the CPI–U for the month of November 2018, with the resulting sum rounded up to the nearest whole dollar. ■ 5. Revise § 1231.5 to read as follows: § 1231.5 Applicability in the event of receivership. The provisions of this part, or any consent or approval granted under the provisions of this part by FHFA, shall not in any way bind any receiver of a regulated entity. Any consent or approval granted under the provisions of this part by FHFA shall not in any PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 65291 way obligate FHFA as receiver to pay any claim or obligation pursuant to any golden parachute, severance, indemnification, or other agreement, or otherwise improve any claim of any affiliated party on or against FHFA as receiver. Nothing in this part may be construed to permit the payment of salary or any liability or legal expense of an affiliated party contrary to section 1318(e)(3) of the Safety and Soundness Act (12 U.S.C. 4518(e)(3)). ■ 6. Revise § 1231.6 to read as follows: § 1231.6 Filing instructions. (a) Scope. This section contains procedures for requesting the consent of the Director and for filing any notice, where consent or notice is required by § 1231.3. (b) Where to file. A troubled institution must submit any request for consent or notice required by § 1231.3 to the Manager, Executive Compensation Branch, or to such other person as FHFA may direct. (c) Content of a request for FHFA consent. A request pursuant to § 1231.3 must: (1) Be in writing; (2) State the reasons why the troubled institution seeks to enter into the agreement or make the payment; (3) Identify the affiliated party or describe of the class or group of affiliated parties who would receive or be eligible to receive payment; (4) Include a copy of any agreement, including any plan document, contract, other agreement or policy regarding the subject matter of the request; (5) State the cost of the proposed payment or payments, and the impact on the capital and earnings of the troubled institution; (6) State the reasons why consent to the agreement or payment, or to both the agreement and payment, should be granted; (7) For any plan that the troubled institution believes is a nondiscriminatory benefit plan, other than a plan covered by § 1231.3(b)(3)(i), state the basis for the conclusion that the plan is nondiscriminatory; (8) For any bona fide deferred compensation plan or arrangement, state whether the plan would be exempt under this part but for the fact that it was either established or materially amended to increase benefits payable thereunder (except for changes required by law) within the one-year period prior to the regulated entity or the OF becoming a troubled institution; (9) For any agreement with an individual affiliated party, or for any payment, either: E:\FR\FM\20DER1.SGM 20DER1 65292 Federal Register / Vol. 83, No. 244 / Thursday, December 20, 2018 / Rules and Regulations (i) State that the troubled institution is reasonably assured that the affiliated party has not engaged in any of the actions listed in § 1231.3(e)(1)(i) through (iv), or, (ii) If the troubled institution is not reasonably assured that the affiliated party has not engaged in any of the actions listed in § 1231.3(e)(1)(i) through (iv) but nonetheless wishes to request consent, describe the results of its due diligence and, in light of those results, the reason why consent to the agreement or payment should be granted. (d) FHFA decision on a request. FHFA shall provide the troubled institution with written notice of the decision on a request as soon as practicable after it is rendered. (e) Content of notice to FHFA. A notice pursuant to § 1231.3(e)(3) must: (1) Be in writing; (2) Identify the affiliated party who would receive or be eligible to receive payment; (3) Include a copy of any agreement or policy regarding the subject matter of the request; and (4) State each reason why the troubled institution cannot meet the standard set forth in § 1231.3(e)(2). (f) Waiver of form or content requirements. FHFA may waive or modify any requirement related to the form or content of a request or notice, in circumstances deemed appropriate by FHFA. (g) Additional information. FHFA may request additional information at any time during the processing of the request or after receiving a notice. Dated: December 14, 2018. Melvin L. Watt, Director, Federal Housing Finance Agency. [FR Doc. 2018–27564 Filed 12–19–18; 8:45 am] BILLING CODE 8070–01–P DEPARTMENT OF COMMERCE Bureau of Industry and Security 15 CFR Part 774 [Docket No. 180918851–8851–01] khammond on DSK30JT082PROD with RULES RIN 0694–AH64 Control of Military Electronic Equipment and Other Items the President Determines No Longer Warrant Control Under the United States Munitions List (USML); Correction Bureau of Industry and Security, Commerce. ACTION: Final rule; correcting amendments. AGENCY: VerDate Sep<11>2014 16:40 Dec 19, 2018 Jkt 247001 The Bureau of Industry and Security (BIS) is amending the Export Administration Regulations (EAR) by correcting two entries on the Commerce Control List (CCL) that control Global Navigation Satellite Systems (GNSS) receiving equipment. It was brought to BIS’ attention that it did not implement controls over items that no longer warrant control under the United States Munitions List (USML) in a previous published rule. This rule corrects that error. BIS estimates that there will be 12 license applications submitted to BIS annually as a result of this rule. DATES: Effective date: This rule is effective: December 20, 2018. FOR FURTHER INFORMATION CONTACT: Dennis Krepp, Office of National Security and Technology Transfer Controls, (202) 482–1309, dennis.krepp@bis.doc.gov. SUPPLEMENTARY INFORMATION: SUMMARY: Background On October 12, 2016, the Bureau of Industry and Security (BIS) published a rule in the Federal Register entitled ‘‘Revisions to the Export Administration Regulations (EAR): Control of Fire Control, Laser, Imaging, and Guidance Equipment the President Determines No Longer Warrant Control Under the United States Munitions List (USML)’’ (81 FR 70320). This rule added to the Commerce Control List military electronics and related items the President determined no longer warrant control under the United States Munitions List (USML) of the International Traffic in Arms Regulations (ITAR) (22 CFR 120–130). BIS published the rule simultaneously with a Department of State rule that amended the list of articles controlled by USML Category XII (22 CFR 121.1) to control only those articles the President had determined warrant control in that category of the USML (81 FR 70340). The BIS rule was supposed to change the License Requirement section of Export Control Classification Number (ECCN) 7A005 to modify the CCL to cover 7A005.b, Global Navigation Satellite Systems (GNSS) receiving equipment employing ‘adaptive antenna systems’. This equipment was removed from the USML. However, BIS inadvertently did not update the CCL as intended. The revisions described below provide that this equipment is covered by 7A005.b, and that items otherwise subject to 7A005.a are subject to the ITAR. In order to more clearly distinguish the national security controlled items from the missile technology controlled items in ECCN 7A005, BIS is fully listing the MTCR PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 item 11.A.3 in the CCL under ECCN 7A105. Some of the items that this rule lists in ECCN 7A105 would be fully or partially subject to the ITAR were they not listed on the CCL. Therefore, it is very important for the public to employ the order of review principles found in Supplement No. 4 to part 774 of the EAR to classify their item correctly. Revision to ECCN 7A005 This correction rule amends the License Requirements section of ECCN 7A005. The first amendment removes the text ‘‘These items are ‘‘subject to the ITAR’’ (see 22 CFR parts 120 through 130).’’ and adds in its place ‘‘Reason for Control: NS, MT and AT’’. The second amendment adds a License Requirements table to indicate a license requirement for national security (NS) reasons for the export or reexport of items listed in ECCN 7A005.b to all countries that have an ‘‘X’’ in NS Column 1 on the Commerce Country Chart (see Supplement No. 1 to part 738 of the EAR), i.e., all countries, except Canada. The table also includes a license requirement for anti-terrorism (AT) reasons for the export or reexport of such items to countries that have an ‘‘X’’ in AT Column 1 of the Commerce Country Chart and for countries for which the EAR indicates a license requirement in a referenced section of the EAR on the Commerce Country Chart. Missile Technology (MT) controls are also added to the License Requirements table for ECCN 7A005.b items that meet or exceed the parameters of ECCN 7A105 when exported or reexported to countries that have an ‘‘X’’ in MT Column 1 of the Commerce Country Chart. This rule also adds a License Exception section; however, no list based license exceptions will be available for this item. Transactionbased license exceptions or License Exception STA may be available if the transaction meets the criteria for any of those license exceptions in part 740 of the EAR. The Related Control paragraph in ECCN 7A005 is also amended. This rule adds a reference to ECCN 7A611 in paragraph (1) and revises the sentence in paragraph (1) to improve readability. It also replaces the current text of paragraph (2) (‘‘(2) See USML Category XII(d) for GNSS receiving equipment subject to the ITAR.’’) with the following text: ‘‘See USML Category XII(d) for GNSS receiving equipment subject to the ITAR and USML Category XI(c)(10) for antennae that are subject to the ITAR.’’ Lastly, it adds paragraph (3) to read as follows, ‘‘(3) 7A005.a is E:\FR\FM\20DER1.SGM 20DER1

