Federal Home Loan Bank System Boards of Directors and Executive Management, 87730-87758 [2024-24767]

Download as PDF 87730 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules FEDERAL HOUSING FINANCE AGENCY 12 CFR Parts 1239, 1261, and 1273 RIN 2590–AB24 Federal Home Loan Bank System Boards of Directors and Executive Management Federal Housing Finance Agency. ACTION: Notice of proposed rulemaking. AGENCY: The Federal Housing Finance Agency (FHFA or the Agency) is proposing to revise regulations addressing boards of directors and overall corporate governance of the Federal Home Loan Banks (Banks) and the Bank System’s Office of Finance (OF) to update and clarify regulatory requirements on a variety of topics including: FHFA’s annual designation of Bank directorships; Bank director eligibility and professional qualifications; nomination, election, and removal of Bank directors; the conduct of System board and committee meetings; conflicts of interest; and the respective responsibilities of System boards of directors and executive management. SUMMARY: Written comments must be received on or before February 3, 2025. ADDRESSES: You may submit your comments on the proposed rule, identified by regulatory information number (RIN) 2590–AB24, by any one of the following methods: • Agency Website: https:// www.fhfa.gov/regulation/federalregister?comments=open. • Federal eRulemaking Portal: https://www.regulations.gov. Follow the instructions for submitting comments. If you submit your comment to the Federal eRulemaking Portal, please also send it by email to FHFA at RegComments@fhfa.gov to ensure timely receipt by FHFA. Include the following information in the subject line of your submission: Comments/RIN 2590–AB24. • Hand Delivered/Courier: The hand delivery address is: Clinton Jones, General Counsel, Attention: Comments/ RIN 2590–AB24, Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Deliver the package at the Seventh Street entrance Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m. • U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service: The mailing address for comments is: Clinton Jones, General Counsel, Attention: Comments/RIN 2590–AB24, lotter on DSK11XQN23PROD with PROPOSALS2 DATES: VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please note that all mail sent to FHFA via U.S. Mail is routed through a national irradiation facility, a process that may delay delivery by approximately two weeks. For any timesensitive correspondence, please plan accordingly. FOR FURTHER INFORMATION CONTACT: Lindsay Spadoni, Assistant General Counsel, Office of General Counsel, (202) 649–3634, Lindsay.Spadoni@ FHFA.gov; or Janna Bruce, Senior Financial Analyst, Division of Bank Regulation, (202) 649–3202, Janna.Bruce@FHFA.gov. These are not toll-free numbers. For TTY/TRS users with hearing and speech disabilities, dial 711 and ask to be connected to any of the contact numbers above. SUPPLEMENTARY INFORMATION: I. Comments FHFA invites comments on all aspects of the proposed rule and will take all comments into consideration before issuing a final rule. Comments will be posted to the electronic rulemaking docket on the FHFA public website at https://www.fhfa.gov, except as described below. Commenters should submit only information the commenter wishes to make available publicly. FHFA may post only a single representative example of identical or substantially identical comments, and in such cases will generally identify the number of identical or substantially identical comments represented by the posted example. FHFA may, in its discretion, redact or refrain from posting all or any portion of any comment that contains content that is obscene, vulgar, profane, or threatens harm. All comments, including those that are redacted or not posted, will be retained in their original form in FHFA’s internal rulemaking file and considered as required by all applicable laws. Commenters that would like FHFA to consider any portion of their comment exempt from disclosure on the basis that it contains trade secrets, or financial, confidential or proprietary data or information, should follow the procedures in section IV.D. of FHFA’s Policy on Communications with Outside Parties in Connection with FHFA Rulemakings, see https://www.fhfa.gov/ sites/default/files/documents/Ex-ParteCommunications-Public-Policy_3-519.pdf. FHFA cannot guarantee that such data or information, or the identity of the commenter, will remain confidential if disclosure is sought pursuant to an applicable statute or regulation. See 12 CFR 1202.8 and PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 1214.2 and the FHFA FOIA Reference Guide at https://www.fhfa.gov/about/ foia-reference-guide for additional information. II. Background A. Statutory Requirements on Bank System Governance The Bank System consists of eleven district Banks and the OF. The Banks are wholesale, cooperatively owned financial institutions, the debt of which is the joint and several obligation of all eleven Banks. They are organized under authority of the Federal Home Loan Bank Act (Bank Act) to serve the public interest by enhancing the availability of residential housing finance and community lending credit through their member institutions and, to a very limited extent, through certain eligible nonmembers. In general, only members may obtain advances (low-cost secured loans) and access other products and services provided by a Bank. The Bank Act vests the management of each Bank in its board of directors.1 As required by statute, each Bank’s board comprises two types of directors: (1) member directors, who are drawn from the officers and directors of member institutions located in the Bank’s district and who are elected to represent members in each respective state in that district; and (2) independent directors, who are unaffiliated with any of the Bank’s member institutions or borrowing housing associates,2 but who reside in the Bank’s district and are elected on an at-large basis.3 The Bank Act specifies that a majority of seats on each Bank’s board of directors must be member directorships, while not less than 40 percent must be independent directorships.4 Both types of directors serve four-year terms, which must be staggered so that approximately onequarter of a Bank’s total directorships are up for election every year.5 The Bank Act establishes the eligibility requirements for both types of Bank directors, including the professional qualifications required for independent directors, and sets forth requirements for their nomination and election.6 The statute requires the FHFA Director to annually designate the size and composition of each Bank’s board of directors for the following calendar 1 See 12 U.S.C. 1427(a)(1). regulations refer to eligible nonmember borrowers as ‘‘housing associates.’’ See 12 CFR part 1264. 3 See 12 U.S.C. 1427(a)(4), (b), and (d). 4 See 12 U.S.C. 1427(a)(2). 5 See 12 U.S.C. 1427(d). 6 See 12 U.S.C. 1429, 1430(a)(1), 1430b. 2 FHFA’s E:\FR\FM\04NOP2.SGM 04NOP2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules year, including by establishing the number of member and independent directorships and allocating member directorships among the states of the Bank district.7 The Bank Act requires that at least two of a Bank’s independent directors qualify as ‘‘public interest’’ independent directors, each of which must ‘‘have more than 4 years of experience in representing consumer or community interests on banking services, credit needs, housing, or financial consumer protections.’’ 8 Each independent director that is not a public interest independent director (referred to in this proposed rule as a ‘‘regular independent director’’) must ‘‘have demonstrated knowledge of, or experience in, financial management, auditing and accounting, risk management practices, derivatives, project development, or organizational management, or such other knowledge or expertise as the [FHFA] Director may provide by regulation.’’ 9 By regulation, FHFA has added ‘‘the law’’ to that list of qualifying knowledge and experience.10 lotter on DSK11XQN23PROD with PROPOSALS2 B. Existing Regulations on Corporate Governance of Banks and OF Part 1261 of FHFA’s regulations, entitled ‘‘Federal Home Loan Bank Directors,’’ implements the statutory provisions and otherwise establishes requirements and processes relating to the composition and operations of Bank boards of directors. With respect to the former, sections in subpart B of the regulation (§§ 1261.2 through 1261.15) cover the annual designation of Bank directorships by the FHFA Director, director eligibility, the nomination and election processes, reporting and record retention requirements, handling conflicts of interest, and the filling of vacancies. Sections in subpart C (§§ 1261.20 through 1261.24) address director compensation and expenses and the conduct of board and committee meetings.11 In addition to the corporate governance issues addressed in part 1261, part 1239 of FHFA’s regulations, entitled ‘‘Responsibilities of Boards of Directors, Corporate Practices, and Corporate Governance,’’ addresses duties and responsibilities of directors, required board committees, and programs and policies each Bank must establish and maintain. Although part 1239 generally applies to all of FHFA’s 7 See 12 U.S.C. 1427(b)(1), (c). U.S.C. 1427(a)(3)(B)(ii). 9 12 U.S.C. 1427(a)(3)(B)(i). 10 See 12 CFR 1261.7(e)(1). 11 Subpart A of the existing regulation, entitled ‘‘Definitions,’’ has no content. 8 12 VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 regulated entities, subpart E of the regulation sets forth requirements that are specific to the Banks. Part 1273 of FHFA’s regulations governs the Bank System’s OF, with governance issues— including composition and meetings of the OF board of directors—being addressed primarily in § 1273.8. III. Overview of the Proposed Rule The proposed rule would make numerous revisions to part 1261, as well as more limited revisions to parts 1239 and 1273 to address various issues related to the corporate governance of the Banks and the OF. While the greater portion of the proposed changes to existing regulatory text are intended merely to restate existing requirements more clearly, many of the proposed revisions are substantive. The latter are being proposed primarily to ensure that the Banks maintain strong corporate governance that enables them to effectively fulfill their public policy mission while maintaining safe and sound operations. New proposed requirements and authorities would help ensure the Banks have the leadership and resources to forestall avoidable difficulties and to address challenges that may arise in the years ahead. The proposed revisions reflect FHFA’s view that corporate governance of the Banks is strengthened when: the public interest is adequately represented; Bank boards have the collective knowledge and expertise to guide the Bank through new and emerging risks and complex problems; independent directors represent a true independent voice; each Bank has the tools to ensure that its directors are fit to serve in a fiduciary role with the Bank; and Bank directors and management are incentivized to carry out their duties and responsibilities conscientiously. As discussed further below, several of the proposed changes implement action items from FHFA’s FHLBank System at 100: Focusing on the Future Report (FHLBank System at 100 Report or Report), published in November 2023. The proposed rule would also address issues raised in comments received in response to FHFA’s April 2023 Notice of Regulatory Review, which was published pursuant to FHFA’s Regulatory Review Plan.12 Other 12 See 88 FR 22919 (Apr. 14, 2023) (FHFA Notice of Regulatory Review). The Regulatory Review Plan establishes a process by which, at least every five years, FHFA issues a notice of the regulatory review in the Federal Register and requests comments on how its regulations may be made more effective and less burdensome in achieving the Agency’s regulatory objectives. See 77 FR 10351 (Feb. 22, 2012) (FHFA Regulatory Review Plan). PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 87731 substantive changes are intended to increase transparency by codifying existing guidance or practices or to provide clarity on issues for which there currently exists no formal guidance, but on which FHFA has received inquiries. Finally, FHFA is also proposing many non-substantive revisions to part 1261, which are intended merely to address existing requirements, processes, and authorities pertaining to Bank boards and directors more clearly than does the existing regulation. The FHLBank System at 100 Report provides a blueprint for innovative and prudent steps to bolster and improve the Bank System over the next several years, with the goal of ensuring that the Banks remain well positioned to meet the needs of their members and the communities they serve as they approach their 100th anniversary. The Report was informed by a year-long review of the Bank System involving significant stakeholder outreach, a historical review of the role of the Banks, and detailed analysis of both the strengths and areas for improvement in the System’s current structure. As stated in the Report, FHFA’s vision for the future is to have an effectively governed Bank System that efficiently provides stable and reliable funding to creditworthy members and delivers innovative products and services to support the housing and community development needs of the communities its members serve, all in a safe and sound manner. The Report noted that each Bank’s ‘‘effectiveness in achieving its mission and safety and soundness goals is influenced by its governance.’’ 13 The Report laid out four regulatory actions to be taken by FHFA to strengthen Bank boards of directors and enable them to effectively address emerging risks and to oversee the safety and soundness and mission achievement of the Banks in today’s financial market environment: (1) clarify required qualifications for public interest independent directors; (2) expand the list of qualifying experience for regular independent directors to reflect business developments in housing finance and new and emerging risks and complex problems; (3) encourage the Banks to evaluate potential gaps in board knowledge and pursue opportunities to address these gaps by nominating individuals with particular skills, backgrounds, and experience; and (4) facilitate the nomination of individuals with 13 See E:\FR\FM\04NOP2.SGM FHLBank System at 100 Report at 64. 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 87732 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules technical subject matter expertise.14 The proposed rule would address each of those four action items. The proposed rule would clarify required qualifications for public interest independent directors, including by specifying criteria for a Bank to consider when determining if an individual has ‘‘represented’’ consumer or community interests on banking services, credit needs, housing, or financial consumer protections, as required by statute to qualify as a public interest independent director. The rule would codify existing guidance that a person must have advocated for, or otherwise acted primarily on behalf of or for the direct benefit of, consumers or the community to meet the representation requirement. The revised regulation would require each Bank to take affirmative measures to ensure that its board of directors has the knowledge and experience needed to adequately oversee the management of the Bank. Based on input received during the FHLBank System at 100 outreach, the proposed rule would add artificial intelligence, information technology and security, climate-related risk, Community Development Financial Institution (CDFI) business models, and modeling to the list of qualifying experience for regular independent directors. To ensure coverage of critical areas, each Bank’s board would be required to conduct an annual assessment of the skills and experience possessed by its incumbents and those for which the board has a need. ‘‘Skills and experience’’ assessments are authorized, but not required, under the existing regulation.15 Banks would be required to take active steps to seek independent directorship nominees—and to encourage member directorship nominees—who possess needed skills and experience. The revised regulation also would require the Banks to prioritize knowledge and experience relevant to the business, programs, and mission of the Bank and gained primarily through full time paid executive, management, or other senior positions when considering potential independent directorship nominees. To provide Banks with more flexibility to address critical needs when filling board vacancies, the proposed rule would add a provision expressly permitting Banks to fill a vacant public interest independent directorship by redesignating a qualifying incumbent regular independent director as a public 14 See 15 See FHLBank System at 100 Report at 67. 12 CFR 1261.9(a). VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 interest independent director and vice versa. The Bank could then find new nominees to fill the resulting independent directorship vacancy (a practice FHFA currently permits). At several points during the outreach phase of the FHLBank System at 100 initiative, stakeholders stressed the importance of independent voices on a Bank’s board. The proposed rule includes provisions addressing director independence. It would make modest changes to increase the separation between independent directors and Bank members by extending ‘‘independence’’ requirements (which currently only apply to seated directors) to independent directorship nominees and prohibiting former member directors from serving as an independent director until they have been off the board for at least two years. In response to a Notice of Regulatory Review comment, the proposed rule includes a new provision clarifying the definition of ‘‘advances’’ for purposes of the prohibition against an independent director serving as an officer, employee, or director of any ‘‘recipient of advances’’ from the Bank. This issue is of particular relevance for independent directors who lead or work for entities certified as housing associates.16 As proposed, the word ‘‘advances’’ would refer to any loan from a Bank to the recipient, regardless of form or nomenclature, except for debt securities traded in the public capital markets. This definition strikes a balance between preventing circumvention of the independence requirements and allowing Banks to tap into their housing associates’ valuable expertise without having to relinquish, or decline to make, investments in their debt securities. The proposed rule would codify requirements and authorities relating to the ‘‘fitness’’ of an individual to serve as a director. It would require that a Bank decline to nominate or seat as a director any individual it knows to be ‘‘unfit’’ to serve and authorize each Bank’s board to adopt bylaws or policies under which it may remove directors ‘‘for cause’’ upon a two-thirds vote of the board. As proposed, ‘‘cause’’ for removal would include code of ethics or policy violations, violations of the law, posing a risk of material harm to the Bank, conduct or a mental condition indicating an inability to oversee the Bank, and poor performance or lack of participation. The proposed rule would also require that each Bank’s board 16 See 12 CFR part 1264. A Bank may make an advance to an entity, such as a state housing finance agency, that is certified as a housing associate, but housing associates cannot become bank members. PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 conduct an annual assessment of director performance and participation to determine whether each director is contributing positively to the board’s ability to adequately oversee the operations of the Bank. The proposed rule would require that director compensation reflect performance, as determined through the annual assessment, and permit the board to remove a director where the assessment reveals that a director’s continuous poor performance or lack of participation is compromising the board’s ability to adequately oversee the operations of the Bank. Additionally, the proposed rule would allow the FHFA Director to establish and provide notice of an annual amount of director compensation determined to be reasonable. As further assurance that all Bank directors are fit to serve, the proposed rule would codify as a regulatory requirement the Banks’ existing practice of conducting thorough background checks on independent directorship nominees, as well as individuals under consideration to fill a vacant directorship. It would also for the first time expressly require the Banks to conduct background checks for their member directorship nominees. The revised regulation would prohibit a Bank from including any individual on the ballot without having first confirmed, based on the background check, the individual’s fitness to serve in a fiduciary role with the Bank. With respect to directorship terms and term limits, the proposed rule would expressly provide that FHFA may continue, as part of the annual designation of directorships process, to adjust downward the length of terms from time to time where required to maintain the even staggering of directorship terms on a Bank’s board. The proposed rule would make clear that such truncated terms do not count as ‘‘full terms’’ for purposes of the statutory term limit provisions, but that full terms on either side of a truncated term must be counted as consecutive for those purposes. In one of only a few revisions to address corporate governance issues below the board level, the proposed rule would require each Bank to adopt and implement a conflicts of interest policy covering all Bank employees. The required policy would establish appropriate limitations, standards, and procedures on the holding of outside positions and financial interests by Bank employees and close family members and associates. Although the treatment of different types of employees under such a policy may be E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules calibrated to the risk presented, each Bank’s policy would be required to prohibit its executive officers and senior management from holding paid positions with any entity that is, or may be eligible to become, a member or housing associate of any Bank or with any affiliate of such entity. Finally, the proposed rule would revise the regulation’s existing provisions on record retention. Changes would increase the amount of time a Bank must retain materials pertaining to its directors and the director nomination and election process from two years to the longer of seven years or seven years after the director to which the information pertains leaves the board. This requirement is consistent with recognized best practices and should not be burdensome to implement in an electronic environment. Although the proposed rule would impose new requirements (in addition to codifying some existing expectations), it would also implement new, or make permanent previously temporary, flexibilities. As requested in a Notice of Regulatory Review comment, the proposed rule would remove the requirement that Bank boards satisfy their six meeting per year minimum only through in-person meetings. The proposed revision would codify the substance of a waiver that has been in place since early in the COVID–19 pandemic by permitting Bank and OF board and committee meetings to be held by video or teleconferencing, or in a hybrid format, provided all directors have an opportunity to communicate, have access to all written documents and presentations, and all participants are within a state or U.S. Territory that is part of a Bank district. To reduce burden in other areas, the proposed rule would also implement a number of other recommendations received as comments on the Notice of Regulatory Review. These changes include expanding the range of armslength transactions not considered to be a prohibited ‘‘financial interest’’ for purposes of the Bank director conflictsof-interest requirements, updating and expanding the authorized methods for withdrawal of OF operating funds, and allowing the OF board of directors to delegate review and approval of contracts as specified in applicable governance documents. In addition to these substantive revisions, the proposed rule would make non-substantive revisions throughout part 1261 to improve the readability of the regulatory text and provide greater clarity on the requirements, processes, and authorities pertaining to Bank directors. In VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 particular, provisions governing the annual designation of directorships, director eligibility, the nomination and election processes, and the filling of vacant directorships would be updated. These proposed non-substantive revisions include substitution of clearer phrasing, changes to assure consistent use of terminology, consolidation of related subject matter, replacement of statutory cross-references with either substantive text or regulatory crossreferences, reorganization of sections and revision of headings, and removal of transitional material that is no longer needed. IV. Section-by-Section Analysis of the Proposed Rule A. Revisions to 12 CFR Part 1261 1. Definitions—§ 1261.2 Section 1261.2 of the existing regulation sets forth definitions applicable to subpart B of part 1261, which consists of the provisions governing Bank director eligibility, nominations, and elections. Existing § 1261.2 includes definitions for ‘‘independent directorship,’’ ‘‘member directorship,’’ ‘‘public interest director,’’ and ‘‘public interest directorship.’’ As described below, the proposed rule would add to and revise the regulatory terms describing the Bank directorship types and sub-types. The proposals are intended to provide clarity, and revisions to existing definitions are not intended to change the scope of the defined terms. The existing regulation defines the terms ‘‘independent directorship’’ and ‘‘member directorship’’ by means of cross-references to the relevant provisions of the Bank Act. The proposed rule would replace these statutory references with crossreferences to the regulatory provisions establishing the eligibility and designation requirements for those two types of Bank directorships. FHFA believes it is preferable to define terms with reference to the regulation itself, as opposed to requiring reference to the statute the regulation is intended to implement. Because part 1261 addresses both ‘‘directorships’’ (the designated seats comprising a Bank’s board) and ‘‘directors’’ (the individuals filling those seats), those variants would be defined together for each directorship type. While both the Bank Act and the existing regulation define ‘‘public interest directorship’’ (referring to an independent directorship to be filled by an individual meeting the ‘‘representing consumer or community interests’’ qualification requirement), both refer to an independent directorship to be filled PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 87733 by an individual meeting the ‘‘knowledge and experience’’ qualification requirement of the statute with such undefined terms as ‘‘an independent directorship, other than a public interest directorship’’ and ‘‘an independent director that is not a public interest director.’’ The proposed rule would establish a joint definition for ‘‘regular independent directorship and regular independent director’’ to refer to those types of independent directorships and directors, and would define the terms with a cross-reference to the new provision addressing the qualifications requirements for such directors under the proposed rule (§ 1261.5(c)(1), discussed below). The existing regulation defines ‘‘public interest directorship’’ as ‘‘an independent directorship filled by an individual with more than four years of experience representing consumer or community interests in banking services, credit needs, housing or consumer financial protections.’’ The regulation separately defines ‘‘public interest director’’ to mean ‘‘an individual serving in a public interest directorship.’’ The proposed rule would revise the former term to ‘‘public interest independent directorship’’ to make clear that it refers to a sub-type of independent directorship and so the construction of the term parallels that of its counterpart, ‘‘regular independent directorship.’’ The proposed rule would also combine the ‘‘directorship’’ and ‘‘director’’ definitions into one paragraph and define the terms with a cross-reference to the new provision addressing the qualifications requirements for such directors under the proposed rule (§ 1261.5(c)(2), also discussed below), so that the definitions parallel those of the other directorship types. The proposed rule would also add a definition for the term ‘‘nominee,’’ referring to an individual formally nominated by a Bank’s members or board of directors, as appropriate, to stand for election for a Bank directorship. This change is intended to allow a clearer distinction in the regulatory text between requirements that apply to persons requesting or being considered for nomination for a directorship and requirements that apply only to those that have been duly nominated. Existing § 1261.2 defines the term ‘‘voting State’’ to mean ‘‘the District of Columbia, Puerto Rico, or the State of the United States in which a member’s principal place of business, as determined in accordance with 12 CFR part 1263, is located as of the record date,’’ and further clarifies that ‘‘[t]he E:\FR\FM\04NOP2.SGM 04NOP2 87734 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules voting State of a member with a principal place of business located in the U.S. Virgin Islands as of the record date is Puerto Rico, and the voting State of a member with a principal place of business located in American Samoa, Guam, or the Commonwealth of the Northern Mariana Islands as of the record date is Hawaii.’’ The proposed rule would amend this definition to eliminate the unnecessary references to the District of Columbia and Puerto Rico in the first clause. Section 1201.1 of FHFA’s regulations, which defines terms that are used frequently throughout the regulations, already defines the term ‘‘State’’ to include the District of Columbia and Puerto Rico (as well as American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, and the United States Virgin Islands), so there is no reason to specify their inclusion in the definition of ‘‘voting State.’’ Where appropriate, the proposed rule would also revise numerous references to a ‘‘State’’ in existing part 1261 to refer to a ‘‘voting State.’’ This is especially important with respect to provisions on the allocation of member directorships and member directorship nominations and voting, as the latter term includes the concept that members in U.S. Virgin Islands nominate, vote for, and are represented by member directors for Puerto Rico, while members in American Samoa, Guam, or the Northern Mariana Islands nominate, vote for, and are represented by member directors for Hawaii. lotter on DSK11XQN23PROD with PROPOSALS2 2. General Provisions—§ 1261.3 Section 1261.3 of the existing regulation sets forth ‘‘General provisions’’ addressing board size and composition, length of term of directorships, annual elections, location of members for purposes of voting to fill member directorships, and the calculation of dates for purposes of determining compliance with deadlines required under the regulation. The proposed rule would remove the material on board size and composition in existing § 1261.3(a), the substance of which would be consolidated with related material on the designation of directorships in revised § 1261.4. The remaining paragraphs of § 1261.3 would be redesignated as appropriate and revised to remove or replace statutory references and streamline language for greater clarity and consistency. No change in substantive meaning is intended. VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 3. Annual Designation of Directorships—§ 1261.4 Section 1261.4 of the existing regulation addresses the annual ‘‘designation of directorships’’ process which results in the issuance of an order by the FHFA Director designating the size and composition of each Bank’s board of directors for the following calendar year. The proposed rule would make various revisions to this section to consolidate provisions relating to the designation of directorships and to provide clarity regarding the methods through which FHFA determines the appropriate size and composition for each Bank’s board and the requirements and procedures associated with the process. The proposed rule would also change the heading of § 1261.4 to ‘‘Annual designation of directorships’’ to reflect that the process is annual and that the Director designates not only member directorships, but also independent directorships for each Bank. The proposed revisions are not intended to change any current procedure or requirement. The proposed rule would redesignate existing § 1261.4(a) as § 1261.4(b) and would add a new paragraph (a) providing that the Director will annually issue a written order designating for each Bank’s board of directors for the following calendar year: (1) the total number of member directorships and their allocation among the voting States of the Bank’s district; (2) the total number of independent directorships; and (3) the directorships for which an election will be held for terms beginning on January 1 of the following year, and the length of those terms.17 The designation of directorships has been carried out by means of a Director’s order since the inception of FHFA and the new regulatory text would make this explicit and would more accurately describe the content of the designations order than existing § 1261.3(a). Consistent with current practice, the proposed rule would provide that the Director will issue the designation of directorships order by June 1 of each year. Redesignated § 1261.4(b), requiring each Bank to submit a capital stock report to provide data for the allocation of member directorships and the determination of the number of votes each member may cast in the election, would remain substantively unchanged. For clarity, however, the sentence 17 Bank directorship terms, for both member and independent directors, are generally four years but, as discussed below, FHFA may on rare occasions truncate the term length for a Bank directorship to maintain the equal staggering of terms. PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 providing that ‘‘[i]f a Bank has issued more than one class of stock, it shall report the total shares of stock of all classes required to be held by members’’ would be revised to refer to ‘‘the total shares of each class of stock required to be held by the members.’’ Paragraphs (b) and (c) of existing § 1261.4—entitled ‘‘Designation of member directorships’’ and ‘‘Allocation of directorships,’’ respectively—would be replaced by a new § 1261.4(c), which is intended to describe the process through which FHFA sets the total number of member directorships for each Bank and allocates them among the respective States of the Bank district. Proposed paragraph (c)(1) would describe the first part of the statutorily required process, whereby member directorships are allocated among the States of each district based on the relative amount of Bank stock the members in each respective state were required to hold as of December 31 of the preceding year. As described in the proposed regulatory text, FHFA begins by choosing for each Bank a ‘‘base’’ number of member directorships to allocate among the states of the district. For practical reasons, the base number is typically eight,18 but may differ where there is a legal or policy reason for selecting a different number. For example, where the number of states comprising a Bank district exceeds eight, FHFA must begin with a higher base number for that Bank because the Bank Act requires that each state have a minimum of one member directorship. In other cases, for example where application of the statutory ‘‘grandfather provision’’ (discussed below) would otherwise result in an excessively large board size, FHFA may start with a base number lower than eight.19 Proposed § 1261.4(c)(1)(i) provides that FHFA will then use the ‘‘method of equal proportions’’ to allocate those member directorships among the voting States of the Bank district, based on the ratio of the number of shares of Bank stock required to be held by the members in each State to the number of shares required to be held by all members of the Bank. As required by statute,20 proposed § 1261.4(c)(1)(ii) makes clear that each State must be allocated at least one, but no more than 18 Among other things, a base number of eight seats has been shown to result in most cases in a board that is not excessively large, but is large enough so that the board’s composition meets all statutory requirements. 19 The Bank Act provides that each Bank is to have a board of 13 directors, ‘‘or such other number as the Director determines appropriate.’’ See 12 U.S.C. 1427(a)(1). 20 See 12 U.S.C. 1427(c). E:\FR\FM\04NOP2.SGM 04NOP2 87735 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules six, member directorships. As does the existing regulation, proposed § 1261.4(c)(1)(iii) provides that, for those Banks that have issued more than one class of stock, member directorships will be allocated based on the combined number of shares required to be held by members. Proposed § 1261.4(c)(1)(iv) would make clear that the required stock amounts on which the allocations are based shall be the amounts as of the record date (December 31 of the preceding calendar year, as defined in § 1261.2) shown in the capital stock report required to be submitted by the Banks under redesignated § 1261.4(b). In practice, when allocating member directorships for a Bank, FHFA first allocates one member directorship to each State in the Bank district to fulfill the minimum statutory requirement. Any remaining seats are then allocated using the ‘‘method of equal proportions,’’ which is the method that has been used to apportion seats in the United States House of Representatives since 1941.21 The use of the method of equal proportions is intended to result in the stock-based allocation of member directorships having the closest possible correlation with the relative amounts of stock required to be held by Bank members in each respective state of the district. Under the method of equal proportions, after each state has been allocated one seat, a priority value is calculated for each potential subsequent seat a state could be allocated—out to the maximum of six member directorships that may be allocated to each State—based on the following formula: p V = --;::::::== Jn(n-1) • V represents a priority value. • P represents the total shares of Bank stock required to be held by members in a particular State. • n represents the number of member directorships the state would have if it gained a seat. The remaining seats are then allocated sequentially among the states of the district based on those priority values. For example, if FHFA were to allocate eight member directorships among the states of a Bank district including three states having required member stock holdings of 20 million, 12.5 million, and 5 million shares, respectively, the priority values for potential seats #2 through #6 for each state would be as follows: Seat # > 2nd Seat 3rd Seat 4th Seat 5th Seat 6th Seat Multiplier > 0.7071068 0.4082483 0.2886751 0.2236068 0.1825742 State A (20,000,000 sh) ........................................................................... State B (12,500,000 sh) ........................................................................... State C (5,000,000 sh) ............................................................................ 14,142,136 8,838,835 3,535,534 8,164,966 5,103,104 2,041,241 5,773,503 3,608,439 1,443,376 4,472,136 2,795,085 1,118,034 3,651,484 2,282,177 912,871 This would result in a priority order for the allocation of seats #2 through #6 for each state as follows: 2nd lotter on DSK11XQN23PROD with PROPOSALS2 State A ....................................................................................................................................................... State B ....................................................................................................................................................... State C ....................................................................................................................................................... I 3rd 1 2 9 I 3 5 12 4th I 4 8 13 5th I 6 10 14 6th I 7 11 15 Assuming a base number of eight total member directorships are to be allocated, there would be five remaining seats after each state has been allocated one seat. Based on the priority order reflected in the table above, State A would be allocated the first of the remaining seats, State B the second, State A the third and fourth, and State B the fifth, resulting in an overall allocation of four seats to State A, three seats to State B, and one seat to State C. The Bank Act generally requires that FHFA allocate member directorships based on the ratio of required stock holdings. However, the statute also requires that, whenever the number of member directorships representing the members located in any State would not be at least equal to the total number representing that State on December 31, 1960, FHFA ‘‘shall add to the board of directors’’ such additional seats as are necessary to bring the total number being allocated to that State up to the 1960 total (the ‘‘grandfather provision’’).22 The minimum number of member directorships that must be allocated to each State to meet the requirements of the grandfather provision is specified in a table set forth in existing § 1261.15, which would not be revised as part of this rulemaking. Existing § 1261.4(c) implements the grandfather provision through a bare cross-reference to the statute. In contrast, proposed § 1261.4(c)(2) would expressly provide that, where the stockbased allocation has resulted in a state being allocated fewer member directorships than shown for that State in § 1261.15, FHFA will allocate it as many additional member directorships as are necessary to increase the total number of member directorships for that State to the number shown on the table in that section. Only those states that have been ‘‘grandfathered’’ at more than one member directorship appear on the table in § 1261.15. Proposed § 1261.4(c)(2) would deem the minimum number of member directorships required to fulfill the ‘‘grandfather provision’’ to be one for those States not appearing on the table. In the example above, if all three States had been represented by three member directorships in 1960, FHFA would need to allocate two additional seats to State C, beyond the one earned in the stock-based allocations, increasing the total number of member directorships for the Bank to 10. 21 The method of equal proportions has been the required method for the stock-based allocation of Bank member directorship seats since 1998. See 63 FR 65683, 65685, 65688 (Nov. 30, 1998) (final rule); 63 FR 26532, 26533 (May 13, 1998) (proposed rule). 22 12 U.S.C. 1427(c). By its express terms, the statutory grandfather provision does not apply to the directorships of any Bank resulting from the merger of two or more Banks—currently only the Federal Home Loan Bank of Des Moines. VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 E:\FR\FM\04NOP2.SGM 04NOP2 EP04NO24.000</GPH> Seat # > lotter on DSK11XQN23PROD with PROPOSALS2 87736 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules Proposed § 1261.4(d) would state that, after the total number of member directorships and their allocation have been determined for each Bank, FHFA will set the number of independent directorships at a number within the statutorily prescribed range of at least 40 percent, but less than 50 percent, of total directorships. In the example above, with 10 member directorships, FHFA could choose to designate seven, eight, or nine independent directorships (with independent directors representing 41 percent, 44 percent, or 47 percent of boards comprising 17, 18, or 19 directors). That decision is based on a variety of general and Bank-specific considerations, including the number of independent directorships designated for the current year. Under the designation of directorships process, year-to-year changes in the relative level of required stock holdings for the members in the various States of a Bank district may result in the redesignation of one or more member directorships from one state to another. In some cases, the interaction of changes in the relative level of required stockholdings with the requirements of the grandfather provision may result in the addition of a new member directorship to a Bank’s board. This could also lead to the addition of a new independent directorship if needed to maintain the required ratio of independent directorships to total directorships. In other instances, FHFA may simply choose to add a new independent directorship for policy reasons or at the request of a Bank’s board. Proposed § 1261.4(e) would address these redesignations and additions. Proposed paragraph (e)(1) (like existing § 1261.4(e)) would make clear that the member directorship representing the state that is losing a seat terminates as of December 31 of the year the designation of directorships order is issued and a new directorship is created as of January 1 of the following year to represent the state that is gaining a seat. The Bank would need to hold an election to fill the newly added member directorship during the year the designation of directorships order is issued, with the duly elected director to begin serving on the following January 1. The individual occupying the member directorship being terminated would cease to be a director after December 31 of the current year. As does the existing regulation, proposed paragraph (e)(1) would further provide that the length of the initial term of the newly added member directorship shall be adjusted to equal the remaining term of the directorship VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 being terminated, to ensure that the terms of the Bank’s directorships remain staggered with approximately one quarter of the terms expiring each year, as required by statute.23 Similarly, proposed paragraph (e)(2) would provide that the Director may truncate the initial term of any new directorship added to a Bank’s board if needed to maintain the even staggering of terms. As under the existing regulation, such truncated terms would not be counted in determining term limits for Bank directors (this is discussed further below). Finally, proposed § 1261.4(f) would provide that the board of directors of each Bank shall determine the number of public interest independent directorships to be included among its designated independent directorships for the following year, a requirement that appears in § 1261.3(a) of the existing regulation. Under the proposed provision, a Bank would now also be expressly permitted to change the number of public interest independent directorships during the year (a practice which FHFA has permitted). As required by statute, a Bank would at all times need to have at least two such directorships. 4. Director Eligibility—§ 1261.5 The proposed rule would make numerous revisions to § 1261.5 of the existing regulation, which governs director eligibility, including qualifications for independent directors and term limits. These revisions are intended to consolidate provisions relating to director eligibility, strengthen eligibility requirements to encourage strong corporate governance, fill in gaps in the coverage of the existing regulation, and provide greater overall clarity than the existing regulation. The proposed rule would make clarifying revisions to § 1261.5(a), which implements the statutory eligibility requirements for member directors, with no intended change to the substance. The heading to the provision would be revised to make clear (as does the existing text) that the eligibility requirements apply not just to sitting directors, but to nominees as well. Proposed paragraph (a)(1) would provide that each member director, and each nominee for a member directorship must be: (i) a citizen of the United States; and (ii) an officer or director of a member institution that is located in the voting State of the Bank district to which the directorship being occupied, sought, or filled has been allocated under proposed § 1261.4(c). As required by statute, paragraph (a)(1)(ii) would make clear that the member institution with which any member director or member directorship nominee is associated must meet all minimum capital requirements established by its appropriate Federal banking agency or appropriate State regulator. As does existing § 1261.5(a), paragraph (a)(2) would provide that the institution with which the director is associated must have been a member as of the ‘‘record date’’ (that is, December 31 of the year preceding the election) or, in the case of a director chosen by a Bank’s board of directors to fill a vacancy, as of the time the board acts. Existing § 1261.5(b) provides that each member director, and each nominee to a member directorship, must be an officer or director of a member located in the State to which the Director has allocated the directorship. Because its substance would be incorporated into proposed § 1261.5(a), the proposed rule would delete this provision. Existing § 1261.5(c), entitled ‘‘Eligibility requirements for independent directors,’’ provides that each independent director and each nominee to an independent directorship shall be: (1) a citizen of the United States; and (2) a bona fide resident of the district in which the Bank is located. The Bank Act actually sets forth a total of four requirements each independent director must meet to be eligible to serve. In addition to the two covered by existing § 1261.5(c), an independent director may not serve as an officer of any Bank or as a director, officer, or employee of any member of a Bank, or of any recipient of advances from a Bank 24 and must possess certain professional qualifications, which differ depending on whether the individual is filling a public interest independent directorship or a regular independent directorship.25 While the latter two requirements are covered in separate provisions of the existing regulation (§§ 1261.10 and 1261.7, respectively), they are not identified as ‘‘eligibility requirements’’ in § 1261.5(c). The proposed rule would redesignate § 1261.5(c) as § 1261.5(b) and would expand the list of eligibility requirements set forth therein to include the independence and qualifications requirements. This proposed revision is intended to provide clarity by itemizing in one provision all of the requirements an individual must meet to be eligible for nomination and service as an independent director. In the case of the 24 12 23 See PO 00000 12 U.S.C. 1427(d). Frm 00008 Fmt 4701 25 12 Sfmt 4702 E:\FR\FM\04NOP2.SGM U.S.C. 1427(a)(3)(B)(iii). U.S.C. 1427(a)(3)(B)(i), (ii). 