Agencies

[Federal Register Volume 83, Number 244 (Thursday, December 20, 2018)]
[Rules and Regulations]
[Pages 65283-65292]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27564]


=======================================================================
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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1231

RIN 2590-AA72


Golden Parachute and Indemnification Payments

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is amending its 
golden parachute payments regulation to better align it with areas of 
FHFA's supervisory concern and reduce administrative and compliance 
burdens. This final rule amends a requirement that FHFA review and 
consent before a regulated entity or the Office of Finance (OF) enters 
certain agreements to make, or makes, certain payments that are 
contingent on the termination of an affiliated party, if the regulated 
entity or the OF is in a troubled condition, in conservatorship or 
receivership, or insolvent. FHFA's experience implementing the 
regulation indicated that it required review of some agreements and 
payments where there was little risk of excess or abuse, and thus that 
it was too broad.
    As amended, the rule will reduce the number of agreements and 
payments that are subject to FHFA prior review by focusing on those 
agreements and payments where there is greater risk of an excessive or 
abusive payment (in general, payments to and agreements with executive 
officers, broad-based plans covering large numbers of employees (such 
as severance plans), and payments made to non-executive-officer 
employees who may have engaged in certain types of wrongdoing). In 
addition, the rule as amended

[[Page 65284]]

clarifies the inquiry into possible employee wrongdoing that a 
regulated entity is required to undertake prior to entering into an 
agreement to make or making a golden parachute payment. Amendments also 
revise and clarify other rule procedures, definitions, and exemptions.

DATES: Effective date: January 22, 2019.

FOR FURTHER INFORMATION CONTACT: Alfred Pollard, General Counsel, (202) 
649-3050, Alfred.Pollard@fhfa.gov; Lindsay Simmons, Assistant General 
Counsel, (202) 649-3066, Lindsay.Simmons@fhfa.gov; or Mary Pat Fox, 
Manager for Compensation, Division of Enterprise Regulation, (202) 649-
3215, MaryPat.Fox@fhfa.gov. These are not toll-free numbers. The 
mailing address is: Federal Housing Finance Agency, 400 Seventh Street 
SW, Washington, DC 20219. The telephone number for the 
Telecommunications Device for the Hearing Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    FHFA has broad discretionary authority to prohibit or limit any 
``golden parachute payment,'' generally defined as any payment, or any 
agreement to make a payment, in the nature of compensation by a 
regulated entity for the benefit of an ``affiliated party'' that is 
contingent on the party's termination, when the regulated entity is in 
troubled condition, in conservatorship or receivership, or insolvent (a 
``troubled institution'').\1\ This provision, at 12 U.S.C. 4518(e) 
(Section 4518(e)), was added to the Federal Housing Enterprises 
Financial Safety and Soundness Act (the Safety and Soundness Act) in 
2008. Legislative history suggests Section 4518(e) is intended to 
permit FHFA to prevent payments to departing employees and other 
affiliated parties that are excessive or abusive, could threaten (or 
further threaten) the financial condition of the troubled institution, 
or are inappropriate based on wrongdoing by the recipient.
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    \1\ The ``regulated entities'' are the Federal National Mortgage 
Association (Fannie Mae) and any affiliate, the Federal Home Loan 
Mortgage Corporation (Freddie Mac) and any affiliate, (collectively, 
the Enterprises), and the Federal Home Loan Banks (the Banks). 12 
U.S.C. 4502(20). The OF is a joint office of the Banks, to which 
FHFA extends the Golden Parachute Payments rule through its general 
regulatory authority. See id. sec. 4511(b)(2); see also 78 FR 28452, 
28456 (May 14, 2013) and 79 FR 4394 (Jan. 28, 2014). In this notice, 
the terms ``regulated entity'' and ``troubled institution'' include 
the Enterprises, Banks, and the OF, unless the OF is otherwise 
expressly addressed.
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    Section 4518(e) requires the Director to promulgate rules defining 
``troubled condition'' and prescribing factors to be considered when 
prohibiting or limiting any ``golden parachute payment,'' and suggests 
some factors the Director may consider. To ensure that FHFA had an 
opportunity to review and, if necessary, prohibit or limit golden 
parachute payments and agreements before they are made, the golden 
parachute payments final rule published in January 2014 (``the 2014 
rule'') prohibited all golden parachute payments and agreements that 
were not exempt from or permitted by operation of the rule. Prohibited 
agreements or payments could be permitted by the Director after review.
    Because the 2014 rule applied equally to golden parachute payments 
and agreements, it required FHFA to determine the permissibility of 
prohibited agreements before they were entered into and of prohibited 
payments before they were made. In most cases, this meant that a 
troubled institution was required to request FHFA's prior review and 
consent to a payment that would be made in accordance with an agreement 
to which FHFA had already consented. This ``double approval'' 
requirement was recognized by FHFA and commenters when the rule was 
proposed in 2013 and finalized in 2014.\2\ FHFA noted then that it was 
an appropriate supervisory approach because conditions could change 
after an agreement was approved but before a payment was made (for 
example, the condition of a troubled institution could further 
deteriorate, or an intended recipient could be found to have 
contributed to the deterioration or engaged in wrongdoing with a 
material adverse effect on the regulated entity). In practice, that 
approach resulted in FHFA's receiving numerous requests for review of 
golden parachute payments and agreements.
---------------------------------------------------------------------------

    \2\ See 78 FR 28452, 28545 (May 14, 2013) (Notice of Proposed 
Rulemaking) and 79 FR 4394, 4396 (Jan. 28, 2014) (Final Rule).
---------------------------------------------------------------------------

    Narrowly drafted exemptions from the 2014 rule also gave rise to 
numerous requests for review. For example, because severance pay plans 
of the regulated entities do not meet an exemption for 
``nondiscriminatory'' plans, troubled institutions were not permitted 
to make severance payments to any employees--even small payments to 
lower-level employees--without FHFA review and consent. Likewise, an 
exemption for payments pursuant to a ``bona fide deferred compensation 
plan or arrangement'' did not apply or was lost if the plan was 
established or amended after the date that was one year prior to the 
time the regulated entity became a troubled institution, meaning such 
plans and any plan payments required FHFA prior review.
    Based on experience reviewing proposed agreements and payments, 
FHFA determined that the scope of the 2014 rule was too broad because 
it required a troubled institution to submit and FHFA to review 
agreements and payments where there was very little risk of an abusive 
or excessive payment or threat to the financial condition of the paying 
regulated entity, and little likelihood that the employee or other 
affiliated party receiving payment could have engaged in the type of 
wrongdoing that FHFA would consider as the basis for prohibiting or 
limiting an agreement or payment. Separately, FHFA also determined that 
the 2014 rule could be harmonized with other requirements related to 
the compensation of executive officers of the regulated entities, 
including termination payments, avoiding the need to request or engage 
in separate reviews.\3\ On those bases, FHFA proposed amendments to the 
2014 rule, which it fully described and on which it requested comments 
in an earlier Federal Register Notice.\4\
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    \3\ See generally, 12 U.S.C. 1452(h), 1723a(d)(3), and 4518(a); 
see also 12 CFR part 1230.
    \4\ 83 FR 43802 (Aug. 28, 2018).
---------------------------------------------------------------------------

II. Comments

    During a 45-day comment period that ended on October 12, 2018, FHFA 
received a joint letter from ten of the eleven Federal Home Loan Banks 
(Banks) and the OF (collectively, the Banks), and a letter from Freddie 
Mac. Commenters generally expressed support for the reduction of 
burdens embodied in the proposed amendments and requested changes to 
reduce burden further. Some comments also requested or suggested 
clarifications of rule provisions or topics not addressed by the rule, 
such as grandfathering. For organizational purposes, comments are 
addressed in the order of the rule provision to which they relate.