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules independence and qualifications requirements, proposed § 1261.5(b) would cross-reference other provisions of the revised regulation (§§ 1261.10 and 1261.5(c), respectively) providing more detail on how a Bank must determine whether an individual meets those requirements. Under proposed § 1261.5(b), all four requirements would apply to both sitting independent directors and to independent directorship nominees. While the citizenship, residency, and qualifications requirements apply to nominees as well as sitting directors under the existing regulation, the independence requirement currently applies only to seated directors. The extension of this requirement to nominees is discussed below in the analysis of proposed § 1261.10. The proposed rule would add a new paragraph (c) to § 1261.5 to address the required professional qualifications for both regular and public interest independent directors. Under the existing regulation, both sets of required qualifications are fully or partially stated in multiple provisions, which FHFA believes is a potential source of confusion.26 Under the proposed rule, the required qualifications for regular and public interest independent directors would be described once—in proposed § 1261.5(c)—which would, in turn, simply be cross-referenced where relevant in other provisions of the revised regulation. As explain below, the proposed rule would also make substantive revisions to the regulatory text describing the qualifications. The existing regulation, at § 1261.7(e), provides that each independent director that is not a public interest independent director (i.e., a ‘‘regular independent director’’ under the proposed rule) must ‘‘have experience in, or knowledge of, one or more of the following areas: auditing and accounting, derivatives, financial management, organizational management, project development, risk management practices, and the law.’’ 27 To that list of qualifying knowledge and experience, which would now appear in proposed § 1261.5(c)(1), the proposed rule would add artificial intelligence, information technology and security, climate-related risk, CDFI business models, and modeling. These additions were developed both from input on critical areas of expertise that should be covered by a Bank’s board of directors sought and received 26 See 12 CFR 1261.5(c)(2), 1261.7(d)(1)(i) and (e)(2) (public interest independent director qualifications); 12 CFR 1261.7(d)(1)(ii) and (e)(1), 1261.8(a)(1)(iii) (regular independent director qualifications). 27 See 12 CFR 1261.7(e). VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 during the FHLBank System at 100 initiative and from understanding of the Banks’ corporate governance needs developed through FHFA’s general supervisory efforts. Their inclusion is intended to encourage each Bank’s board to take active steps to ensure it has sufficient knowledge and expertise regarding recent business developments in housing finance and new and emerging risks and complex problems that could affect Bank operations. To allow FHFA and the Banks to respond more rapidly to evolving conditions and risks going forward, the list of qualifying knowledge or expertise for regular independent directors in proposed § 1261.5(c)(1) would also include ‘‘such other areas as the Director shall determine,’’ thus allowing FHFA to add other areas to the list, as appropriate, without going through the rulemaking process. Such additions would be conveyed through guidance. FHFA requests comment on whether these areas of qualifying experience are appropriate and whether other specific areas should be included. Proposed § 1261.5(c)(2) would implement the statutory requirement that each public interest independent director qualify by having ‘‘more than four years of experience representing consumer or community interests in banking services, credit needs, housing, or consumer financial protection.’’ The application of this requirement has been a frequent subject of inquiry and discussion between FHFA and Bank boards of directors and staff, potential directors, and trade groups since it was adopted as part of the Housing and Economic Recovery Act of 2008 (HERA).28 In early 2022, FHFA issued a revised version of the Bank Independent Director Application Form (FHFA Form #129), the instructions for which provide guidance on how to determine whether an applicant for a public interest independent directorship meets the statutory qualifications.29 The guidance provided on the Form is consistent with advice given by FHFA in individual cases over the years. In addition to restating the statutory requirement, proposed § 1261.5(c)(2) would include the substance of this material to provide clarity on the 28 Under existing §§ 1261.7(f) and 1261.14(b), FHFA has an opportunity to review the completed Independent Director Application Forms and other supporting materials for each Bank’s proposed independent directorship nominees and to provide comments to the Bank where warranted. For public interest independent directorship nominees, FHFA’s review includes evaluation of whether the individual’s professional experience meets the statutory standard. 29 FHFA released an updated version of the Form with some additional minor revisions in 2023. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 87737 implementation of the statutory standard in the regulation itself. The new provision would stipulate that, for purposes of determining compliance with the public interest qualification requirements, ‘‘representing’’ means advocating for, or otherwise acting primarily on behalf of or for the direct benefit of, consumers or the community in one of the four enumerated areas. Those who have not advocated for or acted on behalf of or for the direct benefit of consumers and the community in any material capacity cannot reasonably be viewed as representatives of those constituencies. Industry-side interests are more than adequately represented among the Banks’ member and regular independent directors. Among other things, FHFA believes that experience related to fair housing, fair lending, consumer protection, affordable housing, community development, and diversity and inclusion that otherwise meets the requirements of the statute and regulation would be qualifying experience for public interest independent directors. Proposed § 1261.5(c)(2) would also provide that qualifying experience in one of the four enumerated areas may have been acquired in professional, public service, or significant volunteer positions, so long as the work done was substantial in terms of time commitment and responsibility and that the experience was accrued from activities personally undertaken by the director or nominee, as opposed to being attributed based solely on the activities of organizations with which the person was associated. Prior to 2008, the Bank Act required the appointment of at least two ‘‘community interest’’ directors at each Bank ‘‘chosen from organizations with more than a 2-year history of representing consumer or community interests on banking services, credit needs, housing, or financial consumer protections.’’ In 2008, HERA substituted the current language focusing on the personal experience of the individual in representing community or consumer interests, as opposed to the mission of the organization with which they were affiliated. The additional clarifying regulatory text is intended to ensure that nominees meet the statutory requirement of personal experience and have the kind of knowledge, experience, and perspective necessary to oversee a Bank and guide it in the safe and sound fulfillment of its public policy mission. Experience gained through full-time paid employment is almost always qualifying. FHFA has generally viewed experience with nonprofits, community E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 87738 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules organizations, state and local housing finance agencies, and non-member CDFIs, or service as an elected, appointed, or career government official, to be qualifying. Ultimately, determinations as to qualification to serve as a public interest independent director must be made on a case-by-case basis, given the numerous ways in which a person could conceivably meet the statutory standard. Both regular and public interest independent directors need to have the capacity to challenge Bank management on important issues, including the sufficiency and effectiveness of its mission programs. While Bank boards can benefit from a wide variety of viewpoints, FHFA has observed that the most effective directors possess knowledge and experience that are relevant to the business, programs, and mission of the Bank and that provide a basis for understanding the actual and potential impact of the Bank’s activities on its members and on communities within the Bank’s district. FHFA also believes that service in full-time executive, management, or other senior paid professional positions generally provides the most valuable experience for a Bank director. Proposed § 1261.5(c)(3) would require that Banks’ boards prioritize those characteristics when soliciting and choosing Bank independent directorship nominees. With respect to length of board service, the Bank Act limits Bank directors to ‘‘three consecutive full terms’’ and requires former directors who have termed out to sit out for a minimum of two years before seeking to serve again as a Bank director.30 Section 1261.5(d) of the existing regulation, entitled ‘‘Restrictions,’’ implements the statutory term limit provisions by setting forth principles for determining whether a director has been elected to and served three consecutive full terms. In general, under the existing regulation, four-year terms to which a director has been elected and has served any part count as full terms, while terms that have been truncated to maintain board staggering and terms served out by a vacancy electee do not. Much of the material in existing § 1261.5(d) is intended to address issues arising from the transition from the pre-HERA regime, under which directors served three-year terms and independent 30 12 U.S.C. 1427(d). (The Bank Act provides that ‘‘[i]f any person . . . has been elected to each of three consecutive full terms as a director of a [Bank] and has served for all or part of each of said terms, such person shall not be eligible for election to a directorship of such [Bank] for a term which begins earlier than two years after the expiration of the last expiring of said three terms’’). VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 directors were appointed by the Bank System regulator, to the current regime, under which directors serve four-year terms and independent directors are nominated by Bank boards and elected by Bank members. Proposed § 1261.5(d) (which would be re-titled ‘‘Term limits’’) would continue to address director term limits using the principles reflected in the existing regulation. The proposed rule, however, would remove from the regulatory text the post-HERA transition material, which is no longer needed because all directors who were serving at the time of the statutory change have now termed out, and otherwise streamline the language and structure of the provision. Consistent with other revisions, the proposed rule would replace crossreferences to the Bank Act with either an express substantive statement or a cross-reference to a substantive regulatory provision. As proposed, § 1261.5(d) would continue to provide that truncated terms do not count as full terms, but would make clear that two full terms on either side of a truncated term count as consecutive full terms; that is, while a truncated term may not count in the term limit calculation, it cannot re-set the term limit calculation back to zero. Existing § 1261.5(e) explains that a director shall become ineligible to remain in office if, during their incumbency, the directorship to which they have been elected is eliminated. The proposed rule would add to this provision a cross-reference to the section of the proposed rule (§ 1261.4, governing the designation of directorships) under which a seat could be eliminated. As under the existing regulation, proposed § 1261.5(e) would continue to provide that the incumbent director shall become ineligible after the close of business on December 31 of the year in which the directorship is eliminated. Section 1261.6 of the existing regulation, governing the determination of members votes, would not be changed by the proposed rule. 5. Nominations for Member and Independent Directorships—§ 1261.7 Section 1261.7 of the existing regulation governs nominations for member and independent directorships, including election announcements, the submission and acceptance of member directorship nominations, independent directorship qualifications and nominations, and eligibility verification. The proposed rule would make numerous textual and structural revisions to § 1261.7, most of which are PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 non-substantive and intended only to provide clarity. Existing § 1261.7(a) requires that ‘‘[w]ithin a reasonable time in advance of an election,’’ a Bank provide notice to each member in its district of the commencement of the election process to include: (1) the number of member directorships designated for each voting State and the total number of independent directorships; (2) the name of, and pertinent information about, each incumbent Bank director; (3) a brief statement of the skills and experience the Bank believes are most likely to add strength to its board; (4) an attachment identifying every member, its voting state, and the number of votes it is eligible to cast; and (5) a certificate to be used by member institutions to make any desired nominations. The proposed rule would make three substantive revisions to the list of information to be included in or with the election announcement, each of which FHFA believes is consistent with the current practice of most Banks. First, the proposed rule would require that the statement regarding the number of member and independent directorships include the number of independent directorships designated by the Bank as public interest independent directorships for the following calendar year. Second, the proposed rule would require that the election notice identify the member directorships, regular independent directorships, and public interest independent directorships, respectively, for which the Bank will be holding an election in the current year. Finally, while the existing regulation makes inclusion of a brief statement of sought-after skills and experience contingent on the Bank having carried out the assessment of board skills and experience permitted under existing § 1261.9, the proposed rule would make the inclusion of the statement mandatory because, as discussed below, the annual assessment would also be made mandatory. In addition to these substantive revisions, the proposed rule would also move a misplaced heading and renumber the paragraphs to accommodate the additional material. The proposed rule would combine into proposed § 1261.7(b) material that appears in existing paragraphs (b) and (c) governing member directorship nominations by members and the acceptance of such nominations by a Bank’s board. The one substantive change would be the removal in two places of the requirement that election and nomination records be retained for at least two years after the date of the election. These provisions would be replaced by a new § 1261.7(f), requiring E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules each Bank to retain all information received under proposed § 1261.7 for at least seven years after the date of the election in question and, in the case of any information about a specific director, for at least seven years after that director leaves the board (discussed below). The remaining changes consist of non-substantive paragraph redesignations, revised headings, and minor textual changes to provide clarity. In the existing regulation, § 1261.7(d) and (e) address independent director nominations and independent director required qualifications, respectively. The proposed rule would remove § 1261.7(e) in its entirety because, under the revised regulation, the required qualifications for regular and public interest independent directors would be stated in only one provision—proposed § 1261.5(c). Further duplicative statements regarding the required qualifications would also be removed from existing § 1261.7(d), which would be redesignated as § 1261.7(c). The proposed rule would also remove from the redesignated provision language indicating that an interested individual may not submit, and a Bank may not consider, an Independent Director Application Form that does not demonstrate that the applicant is both eligible and qualified to serve; these restrictions are not consistent with the intended use of the completed Form as a means through which eligibility may be determined. Instead, the proposed rule would include in proposed § 1261.7(d)(3), discussed below, a new express provision prohibiting a Bank’s board from nominating any individual for an independent directorship or accepting the nomination of any individual for a member directorship if it has not concluded based on the appropriate completed Form and supplementary materials that the individual is eligible to serve. The proposed rule would also remove the language in existing § 1261.7(d)(3) requiring that each Bank determine and announce to its members the number of public interest independent directorships to be included among its authorized independent directorships for the following year, because this requirement would be covered by proposed § 1261.4(f). The proposed rule would also remove language requiring each Bank to retain all completed Independent Director Application Forms for at least two years after the date of the election because, as mentioned, the record retention requirements for all records related to the nomination and election of directors would now be governed by proposed § 1261.7(f). The remaining changes to VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 the existing provisions on the nomination of independent directors would be non-substantive textual and organizational revisions (including the division of different topical material into paragraphs) for better readability. Existing § 1261.7(f) addresses the steps each Bank must take to verify the eligibility of its member and independent director nominees. It requires each Bank to use the information provided on the Member Director Eligibility Certification Form or the Independent Director Application Form, as applicable, to verify that each nominee meets the relevant eligibility requirements and, for independent directorship nominees, possesses the required qualifications. The provision further requires that, before announcing any independent director nominee, the Bank deliver to FHFA for review a copy of the proposed nominee’s executed Independent Director Application Form. Although the existing regulation does not generally require FHFA approval of Bank independent directorship nominees, existing § 1261.7(f) requires a Bank’s board to consider any comments on a proposed nominee provided by FHFA within two weeks of FHFA’s receipt of the Application Form for that individual.31 The proposed rule would redesignate § 1261.7(f) as § 1261.7(d) and, for clarity, would break the existing text into topical paragraphs and revise references to the member and independent director eligibility requirements to add crossreferences to the applicable substantive provisions of the revised regulation (proposed § 1261.5(a) and (b) respectively). The proposed rule would also add a new paragraph (d)(3) expressly prohibiting a Bank’s board from nominating any individual for an independent directorship or including on the ballot any individual nominated for a member directorship except where it has concluded that the individual meets the applicable eligibility requirements and is not term limited. Although this concept is implicit in the existing regulation, FHFA believes it is preferable for the regulation to set forth a clear statement to this effect. The proposed rule would add a new § 1261.7(e), which would prohibit a Bank’s board from nominating any person for an independent directorship 31 In 2022, in conjunction with FHFA’s issuance of the revised Bank Independent Director Application and Certification Forms, FHFA’s Division of Bank Regulation issued a Supervisory Letter on the proper submission of Independent Director Application Forms and pertinent supplementary material to FHFA for review. This guidance would remain in effect under the proposed rule. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 87739 or including on the election ballot any individual nominated for a member directorship without having first conducted a thorough background check and concluding that the individual is fit to serve in a fiduciary role with the Bank. The proposed rule would require each Bank to include a discussion of the results of the background check for each independent directorship nominee when submitting its Independent Director Application Forms to FHFA, including any potentially concerning information that was revealed and how the Bank’s concerns were allayed. In recent years, the Banks have typically conducted background checks on independent directorship nominees and addressed the results of those checks in their submissions to FHFA; the proposed rule would codify this practice. The rule would also require each Bank to conduct a background check on nominees for a member directorship, as the risks background checks are designed to mitigate are no less of a concern for member directors than they are for independent directors. Although the Bank Act clearly vests in a Bank’s members the authority to nominate and elect their own representatives on a Bank’s board, the continued safe and sound operation of every Bank depends upon the reservation of some mechanism for identifying and addressing potential risks to the institution that could be posed by its own directors. Bank directors not only have a unique opportunity to influence a Bank’s course of action, they also are privy to the most sensitive inside information, including confidential supervisory information (CSI), about the operations, finances, and personnel of the Bank. It is critical that a Bank’s board retain the ability to police itself and prevent individuals whose history of criminality, malfeasance, poor judgment, or other concerning behavior indicates they are not fit to fulfill a fiduciary role with the Bank from being or remaining seated as directors. Conducting a background investigation in support of a director’s nomination, whether for a member or independent directorship, is a commonsense way to prevent problems before they start. In July 2020, FHFA’s Division of Bank Regulation issued a Supervisory Letter discussing the importance of conducting a thorough background check on any individual a Bank’s board intends to nominate for an independent directorship. The guidance given in the letter remains applicable to background checks to be carried out under proposed § 1261.7(e). E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 87740 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules Without a background investigation, a Bank could not reasonably determine whether a potential nominee meets its own standards, including codes of conduct, codes of ethics, conflicts of interest policies, and anti-fraud policies. A background check also gives a Bank an opportunity to verify that eligibility requirements have been met and that the employment and educational history shown on nominee’s Application Forms is accurate. On occasion, a background check may reveal information that calls into question the validity of the responses on the Application Form, or the fitness of the nominee to serve in a fiduciary role with a large financial institution like the Bank. Examples that may give rise to concerns about the latter include a criminal record, past bankruptcy, or failure to pay taxes. A Bank should evaluate the circumstances surrounding each issue of concern and take appropriate steps to determine whether the risk can be satisfactorily mitigated or whether the board should decline to the nominate an individual for an independent directorship or post a member-nominated individual on the ballot for a member directorship. In either case, the board should thoroughly document its decision-making process. Finally, the proposed rule would add a new § 1261.7(f), which would require each Bank to retain all information received under proposed § 1261.7 for at least seven years after the date of the election in question and, in the case of any information about a specific director, for at least seven years after that director leaves the board. Each Bank would be required to maintain those records pursuant to a duly adopted policy. As mentioned above, existing § 1261.7 includes a number of separate provisions requiring that a Bank retain various documents for at least two years after an election.32 FHFA believes that all material documentation regarding a Bank’s nomination and election process should be subject to the same retention requirements and that two years is not a sufficient length of time to retain those types of important records. Seven years is a conservative retention period that is frequently required by law or corporate policy,33 and one that is an appropriate minimum for Bank nomination and election records and not burdensome for a Bank 32 See 12 CFR 1261.7(b)(3), (c), (d)(2) (nominating certificates, executed Membership Director Certification Forms, and Independent Directorship Application Forms, respectively). 