Section 1231.2, Definition of ``Golden Parachute Payment''

    FHFA proposed to remove the phrase ``pursuant to an obligation of 
the regulated entity'' from the regulatory ``golden parachute payment'' 
definition, to clarify that the definition covers gifts and the process 
by which FHFA reviews gifts by a troubled institution to a terminating 
employee (or other affiliated party). FHFA has general authority to 
prohibit an improper gift, and interprets the statutory definition of 
``golden parachute payment,'' which references ``an obligation,'' as 
clarifying that

[[Page 65285]]

FHFA's authority to prohibit or limit golden parachute payments 
includes those made pursuant to an obligation.\5\ FHFA was concerned 
that including the phrase ``pursuant to an obligation'' within the 
regulatory definition could be read to imply that the rule does not 
extend to excessive or abusive payments that are made gratuitously, 
which would be inconsistent with the policy of Section 4518(e). FHFA 
also noted that it had applied the 2014 rule to gifts, and that 
troubled institutions had requested FHFA's review of and consent to 
proposed retirement gifts. Thus, the proposed change in regulatory text 
would align the rule with FHFA's interpretation and application of it.
---------------------------------------------------------------------------

    \5\ Under this interpretation, including the phrase ``pursuant 
to an obligation of the regulated entity'' in federal law clarifies 
the primacy of the federal supervisor to prohibit or limit 
obligatory payments, despite state laws otherwise upholding the 
enforceability of contracts. In fact, recent court decisions have 
confirmed that a taking does not occur for purposes of the Tucker 
Act, 28 U.S.C. 1491, when FHFA prohibits a golden parachute payment, 
even one made pursuant to an agreement entered into before the 
enactment of Section 4518(e) in 2008.
    In Piszel v. U.S., 833 F.3d 1366 (Fed. Cir. 2016), the Court of 
Appeals for the Federal Circuit held that no taking occurred because 
the affiliated party retained the ability to pursue a claim for 
damages from the regulated entity for breach of contract. FHFA 
agrees that there was no taking, but also observes that awarding 
damages for breach of contract would clearly defeat the purpose of 
Section 4518(e), which is to prevent the affiliated party from 
receiving such a payment. The Court of Federal Claims had held in 
that case that no taking occurred (see Piszel v. U.S., 121 Fed. Cl. 
793 (2015)) because of an insufficiently cognizable property 
interest, considering the contract in the context of the regulatory 
and statutory scheme (``a heavily regulated environment;'' and 
statutory provisions expressly authorized FHFA's predecessor agency 
to prohibit compensation it deemed to be unreasonable at any time 
and did not ``guarantee [ ] that the government could not later 
change its mind'' after approving compensation as reasonable). That 
conclusion would be even stronger with respect to a payment made 
subject to an agreement entered into after Section 4518(e)'s 
enactment, a proposition with which the Federal Circuit may have 
agreed, see 833 F.3d at 1374.
---------------------------------------------------------------------------

    Although the Banks agreed that FHFA has authority to prohibit an 
improper gift, they commented that the phrase ``pursuant to an 
obligation of the regulated entity'' should remain in the rule 
definition. In contrast to FHFA's interpretation, the Banks stated that 
they believe reference to ``an obligation'' in the statutory definition 
meant that Congress intended FHFA's authority to prohibit or limit 
golden parachute payments to extend only to payments that an 
institution is contractually obligated to make. The Banks opined that 
payments not pursuant to an obligation, such as improper voluntary 
gifts, should be regulated only to the extent that FHFA found such 
payments to be excessive or an unsafe and unsound practice, but not 
under its golden parachute payments authority.
    The Banks and FHFA agree that FHFA has authority to prohibit or 
limit any improper voluntary gift, through its general supervisory 
authority.\6\ FHFA believes it is important to review payments, 
including gifts, to terminating employees by a troubled institution, as 
it is more likely that a voluntary gift would be deemed improper (for 
example, excessive, abusive, or the result of an unsafe and unsound 
practice) when made by a troubled institution. By removing the phrase 
``pursuant to an obligation of the regulated entity'' from the 
regulatory ``golden parachute payment'' definition, FHFA is clarifying 
the process for its review of voluntary payments to terminating 
employees by a troubled institution before such payments are made, to 
determine their propriety in accordance with transparent regulatory 
considerations.
---------------------------------------------------------------------------

    \6\ See generally, 12 U.S.C. 4511, 4513, and 4526, citations to 
which are included in the rule's ``authority'' provision.
---------------------------------------------------------------------------

    FHFA also notes that other amendments should limit the number of 
gifts subject to its review, including rule provisions permitting a 
small value gift to an executive officer of a troubled institution on a 
significant life event such as retirement, permitting de minimis 
payments to other affiliated parties, and exempting payments provided 
through a ``nondiscriminatory benefit plan.'' \7\ Together, these 
provisions are intended to balance FHFA's supervisory concern for gifts 
by troubled institutions with the burden of a prior review process. For 
these reasons, FHFA is amending the rule as proposed, by removing the 
phrase ``pursuant to an obligation of a regulated entity'' from the 
``golden parachute payment'' definition.
---------------------------------------------------------------------------

    \7\ FHFA intends to interpret ``agreement,'' as defined in the 
rule, broadly where appropriate. For example, FHFA may consider a 
written policy governing a common practice to be an ``agreement'' 
for purposes of the rule.
---------------------------------------------------------------------------

Section 1231.3(a), Golden Parachute Payments and Agreements Requiring 
FHFA Consent

    FHFA proposed to retain the general construct of the 2014 rule and 
will continue to prohibit all golden parachute payments and agreements 
that are not exempt from or permitted by the rule. Prohibited 
agreements or payments may still be permitted by the Director after 
review. The Banks commented that this approach can result in a ``double 
approval'' requirement, which ``creates uncertainty for executives that 
the compensation agreements they negotiated at the start of employment 
may not be honored.'' The Banks suggested that ``double approval'' be 
entirely removed from the rule.
    The Banks made a similar comment in response to the 2013 Notice of 
Proposed Rulemaking that resulted in the 2014 rule.\8\ As FHFA then 
responded, Section 4518(e) clearly permits FHFA to prohibit or limit 
golden parachute agreements and payments when a regulated entity is a 
troubled institution, and many policy reasons support the approach of 
reviewing both agreements (including plans) and associated payments 
(e.g., a plan may be designed to cover a class of employees, where 
neither the regulated entity requesting review nor FHFA knows the 
specific employees who may, or will, ultimately receive a termination 
payment; or the financial condition of a troubled institution may 
deteriorate after FHFA consents to a plan as a golden parachute 
agreement, but before payments are made).\9\
---------------------------------------------------------------------------

    \8\ 79 FR at 4396.
    \9\ Id. at 4396-97.
---------------------------------------------------------------------------

    It is also not clear that removing ``double approval'' would create 
the certainty desired: If an executive officer entered into a 
compensation arrangement prior to a Bank's becoming a troubled 
institution, but terminated employment when the Bank was troubled, even 
under a ``single approval'' approach, FHFA review of either the 
agreement (as entered into) or the payment (as proposed to be made) 
would be required. The Banks do not suggest that FHFA could not 
prohibit or limit either the agreement or the payment at that time, 
although such a prohibition or a limitation would clearly disrupt the 
agreement the executive officer reached with the Bank when hired. FHFA 
also notes that its approach is consistent with that taken by the FDIC 
and the other federal banking agencies, and thus may be familiar to 
prospective employees of FHFA's regulated entities.\10\ For these 
reasons, FHFA is retaining the construct of the 2014 rule and will 
require a troubled institution to submit agreements and payments that 
are not exempt from or permitted by operation of the rule to FHFA for 
prior review and consent.
---------------------------------------------------------------------------