33 See, e.g., 17 CFR 210.2–06 (Securities and Exchange Commission rule requiring records of an audit or review of an issuer’s financial statements to be retained for seven years). VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 to fulfill given the ease with which electronic records are stored.34 Where information involves an individual that was elected to the board, proposed § 1261.7(f) would require the information to be retained for the duration of that director’s service and then for at least seven years after that director leaves the board. Issues regarding sitting Bank directors arise from time to time that call for reference to information or materials submitted years earlier as part of the nomination process and these materials should remain accessible until well after the directors to which they pertain have left the board. 6. Election Process—§ 1261.8 Section 1261.8 of the existing regulation governs the various aspects of the Bank director election process. The proposed rule would make several substantive revisions to this section, including revisions regarding the required contents of a Bank’s director election ballot, the authority of a Bank’s board to decline to seat a director-elect for cause, and the length of time ballots need to be retained. Existing § 1261.8(b) provides that if a Bank has conducted an annual assessment of the skills and experience possessed by the board permitted by § 1261.9 and has included the results of the assessment as part of the election notice, it may include with each ballot a statement of the results of that assessment or any subsequent assessment. As discussed below, the proposed rule would revise § 1261.9 to make the now optional assessment mandatory for each Bank. The proposed rule would also require that the results of that assessment be included as part of the election notice required under § 1261.7(a). Consistent with those changes, the proposed rule would delete existing § 1261.8(b) and revise § 1261.8(a) to require that a Bank include on the ballot a statement of the results of the assessment, including an explanation for any differences between the statement on the ballot and that appearing on the earlier election notice. Revised § 1261.8(a) would also require that each Bank include on its election ballot a brief description of the skills 34 FHFA’s regulations at 12 CFR part 1235 establish general minimum requirements for record retention for the Agency’s regulated entities, including the Banks and the OF. The standards established require that the regulated entities maintain adequate records in accordance with consistent accounting policies and practices that enable the Director to evaluate the financial condition of each regulated entity and the OF and such other operational and management standards as the Director determines to be appropriate. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 and experience of each nominee for a member directorship. This is permitted but not required under the existing regulation, which does require that that qualifying areas of expertise for independent directorship nominees be noted on the ballot (a requirement that would be retained under the proposed rule). To accommodate these substantive revisions, the provisions within § 1261.8(a) would be redesignated as paragraphs (a)(1) through (6). Given the ever changing business and societal landscape within which the Banks operate, it is prudent to look beyond the four to six regular independent directors they are likely to have on their respective boards and find ways to promote the nomination and election to member directorships of individuals that have the experience to cover some of the critical areas of board expertise. For example, if the Chief Technology Officer (CTO) of a Bank member were to be elected as a member director, that individual would likely be able to provide the board with necessary expertise in information technology and security and possibly in other critical areas enumerated in proposed § 1261.5(c). Even if the nomination and election of member directors is largely within the control of Bank members in the respective voting States of the district, the required statement of needed skills and expertise on the election notice and ballot and the required inclusion on the ballot of a statement on the knowledge and skills possessed by individual member directorship nominees would encourage Bank members to take into account the expertise needed to allow the board to most effectively supervise the operations of the Bank. The coverage of vital areas of expertise through member directors, where possible, would allow the Bank to seek independent directors to cover some of the areas of expertise that senior officers and directors of Bank member institutions would be less likely to have. Existing § 1261.8(f)(4) provides that a ‘‘[b]ank shall not declare elected a nominee that it has reason to know is ineligible to serve, nor shall it seat a director-elect that it has reason to know is ineligible to serve.’’ This provision, which would be redesignated as § 1261.8(e)(4), would be revised also to prohibit a Bank’s board from declaring elected a nominee or seating any director-elect it has reason to know is ‘‘unfit’’ to serve. As discussed above with respect to the background check required under § 1261.7(e), a Bank’s board must retain the ability to address the directorship status of individuals E:\FR\FM\04NOP2.SGM 04NOP2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 who may pose a material risk to the Bank to fulfill its fiduciary duty to protect the Bank’s interests. Proposed § 1261.8(e)(4) would authorize and require a Bank to prevent the seating of a director if it obtains information indicating the individual poses a material and unacceptable risk to the Bank that was not available to it at the time it conducted the required background check. Because § 1261.8(b) would be eliminated, the proposed rule would redesignate existing paragraphs (c) though (h) as paragraphs (b) through (g). It would also make multiple nonsubstantive changes throughout the section by adding cross-references to appropriate provisions of the revised regulation, removing redundant statements of the required qualifications for independent directors, and making other minor changes to nomenclature and phrasing. 7. Actions Affecting Director Elections— § 1261.9 Existing § 1261.9 addresses actions affecting director elections. Paragraph (a) authorizes each Bank to ‘‘conduct an annual assessment of the skills and experience possessed by its board of directors as a whole and [to] determine whether the capabilities of the board would be enhanced through the addition of individuals with particular skills and experience.’’ The proposed rule would make this annual assessment mandatory and require that the results of the assessment be reflected in the election announcement under proposed § 1261.7(a) and the election ballot under proposed § 1261.8(a), as discussed above. It would also require that the assessment be undertaken ‘‘pursuant to policies adopted by the board.’’ To effectively oversee a Bank’s operations, its board should be balanced and includes a diversity of experience and perspectives across member and independent directors. Periodic assessment of the knowledge and skills possessed by sitting board directors and identification of areas that require better coverage is critical to ensuring that a Bank’s board of directors is able to effectively oversee and guide the operations of the Bank. FHFA requests comment on whether requiring that such an assessment be completed on a less frequent cadence than annually would compromise a Bank’s ability to plan effectively. Aside from this, to plan effectively, Bank boards of directors should develop and maintain a director’s service timeline to track all directors’ terms from beginning to end; develop and annually review and update a director VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 position description for member directors, regular independent directors, and public interest independent directors; and focus recruiting on addressing gaps in knowledge and skills identified by the assessment. Insufficient board succession planning can lead to a lack of experience and expertise needed to effectively oversee a Bank’s operations. For example, if several long-tenured directors were to vacate a Bank’s board simultaneously, the board may face a critical loss of institutional knowledge. Without appropriate succession planning, a Bank’s board may find itself lacking knowledge, skills, and abilities that are critical to providing effective strategic direction and oversight. The remaining revisions to § 1261.9(a) would be non-substantive clarifying revisions to change the heading from the cryptic ‘‘Banks’’ to the more descriptive ‘‘Annual assessment of skills and experience,’’ add cross-references to appropriate provisions of the revised regulation, remove redundant statements of the required qualifications for independent directors, and make other minor changes to nomenclature and phrasing. Existing § 1261.9(b) and (c) would remain unchanged. 8. Independent Director Independence—§ 1261.10 Section 1261.10 is currently entitled ‘‘Independent director conflict of interests.’’ Because the focus of the section is to elaborate on the ‘‘independence’’ requirements for independent directors, the proposed rule would revise the heading of § 1261.10 to read ‘‘Independent director independence.’’ Conflicts-of-interest policies for all Bank directors are covered separately from independence requirements, in § 1261.11. Existing § 1261.10(a) prohibits any independent director from serving as an officer, employee, or director of any member of the Bank, or of any recipient of advances from the Bank, or as an officer of any Bank, during that director’s term of service on the Bank’s board. The proposed rule would redesignate paragraph (a) as paragraph (a)(1) and revise the provision to prohibit an independent director from serving not only as an officer, but also as any kind employee, of another Bank. Permitting even a non-executive employee of one Bank to serve on the board of another Bank could not only compromise the independence of the board on which the individual sits, but could also give rise to internal control concerns for the Bank employing the individual. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 87741 The proposed rule would further revise newly-redesignated § 1261.10(a)(1) to prohibit not just the seating, but also the nomination of individuals with any of the impermissible connections. Under the existing regulation, FHFA has permitted Banks to nominate individuals with a prohibited connection for an independent directorship, provided the nominee agrees to relinquish the impermissible position prior to being seated on the board. Extending the independence requirement to the nomination phase creates greater separation between a director’s term of service and pursuit of possible conflicting interests and helps ensure that anyone wishing to serve as an independent director is committed to being a true outside voice.35 The proposed rule would also create a new paragraph (a)(2), which would define the term ‘‘advances’’ for purposes of applying the prohibition against the seating or nomination of any officer, employee, or director of any ‘‘recipient of advances’’ from the Bank. As proposed, the term would include any loan from a Bank to the recipient, regardless of form or nomenclature, except for debt securities traded in the public capital markets. This definition is intended to prevent Banks and housing associates such as state housing finance agencies (SHFAs) from skirting the independence requirements by creating bespoke lending terms for the housing associate by which an independent director or nominee is employed in an arrangement called something other than an ‘‘advance.’’ At the same time, the definition would allow Banks to support their housing associates through the purchase of debt securities on the open market on the same terms and conditions as are applicable to other market participants even where an employee of the housing associate is serving as an independent director. Providing clarity regarding the meaning of the word ‘‘advances’’ in this context was suggested in the Bank System’s joint letter in response to FHFA’s Spring 2023 Notice of Regulatory Review. FHFA requests comment on whether the proposed definition adequately addresses the relevant legal and policy concerns or whether a different definition would be more appropriate. 35 Notwithstanding FHFA’s approach to this issue since the post-HERA requirements were implemented, the extension of the independence requirements to independent directorship nominees is consistent with section 7(b)(2)(B) of the Bank Act, which provides that ‘‘[n]ominees shall meet all applicable requirements prescribed in this section.’’ See 12 U.S.C. 1427(b)(2)(B). E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 87742 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules The proposed rule would make no revisions to existing § 1261.10(b). Existing § 1261.10(c) provides that, for purposes of determining compliance with the independence requirements, a Bank shall attribute to the independent director any officer position, employee position, or directorship of the director’s spouse. The proposed rule would further strengthen independence requirements by extending the attribution requirement to all ‘‘immediate family members’’ of the director or nominee. Existing § 1261.11(f) defines ‘‘immediate family member’’ to include a ‘‘parent, sibling, spouse, child, or dependent, or any relative sharing the same residence as the director’’ for purposes of the director conflicts-of-interest requirements; under the proposed rule, the same definition would apply for purposes of the independence provisions. The proposed change recognizes that director independence can be compromised through the activities and financial interests of close family members other than a spouse, seeks to prevent circumvention of the spirit of the independence requirement, and aligns the standards for the independence requirement with those of the conflictsof-interest requirements. In line with the extension of the independence requirements to nominees under proposed § 1261.10(a), the rule would also add a new paragraph (d) to § 1261.10 to require any former member director to wait at least two years after leaving a member directorship before returning to the board as an independent director (assuming all eligibility requirements are met for the position). The two-year requirement parallels the two-year requirement set forth in the statutory provision at 18 U.S.C. 207 that is the primary source of post-employment restrictions applicable to officers and employees of the executive branch of the Federal Government and the two year period during which former Bank directors who have termed out are prohibited from serving.36 These types of transitions have happened on occasion and FHFA has typically permitted a member director to transition to an independent directorship upon relinquishing the impermissible position, without any ‘‘cooling off’’ period. By requiring a twoyear sit out period FHFA intends to create greater separation between the seating of an independent director and the individual’s employment with a member. The Agency requests comments on whether a different length 36 See 12 U.S.C. 1427(d). VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 of time would more effectively ensure board independence. 9. Conflicts of Interest Policy for Bank Directors—§ 1261.11 In § 1261.11, the proposed rule would revise the section heading to read ‘‘Conflicts of interest’’ instead of ‘‘Conflict of interests’’ and would make related conforming changes throughout the section. The only other changes to § 1261.11 would be to revise the definition of ‘‘financial interest’’ in paragraph (f) and to list definitions in alphabetical order. Existing § 1261.11(b) requires a Bank director to disclose any ‘‘financial interests,’’ as well as those of any immediate family member or business associate, in any matter to be considered by the Bank’s board of directors and in any other proposed or actual business matter involving the Bank and any other person or entity and to refrain from considering or voting on any issue in which the director, any immediate family member, or any business associate has any financial interest. For purposes of those requirements, existing § 1261.11(f) defines ‘‘financial interest’’ to mean ‘‘a direct or indirect financial interest in any activity, transaction, property, or relationship that involves receiving or providing something of monetary value, and includes, but is not limited to any right, contractual or otherwise, to the payment of money, whether contingent or fixed.’’ The provision further states that the term ‘‘does not include a deposit or savings account maintained with a member, nor does it include a loan or extension of credit obtained from a member in the normal course of business on terms that are available generally to the public.’’ In its letter in response to FHFA’s Spring 2023 Notice of Regulatory Review, the Bank System commented that the list of exclusions in the definition of ‘‘financial interest’’ found in existing § 1261.11 is too narrow in scope and should be broadened to reflect other financial services products obtained under similar circumstances. In response to the comment, FHFA is proposing to revise the exclusion from the definition of ‘‘financial interest’’ in § 1261.11(f) to refer to ‘‘a deposit or savings account, loan or extension of credit, or other accounts and products obtained in the normal course of business on non-preferential terms generally available to the public from a member institution or from a nonmember counterparty to the Bank on whose board the director sits.’’ In the same letter, the Bank System recommended that FHFA harmonize the standard for what constitutes a conflict PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 under FHFA’s Affordable Housing Program (AHP) regulation 37 with the standard for Bank directors under § 1261.11—specifically, that the definitions of ‘‘financial interest’’ and ‘‘immediate family member’’ be made identical for both regulations. Existing § 1261.11 defines ‘‘immediate family member’’ as a parent, sibling, spouse, child, or dependent, or any relative sharing the same residence as the director. That definition would remain unchanged under the proposed rule and would also be used, along with the revised definition of ‘‘financial interest,’’ in the new provision on Bank employee conflicts under proposed 12 CFR 1239.31 (discussed below). FHFA anticipates that the Bank System’s request regarding the AHP regulation will be addressed in a subsequent rulemaking. The proposed rule would not make any other revisions to § 1261.11. 10. Reporting Requirements for Bank Directors—§ 1261.12 The proposed rule would make only one change to § 1261.12, which establishes reporting requirements for Bank directors. Existing § 1261.12(b) provides that at any time a director believes or has reason to believe that they no longer meet the eligibility requirements set forth in the Bank Act or the regulation, the director shall promptly notify the Bank and FHFA in writing. The proposed rule would eliminate the requirement that a director submit the notification to FHFA, requiring only that it be submitted to the Bank. The last sentence of § 1261.12(b) requires a Bank to promptly notify FHFA in writing any time it believes or has reason to believe that any director no longer meets the eligibility requirements, and this has typically been the method through which FHFA has been informed of director ineligibility. Director eligibility is an issue for a Bank to monitor and address in the first instance and there is no reason for an individual director to contact FHFA directly about eligibility issues. 37 The AHP regulation prohibits Bank directors, employees, and advisory council members from participating in decisions regarding AHP projects in which they or a family member have a financial interest and requires each Bank to adopt a conflictsof-interest policy for its AHP. See 12 CFR 1291.16. For purposes of these requirements, the regulation defines ‘‘family member’’ as ‘‘any individual related to a person by blood, marriage, or adoption,’’ see 12 CFR 1291.1, but does not define ‘‘financial interest.’’ E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules 11. Ineligibility and Removal of Bank Directors—§ 1261.13 Existing § 1261.13 addresses the ineligibility of Bank directors. It provides that upon a determination by FHFA or a Bank that any director of the Bank no longer satisfies the statutory or regulatory eligibility requirements, or has failed to comply with the reporting requirements, the directorship shall immediately become vacant. The proposed rule would retain this provision without revision, other than to redesignate it as paragraph (a), with the heading ‘‘Ineligibility.’’ The proposed rule would also create a new paragraph (b) to establish the authority of a Bank’s board to remove directors for good cause, which may be based upon: (i) a material violation of the Bank’s code of ethics or other applicable Bank policy; (ii) a material violation of the Bank Act, FHFA regulations or other criminal or civil law; (iii) a determination by the board that continuation in office of such director would be materially harmful to the Bank; (iv) conduct, or a mental or physical condition, that raises substantial questions concerning the director’s ability to fulfill their duties and obligations; or (v) a determination under proposed § 1261.22(b)(3) (discussed below, requiring that the board assess director performance annually) that the director’s continuous poor performance or lack of participation is compromising the board’s ability to adequately oversee the operations of the Bank. Under the proposed rule, a Bank would also be required to promptly notify FHFA in writing of any pending or final removal actions taken pursuant to this authority. As stated above with respect to the required background check for directorship nominees, the safe and sound operation of every Bank depends, in part, upon the existence of some mechanism for identifying and addressing potential risks to a Bank that could be posed by its own directors. It is important that a Bank’s board have clear authority to address risks posed by sitting directors, as well as potential risks posed by those seeking to become directors. FHFA believes that the prescribed list of ‘‘good cause’’ bases for removal, as well as the requirements that two-thirds of disinterested Bank directors vote to remove and that a Bank carry out any actions pursuant to policies adopted by the Bank’s board should minimize the chance that any removal authority would be abused or applied in anything other than an objective fashion in the best interests of the Bank. VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 Some Banks already have a policy providing for the good cause removal of directors, which FHFA believes is appropriate. FHFA believes it is important to make clear that each Bank’s board retains this limited authority and requests comment on whether it would be appropriate to require each Bank to adopt policies on good cause removal. The Agency also requests comment on whether any factors should be added or eliminated from the list of ‘‘good cause’’ bases for removal and on whether the revised regulation should require separate votes by member and independent directors or something other than a two-thirds vote for removal. 