    \10\ See 12 CFR 359.4(a)(1).
---------------------------------------------------------------------------

Section 1231.3(b), Exempt Golden Parachute Payments and Agreements

    1. Qualified Pension or Retirement Plans
    FHFA did not propose any change to an exemption in the 2014 rule 
for payments pursuant to any pension or

[[Page 65286]]

retirement plan that is ``qualified (or intended within a reasonable 
period of time to be qualified) under section 401 of the Internal 
Revenue Code of 1986 (26 U.S.C. 401).'' That language implements a 
statutory exemption and was derived from a similar rule adopted by the 
Federal Deposit Insurance Corporation in 1996.\11\ Freddie Mac 
commented, however, that although employers previously were able to 
obtain periodic Section 401 qualification determinations from the 
Internal Revenue Service (IRS), the IRS has curtailed its issuance of 
such determinations. Now, certain plans may not receive an IRS 
determination for quite some time, if ever.\12\ Consequently, the 
phrase ``within a reasonable period of time'' could limit application 
of the exemption in an unforeseen and unintended manner. Freddie Mac 
requested FHFA clarification that, in cases where a plan that is 
intended to be qualified does not have an associated IRS determination, 
it will nonetheless be exempt from the ``golden parachute payment'' 
definition.
---------------------------------------------------------------------------

    \11\ Compare 12 U.S.C. 1828(k)(4)(C)(i) and 4518(e)(4)(C)(i); 
see also 61 FR 5,926, 5931 (Feb. 15, 1996).
    \12\ See IRS Rev. Proc. 2016-37 (July 18, 2016).
---------------------------------------------------------------------------

    The statutory exemption that the 2014 rule implements is not 
conditioned on an IRS determination of qualification, but applies to a 
plan that ``is qualified (or is intended to be qualified).'' \13\ The 
statutory exemption does not include any timing constraint on any such 
determination. On that basis, FHFA believes ``is intended to be'' is 
best read as referring to the employer's intention regarding the plan's 
legal status, as opposed to the employer's intention to obtain an IRS 
determination about the plan's legal status. Thus, the statutory 
exemption covers both a plan that is qualified and has received an IRS 
determination and a plan that the employer intends to be qualified 
under section 401 (even without an IRS determination). To reflect that 
scope, FHFA has removed the phrase ``within a reasonable period of 
time'' from the rule, so that it now mirrors the statutory 
exemption.\14\
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    \13\ 12 U.S.C. 4518(e)(4)(C)(i).
    \14\ In the case that a plan that is intended to be qualified is 
discovered to have failed to meet the requirements for 
qualification, such as by receiving such a determination from the 
IRS, then in order to keep the exemption under the rule, the 
employer would need to amend the plan to correct the error and meet 
the requirements for qualification as soon as reasonably 
practicable.
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2. Nondiscriminatory Benefit Plans
    Nondiscriminatory employee plans and programs. To implement a 
statutory exemption for ``other nondiscriminatory benefit plans,'' FHFA 
proposed to include an exemption for any benefit plan that is a 
``nondiscriminatory employee plan or program'' in accordance with IRS 
rules and published guidance interpreting 26 U.S.C. 280G (Section 
280G). Section 280G generally addresses the calculation of an 
``excess'' parachute payment and exempts any ``nondiscriminatory 
employee plan or program'' from that calculation. In response to a 
question received, FHFA wishes to clarify that requirements necessary 
in order for a plan to qualify as ``nondiscriminatory'' for purposes of 
Section 280G must be met in order for the plan to be exempt from the 
``golden parachute payment'' definition. In other words, it is not 
solely the type of plan (e.g., a tuition assistance plan) that triggers 
the exemption, but the fact that the plan meets the IRS conditions and 
requirements to be considered ``nondiscriminatory.'' \15\
---------------------------------------------------------------------------

    \15\ For example, to be an exempt cafeteria plan under 26 CFR 
280G-1, the plan must not increase benefits for officers or other 
highly compensated participants. See 26 U.S.C. 125. Generally, 
nondiscriminatory benefit plans would offer similar benefits to all 
participants. FHFA intends the exemption for any ``nondiscriminatory 
employee plan or program'' to be self-executing, meaning the 
regulated entities must determine whether their benefit plans meet 
any conditions imposed by the Internal Revenue Code or the IRS, in 
order for the exemption to apply.
---------------------------------------------------------------------------

    Severance pay plans. FHFA also proposed to remove an exemption for 
severance pay plans that met a rule definition of ``nondiscriminatory'' 
(and other conditions), based on its experience implementing the 2014 
rule. Specifically, FHFA observed that the market-based severance pay 
plans of its regulated entities did not meet that regulatory standard, 
and the failure to meet it required FHFA to review all the severance 
pay plans and payments of its troubled institutions. Based on that 
review, FHFA determined as a matter of policy that severance pay plans 
and payments should be subject to prior review. FHFA also noted, 
however, that a regulated entity could request an exemption for any 
severance pay plan it believes is in fact nondiscriminatory, as Section 
4518(e) provides a statutory exemption for ``nondiscriminatory benefit 
plans.'' Thus, removal of the regulatory ``nondiscriminatory'' 
definition would not eliminate the possibility of an exemption for a 
nondiscriminatory severance pay plan; rather, it would remove a 
regulatory definition that the plans reviewed by FHFA did not meet.
    The Banks commented on the value of severance pay plans generally 
and opposed removal of the definition of ``nondiscriminatory.'' They 
suggested instead that FHFA retain a ``nondiscriminatory'' definition 
but amend it to include the types of severance plans currently used at 
the Banks or, as an alternative, exempt severance for ``rank-and-file'' 
employees. The Banks also requested that severance pay plans (among 
other types of plans and agreements) in effect as of the date the rule 
is amended be grandfathered, expressing the view that Section 4518(e) 
does not support ``retroactive'' review.
    FHFA agrees with the Banks that severance plans are an important 
benefit for retaining employees, and that employee retention can be an 
appropriate consideration for a troubled institution.\16\ FHFA 
considered amending the regulatory definition of ``nondiscriminatory'' 
when developing its proposed rule but was not able to design a 
definition that both plausibly expressed the ``nondiscriminatory'' 
requirement and would operate to exempt a current, market-based, 
severance pay plan. As a practical matter, these plans are intended to 
provide greater benefits to higher-ranking employees than to lower-
ranking ones, and thus are intended to discriminate.\17\ Thus, FHFA 
does not believe the Banks' suggestion (expanding the regulatory 
definition of ``nondiscriminatory'' to include the severance plans used 
by the regulated entities) is workable.
---------------------------------------------------------------------------

    \16\ FHFA stated in the preamble to the proposal, for example, 
that ``an appropriately structured severance pay plan could have a 
retentive effect on employees that could be stabilizing as a 
troubled institution works to improve its financial condition.'' 83 
FR at 43808.
    \17\ FHFA also observes that no regulated entity amended its 
severance plan to meet the 2014 rule's ``nondiscriminatory'' 
definition. That could demonstrate that even a troubled institution 
believed having a market-based severance pay plan was a more 
important business consideration than obtaining the regulatory 
exemption that would have applied.
---------------------------------------------------------------------------

    FHFA also considered exempting severance pay plans and payments as 
they relate to lower-ranking employees when developing the proposed 
rule. Based on a number of policy considerations (some of which are 
also set forth in the proposal), FHFA determined that a better approach 
would be to require FHFA review of severance pay plans and, if FHFA 
consents to the plan, permit payments to be made to employees other 
than executive officers without FHFA review, provided the regulated 
entity determines, after appropriate due diligence, that it is 
reasonably assured the employee has not engaged in the types of 
wrongdoing described in the

[[Page 65287]]

rule. This approach will reduce burdens imposed on a troubled 
institution by the 2014 rule: It eliminates the requirement to make a 
certification about employee wrongdoing when submitting a plan for 
review and eliminates the requirement to submit a request for FHFA 
consent to payment provided the regulated entity meets the ``reasonably 
assured'' standard, following appropriate due diligence. FHFA also 
believes that amendments to the 2014 rule related to assessing possible 
wrongdoing by employees will further reduce burden. Specifically, FHFA 
is clarifying both the standard that must be met (``reasonably 
assured'') and the type of inquiry expected (appropriate due diligence, 
considering the level and responsibilities of the employee). FHFA 
recognizes that minimal due diligence may be appropriate in some cases, 
considering the types of wrongdoing set forth in the rule and the 
responsibilities of some employees who may be eligible for severance 
pay.
    FHFA also clarifies that it does not object to the 2014 rule's 
definition of ``nondiscriminatory'' as a standard for nondiscrimination 
in a severance pay plan. If a severance pay plan of a troubled 
institution is structured to meet that definition--or any other 
plausible standard for ``nondiscriminatory''--that regulated entity may 
request an exemption for the plan based on its ``nondiscriminatory'' 
nature. Because there is a statutory exemption for ``nondiscriminatory 
benefit plans,'' the rule as amended acknowledges that a troubled 
institution may request an exemption for any benefit plan on the basis 
that it is ``nondiscriminatory.'' If FHFA agrees with the regulated 
entity's supported assertion that a benefit plan, including a severance 
pay plan, is ``nondiscriminatory,'' that plan, and payments pursuant to 
it, will be exempt.
    Finally, FHFA does not agree that Section 4518(e) does not support 
review of plans and agreements in effect when a regulation is adopted 
or amended. The Banks made a similar comment in 2013, prior to FHFA's 
adoption of the 2014 rule, which FHFA addressed at that time.\18\ 
FHFA's view on the statutory authority and responsibility it was given 
by Congress has not changed. Where a rule providing for FHFA review of 
and consent to golden parachute payments and agreements has been in 
place since early 2014, and FHFA is not now establishing a stricter 
standard for review of such plans or agreements, it is particularly 
difficult to see how a ``retroactive'' analysis would be applied. 
Consequently, plans and agreements in place as of the effective date of 
the rule amendments are not grandfathered and will be subject to the 
rule provisions.
---------------------------------------------------------------------------

    \18\ 79 FR at 4395-6.
---------------------------------------------------------------------------

Section 1231.3(c), Agreements for Which FHFA Consent Is Not Required

    Plans directed by the Director. FHFA proposed to amend the 2014 
rule to permit plans or agreements that provide for termination 
payments to affiliated parties of a troubled institution without FHFA 
review, when such arrangements are established or directed by FHFA 
acting as conservator or receiver or otherwise pursuant to authority 
conferred by 12 U.S.C. 4617. FHFA received a question about application 
of that provision, specifically, whether it was intended to permit 
every arrangement established after FHFA was appointed conservator or 
receiver. The questioner noted that any arrangement of the regulated 
entity established after FHFA was appointed conservator or receiver 
could be construed as ``established or directed by FHFA acting as 
conservator or receiver'' because, pursuant to 12 U.S.C. 4617, when 
appointed conservator or receiver, FHFA succeeds to all rights, titles, 
powers and privileges of the regulated entity, with all the powers of 
its shareholders, officers, and directors, and to all of the assets of 
the regulated entity. That construction was not intended (nor, FHFA 
believes, is it a fair interpretation of the rulemaking as a whole, 
since such a construction would result in the rule applying almost 
exclusively to a regulated entity in troubled condition but not to a 
regulated entity for which a conservator or receiver has been 
appointed, and would have been discussed in that context; nor is it a 
fully accurate interpretation of the relationship between the 
conservator and the Enterprises' boards and management.\19\) To avoid 
any future confusion, however, FHFA has added the word ``expressly,'' 
which it always viewed as implied, to provisions permitting the 
arrangements established or directed by the Director acting pursuant to 
authority conferred by 12 U.S.C. 4617, without FHFA prior review or 
consent.
---------------------------------------------------------------------------

    \19\ See Responsibilities of Boards of Directors, Corporate 
Practices and Corporate Governance Matters, 80 FR 72328 n.2 (Nov. 
19, 2015).
---------------------------------------------------------------------------

    De minimis amount. FHFA proposed to permit a troubled institution 
to enter into an agreement to make a golden parachute payment to an 
affiliated party other than an executive officer without FHFA review 
and consent, and without the due diligence otherwise required, where 
the amount of the payment, when aggregated with other golden parachute 
payments, does not exceed $2,500. FHFA also noted that a higher or 
lower amount than the proposal's cap of $2,500 could be supported. 
Freddie Mac and the Banks each commented on this proposal, generally 
supporting the concept of permitting de minimis payments while 
requesting that the de minimis amount be increased from $2,500 to 
$5,000.
    As an alternative to increasing the de minimis amount, Freddie Mac 
suggested exempting all golden parachute payments paid to employees of 
a certain level and below. Freddie Mac suggested a level of employee, 
based on its employment structure, to whom it believed payments would 
not be subject to FHFA review, but also acknowledged that different 
regulated entities would have different employee structures. Freddie 
Mac suggested that FHFA could determine the appropriate level of 
employee for such an exemption at the time the regulated entity becomes 
a troubled institution.
    When developing the proposed rule, FHFA staff considered a de 
minimis amount of $5,000, which is the amount of a de minimis exemption 
provided by the FDIC in guidance on application of its similar 
rule.\20\ FHFA staff selected $2,500 because, should one of FHFA's 
regulated entities become troubled, FHFA does not have access to a 
privately funded, FHFA-administered insurance fund, in contrast to the 
FDIC with regard to insured depository institutions. On further 
consideration, however, FHFA believes that increasing the amount to 
$5,000 will not materially change the presumption stated in the 
preamble to the proposed rule, that a non-executive-officer affiliated 
party receiving such a de minimis amount upon separation either was not 
in a position to materially affect the financial condition of the 
regulated entity or engage in certain types of wrongdoing listed in the 
rule or, if the affiliated party was in such a position, the payment 
does not settle a claim involving such wrongdoing. For this reason, 
FHFA has increased the de minimis cap in the final rule to $5,000.
---------------------------------------------------------------------------

    \20\ See FDIC Guidance on Golden Parachute Applications, FIL 
Letter 66-2010 (Oct. 14, 2010).
---------------------------------------------------------------------------

    In contrast, FHFA believes Freddie Mac's suggestion to exempt all 
golden parachute payments to all employees below a certain level would 
not be appropriate. It would be difficult for FHFA to establish, by 
rule, a level of employee for which there is no value in reviewing 
golden parachute payments, regardless of the size of the payment. To do 
so would require reasonable

[[Page 65288]]

confidence that, among other things, an employee at or below that level 
could not engage in the types of wrongdoing set forth in the rule. 
While as a general matter the level of an employee can be an indicator 
of the extent of the employee's ability to affect a company, due 
diligence to determine whether the types of wrongdoing listed in the 
rule have occurred can still be important. For example, lower-level 
employees still have the ability to cause material harm to a company 
(such as reputational harm and technological sabotage) and may still 
receive substantial settlement payments. For those reasons, FHFA 
believes that the amount of the payment, rather than the level of the 
employee, serves as a better proxy for identifying instances where the 
burden of review, including due diligence, is not warranted. FHFA 
believes that the proposed approach, which would reduce burden by 
permitting smaller value payments to employees (and other affiliated 
parties) who are not executive officers, strikes the appropriate 
balance of administrative and policy considerations.

Section 1231.3(d), Payments for Which FHFA Consent Is Not Required

    FHFA proposed to permit some golden parachute payments to be made 
to an affiliated party other than an executive officer without FHFA 
prior review and consent. The Banks suggested a change to the proposed 
rule text for clarity and readability (to modify an introductory phrase 
to read ``To an affiliated party who is not an executive officer, 
where:''). FHFA agrees that this change improves clarity of the rule, 
and has changed the text as suggested.