12. Vacant Bank Directorships— § 1261.14 Section 1261.14 of the existing regulation establishes the requirements and procedures for the filling of vacant Bank directorships by the Bank’s board of directors. The proposed rule would make numerous clarifying edits to this section. Existing § 1261.14(a), entitled ‘‘Filling of unexpired terms,’’ requires that, when a directorship vacancy occurs, the Bank’s board elect an individual to complete the unexpired term of office of the vacant directorship. The election is determined by a majority vote of the remaining Bank directors sitting as a board, regardless of whether the remaining Bank directors constitute a quorum.38 The regulation permits a Bank’s board to fill an anticipated vacancy prior to its occurrence, but it may do so no sooner than the regularly scheduled board meeting immediately prior to the effective date of the vacancy.39 To fill a particular vacancy, a Bank’s board may elect only an individual who satisfies all the statutory and regulatory eligibility requirements ‘‘that applied to his or her predecessor’’ and, for independent directorships, also satisfies any of the independent director qualifications. If a Bank does not have at least two sitting public interest independent directors, its board must designate the vacant directorship as a public interest independent directorship and elect an eligible and qualified individual to fill it.40 While retaining the same basic approach, the proposed rule would restate the standards for determining who is eligible to fill a particular vacancy and expressly allow Banks some flexibility in filling vacant independent directorships. The 38 12 CFR 1261.14(a)(1). CFR 1261.14(a)(2). 40 12 CFR 1261.14(a)(3). 39 12 PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 87743 proposed rule would also reconfigure existing paragraph (a)(1) into the introductory paragraph to § 1261.14(a) and redesignate the succeeding paragraphs accordingly. With respect to determining who is an eligible successor to a director that has left the board, the existing regulation provides that the board ‘‘shall elect only an individual who satisfies all the eligibility requirements in the Bank Act and in this subpart that applied to his or her predecessor and, for independent directorships, also satisfies any of the qualifications in the Bank Act or this subpart.’’ The proposed rule would delete this language and state, simply, in § 1261.14(a)(2) that a Bank’s board must: (i) fill a vacant member directorship only with an individual who meets the member director eligibility requirements set forth in proposed § 1261.5(a) (including by being an officer or director of a member located in the voting state to which the vacant member directorship is allocated); and (ii) fill a vacant independent directorship only with an individual who meets the eligibility requirements for independent directors set forth in proposed § 1261.5(b). By statute, a Bank’s board must at all times have at least two seats designated as public interest independent directorships. If one of those seats becomes vacant, it should be filled as expeditiously as possible. Proposed § 1261.14(a)(3) would provide more express flexibility in filling a vacant public interest independent directorship than the existing regulation by permitting a Bank’s board either to: (i) elect an individual who is qualified under § 1261.5(c)(2) to serve as a public interest independent director to fill the vacancy; or (ii) elect to redesignate as a public interest independent director a sitting regular independent director who is qualified under § 1261.5(c)(2) to serve as a public interest independent director. In the latter case, the board would elect another individual who is qualified under § 1261.5(c)(1) to serve as a regular independent director to fill the resulting vacant regular independent directorship. The proposed change would also make it possible for the board of directors to redesignate a public interest independent director as a regular independent director. This may occur, for example, if the Bank already has more than two sitting public interest independent directors on its board. Although FHFA views such scenarios as permissible under the existing language and has permitted Banks to fill vacant public interest and regular independent directorships in that way, the proposed revisions would E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 87744 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules make it clear that the Banks have this flexibility. Proposed § 1261.14(a)(4) would make clear that a Bank’s board of directors must consult with the Bank’s Advisory Council before considering any individual to fill a vacant independent directorship, just as is required under existing § 1261.7(d)(2) (proposed § 1261.7(c)(3)) when a board is considering independent directorship nominations during the regular election cycle. Existing § 1261.14(b), entitled ‘‘Verifying eligibility,’’ requires that prior to any election to fill a board vacancy, the Bank obtain an executed Application or Certification Form (as appropriate) from each individual being considered to fill the vacancy and use the Forms to verify each individual’s eligibility and qualifications. The existing provision also requires that the Bank deliver to FHFA for its review a copy of the Application Form of each individual being considered by the board. The proposed rule would make several clarifications to § 1261.14(b), as well as breaking the revised material into four paragraphs for better readability. Proposed § 1261.14(b)(1) would continue to require that a Bank obtain the appropriate executed Application or Certification Form from each individual being considered to fill a vacancy and would clarify that this requirement applies even when a Bank’s board is contemplating the redesignation of a sitting regular independent director as a public interest independent director or vice versa. Proposed § 1261.14(b)(2) would require that a Bank conduct a background check on any individual being considered to fill a vacant directorship in the same manner as required for nominees in the regular election cycle under proposed § 1261.7(e). Proposed § 1261.14(b)(3) would continue to require that a Bank’s board deliver to FHFA for review the executed Independent Director Application Form for each individual being considered by the board to fill a vacant independent directorship and would clarify that (as is the case for its review of Independent Director Application Forms during the regular election cycle) FHFA has two weeks within which to provide comments to the Bank. The proposed provision would also require a Bank to provide a summary of the background check. Finally, proposed § 1261.14(b)(4) would require a Bank to retain all information obtained under § 1261.14(b) for at least seven years after the date of VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 the election in question and, in the case of any information about a specific director, for at least seven years after that director leaves the board. This parallels the retention requirements that would apply to materials received during the regular nomination and election cycles under §§ 1261.7(f) and 1261.8(e)(5). Existing § 1261.14(c), governing notification, would remain unchanged under the proposed rule. In the remainder of subpart B of part 1261, the proposed rule would make no changes to existing § 1261.15 (setting forth the table for ‘‘grandfathered’’ member directorships) and would remove § 1261.16, which contains no regulatory text and is designated as reserved. 13. (Directors’ Compensation) General— § 1261.21 In subpart C of the existing regulation, § 1261.21 addresses Bank and OF director compensation.41 Existing § 1261.21(a) authorizes each Bank and OF to pay its directors reasonable compensation and necessary expenses. This authority is subject to further provisions of subpart C requiring each Bank and the OF to compensate its directors pursuant to an annually adopted and FHFA-reviewed written compensation policy 42 and authorizing the Director to disapprove compensation or expenses determined not to be reasonable.43 Existing § 1261.21(b) requires that each Bank and OF report to the Director annually about the compensation it anticipates paying out in the following year and director compensation, expenses, and meeting attendance for the immediately preceding calendar year. FHFA is proposing changes to both paragraphs (a) and (b) of existing § 1261.21, as described below. Proposed amendment to paragraph (a), ‘‘Standard.’’ By statute, the Banks and OF are authorized to pay their directors reasonable compensation for the time required of them and necessary expenses they incurred in performing their duties, provided the Bank System regulator approves such compensation.44 As did predecessor Bank System regulators, FHFA interprets its statutory obligation to 41 Section 1261.21 applies to OF independent directors by operation of 12 CFR 1273.7(f)(2). Bank presidents serve as ex officio directors of the OF but are not compensated for such service. 12 CFR 1273.7(f)(1). 42 See 12 CFR 1261.22(a) and (d). 43 See 12 CFR 1261.23. 44 See 12 U.S.C. 1427(i)(1). FHFA has applied section 7(i) to OF pursuant to the Director’s authorities under 12 U.S.C. 4511(b)(2). PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 approve reasonable director compensation as conferring authority to establish a maximum amount or level of reasonable compensation and to provide prior notice of that amount to each Bank and the OF. FHFA now proposes to state that authority in the regulation. Current section 7(i)(1) of the Bank Act is identical to the provision regarding director compensation originally enacted as section 7(h) of the Bank Act in 1932, providing that ‘‘[e]ach bank may pay its directors reasonable compensation for the time required of them, and their necessary expenses, in the performance of their duties, in accordance with the resolutions adopted by such directors, subject to the approval of the board.’’ 45 Although the current statutory provision does not expressly identify FHFA as the approving authority, review of the Bank Act demonstrates that ‘‘board,’’ as used in the approval proviso, must be read to refer to FHFA. When originally enacted in 1932, the Bank Act defined ‘‘board’’ as the Federal Home Loan Bank Board (FHLBB), the original regulator of the Bank System.46 Thus, through use of the word ‘‘board,’’ section 7(h) as originally enacted unambiguously provided the FHLBB authority to approve Bank director compensation. When section 7 of the original Bank Act is read as a whole, it is apparent that Congress used the term ‘‘board’’ standing alone to mean the Bank System regulator, and used ‘‘board of directors’’ or a clear derivative of that term (e.g., a ‘‘board of eleven directors,’’ or ‘‘such board’’) when referring to a Bank’s board of directors.47 Moreover, that approach is evident throughout the Bank Act as originally enacted 48 and across amendments over time.49 Original section 7(h) was redesignated as section 7(i) in 1935.50 When Congress amended sections 7(a) through (h) in 1961 to revise provisions governing the 45 Compare 12 U.S.C. 1427(i)(1) with Public Law 72–304, sec. 7(h), 47 Stat. 725, 730 (July 22, 1932). 46 Public Law 72–304, sec. 2(1), 47 Stat. 725. 47 Public Law 72–304, sec. 7(a) and (b), 47 Stat. 730. 48 See generally, Public Law 72–304, secs. 12, 17, 18, and 20, 47 Stat. 735–38. 49 Amendments from 1935 also used ‘‘Board’’ in uppercase to refer to the FHLBB. Among other changes, amendments to section 7 in 1935 provided for the election of ‘‘[t]wo of such [Bank] directors’’ by Bank members without regard to classes, under ‘‘rules and regulations to be prescribed by the Board.’’ Public Law 74–76, sec. 3(b), 49 Stat. 293, 294 (May 28, 1935) (emphasis added). As later examples, see Public Law 84–345, sec. 109(a)(2), 69 Stat. 635, 640 (Aug. 11, 1955), and Public Law 86– 349, sec. 1 and 2, 73 Stat. 625 (Sept. 22, 1959). The 1935 amendments also added a new paragraph (d), such that original paragraph (h) on Bank director compensation was re-lettered paragraph (i), as it is today. 50 Public Law 74–76, sec. 3(b), 49 Stat. 294. E:\FR\FM\04NOP2.SGM 04NOP2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules election and appointment of Bank directors it added a clause stating that ‘‘Federal Home Loan Bank Board’’ would be ‘‘hereinafter in this section referred to as the Board’’ to paragraph (a).51 Section 7(i) on director compensation and section 7(j) on administration of the affairs of each Bank by its board of directors were not addressed in the 1961 amendments, and section 2(1) of the Bank Act, defining ‘‘board’’ as the FHLBB, also was not amended or repealed. As a result, after the 1961 amendments, section 7 used both ‘‘Board’’ and ‘‘board’’ standing alone, and each term was identified or defined as—and understood to refer to— the Bank System regulator. Reading ‘‘board’’ otherwise—as referring to a Bank’s board of directors— leads to an implausible outcome. For example, the Bank’s board of directors would then be statutorily required to act twice on the matter of directors’ compensation—once by resolution and once by ‘‘approval’’—or one of the two actions (resolution or approval) is unnecessary, because it would be redundant.52 Moreover, such a reading also requires assuming that in 1961 Congress intended to withdraw authority from the Bank System regulator and confer it on each Bank’s board of directors through a new practice, used in only one place in the Bank Act, of referring to the Bank’s board of directors as ‘‘board,’’ standing alone in lowercase and as distinguished from ‘‘Board,’’ meaning the Bank System regulator, standing alone in uppercase. The correct reading of section 7 after the 1961 amendments is that either ‘‘board’’ or ‘‘Board,’’ when standing alone in section 7, meant the ‘‘Federal Home Loan Bank Board.’’ This conclusion is also supported by the Bank System regulator’s contemporaneous understanding, as evidenced by the fact that following the 1961 amendments, the FHLBB did not revise its Bank director compensation regulation adopted in 1958, which stated that Bank directors’ fees were subject to the approval of the FHLBB.53 51 Public Law 87–211, 75 Stat. 486 (Sept. 8, 1961). clause and word of a statute should, if possible, be given effect.’’ United States v. Menasche, 348 U.S. 528, 538–539 (1955) (internal citations omitted). ‘‘The presence of statutory language cannot be regarded as mere surplusage; it means something.’’ Potter v. U.S., 155 U.S. 438, 446 (1894). 53 See 23 FR 9878, 9885 (Dec. 23, 1958). Presumably Congress was aware of this interpretation in 1961, when it chose not to amend paragraph (i). The FHLBB did not amend its Bank directors’ compensation regulation again until 1978, when it codified its policy, first established in 1974, of imposing supervisory limits on Bank director compensation. See 43 FR 46835 (Oct. 11, 1978). lotter on DSK11XQN23PROD with PROPOSALS2 52 ‘‘Every VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) established the Federal Housing Finance Board (Finance Board) to replace the FHLBB as the Bank System regulator and revised the Bank Act to replace all uses of ‘‘board’’ except in section 7 with ‘‘Board,’’ which FIRREA defined as the Finance Board.54 Because this change in terms did not cover section 7 (plausibly to avoid changing ‘‘board’’ in the term ‘‘board of directors’’ to ‘‘Board’’), in sections 7(a) through (h) ‘‘Board’’ continued to connote the Bank System regulator while section 7(i) continued to use the lowercase ‘‘board.’’ There is no evidence that FIRREA’s failure to change the word ‘‘board’’ in section 7(i) as part of the conforming amendments to reflect the name of the new System regulator, however, was intended to change the long-held understanding that the word refers to the Bank System regulator. In contrast, FHLBB regulations in effect immediately prior to FIRREA’s enactment and later regulations of the Finance Board demonstrate that those agencies understood ‘‘board’’ in the approval proviso to refer to the System regulator.55 Most recently, section 7(i) of the Bank Act was amended by HERA in 2008, when section 7(i)(2), which was added by the Gramm-Leach-Bliley Act (GLBA) in 1999 and imposed statutory limits on Bank director compensation, was repealed.56 The 2008 amendment thus returned section 7(i)(1) to the same language as section 7(i) before GLBA was enacted, providing that director compensation was subject to the approval of the ‘‘board’’—in lowercase but standing alone. Because HERA also 54 Public Law 101–73, secs. 401(a)(2), 702(a), and 703, 103 Stat. 354, 413, and 415 (Aug. 9, 1989); see also Public Law 101–73, sec. 701(a)(1) and (b), 103 Stat. 411, 412. 55 See 12 CFR 522.60 (1989), as originally adopted in 1978, 43 FR 46837. This regulatory provision was not thereafter amended by the FHLBB but was transferred without change by the Finance Board after FIRREA’s enactment, see 54 FR 36757, 36758 (Sept. 5, 1989). See also 61 FR 43151, 43153 (Aug. 21, 1996) (wherein the Finance Board determined that a dollar cap on Bank director compensation was appropriate considering ‘‘the agency’s statutory responsibility to ‘approve’ Bank directors’ compensation, see 12 U.S.C. 1427(i), the Bank Act’s requirement that such compensation be ‘reasonable,’ see id., and the preference for providing a clear regulatory standard.’’). 56 Public Law 110–289, sec. 1202(7), 122 Stat. 2783 (July 30, 2008); see also Public Law 106–102, sec. 606(b), 113 Stat. 1450, 1453 (Nov. 12, 1999). Even after GLBA’s imposition of statutory limits the Bank System regulator continued to assert approval authority by regulation, see 12 CFR 932.17(f) (2000) (‘‘Payments made to directors in compliance with the limits on annual directors’ compensation and the standards set forth in this section are deemed to be approved by the Finance Board for purposes of section 7(i) of the [Bank] Act, as amended.’’). PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 87745 made FHFA the Bank System regulator, replacing the Finance Board, HERA included a number of general amendments changing references to the ‘‘Board’’ or the ‘‘Finance Board’’ to the ‘‘Director’’ of FHFA.57 Likely because ‘‘board’’ in the section 7(i)(1) approval proviso was not capitalized, it was not identified as a reference in need of updating. Once again however, the fact that the proviso was not changed indicates that Congress did not intend to change its meaning. And, as has been consistently demonstrated from the enactment of the Bank Act in 1932 through its many amendments and in the regulations of successive System regulators, the proviso means that the Bank System regulator—now FHFA— has authority to approve Bank director compensation.58 The legislative and regulatory history that substantiates FHFA’s authority to approve Bank director compensation also affirms its authority to establish limits on ‘‘reasonable’’ compensation. As early as 1974, the Bank System regulator limited Bank director compensation by policy, exercising statutory authority identical to that in existing section 7(i)(1).59 Thereafter, the Bank System regulator’s authority to determine a level of ‘‘reasonable’’ Bank director compensation was codified in regulation, first in 1978 and again in 1989, 1996, 1999, 2000, 2002, and 2010.60 In common with earlier Bank System regulators, FHFA views its express statutory authority to approve Bank director compensation on the basis that it is reasonable as conferring authority to establish and provide to the Banks and OF an amount of director compensation that FHFA has determined would be reasonable. After administering the existing regulation for almost 15 years, FHFA believes it could be useful to provide the Banks and OF information on a level or amount of director compensation FHFA has determined to be reasonable, for consideration when each Bank and OF develops its directors’ compensation policy. The existing regulation requires each Bank and OF to submit its director compensation policy to FHFA for prior 57 Public Law 110–289, sec. 1204, 122 Stat. 2785. statutory interpretation by the administrative regulator ‘‘is of persuasive force,’’ U.S. v. Madigan, 300 U.S. 500, 505 (1937); see also Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). 59 See 61 FR 17603 (Apr. 22, 1996). 60 See 43 FR 46837 (Oct. 11, 1978), 54 FR 36757 (Sept. 5, 1989), 61 FR 43151 (Aug. 21, 1996), 64 FR 71278 (Dec. 21, 1999), 65 FR 8260 (Feb. 18, 2000), 67 FR 12846 (Mar. 20, 2002), and 75 FR 17040 (Apr. 5, 2010). 58 Consistent E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 87746 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules review and addresses FHFA’s obligation to disapprove director compensation that is not reasonable. The Bank Act does not define ‘‘reasonable,’’ but FHFA relies on concepts and processes similar to those used in its review of Bank executive officer compensation (where, by statute, FHFA is required to prohibit the regulated entities from providing executive officers compensation that is not reasonable and comparable to compensation paid by similar institutions for the performance of similar duties 61). When determining if proposed compensation of Bank or OF directors is ‘‘reasonable,’’ FHFA considers a variety of factors including compensation of directors at other banking institutions; the Banks’ status as government-sponsored enterprises and features of their statutory charters, governance, and businesses that may distinguish them from other institutions; their statutory purposes and mission; and the fact that they were created to serve a public purpose. Currently, if FHFA determines that proposed director compensation is not reasonable, it does not provide the relevant Bank or OF information on an alternative amount of compensation that FHFA would deem to be reasonable. Instead, the Bank or OF must submit a new proposal, subject to a new FHFA review. FHFA believes this process imposes a burden on the Banks and OF which could be reduced or avoided if FHFA provided notice of a maximum amount of annual director compensation FHFA has determined would be reasonable. Because FHFA has not previously exercised that authority, and for consistency with earlier System regulators which stated such authority in regulation, FHFA now believes it should state its authority to establish an amount of ‘‘reasonable’’ director compensation and to provide prior notice of that amount to the Banks and OF in regulation. FHFA does not propose to establish a maximum amount or level of compensation in this regulatory action. In the future, FHFA may establish such an amount and may do so through a regulatory amendment or an order. FHFA may also provide guidance on an amount of Bank or OF director compensation it believes would be reasonable. In any case, FHFA expects any amount or level of ‘‘reasonable’’ compensation so established would reflect consideration factors such as those set forth above. Likewise, FHFA does not propose to amend other provisions of existing 61 See subpart C that currently require each Bank and OF, when submitting its directors’ compensation policy to FHFA, to include all studies or other supporting materials upon which the board relied in determining the level of compensation and expenses to pay to its directors; require FHFA to review the policy; and acknowledge FHFA’s authority to disapprove the policy if FHFA determines that compensation and/or expenses to be paid to the directors are not reasonable.62 Should FHFA in the future provide the Banks and OF prior notice of a maximum amount of director compensation determined to be reasonable, FHFA does not intend that each Bank or OF simply adopt that amount in its policy. Instead, FHFA expects that the board of directors of each Bank and OF would continue to evaluate and affirmatively determine reasonable director compensation and that each annual policy submission would continue to provide studies, supporting materials, and justification for such determinations. As it does currently, FHFA expects to review each submission in full and may disapprove proposed compensation that is not supported as reasonable. FHFA may also approve a proposal to pay compensation that exceeds the amount FHFA has communicated by prior notice if the Bank or OF provides appropriate support. Proposed amendment to paragraph (b), ‘‘Reporting.’’ As noted above, existing § 1261.21(b) requires that each Bank report to the Director annually about the compensation it anticipates paying out in the following year and director compensation, expenses, and meeting attendance for the immediately preceding calendar year. One of the items required to be included in the latter category under the existing regulation is ‘‘[t]he number of board and designated committee meetings each director attended in-person or through electronic means such as video or teleconferencing.’’ In order to conform more closely to the language that would be used in revised § 1261.24 (discussed below), the proposed rule would revise the description of this item to refer to ‘‘meetings each director attended in person or remotely, through video or teleconferencing, and in accordance with § 1261.24(b).’’ 14. Directors’ Compensation Policy— § 1261.22 Existing § 1261.22 requires that a Bank adopt a written compensation policy to ‘‘provide for the payment of reasonable compensation and expenses 12 U.S.C. 4518(a); see also 12 CFR part 62 See 1230. VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 PO 00000 12 CFR 1261.22 and 1261.23. Frm 00018 Fmt 4701 Sfmt 4702 to the directors for the time required of them in performing their duties as directors.’’ The policy must ‘‘address the activities or functions for which director attendance or participation is necessary and which may be compensated, and . . . explain and justify the methodology used to determine the amount of compensation to be paid to the Bank director.’’ A Bank’s compensation policy must require that compensation be reduced, as necessary, to reflect lesser attendance or performance at board or committee meetings during a given year. The proposed rule would split paragraph (b), addressing minimum contents for Bank compensation plans, into two paragraphs. It would also add a third paragraph, § 1261.22(b)(3), requiring each Bank to establish, as part of its compensation policy, a fair and impartial process for annually evaluating individual director performance and participation, including, but not limited to, an assessment of whether each director: (i) demonstrated understanding of the Bank System; (ii) demonstrated knowledge of the Bank’s policies and governance documents; (iii) demonstrated understanding of his or her legal and ethical responsibilities as a board member; (iv) made suggestions congruent with the Bank’s mission, vision and values (even if divergent from majority opinion); and (v) acted in support of Board decisions, regardless of initial position. The proposed rule would also revise newly designated § 1261.22(b)(2) to stipulate that, as a consequence for poor performance or participation, a Bank’s board may not only reduce a director’s pay, but may also remove a director whose lack of performance or participation is compromising the board’s ability to adequately oversee the operations of the Bank. This authority is also referenced in proposed § 1261.13, which addresses a board’s authority to remove a director for good cause. Bank directors hold positions of trust and are well compensated for their time and efforts. Each Bank needs all of its directors to devote the time, attention, and thought necessary to properly oversee the Bank and its operations. It is a matter of strong corporate governance for a Bank’s board of directors to have an effective process for assessing the performance of board directors; this process can help improve individual and collective board performance.63 It is just as essential that 63 See PwC’s, Governance Insights Center, Individual director assessments, (August 2023), available at https://www.pwc.com/us/en/services/ E:\FR\FM\04NOP2.SGM 04NOP2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 a Bank’s board have an effective mechanism for addressing lack of performance. In extreme cases, where a director’s performance is so poor or detrimental that it poses a risk to the board’s ability to effectively oversee the Bank’s operations, this could include removal of a director using the procedures established under proposed § 1261.13(b). 15. Board Meetings—§ 1261.24 The proposed rule would make multiple substantive changes to codify a waiver FHFA first issued in 2020 permitting Bank System board and committee meetings to be held in virtual formats. Existing § 1261.24(a) requires that the board of directors of each Bank hold as many meetings each year as are necessary and appropriate to carry out its fiduciary duties regarding its oversight of the Bank, provided that each board must hold a minimum of six in-person meetings during each calendar year. A similar regulatory requirement applies to the board of directors of the OF.64 As mentioned above, FHFA regulations also require that each Bank annually adopt a written compensation policy to provide for the payment of reasonable compensation and expenses to the directors for the time required of them in performing their duties as directors.65 The OF is required to pay reasonable compensation to independent directors in accordance with the requirements of part 1261 applying to the compensation of Bank directors, including the requirement that compensation be reduced to reflect lesser attendance or performance at board or committee meetings.66 The requirements for Bank and OF boards to hold at least six in-person meetings are prudential measures adopted by FHFA as an aid to promoting sound governance; they are not required by statute. In response to the COVID–19 pandemic, the FHFA Director issued a letter in March 2020 waiving the need to comply with the inperson board meeting regulatory requirements and with provisions of compensation policies tying compensation to attendance at in-person board and committee meetings. Over the course of the pandemic, the waiver was extended nine times and the last extension remains in effect without an expiration date. governance-insights-center/library/assets/pwcindividual-director-assessments.pdf. 64 See 12 CFR 1273.8(b). 65 See 12 CFR 1261.22. 66 See 12 CFR 1273.7(f)(2). VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 Although the COVID–19 public health emergency has ended and FHFA prefers that Banks and OF hold in-person board meetings whenever possible, it also recognizes the benefits of allowing greater flexibility in fulfilling the Agency’s regulatory requirement to hold at least six board meetings a year, particularly in times of emergency. The proposed revisions allowing boards to meet remotely at their discretion without seeking prior Agency approval could promote efficiency by minimizing delays in response to urgent issues and reducing travel costs and unexpected travel disruptions while fostering greater board participation for directors unable to attend in person. Additionally, the Bank System has already demonstrated its ability to use electronic platforms to engage in discourse and conduct business over the past four years. The proposed rule would permanently address the issue by codifying the substance of the existing waiver into regulation. The principal effect of modifying the regulation would be to allow the Banks and OF an alternative means of holding a board meeting that would otherwise be held in person. The interests of the members and the public should be equally represented through either type of board meeting. Expectations for attendance and performance at meetings and the compensation methodology should be communicated to board members in the compensation policy, which, with supporting materials, must be submitted to the FHFA Director annually.67 Consequently, the Agency would expect the Banks and OF to keep adequate meeting records to sufficiently document board member attendance and performance. FHFA also expects the Banks and OF to appropriately mitigate any security risks that may arise from meeting in a virtual setting. The proposed rule would revise existing § 1261.24(a) to remove the requirement that the six minimum board meetings be ‘‘in-person.’’ In conjunction with this, the proposed rule would revise § 1261.24(b) to provide that ‘‘[a] Bank’s board of directors and its committees may conduct meetings in-person, through video conferencing or teleconferencing, or in a hybrid format, provided that all directors have an opportunity to communicate and have access to all written documents and presentations.’’ Any meeting of the type described can be counted as one of the minimum six meetings required under § 1261.24(a). Proposed § 1261.24(b)(2) would state an expectation that that each Bank will 67 See PO 00000 12 CFR 1261.22(d). Frm 00019 Fmt 4701 ‘‘generally’’ hold board and committee meetings within the Bank district and would retain the prohibition against holding any board or committee meeting that is not within a ‘‘State’’ as defined by 12 CFR 1201.1. This definition includes ‘‘United States, American Samoa, the Commonwealth of the Northern Mariana Islands, the District of Columbia, Guam, Puerto Rico, or the United States Virgin Islands.’’ 68 It would further require that all directors be located within a State, as so defined, when attending a board or committee meeting via video conference or teleconference. The proposed rule would also add to § 1261.24 a new paragraph (c) to define ‘‘quorum’’ to mean ‘‘for purposes of meetings of a Bank’s board of directors, . . . a majority of sitting directors, which must include a majority of sitting independent directors.’’ This provision would better ensure that independent voices are heard on critical Bank issues and provide consistency within the Bank System. The proposed provision parallels the definition of ‘‘quorum’’ as it is currently stated in the OF regulation at 12 CFR 1273.8(b). B. Revisions to 12 CFR Part 1239 Although each Bank is required under existing § 1261.11 to adopt a conflictsof-interest policy to cover all of its board directors, there is currently no equivalent requirement with respect to Bank employees, many of whom are in no less a position of trust at the Bank than are its board directors. Part 1239 of FHFA’s regulations addresses responsibilities of boards of directors, corporate practices, and corporate governance for FHFA’s regulated entities. The proposed rule would add to part 1239 a new § 1239.31 requiring each Bank to adopt a conflictsof-interest policy covering its employees and establishing the requirements for those policies. The content and format of the new section is based on that of § 1261.11, which addresses the Bank director conflicts-of-interest policy requirement, appropriately modified to be applicable to Bank employees. Proposed § 1239.31(a) would require that each Bank’s board of directors adopt a written conflicts-of-interest policy covering all employees, which must, at a minimum: (1) require that all employees of the Bank discharge their official responsibilities in an objective and impartial manner in furtherance of the interests of the Bank’s membership as a whole and consistent with the public interest; (2) establish appropriate limitations, standards, and procedures 68 See Sfmt 4702 87747 E:\FR\FM\04NOP2.SGM 12 CFR 1201.1. 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 87748 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules regarding the holding of outside positions and financial interests by Bank employees and close family members and associates; (3) prohibit executive officers and senior management from holding paid positions with any entity that is, or may be eligible to become, a member or housing associate of any Bank or with any affiliate of such entity; (4) prohibit employees from participating in any particular matter in which the employee or any immediate family member or business associate has a financial interest; (5) prohibit employees from otherwise holding financial interests that conflict with the conscientious performance of duty; (6) require employees to disclose actual or apparent conflicts of interests and establish procedures for addressing such conflicts, including recusal; (7) require the establishment of internal controls to ensure that conflicts-of-interest reports are made and filed and that conflicts-ofinterest issues are disclosed and resolved; and (8) establish procedures to monitor compliance with the conflictsof-interest policy. While the proposed rule would require each Bank’s policy to set appropriate guidelines for all of its personnel, FHFA would expect a Bank to appropriately calibrate the treatment of different types of employees under the policy according to the risk presented, including by setting more stringent standards for executives and officers. Paralleling § 1261.11, paragraphs (b) and (c) of proposed § 1239.31 would prohibit employees in most cases from disclosing or using confidential information they receive by reason of their position with the Bank and discourage Bank employees from accepting gifts that appear to be intended to influence the employee’s actions. Proposed paragraph (d) would employ the same definitions that are used in proposed § 1261.11(f). For purposes of attribution, ‘‘immediate family member’’ means a parent, sibling, spouse, child, or dependent, or any relative sharing the same residence as the director and the term ‘‘business associate’’ means any individual or entity with whom a director has a business relationship, including, but not limited to: (1) Any corporation or organization of which the employee is an officer or partner, or in which the employee beneficially owns ten percent or more of any class of equity security, including subordinated debt; (2) Any other partner, officer, or beneficial owner of ten percent or more of any class of equity security, including subordinated debt, of any such corporation or organization; and (3) Any VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 trust or other estate in which an employee has a substantial beneficial interest or as to which the employee serves as trustee or in a similar fiduciary capacity. The definition of ‘‘financial interest’’ matches the revised definition of that term in proposed § 1261.11(f). C. Revisions to 12 CFR Part 1273 The proposed rule would also make several revisions to part 1273, which governs the OF. Primarily, the proposed rule would amend part 1273 to revise the provision governing the minimum number and site of OF board meetings to match the revised language with respect to the Bank’s boards in § 1261.24. The remaining proposed revisions are in response to comments provided by the Bank System in response to FHFA’s Spring 2023 Notice of Regulatory Review. 1. Funding of the OF—§ 1273.5 Existing § 1273.5 addresses the funding of the OF. Existing § 1273.5(b)(1)(ii) limits OF operating funds withdrawals to check, wire transfer, or draft signed by the Chief Executive Officer (CEO) or other persons designated by the OF board of directors. In its letter sent in response to FHFA’s Spring 2023 Notice of Regulatory Review, the Bank System commented that the existing regulation governing the withdrawal of OF operating funds is both limited and outdated. It suggested that the regulation be modernized to permit the use of other widely accepted fund transfer methods that have been or will be developed in the future and that the regulation be expanded to allow CEO delegation of authority to achieve greater operational efficiency. In response, FHFA is proposing to revise § 1273.5(b)(1)(ii) to expand the range of permissible OF withdrawal methods to include ‘‘draft[s]’’ and ‘‘other funds transfer methods with written authorization by the CEO or other persons designated by the CEO or OF board of directors in accordance with OF governance documents.’’ 2. General Duties of the OF Board of Directors—§ 1273.8 Existing § 1273.8 addresses the ‘‘general duties of the OF board of directors.’’ Paragraph (b) of this section establishes requirements for OF board meetings, requiring that the OF board of directors conduct its business by majority vote of its members at meetings convened in accordance with its bylaws, and hold no fewer than six inperson meetings annually. The proposed rule would subdivide § 1273.8(b) into four paragraphs for clarity and would revise the existing PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 text concerning meeting frequency and location in a manner paralleling the proposed changes to the board meeting requirements for the Banks set forth in § 1261.24. The reasons for these revisions are discussed in depth in the discussion of proposed § 1261.24, above. Proposed § 1273.8(b)(1) would allow the OF board of directors and its committees to conduct meetings ‘‘in person, through video conferencing or teleconferencing, or in a hybrid format, provided that all meeting attendees have an opportunity to communicate and have access to all written documents and presentations.’’ Under the proposed rule, all such meetings could be counted toward the minimum of six board meetings per year that is required under the existing regulation and as proposed. The proposed rule, in § 1273.8(b)(2), would prohibit the OF from holding any board or committee meeting that is not within a ‘‘State’’ as defined by 12 CFR 1201.1 and would also require that all directors be located within a State, as so defined, when attending the meeting via teleconference or video conference. Proposed § 1273.8(b)(3) and (4) would retain the meeting notice and quorum provisions, respectively, of the existing regulation. In existing § 1273.8, paragraph (d) enumerates duties of the OF board, other than those relating to Bank System consolidated obligations, among which is included the duty to review and approve all contracts of the OF, except for contracts for which exclusive authority is provided to the Audit Committee by regulation. In its letter sent in response to FHFA’s Spring 2023 Notice of Regulatory Review the Bank System commented that the current requirement seems impractical and unnecessary, as those activities generally fall under management’s responsibilities. In response, FHFA is proposing to eliminate the requirement that the OF board of directors review and approve all contracts of the OF, except for those reserved to the audit committee by regulation. Instead, proposed § 1273.8(d)(4) would state that the OF board of directors will review and approve contracts of the OF, as specified in OF governance documents. V. Considerations of Differences Between the Banks and the Enterprises Section 1313(f) of the Safety and Soundness Act requires the Director of FHFA, when promulgating regulations relating to the Banks, to consider the differences between the Banks and the Enterprises (Fannie Mae and Freddie Mac) as they relate to: the Banks’ cooperative ownership structure; the E:\FR\FM\04NOP2.SGM 04NOP2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules mission of providing liquidity to members; the affordable housing and community development mission; their capital structure; and their joint and several liability on consolidated obligations.69 The Director also may consider any other differences that are deemed appropriate. In preparing this proposed rule, the Director considered the differences between the Banks and the Enterprises as they relate to the above factors, and determined that the rule is appropriate. FHFA requests comments regarding whether differences related to those factors should result in any revisions to the proposed rule. VI. Paperwork Reduction Act The proposed rule would not contain any changes to information collection requirements that would require the approval of the Office of Management and Budget (OMB) under the Paperwork Reduction Act.70 Therefore, FHFA has not submitted any information to OMB for review. lotter on DSK11XQN23PROD with PROPOSALS2 VII. Regulatory Flexibility Act The Regulatory Flexibility Act 71 (RFA) 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.72 FHFA has considered the impact of the proposed rule under the RFA. FHFA certifies that the proposed rule, if adopted as a final rule, would not have a significant economic impact on a substantial number of small entities because the proposed rule applies only to the Banks and OF, which are not small entities for purposes of the RFA. VIII. Providing Accountability Through Transparency Act of 2023 The Providing Accountability Through Transparency Act of 2023 (5 U.S.C. 553(b)(4)) requires that a notice of proposed rulemaking include the internet address of a summary of not more than 100 words in length of a proposed rule, in plain language, that shall be posted on the internet website under section 206(d) of the EGovernment Act of 2002 (44 U.S.C. 3501 69 12 U.S.C. 4513(f). U.S.C. 3501 et seq. 71 5 U.S.C. 601 et seq. 72 See 5 U.S.C. 605(b). 70 44 VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 note) (commonly known as Regulations.gov). FHFA’s proposal and the required summary can be found at https://www.regulations.gov. List of Subjects 12 CFR Part 1239 Administrative practice and procedure, Federal home loan banks, Government-sponsored enterprises, Reporting and recordkeeping requirements. 12 CFR Part 1261 Administrative practice and procedure, Compensation, Conflicts of interest, Directors, Elections, Eligibility, Federal home loan banks, Meetings, Reporting and recordkeeping requirements. 12 CFR Part 1273 Administrative practice and procedure, Audit committee, Consolidated obligations, Directors. Accordingly, for the reasons stated in the preamble, under the authority of 12 U.S.C. 4511, 4513, and 4526, FHFA proposes to amend parts 1239, 1261, and 1273 of chapter XII of title 12 of the Code of Federal Regulations, as follows: PART 1239—RESPONSIBILITIES OF BOARDS OF DIRECTORS, CORPORATE PRACTICES, AND CORPORATE GOVERNANCE 1. The authority citation for part 1239 continues to read as follows: ■ Authority: 12 U.S.C. 1426, 1427, 1432(a), 1436(a), 1440, 4511(b), 4513(a), 4513(b), 4526, and 15 U.S.C. 78oo(b). ■ 2. Add § 1239.31 to read as follows: § 1239.31 Conflicts of interest policy for Bank employees. (a) Adoption of conflicts-of-interest policy. Each Bank’s board of directors shall adopt a written conflicts-ofinterest policy covering all Bank employees. At a minimum, the conflicts-of-interest policy of each Bank shall: (1) Require that all Bank employees discharge their official responsibilities in an objective and impartial manner in furtherance of the interests of the Bank’s membership as a whole and consistent with the public interest; (2) Establish appropriate limitations, standards, and procedures regarding the holding of outside positions and financial interests by Bank employees and close family members and associates; (3) Prohibit Bank executive officers and senior management from holding paid positions with any entity that is, or PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 87749 may be eligible to become, a member or housing associate of any Bank or with any affiliate of such entity; (4) Prohibit Bank employees from participating in any particular matter in which the employee or any immediate family member or business associate has a financial interest; (5) Prohibit Bank employees from otherwise holding financial interests that conflict with the conscientious performance of duty; (6) Require Bank employees to disclose actual or apparent conflicts of interests and establish procedures for addressing such conflicts, including recusal; (7) Require the establishment of internal controls to ensure that conflicts-of-interest reports are made and filed and that conflicts-of-interest issues are disclosed and resolved; and (8) Establish procedures to monitor compliance with the conflicts-of-interest policy. (b) Confidential information. Bank employees shall not disclose or use confidential information they receive solely by reason of their position with the Bank to obtain any benefit for themselves or for any other individual or entity. (c) Gifts. No Bank employee shall accept, and each Bank employee shall discourage the employee’s immediate family members from accepting, any gift that the employee believes or has reason to believe is given with the intent to influence the employee’s actions, or where acceptance of such gift would have the appearance of intending to influence the employee’s actions. Any insubstantial gift would not be expected to trigger this prohibition. (d) Definitions. For purposes of this section: Business associate means any individual or entity with whom a Bank employee has a business relationship, including, but not limited to: (i) Any corporation or organization of which the employee is an officer or partner, or in which the employee beneficially owns ten percent or more of any class of equity security, including subordinated debt; (ii) Any other partner, officer, or beneficial owner of ten percent or more of any class of equity security, including subordinated debt, of any such corporation or organization; and (iii) Any trust or other estate in which an employee has a substantial beneficial interest or as to which the employee serves as trustee or in a similar fiduciary capacity. Financial interest means a direct or indirect financial interest in any activity, transaction, property, or E:\FR\FM\04NOP2.SGM 04NOP2 87750 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules relationship that involves receiving or providing something of monetary value, and includes, but is not limited to any right, contractual or otherwise, to the payment of money, whether contingent or fixed. It does not include a deposit or savings account, loan or extension of credit, or other accounts and products obtained in the normal course of business on non-preferential terms generally available to the public from a member institution or from a nonmember counterparty to the Bank by which the individual is employed. Immediate family member means a parent, sibling, spouse, child, or dependent of a Bank employee, or any relative sharing the same residence as a Bank employee. ■ 3. Revise and republish part 1261 to read as follows: PART 1261—FEDERAL HOME LOAN BANK DIRECTORS Subpart A—Definitions Sec. 1261.1 [Reserved] Subpart B—Federal Home Loan Bank Boards of Directors: Eligibility and Elections 1261.2 Definitions. 