Section 1231.3(e), Required Due Diligence Review and Standard

    FHFA proposed to require a troubled institution that concludes, 
after appropriate due diligence, that it is not ``reasonably assured'' 
the affiliated party has not engaged in the listed types of wrongdoing 
to provide notice of its concerns to FHFA, even if the regulated entity 
does not enter into an agreement or make a payment to the affiliated 
party. The Banks objected to the proposed notice requirement as 
unnecessary, possibly jeopardizing the attorney-client privilege of the 
regulated entity, and possibly ``chilling'' the regulated entity's 
ability to enter into individually negotiated settlement agreements and 
other types of severance arrangements.
    FHFA intends the notice to provide factual information about the 
possible wrongdoing in which the troubled institution believes the 
affiliated party may have engaged. FHFA did not intend the notice to 
include communications to or from lawyers, and thus does not believe it 
will implicate any attorney-client privilege. If FHFA has additional 
questions about a specific situation that may implicate any attorney-
client privileged communications, FHFA expects to work with the 
troubled institution to avoid any possible waiver, based on the 
particular facts and circumstances of the matter at hand.

Section 1231.3(f), Factors for Director Consideration.

    Based on the legislative history of Section 4518(e) and FHFA's 
experience administering the 2014 rule, FHFA proposed adding whether a 
golden parachute payment or agreement is ``excessive or abusive or 
threatens the financial condition of the troubled institution'' to 
listed factors for the Director's consideration. The Banks requested 
that FHFA clarify the terms ``excessive'' and ``abusive.''
    What constitutes ``excessive'' or ``abusive'' will depend on the 
circumstances of the agreement or payment, considering the particular 
troubled institution, its condition, the affiliated party to whom 
payment would be made, the amount of any payment proposed to be made, 
and the circumstances surrounding any agreement or plan governing 
payment. For that reason, FHFA does not believe it is possible to 
define those terms by rule in a manner that would expand on or 
illuminate their plain meaning. FHFA notes that this is only one factor 
among others for the Director to consider when determining whether to 
prohibit or limit a golden parachute payment.

Impact of Rule Amendments on Existing Plans

    FHFA also wishes to clarify that plans of a troubled institution to 
which FHFA consented under the 2014 rule do not need to be submitted 
again due to the amendment of the rule, provided the regulated entity 
is in the same condition that caused it to be a troubled institution 
when FHFA previously consented to the plan. For example, if one of the 
Enterprises is currently operating a benefit plan to which FHFA 
consented, or that FHFA has notified the Enterprise was otherwise able 
to continue in operation under the 2014 rule, that plan does not need 
to be resubmitted simply because the rule is being amended. The 
amendments adopted do not suggest that consent it has previously 
provided should now be reconsidered, and avoiding unnecessary 
resubmission of plans furthers FHFA's desire to reduce regulatory 
burden. On the other hand, payments to be made after the effective date 
of the rule amendments are subject to the rule as amended, and must be 
submitted for review if review is required by the rule.

III. Consideration of Differences Between the Banks and the Enterprises

    Section 1313(f) of the Safety and Soundness Act (12 U.S.C. 
4513(f)), as amended by section 1201 of HERA, requires the Director, 
when promulgating regulations relating to the Banks, to consider 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 may 
also consider any other differences that are deemed appropriate.
    In preparing this final rule, the Director considered the 
differences between the Banks and the Enterprises as they relate to the 
above factors, and determined that the amendments in the final rule are 
neutral regarding the statutory factors. In the proposed rule, FHFA 
requested comments from the public regarding whether differences 
related to these factors should result in any revisions to the proposed 
rule. No significant relevant comments were received.

IV. Paperwork Reduction Act

    The final rule does not contain any information collection 
requirement that requires the approval of the Office of Management and 
Budget (OMB) under the Paperwork Reduction Act (44 U.S.C. 3501 et 
seq.). Therefore, FHFA has not submitted any information to OMB for 
review.

V. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). FHFA has considered the impact of this final 
rule under the Regulatory Flexibility Act. The General Counsel of FHFA 
certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities

[[Page 65289]]

because the regulation applies only to the regulated entities, which 
are not small entities for purposes of the Regulatory Flexibility Act.

VI. Congressional Review Act

    In accordance with the Congressional Review Act,\21\ FHFA has 
determined that this final rule is not a major rule and has verified 
this determination with the OMB. See 5 U.S.C. 504(2).
---------------------------------------------------------------------------

    \21\ See 5 U.S.C. 804(2).
---------------------------------------------------------------------------

 List of Subjects in 12 CFR Part 1231

    Golden parachutes, Government sponsored enterprises, 
Indemnification payments.

    Accordingly, for the reasons stated in the SUPPLEMENTARY 
INFORMATION, and under the authority of 12 U.S.C. 4511, 4513, 4517, 
4518, 4518a, and 4526, FHFA amends part 1231 of subchapter B of chapter 
XII of Title 12 of the Code of Federal Regulations as follows:

PART 1231--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS

0
1. The authority citation for part 1231 is revised to read as follows:

    Authority: 12 U.S.C. 4511, 4513, 4517, 4518, 4518a, 4526, and 
4617.

0
2. Revise Sec.  1231.1 to read as follows:


Sec.  1231.1  Purpose.

    The purpose of this part is to implement section 1318(e) of the 
Safety and Soundness Act (12 U.S.C. 4518(e)) by setting forth the 
factors that the Director will take into consideration in determining 
whether to limit or prohibit golden parachute payments and agreements 
and by setting forth conditions for prohibited and permissible 
indemnification payments that regulated entities and the Office of 
Finance (OF) may make to affiliated parties.

0
3. Revise Sec.  1231.2 to read as follows:


Sec.  1231.2  Definitions.

    The following definitions apply to the terms used in this part:
    Affiliated party means:
    (1) With respect to a golden parachute payment:
    (i) Any director, officer, or employee of a regulated entity or the 
OF; and
    (ii) Any other person as determined by the Director (by regulation 
or on a case-by-case basis) who participates or participated in the 
conduct of the affairs of the regulated entity or the OF, provided that 
a member of a Federal Home Loan Bank shall not be deemed to have 
participated in the affairs of that Federal Home Loan Bank solely by 
virtue of being a shareholder of, and obtaining advances from, that 
Federal Home Loan Bank; and
    (2) With respect to an indemnification payment:
    (i) By the OF, any director, officer, or manager of the OF; and
    (ii) By a regulated entity:
    (A) Any director, officer, employee, or controlling stockholder of, 
or agent for, a regulated entity;
    (B) Any shareholder, affiliate, consultant, or joint venture 
partner of a regulated entity, and any other person as determined by 
the Director (by regulation or on a case-by-case basis) that 
participates in the conduct of the affairs of a regulated entity, 
provided that a member of a Federal Home Loan Bank shall not be deemed 
to have participated in the affairs of that Federal Home Loan Bank 
solely by virtue of being a shareholder of, and obtaining advances 
from, that Federal Home Loan Bank;
    (C) Any independent contractor for a regulated entity (including 
any attorney, appraiser, or accountant) if:
    (1) The independent contractor knowingly or recklessly participates 
in any violation of any law or regulation, any breach of fiduciary 
duty, or any unsafe or unsound practice; and
    (2) Such violation, breach, or practice caused, or is likely to 
cause, more than a minimal financial loss to, or a significant adverse 
effect on, the regulated entity; or
    (D) Any not-for-profit corporation that receives its principal 
funding, on an ongoing basis, from any regulated entity.
    Agreement means, with respect to a golden parachute payment, any 
plan, contract, arrangement, or other statement setting forth 
conditions for any payment by a regulated entity or the OF to an 
affiliated party.
    Bona fide deferred compensation plan or arrangement means any plan, 
contract, agreement, or other arrangement:
    (1) Whereby an affiliated party voluntarily elects to defer all or 
a portion of the reasonable compensation, wages, or fees paid for 
services rendered which otherwise would have been paid to such party at 
the time the services were rendered (including a plan that provides for 
the crediting of a reasonable investment return on such elective 
deferrals); or
    (2) That is established as a nonqualified deferred compensation or 
supplemental retirement plan, other than an elective deferral plan 
described in paragraph (1) of this definition:
    (i) Primarily for the purpose of providing benefits for certain 
affiliated parties in excess of the limitations on contributions and 
benefits imposed by sections 401(a)(17), 402(g), 415, or any other 
applicable provision of the Internal Revenue Code of 1986 (26 U.S.C. 
401(a)(17), 402(g), 415); or
    (ii) Primarily for the purpose of providing supplemental retirement 
benefits or other deferred compensation for a select group of 
directors, management, or highly compensated employees; and
    (3) In the case of any plans as described in paragraphs (1) and (2) 
of this definition, the following requirements shall apply:
    (i) The affiliated party has a vested right, as defined under the 
applicable plan document, at the time of termination of employment to 
payments under such plan;
    (ii) Benefits under such plan are accrued each period only for 
current or prior service rendered to the employer (except that an 
allowance may be made for service with a predecessor employer);
    (iii) Any payment made pursuant to such plan is not based on any 
discretionary acceleration of vesting or accrual of benefits which 
occurs at any time later than one year prior to the regulated entity or 
the OF becoming a troubled institution;
    (iv) The regulated entity or the OF has previously recognized 
compensation expense and accrued a liability for the benefit payments 
according to GAAP, or segregated or otherwise set aside assets in a 
trust which may only be used to pay plan benefits and related expenses, 
except that the assets of such trust may be available to satisfy claims 
of the troubled institution's creditors in the case of insolvency; and
    (v) Payments pursuant to such plans shall not be in excess of the 
accrued liability computed in accordance with GAAP.
    Executive officer means an ``executive officer'' as defined in 12 
CFR 1230.2, and includes any director, officer, employee or other 
affiliated party whose participation in the conduct of the business of 
the regulated entity or the OF has been determined by the Director to 
be so substantial as to justify treatment as an ``executive officer.''
    Golden parachute payment means any payment in the nature of 
compensation made by a troubled institution for the benefit of any 
current or former affiliated party that is contingent on or provided in 
connection with the termination of such party's primary employment or 
affiliation with the troubled institution.
    Indemnification payment means any payment (or any agreement to make 
any payment) by any regulated entity or the OF for the benefit of any 
current or