1261.3 General provisions. 1261.4 Annual designation of directorships. 1261.5 Director eligibility. 1261.6 Determination of member votes. 1261.7 Nominations for member and independent directorships. 1261.8 Election process. 1261.9 Actions affecting director elections. 1261.10 Independent director independence. 1261.11 Conflicts of interest policy for Bank directors. 1261.12 Reporting requirements for Bank directors. 1261.13 Ineligibility and removal of Bank directors. 1261.14 Vacant Bank directorships. 1261.15 Minimum number of member directorships. Subpart C—Federal Home Loan Bank Directors’ Compensation and Expenses 1261.20 Definitions. 1261.21 General. 1261.22 Directors’ compensation policy. 1261.23 Director disapproval. 1261.24 Board meetings. Authority: 12 U.S.C. 1426, 1427, 1432, 4511 and 4526. lotter on DSK11XQN23PROD with PROPOSALS2 Subpart A—Definitions § 1261.1 [Reserved] Subpart B—Federal Home Loan Bank Boards of Directors: Eligibility and Elections § 1261.2 Definitions. As used in this subpart: VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 Advisory Council means the Advisory Council each Bank is required to establish pursuant to section 10(j)(11) of the Bank Act (12 U.S.C. 1430(j)(11)), and part 1291 of this chapter. Bona fide resident of a Bank district means an individual who: (1) Maintains a principal residence in the Bank district; or (2) If serving as an independent director, owns or leases in his or her own name a residence in the Bank district and is employed in a voting State in the Bank district. FHFA ID number means the number assigned to a member by FHFA and used by FHFA and the Banks to identify a particular member. Independent directorship and independent director mean, respectively, a directorship designated as provided under § 1261.4 to be filled by an individual meeting the eligibility requirements of § 1261.5(b) and an individual serving in such a directorship. Member directorship and member director mean, respectively, a directorship designated as provided under § 1261.4 to be filled by an individual meeting the requirements of § 1261.5(a) and an individual serving in such a directorship. Method of equal proportions means the mathematical formula used by FHFA to allocate member directorships among the States in a Bank’s district based on the relative amounts of Bank stock required to be held as of the record date by members located in each State. Nominee means an individual who has been nominated for a Bank directorship under the applicable provision of § 1261.7. Public interest independent directorship and public interest independent director mean, respectively, an independent directorship designated by a Bank to be filled by an individual having the qualifications specified in § 1261.5(c)(2) and an individual serving in such a directorship. Record date means December 31 of the calendar year immediately preceding the election year. Regular independent directorship and regular independent director mean, respectively, an independent directorship designated by a Bank to be filled by a person having the qualifications specified in § 1261.5(c)(1) and an individual serving in such a directorship. Voting State means the State in which a member’s principal place of business, as determined in accordance with 12 CFR part 1263, is located as of the PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 record date. The voting State of a member with a principal place of business located in the U.S. Virgin Islands as of the record date is Puerto Rico, and the voting State of a member with a principal place of business located in American Samoa, Guam, or the Commonwealth of the Northern Mariana Islands as of the record date is Hawaii. § 1261.3 General provisions. (a) Term of directorships. The term of office of each directorship shall be four years, except as adjusted pursuant to § 1261.4(e) or (f) to achieve a staggered board, and shall commence on January 1 of the calendar year so designated by FHFA. (b) Annual elections. Each Bank annually shall conduct an election the purpose of which is to fill all directorships designated by FHFA as commencing on January 1 of the calendar year immediately following the year in which such election is commenced. Subject to the provisions of the Bank Act and in accordance with the requirements of this subpart, the disinterested directors of each Bank, or a committee of disinterested directors, shall administer and conduct the annual election of directors. In so doing, the disinterested directors may use Bank staff or independent contractors to perform ministerial and administrative functions concerning the elections process. (c) Location of members. For purposes of the election of member directors, a member is deemed to be located in its voting State, unless otherwise specified by the Director. (d) Dates. If any date specified in this subpart for action by a Bank, or specified by a Bank pursuant to this subpart, falls on a Saturday, Sunday, or Federal holiday, the relevant time period is deemed to be extended to the next calendar day that is not a Saturday, Sunday, or Federal holiday. § 1261.4 Annual designation of directorships. (a) Designation of directorships order. As provided in this section, the Director will by June 1 of each year issue a written order designating for each Bank’s board of directors for the following calendar year: (1) The total number of member directorships and their allocation among the voting States of the Bank’s district; (2) The total number of independent directorships; and (3) The directorships for which an election will be held for terms beginning on the January 1 of the following year, and the length of those terms. E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules (b) Capital stock reports. (1) On or before April 10 of each year, each Bank shall deliver to FHFA a capital stock report that indicates, as of the record date, the number of members located in each voting State in the Bank’s district, the number of shares of Bank stock that each member (identified by its FHFA ID number) was required to hold, and the number of shares of Bank stock that all members located in each voting State were required to hold. If a Bank has issued more than one class of stock, it shall report the total shares of each class of stock required to be held by the members. The Bank shall certify to FHFA that, to the best of its knowledge, the information provided in the capital stock report is accurate and complete, and that it has notified each member of its minimum capital stock holding requirement as of the record date. (2) The number of shares of Bank stock that any member was required to hold as of the record date shall be determined in accordance with the minimum investment established by the capital plan for that Bank. (c) Allocation of member directorships. For each Bank’s board of directors, the Director will designate a total number of member directorships and allocate them among the voting States of the Bank’s district as follows: (1) Method of equal proportions. (i) FHFA will choose a base number of member directorships and, using the method of equal proportions, allocate those among the voting States of the Bank district according to the ratio of the number of shares of Bank stock required to be held by the members in each State to the number of shares required to be held by all members of the Bank. (ii) In no case shall the number of member directorships allocated to a voting State be fewer than one or more than six. (iii) If a Bank has issued more than one class of stock, the Director will allocate the member directorships based on the combined number of shares required to be held by members. (iv) The Director will allocate a Bank’s member directorships based upon members’ minimum required stock holdings as of the record date, as shown in the Bank’s capital stock report required by paragraph (b) of this section. (2) Grandfather provision. If, after completing the process described in paragraph (c)(1) of this section for a Bank, the number of member directorships allocated to any voting State is not at least equal to the minimum number shown for that voting State on the table in § 1261.15, the Director will allocate to that voting State VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 such number of additional member directorships as are necessary to increase the total number of member directorships allocated to that voting State to the number shown on the table. If a voting State does not appear on the table in § 1261.15, the minimum number of member directorships for that voting State is deemed to be one for purposes of this paragraph (c)(2). (d) Independent directorships. After designating the member directorships for a Bank’s board of directors as provided in paragraph (c) of this section, the Director will designate a number of independent directorships for the Bank’s board that is at least 40 percent, but less than 50 percent, of the total number of directorships on the board. (e) Adjustments—(1) Redesignated member directorships. If the annual designation of directorships results in an existing member directorship being redesignated as representing members in a different voting State, that directorship shall be deemed to terminate in the previous voting State as of December 31 of the current year, and a new directorship to begin in the succeeding voting State as of January 1 of the next year. The new directorship shall be filled by vote of the members in the succeeding voting State and, in order to maintain the staggered terms of directorships, shall be adjusted to a term equal to the remaining term of the previous directorship if it had not been redesignated to another State. (2) New directorships. If the annual designation of directorships results in the addition of one or more directorships to a Bank’s board, the Director may truncate the initial term of any such new directorship if required to ensure that the terms of the Bank’s directorships are staggered with approximately one quarter of the terms expiring each year. (f) Public interest independent directorships. Annually, the board of directors of each Bank shall determine the number of public interest independent directorships to be included among its designated independent directorships for the following year, ensuring that at all times the Bank will have at least two such directorships. In its discretion, a Bank’s board may change the number of public interest independent directorships during the year, provided that there are at all times at least two such directorships. § 1261.5 Director eligibility. (a) Eligibility requirements for member directors and nominees. (1) Each member director, and each PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 87751 nominee for a member directorship, shall be: (i) A citizen of the United States; and (ii) An officer or director of a member that is located in the voting State of the Bank district to which the directorship being occupied, sought, or filled has been allocated under § 1261.4(c) and that meets all minimum capital requirements established by its appropriate Federal banking agency or appropriate State regulator. (2) In the case of a director elected by a Bank’s members under § 1261.8, the institution of which the director is an officer or director must have been a member as of the record date. In the case of a director elected by a Bank’s board of directors to fill a vacancy under § 1261.14, the institution of which the director is an officer or director must be a member at the time the board acts. (b) Eligibility requirements for independent directors and nominees. Each independent director, and each nominee for an independent directorship, shall at all times: (1) Be a citizen of the United States; (2) Be a bona fide resident of the district in which the Bank is located; (3) Meet the independence requirements of § 1261.10; and (4) Meet the applicable qualifications requirements specified in paragraph (c) of this section. (c) Independent director qualifications—(1) Regular independent directors. Each regular independent director and each nominee for a regular independent directorship shall have experience in, or knowledge of, one or more of the following areas: auditing and accounting; derivatives; financial management; organizational management; project development; risk management practices; artificial intelligence; information technology and security; climate-related risk; Community Development Financial Institution (CDFI) business models; modeling; the law; and such other areas as the Director shall determine. Before nominating any individual for a regular independent directorship, the board of directors of a Bank shall determine that such knowledge or experience of the nominee is commensurate with that needed to oversee a financial institution with a size and complexity that is comparable to that of the Bank. (2) Public interest independent directors. Each public interest independent director and each nominee for a public interest independent directorship shall have more than four years of experience representing consumer or community interests in banking services, credit needs, housing, or consumer financial protection. For E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 87752 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules purposes of this paragraph (c)(2), representing means advocating for, or otherwise acting primarily on behalf of or for the direct benefit of, consumers or the community. Qualifying experience in one of the four enumerated areas may have been acquired in professional, public service, or significant volunteer positions, so long as the work done was substantial in terms of time commitment and responsibility. Such experience must have accrued from activities personally undertaken by the director or nominee, as opposed to being attributed based solely on the activities of organizations with which the person was associated. (3) Relevance of experience to be considered. In considering potential nominees for independent directorships, a Bank’s board of directors shall give special consideration to individuals that: (i) Possess knowledge and experience that are relevant to the business, programs, and mission of the Bank and that provide a basis for understanding the actual and potential impact of the Bank’s activities on its members and on communities within the Bank’s district; and (ii) Have gained their knowledge and experience primarily through full time paid executive, management, or other senior positions. (d) Term limits. (1) The following are ineligible for nomination or election to a directorship of a Bank: (i) Any incumbent director whose term of office would not expire before the new term of office would begin; and (ii) Any person that has been elected to each of three consecutive full terms as a director of a Bank and has served for all or part of each of those terms, unless the term of the directorship to be filled begins at least two years after the expiration of the third consecutive term. (2) For purposes of determining whether a person is ineligible under the term limit provision of paragraph (d)(1)(ii) of this section: (i) A four-year term of office shall count as a full term; (ii) A term of office that is adjusted to a period of fewer than four years as provided in § 1261.4(e) shall not count as a full term; (iii) Any full term of office that ends immediately before a term of office that is adjusted to a period of fewer than four years as provided in § 1261.4(e), and any full term of office commencing immediately following such adjusted term of office, shall count as consecutive full terms of office; and (iv) Any period of time served by a director who has been elected by the VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 board of directors to fill a vacancy under § 1261.14 shall not count as a full term. (e) Loss of eligibility. A director shall become ineligible to remain in office if, during the director’s term of office, the directorship to which the director has been elected is eliminated through the annual designation of directorships process described in § 1261.4. The incumbent director shall become ineligible after the close of business on December 31 of the year in which the directorship is eliminated. § 1261.6 Determination of member votes. (a) In general. Each Bank shall determine, in accordance with this section, the number of votes that each member of the Bank may cast for each directorship that is to be filled by the vote of the members. (b) Number of votes. For each member directorship and each independent directorship that is to be filled in an election, each member shall be entitled to cast one vote for each share of Bank stock that the member was required to hold as of the record date. Notwithstanding the preceding sentence, the number of votes that any member may cast for any one directorship shall not exceed the average number of shares of Bank stock required to be held as of the record date by all members located in the same State as of the record date. If a Bank has issued more than one class of stock, it shall calculate the average number of shares separately for each class of stock, using the total number of members in a State as the denominator, and shall apply those limits separately in determining the maximum number of votes that any member owning that class of stock may cast in the election. The number of shares of Bank stock that a member was required to hold as of the record date shall be determined in accordance with the minimum investment requirement established by the Bank’s capital plan. (c) Voting preferences. If the board of directors of a Bank includes any voting preferences as part of its approved capital plan, those preferences shall supersede the provisions of paragraph (b) of this section that otherwise would allow a member to cast one vote for each share of Bank stock it was required to hold as of the record date. If a Bank establishes a voting preference for a class of stock, the members with voting rights shall remain subject to the provisions of section 7(b) of the Bank Act (12 U.S.C. 1427(b)) that prohibit any member from casting any vote in excess of the average number of shares of stock required to be held by all members in its state. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 § 1261.7 Nominations for member and independent directorships. (a) Election announcement. Within a reasonable time in advance of an election, a Bank shall notify each member in its district of the commencement of the election process. Such notice shall include: (1) The number of member directorships designated for each voting State in the Bank district and the number of independent directorships designated for the Bank, including the number of independent directorships designated by the Bank as public interest independent directorships, for the following calendar year; (2) The name of each incumbent Bank director, the name and location of the member at which each member director serves, and the name and location of the organization with which each independent director is affiliated, if any, and the expiration date of each Bank director’s term of office; (3) Identification of the member directorships, regular independent directorships, and public interest independent directorships for which an election will be held; (4) A brief statement describing the skills and experience the Bank believes are most likely to add strength to the board of directors, as determined through the annual assessment required under § 1261.9; (5) An attachment indicating the name, location, and FHFA ID number of every member in the member’s voting State, and the number of votes each such member may cast for each directorship to be filled by such members, as determined in accordance with § 1261.6; and (6) If a member directorship is to be filled by members in a voting State, a nominating certificate for those members. (b) Member directorship nominations—(1) Nominating certificates. (i) Any member that is entitled to vote in the election may nominate an eligible individual to fill each available member directorship for its voting State by delivering to its Bank, prior to a deadline to be established by the Bank and set forth in the notice required in paragraph (a) of this section, a nominating certificate duly adopted by the member’s governing body or by an individual authorized by the member’s governing body to act on its behalf. (ii) The nominating certificate shall include the name of the nominee and the name, location, and FHFA ID number of the member the nominee serves as an officer or director. (iii) The Bank shall establish a deadline for delivery of nominating E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules certificates, which shall be no earlier than 30 calendar days after the date on which the Bank delivers the notice required by paragraph (a) of this section, and the Bank shall not accept certificates received after that deadline. (2) Accepting member directorship nominations. Promptly after receipt of any nominating certificate, a Bank shall notify in writing any individual nominated for a member directorship. An individual may accept the nomination only by delivering to the Bank, prior to a deadline established by the Bank and set forth in its notice, an executed member director eligibility certification form prescribed by FHFA. A Bank shall allow each nominee at least 30 calendar days after the date the Bank delivered the notice of nomination within which to deliver the executed form. A nominee may decline the nomination by so advising the Bank in writing, or by failing to deliver a properly executed member director eligibility certification form prior to the deadline. (c) Independent directorship nominations—(1) Potential nominees. Any individual may request to be considered for nomination to an independent directorship of the board of directors of a Bank by delivering to the Bank, on or before the deadline set by the Bank for delivery of nominating certificates, an executed independent director application form prescribed by FHFA. Any other interested party also may recommend to the Bank that it consider a particular individual as a nominee for an independent directorship, but the Bank shall not nominate any individual unless the individual has delivered to the Bank, on or before the date the Bank has set for delivery of nominating certificates, an executed independent director application form prescribed by FHFA. (2) Application form. The independent director application form prescribed by FHFA will provide a means by which an individual can indicate an intent to be considered for a public interest independent directorship. The board of directors of the Bank shall nominate for a public interest independent directorship only an individual who indicates on the application form a desire to be considered for a public interest independent directorship. (3) Advisory Council. The board of directors of the Bank shall consult with the Bank’s Advisory Council before nominating any individual for any independent directorship. (4) Procedures. Each Bank shall include in its bylaws the procedures it VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 intends to use for the nomination and election of the independent directors. (5) Minimum number of nominees. Each Bank shall nominate at least as many individuals as there are respective regular and public interest independent directorship to be filled in that year’s election. (d) Eligibility verification—(1) Member directorship nominees. Using the information provided on executed member director eligibility certification forms prescribed by FHFA, each Bank shall verify that each nominee for each member directorship meets all the eligibility requirements of § 1261.5(a). (2) Independent directorship nominees. (i) Using the information provided on executed independent director application forms prescribed by FHFA, each Bank shall verify that each nominee for each public interest independent directorship and each regular independent directorship meets the eligibility