[[Page 65290]]

former affiliated party, to pay or reimburse such person for any 
liability or legal expense.
    Individually negotiated settlement agreement means an agreement 
that settles a claim, or avoids a claim reasonably anticipated to be 
brought, against a troubled institution by an affiliated party and 
involves a payment in association with termination to, and a release of 
claims by, the affiliated party.
    Liability or legal expense means--
    (1) Any legal or other professional expense incurred in connection 
with any claim, proceeding, or action;
    (2) The amount of, and any cost incurred in connection with, any 
settlement of any claim, proceeding, or action; and
    (3) The amount of, and any cost incurred in connection with, any 
judgment or penalty imposed with respect to any claim, proceeding, or 
action.
    Payment means:
    (1) Any direct or indirect transfer of any funds or any asset;
    (2) Any forgiveness of any debt or other obligation;
    (3) The conferring of any benefit, including but not limited to 
stock options and stock appreciation rights; and
    (4) Any segregation of any funds or assets, the establishment or 
funding of any trust or the purchase of or arrangement for any letter 
of credit or other instrument, for the purpose of making, or pursuant 
to any agreement to make, any payment on or after the date on which 
such funds or assets are segregated, or at the time of or after such 
trust is established or letter of credit or other instrument is made 
available, without regard to whether the obligation to make such 
payment is contingent on:
    (i) The determination, after such date, of the liability for the 
payment of such amount; or
    (ii) The liquidation, after such date, of the amount of such 
payment.
    Permitted means, with regard to any agreement, that the agreement 
either does not require the Director's consent under this part or has 
received the Director's consent in accordance with this part.
    Troubled institution means a regulated entity or the OF that is:
    (1) Insolvent;
    (2) In conservatorship or receivership;
    (3) Subject to a cease-and-desist order or written agreement issued 
by FHFA that requires action to improve its financial condition or is 
subject to a proceeding initiated by the Director, which contemplates 
the issuance of an order that requires action to improve its financial 
condition, unless otherwise informed in writing by FHFA;
    (4) Assigned a composite rating of 4 or 5 by FHFA under its CAMELSO 
examination rating system as it may be revised from time to time;
    (5) Informed in writing by the Director that it is a troubled 
institution for purposes of the requirements of this part on the basis 
of the most recent report of examination or other information available 
to FHFA, on account of its financial condition, risk profile, or 
management deficiencies; or
    (6) In contemplation of the occurrence of an event described in 
paragraphs (1) through (5) of this definition. A regulated entity or 
the OF is subject to a rebuttable presumption that it is in 
contemplation of the occurrence of such an event during the 90 day 
period preceding such occurrence.

0
4. Revise Sec.  1231.3 to read as follows:


Sec.  1231.3  Golden parachute payments and agreements.

    (a) In general, FHFA consent is required. No troubled institution 
shall make or agree to make any golden parachute payment without the 
Director's consent, except as provided in this part.
    (b) Exempt agreements and payments. The following agreements and 
payments, including payments associated with an agreement, are not 
golden parachute agreements or payments for purposes of this part and, 
for that reason, may be made without the Director's consent:
    (1) Any pension or retirement plan that is qualified (or is 
intended to be qualified) under section 401 of the Internal Revenue 
Code of 1986 (26 U.S.C. 401);
    (2) Any ``employee welfare benefit plan'' as that term is defined 
in section 3(1) of the Employee Retirement Income Security Act of 1974, 
as amended (29 U.S.C. 1002(1)), other than:
    (i) Any deferred compensation plan or arrangement; and
    (ii) Any severance pay plan or agreement;
    (3) Any benefit plan that:
    (i) Is a ``nondiscriminatory employee plan or program'' for the 
purposes of section 280G of the Internal Revenue Code of 1986 (26 
U.S.C. 280G) and applicable regulations; or
    (ii) Has been submitted to the Director for review in accordance 
with this part and that the Director has determined to be 
nondiscriminatory, unless such a plan is otherwise specifically 
addressed by this part;
    (4) Any ``bona fide deferred compensation plan or arrangement'' as 
defined in this part provided that the plan:
    (i) Was in effect for, and not materially amended to increase 
benefits payable thereunder (except for changes required by law) 
within, the one-year period prior to the regulated entity or the OF 
becoming a troubled institution; or
    (ii) Has been determined to be permissible by the Director;
    (5) Any payment made by reason of:
    (i) Death; or
    (ii) Termination caused by disability of the affiliated party; and
    (6) Any severance or similar payment that is required to be made 
pursuant to a state statute that is applicable to all employers within 
the appropriate jurisdiction (with the exception of employers that are 
exempt due to their small number of employees or other similar 
criteria).
    (c) Golden parachute payment agreements for which FHFA consent is 
not required. A troubled institution may enter into the following 
agreements to make a golden parachute payment without the Director's 
consent:
    (1) With any affiliated party where the agreement is expressly 
directed or established by the Director exercising authority conferred 
by 12 U.S.C. 4617.
    (2) With an affiliated party who is not an executive officer where 
the agreement:
    (i) Is an individually negotiated settlement agreement, and the 
conditions of paragraph (e)(2) of this section are met; or
    (ii) Provides for a golden parachute payment that, when aggregated 
with all other golden parachute payments to the affiliated party, does 
not exceed $5,000 (subject to any adjustment for inflation pursuant to 
paragraph (g) of this section).
    (d) Golden parachute payments for which FHFA consent is not 
required. A troubled institution may make the following golden 
parachute payments without the Director's consent:
    (1) To any affiliated party where:
    (i) The payment is required to be made pursuant to a permitted 
individually negotiated settlement agreement; or
    (ii) The Director previously consented to such payment in a written 
notice to the troubled institution (which may be included in the 
Director's consent to the agreement), the payment is made in accordance 
with a permitted agreement, and the troubled institution has met any 
conditions established by the Director for making the payment.
    (2) To an executive officer where the payment recognizes a 
significant life event and does not exceed $500 in value

[[Page 65291]]

(subject to any adjustment for inflation pursuant to paragraph (g) of 
this section).
    (3) To an affiliated party who is not an executive officer, where:
    (i) The payment is made in accordance with a permitted agreement 
and the conditions of paragraph (e)(2) of this section are met; or
    (ii) The payment when aggregated with other golden parachute 
payments to the affiliated party does not exceed $5,000 (subject to any 
adjustment for inflation pursuant to paragraph (g) of this section).
    (e) Required due diligence review; due diligence standard--(1) 
Agreements and payments where consent is requested. A troubled 
institution making a request for consent to enter into a golden 
parachute payment agreement with, or to make a golden parachute payment 
to, an individual affiliated party shall conduct due diligence 
appropriate to the level and responsibility of the affiliated party 
covered by the agreement or to whom payment would be made, to determine 
whether there is information, evidence, documents, or other materials 
that indicate there is a reasonable basis to believe, at the time the 
request is submitted, that the affiliated party:
    (i) Has committed any fraudulent act or omission, breach of trust 
or fiduciary duty, or insider abuse with regard to the regulated entity 
or the OF that is likely to have a material adverse effect on the 
regulated entity or the OF;
    (ii) Is substantially responsible for the regulated entity or the 
OF being a troubled institution;
    (iii) Has materially violated any applicable Federal or State law 
or regulation that has had or is likely to have a material effect on 
the regulated entity or the OF; or
    (iv) Has violated or conspired to violate sections 215, 657, 1006, 
1014, or 1344 of title 18 of the United States Code, or section 1341 or 
1343 of such title affecting a ``financial institution'' as the term is 
defined in title 18 of the United States Code (18 U.S.C. 20).
    (2) Agreements and payments permitted without the Director's 
consent. No troubled institution shall enter into an agreement pursuant 
to paragraph (c)(2)(i) of this section or make a payment pursuant to 
paragraph (d)(3)(i) of this section unless it is reasonably assured, 
following due diligence in accordance with paragraph (e)(1) of this 
section, that the affiliated party to whom payment would be made has 
not engaged in any of the actions listed in paragraphs (e)(1)(i) 
through (iv) of this section.
    (3) Required notice to FHFA. If a troubled institution determines 
it is unable to enter into an agreement pursuant to paragraph (c)(2)(i) 
of this section or make a payment pursuant to (d)(3)(i) of this section 
without the Director's consent because it cannot meet the standard set 
forth in paragraph (e)(2) of this section, and thereafter does not 
request the Director's consent to make the payment, then the troubled 
institution shall provide notice to FHFA of each reason for which it 
cannot meet the standard set forth in paragraph (e)(2) of this section, 
within 15 business days of its determination.
    (f) Factors for Director consideration. In making a determination 
under this section, the Director may consider:
    (1) Whether, and to what degree, the affiliated party was in a 
position of managerial or fiduciary responsibility;
    (2) The length of time the affiliated party was affiliated with the 
regulated entity or the OF, and the degree to which the proposed 
payment represents a reasonable payment for services rendered over the 
period of affiliation;
    (3) Whether the golden parachute payment would be made pursuant to 
an employee benefit plan that is usual and customary;
    (4) Whether the golden parachute payment or agreement is excessive 
or abusive or threatens the financial condition of the troubled 
institution; and
    (5) Any other factor the Director determines relevant to the facts 
and circumstances surrounding the golden parachute payment or 
agreement, including any fraudulent act or omission, breach of 
fiduciary duty, violation of law, rule, regulation, order, or written 
agreement, and the level of willful misconduct, breach of fiduciary 
duty, and malfeasance on the part of the affiliated party.
    (g) Adjustment for inflation. Monetary amounts set forth in this 
part may be adjusted for inflation by increasing the dollar amount set 
forth in this part by the percentage, if any, by which the Consumer 
Price Index for all-urban consumers published by the Department of 
Labor (``CPI-U'') for December of the calendar year preceding payment 
exceeds the CPI-U for the month of November 2018, with the resulting 
sum rounded up to the nearest whole dollar.

0
5. Revise Sec.  1231.5 to read as follows:


Sec.  1231.5  Applicability in the event of receivership.

    The provisions of this part, or any consent or approval granted 
under the provisions of this part by FHFA, shall not in any way bind 
any receiver of a regulated entity. Any consent or approval granted 
under the provisions of this part by FHFA shall not in any way obligate 
FHFA as receiver to pay any claim or obligation pursuant to any golden 
parachute, severance, indemnification, or other agreement, or otherwise 
improve any claim of any affiliated party on or against FHFA as 
receiver. Nothing in this part may be construed to permit the payment 
of salary or any liability or legal expense of an affiliated party 
contrary to section 1318(e)(3) of the Safety and Soundness Act (12 
U.S.C. 4518(e)(3)).

0
6. Revise Sec.  1231.6 to read as follows:


Sec.  1231.6  Filing instructions.

    (a) Scope. This section contains procedures for requesting the 
consent of the Director and for filing any notice, where consent or 
notice is required by Sec.  1231.3.
    (b) Where to file. A troubled institution must submit any request 
for consent or notice required by Sec.  1231.3 to the Manager, 
Executive Compensation Branch, or to such other person as FHFA may 
direct.
    (c) Content of a request for FHFA consent. A request pursuant to 
Sec.  1231.3 must:
    (1) Be in writing;
    (2) State the reasons why the troubled institution seeks to enter 
into the agreement or make the payment;
    (3) Identify the affiliated party or describe of the class or group 
of affiliated parties who would receive or be eligible to receive 
payment;
    (4) Include a copy of any agreement, including any plan document, 
contract, other agreement or policy regarding the subject matter of the 
request;
    (5) State the cost of the proposed payment or payments, and the 
impact on the capital and earnings of the troubled institution;
    (6) State the reasons why consent to the agreement or payment, or 
to both the agreement and payment, should be granted;
    (7) For any plan that the troubled institution believes is a 
nondiscriminatory benefit plan, other than a plan covered by Sec.  
1231.3(b)(3)(i), state the basis for the conclusion that the plan is 
nondiscriminatory;
    (8) For any bona fide deferred compensation plan or arrangement, 
state whether the plan would be exempt under this part but for the fact 
that it was either established or materially amended to increase 
benefits payable thereunder (except for changes required by law) within 
the one-year period prior to the regulated entity or the OF becoming a 
troubled institution;
    (9) For any agreement with an individual affiliated party, or for 
any payment, either:

[[Page 65292]]

    (i) State that the troubled institution is reasonably assured that 
the affiliated party has not engaged in any of the actions listed in 
Sec.  1231.3(e)(1)(i) through (iv), or,
    (ii) If the troubled institution is not reasonably assured that the 
affiliated party has not engaged in any of the actions listed in Sec.  
1231.3(e)(1)(i) through (iv) but nonetheless wishes to request consent, 
describe the results of its due diligence and, in light of those 
results, the reason why consent to the agreement or payment should be 
granted.
    (d) FHFA decision on a request. FHFA shall provide the troubled 
institution with written notice of the decision on a request as soon as 
practicable after it is rendered.
    (e) Content of notice to FHFA. A notice pursuant to Sec.  
1231.3(e)(3) must:
    (1) Be in writing;
    (2) Identify the affiliated party who would receive or be eligible 
to receive payment;
    (3) Include a copy of any agreement or policy regarding the subject 
matter of the request; and
    (4) State each reason why the troubled institution cannot meet the 
standard set forth in Sec.  1231.3(e)(2).
    (f) Waiver of form or content requirements. FHFA may waive or 
modify any requirement related to the form or content of a request or 
notice, in circumstances deemed appropriate by FHFA.
    (g) Additional information. FHFA may request additional information 
at any time during the processing of the request or after receiving a 
notice.

    Dated: December 14, 2018.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2018-27564 Filed 12-19-18; 8:45 am]
 BILLING CODE 8070-01-P