requirements of § 1261.5(b). (ii) Before announcing any independent director nominee, the Bank shall deliver to FHFA for its review a copy of the independent director application forms executed by the individuals nominated for independent directorships. If within two weeks of such delivery FHFA provides comments to the Bank on any independent director nominee, the board of directors of the Bank shall consider FHFA’s comments in determining whether to proceed with those nominees or to reopen the nomination. (3) Eligible nominees. A Bank’s board shall neither nominate any individual for an independent directorship nor include any nominee for a member directorship on the ballot required under § 1261.8(a) if it has not concluded based on the submissions required under this part and any pertinent supplementary material that the individual meets the applicable eligibility requirements set forth in § 1261.5(a) or (b) and is not term-limited as provided under § 1261.5(d). (e) Background checks. A Bank’s board shall neither nominate any individual for an independent directorship nor include any nominee for a member directorship on the ballot required under § 1261.8(a), without having first concluded, based on a thorough background check, that the individual is fit to serve in a fiduciary role with the Bank. Each Bank shall include with its submission required under paragraph (d)(2)(ii) of this section a discussion of the results of the background check for each independent directorship nominee, including any potentially concerning information that PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 87753 was revealed and how the Bank’s concerns were allayed. (f) Record retention. Subject to a duly enacted record retention policy, each Bank shall retain all information received under this section for at least seven years after the date of the election in question and, in the case of any information about a specific director, for at least seven years after that director leaves the board. § 1261.8 Election process. (a) Ballots. Promptly after fulfilling the requirements of § 1261.7(d), each Bank shall prepare and deliver a ballot to each member that was a member as of the record date. The Bank shall include with each ballot a closing date for the Bank’s receipt of voted ballots, which date shall be no earlier than 30 calendar days after the date such ballot is delivered to the member. A ballot shall include at least the following provisions: (1) For states in which one or more member directorships are to be filled in the election, an alphabetical listing of the names of each nominee for such directorship, the name, location, and FHFA ID number of the member each nominee serves, the nominee’s title or position with the member, a brief description of the skills and experience of each nominee, and the number of member directorships to be filled by the members in that voting State in the election; (2) An alphabetical listing of the names of each nominee for a public interest independent directorship and a brief description of how each nominee meets the qualifications requirements for public interest independent directors set forth in § 1261.5(c)(2); (3) An alphabetical listing of the names of each nominee for regular independent directorships and a brief description of how each nominee meets the required qualification requirements for regular independent directors set forth in § 1261.5(c)(1); (4) A statement of the results of assessments conducted under § 1261.9 and, if the statement differs from the statement provided under § 1261.7(a)(4), an explanation of why the statements differ; (5) A statement that write-in candidates are not permitted; and (6) A confidentiality statement prohibiting the Bank from disclosing how any member voted. (b) Lack of member directorship nominees. If, for any voting State, the number of nominees for the member directorships for that State is equal to or fewer than the number of such directorships to be filled in that year’s E:\FR\FM\04NOP2.SGM 04NOP2 lotter on DSK11XQN23PROD with PROPOSALS2 87754 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules election, the Bank shall deliver a notice to the members in the affected voting State (in lieu of including any member directorship nominees on the ballot for that State) that such nominees shall be deemed elected without further action, due to an insufficient number of nominees to warrant balloting. Thereafter, the Bank shall declare elected all such eligible nominees. The nominees declared elected shall be included as directors-elect in the report of election required under paragraph (f) of this section. Any member directorship that is not filled due to a lack of nominees shall be deemed vacant as of January 1 of the following year and shall be filled by the Bank’s board of directors in accordance with § 1261.14. (c) Voting. For each directorship to be filled, a member may cast the number of votes determined by the Bank pursuant to § 1261.6. A member may not split its votes among multiple nominees for a single directorship, and, where there are multiple directorships to be filled, either within the member’s voting State or at large, in the case of independent directorships, a member may not cumulatively vote for a single nominee. If any member votes, it shall by resolution of its governing body either authorizing the voting for specific nominees or delegating to an individual the authority to vote for specific nominees. To vote, a member shall: (1) Mark on the ballot the name of not more than one of the nominees for each directorship to be filled. Each nominee so selected shall receive all of the votes that the member is entitled to cast. (2) Execute and deliver the ballot to the Bank on or before the closing date. A Bank shall not allow a member to change a ballot after it has been delivered to the Bank. (d) Counting ballots. A Bank shall not review any ballot until after the closing date, and shall not include in the election results any ballot received after the closing date. Promptly after the closing date, each Bank shall tabulate the votes cast in the election: for the member directorships, the Bank shall tabulate votes by each voting State; for the independent directorships, the Bank shall tabulate votes for the district atlarge. Any ballots cast in violation of paragraph (c) of this section shall be void. (e) Declaring results—(1) For member directorships. The Bank shall declare elected the nominee receiving the highest number of votes. If more than one member directorship is to be filled for a particular State, the Bank shall declare elected each successive nominee receiving the next highest number of VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 votes until all such open directorships are filled. (2) For independent directorships. (i) The bank shall tabulate separately the votes received for public interest independent directorship nominees and those received for regular independent directorship nominees, in each case in accordance with paragraph (e)(2)(ii) of this section. (ii) If the number of nominees exceeds the number of directorships to be filled, the Bank shall declare elected the nominee receiving the highest number of votes. If more than one directorship is to be filled, the Bank shall declare elected each successive nominee receiving the next highest number of votes for such directorship until all such open directorships are filled. (iii) If the number of nominees is no more than the number of directorships to be filled, the Bank shall declare elected each nominee receiving at least 20 percent of the number of votes eligible to be cast in the election. If any directorship is not filled due to any nominee’s failure to receive at least 20 percent of the votes eligible to be cast, the Bank shall continue the election process for that directorship under the procedures in paragraph (g) of this section. (3) Tie votes. In the event of a tie for the last available directorship, the disinterested incumbent directors of the Bank, by a majority vote, shall declare elected one of the nominees for whom the number of votes cast was tied. (4) Eligibility. A Bank’s board shall not declare elected a nominee that it has reason to know is ineligible or unfit to serve, nor shall it seat a director-elect that it has reason to know is ineligible or unfit to serve. (5) Record retention. The Bank shall retain all ballots it receives for at least seven years after the date of the election, and shall not disclose how any member voted. (f) Report of election. Promptly following the election, each Bank shall deliver a notice to its members, to each nominee, and to FHFA that contains the following information: (1) For each member directorship, the name of the director-elect, the name and location of the member at which he or she serves, his or her title or position at the member, the voting State represented, and the expiration date of the term of office; (2) For each independent directorship, the name of the directorelect, whether the director-elect will fill a public interest or a regular independent directorship and, as appropriate, the consumer or community interest represented by such PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 director, any qualifications under § 1261.5(c)(1), and the expiration date of the term of office; (3) For member directorships, the total number of eligible votes, the number of members voting in the election, and the total number of votes cast for each nominee, which shall be reported by State; and (4) For independent directorships, the total number of eligible votes, the number of members voting in the election, and the total number of votes cast for each nominee, which shall be reported for the district at large. (g) Failure to fill all independent directorships. If any independent directorship is not filled due to the failure of any nominee to receive at least 20 percent of the eligible vote, the Bank shall continue the election process for that directorship under the following procedures: (1) The Bank’s board of directors, after again consulting with the Bank’s Advisory Council, shall nominate at least as many individuals as there are independent directorships to be filled. It may nominate individuals who failed to be elected in the initial vote. The Bank thereafter shall deliver to FHFA a copy of the independent director application form executed by each nominee. (2) The Bank then shall follow the provisions in this section that are applicable to the election process for independent directors, except for the following: (i) The Bank shall not place the name of any nominee on a ballot without prior approval of FHFA; and (ii) The Bank may adopt a closing date that is earlier than 30 calendar days after delivery of the ballots to the eligible voting members, provided the Bank determines that an earlier closing date provides a reasonable amount of time to vote the ballots. § 1261.9 Actions affecting director elections. (a) Annual assessment of skills and experience. Each Bank, acting through its board of directors pursuant to policies adopted by the board, shall conduct an annual assessment of the skills and experience possessed by its board of directors as a whole and may determine whether the capabilities of the board would be enhanced through the addition of individuals with particular skills and experience. If the board of directors determines that the Bank could benefit by the addition to the board of directors of individuals with particular qualifications such as those described in § 1261.5(c)(1), it shall identify those qualifications and inform the members that the Bank is seeking E:\FR\FM\04NOP2.SGM 04NOP2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules member and independent director nominees that have those qualifications as part of its election announcement pursuant to § 1261.7(a). (b) Support for nomination or election. (1) A Bank director, officer, attorney, employee, or agent, acting in his or her personal capacity, may support the nomination or election of any individual for a member directorship, provided that no such individual shall purport to represent the views of the Bank or its board of directors in doing so. (2) A Bank director, officer, attorney, employee or agent and the board of directors and Advisory Council (including members of the Council) of a Bank may support the candidacy of any individual nominated by the board of directors for election to an independent directorship. (c) Prohibition. Except as provided in paragraphs (a) and (b) of this section, or § 1223.21(b)(7) of this chapter, no director, officer, attorney, employee, or agent of a Bank shall: (1) Communicate in any manner that a director, officer, attorney, employee, or agent of a Bank, directly or indirectly, supports or opposes the nomination or election of a particular individual for a directorship; or (2) Take any other action to influence the voting with respect to any particular individual. lotter on DSK11XQN23PROD with PROPOSALS2 § 1261.10 Independent director independence. (a) Employment interests. (1) An independent director, and a nominee for an independent directorship, shall not serve as an officer, employee, or director of any member of the Bank on whose board the individual serves or has been nominated to serve, or of any recipient of advances from such Bank, and shall not serve as an officer or employee of any Bank. An independent director or nominee for any independent directorship, and any individual seeking nomination for an independent directorship, shall disclose all such interests to the Bank on whose board of directors the individual serves or which is considering the individual for nomination to its board of directors. (2) For purposes of paragraph (a)(1) of this section, ‘‘advances’’ includes any loan from a Bank to the recipient, regardless of form or nomenclature, except for debt securities traded in the public capital markets. (b) Holding companies. Service as an officer, employee, or director of a holding company that controls one or more members of, or one or more recipients of advances from, the Bank on whose board an independent director VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 serves is not deemed to be service as an officer, employee or director of a member or recipient of advances if the assets of all such members or all such recipients of advances constitute less than 35 percent of the assets of the holding company, on a consolidated basis. (c) Attribution. For purposes of determining compliance with this section, a Bank shall attribute to the independent director any officer position, employee position, or directorship of the director’s immediate family members (as defined in § 1261.11(f)). (d) Member director transition period. An individual who has served as a member director of any Bank may not serve as an independent director of any Bank until at least two years has elapsed since the date the individual officially left the member directorship, whether due to ineligibility or otherwise. § 1261.11 Conflicts of interest policy for Bank directors. (a) Adoption of conflicts of interest policy. Each Bank shall adopt a written conflicts of interest policy that applies to all members of its board of directors. At a minimum, the conflicts of interest policy of each Bank shall: (1) Require the directors to administer the affairs of the Bank fairly and impartially and without discrimination in favor of or against any member; (2) Require independent directors to comply with § 1261.10(a); (3) Prohibit the use of a director’s official position for personal gain; (4) Require directors to disclose actual or apparent conflicts of interest and establish procedures for addressing such conflicts; (5) Require the establishment of internal controls to ensure that conflicts of interest reports are made and filed and that conflicts of interest issues are disclosed and resolved; and (6) Establish procedures to monitor compliance with the conflicts of interest policy. (b) Disclosure and recusal. A director shall disclose to the Bank’s board of directors any financial interests he or she has, as well as any financial interests known to the director of any immediate family member or business associate of the director, in any matter to be considered by the Bank’s board of directors and in any other business matter or proposed business matter involving the Bank and any other person or entity. A director shall disclose fully the nature of his or her interests in the matter and shall provide to the Bank’s board of directors any information requested to aid in its PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 87755 consideration of the director’s interest. A director shall refrain from considering or voting on any issue in which the director, any immediate family member, or any business associate has any financial interest. (c) Confidential information. Directors shall not disclose or use confidential information they receive solely by reason of their position with the Bank to obtain any benefit for themselves or for any other individual or entity. (d) Gifts. No Bank director shall accept, and each Bank director shall discourage the director’s immediate family members from accepting, any gift that the director believes or has reason to believe is given with the intent to influence the director’s actions as a member of the Bank’s board of directors, or where acceptance of such gift would have the appearance of intending to influence the director’s actions as a member of the board. Any insubstantial gift would not be expected to trigger the prohibition in this paragraph (d). (e) Compensation. Directors shall not accept compensation for services performed for the Bank from any source other than the Bank for which the services are performed. (f) Definitions. For purposes of this section: Business associate means any individual or entity with whom a director has a business relationship, including, but not limited to: (i) Any corporation or organization of which the director is an officer or partner, or in which the director beneficially owns ten percent or more of any class of equity security, including subordinated debt; (ii) Any other partner, officer, or beneficial owner of ten percent or more of any class of equity security, including subordinated debt, of any such corporation or organization; and (iii) Any trust or other estate in which a director has a substantial beneficial interest or as to which the director serves as trustee or in a similar fiduciary capacity. Financial interest means a direct or indirect financial interest in any activity, transaction, property, or relationship that involves receiving or providing something of monetary value, and includes, but is not limited to any right, contractual or otherwise, to the payment of money, whether contingent or fixed. It does not include a deposit or savings account, loan or extension of credit, or other accounts and products obtained in the normal course of business on non-preferential terms generally available to the public from a member institution or from a non- E:\FR\FM\04NOP2.SGM 04NOP2 87756 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules member counterparty to the Bank on whose board the director sits. Immediate family member means parent, sibling, spouse, child, or dependent, or any relative sharing the same residence as the director. § 1261.12 Reporting requirements for Bank directors. (a) Annual reporting. Annually, each Bank shall require each of its directors to execute and deliver to the Bank the appropriate director eligibility certification form prescribed by FHFA for the type of directorship held by such director. The Bank promptly shall deliver to FHFA a copy of the certification form delivered to it by each director. (b) Report of noncompliance. At any time that any director believes or has reason to believe that he or she no longer meets the eligibility requirements set forth in the Bank Act or this subpart, the director promptly shall so notify the Bank in writing. At any time that a Bank believes or has reason to believe that any director no longer meets the eligibility requirements set forth in the Bank Act or this subpart, the Bank promptly shall notify FHFA in writing. lotter on DSK11XQN23PROD with PROPOSALS2 § 1261.13 Ineligibility and removal of Bank directors. (a) Ineligibility. Upon a determination by FHFA or a Bank that any director of the Bank no longer satisfies the eligibility requirements set forth in the Bank Act or this subpart, or has failed to comply with the reporting requirements of § 1261.12, the directorship shall immediately become vacant. Any director that is determined to have failed to comply with any of the requirements in this paragraph (a) shall not continue to serve as a Bank director. Whenever a Bank makes such a determination, the Bank promptly shall notify the Bank director and FHFA in writing. (b) Removal for good cause. (1) A Bank’s board of directors may, upon a vote of two-thirds of its disinterested directors, remove any director for good cause pursuant to policies adopted by the board. Removal for good cause may be based upon: (i) A material violation of the Bank’s code of ethics or other applicable Bank policy; (ii) A material violation of the Bank Act, FHFA regulations, or other civil or criminal law; (iii) A determination by the board that continuation in office of such director would be materially harmful to the Bank; (iv) Conduct, or a mental or physical condition, that raises substantial VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 questions concerning the director’s ability to fulfill his or her duties and obligations; or (v) A determination under § 1261.22(b)(3) that the director’s continuous poor performance or lack of participation is compromising the board’s ability to adequately oversee the operations of the Bank. (2) A Bank shall promptly notify FHFA in writing of any pending or final removal action under this paragraph (b). § 1261.14 Vacant Bank directorships. (a) Filling unexpired terms. Subject to the provisions of this section, when a vacancy occurs on the board of directors of a Bank, the board shall elect, by a majority vote of the remaining Bank directors sitting as a board, an individual to fill the unexpired term of office of the vacant directorship, regardless of whether the remaining Bank directors constitute a quorum of the Bank’s board of directors. (1) The board of directors may fill an anticipated vacancy prior to the effective date of the vacancy, provided the board does so no sooner than the date of the regularly scheduled board meeting that occurs immediately prior to the effective date of the vacancy. (2) The board of directors shall: (i) Fill a vacant member directorship only with an individual who meets the requirements of § 1261.5(a); and (ii) Fill a vacant independent directorship only with an individual who meets the requirements of § 1261.5(b). (3) If a Bank does not have at least two sitting public interest independent directors, its board of directors shall either: (i) Elect an individual who is qualified under § 1261.5(c)(2) to serve as a public interest independent director to fill the vacancy; or (ii) Elect to redesignate as a public interest independent director a sitting regular independent director who is qualified under § 1261.5(c)(2) to serve as a public interest independent director and elect another individual who is qualified under § 1261.5(c)(1) to serve as a regular independent director to fill the resulting vacant regular independent directorship. (4) If the Bank has more than two sitting public interest independent directors, the board of directors may redesignate as a regular independent director a sitting public interest independent director who is qualified under § 1261.5(c)(2). (5) The board of directors of the Bank shall consult with the Bank’s Advisory Council before considering any PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 individual to fill a vacant independent directorship. (b) Verifying eligibility. Prior to any election by the board of directors to fill a board vacancy, the Bank shall fulfill the requirements of this paragraph (b). (1) The Bank shall obtain an executed member director eligibility certification form prescribed by FHFA from each individual being considered to fill a vacant member directorship and an executed independent director application form prescribed by FHFA from each individual being considered to fill a vacant independent directorship (including any sitting regular independent director to be redesignated as public interest independent director). Using the executed forms, each Bank shall verify each individual’s eligibility and, as to independent directors, also shall verify that the individual meets the qualifications requirements for regular independent directors under § 1261.5(c)(1) or public interest independent directors under § 1261.5(c)(2), as appropriate. (2) For each individual being considered to fill a vacant directorship, the Bank shall conduct a background check, as provided in § 1261.7(e). (3) The Bank shall deliver to FHFA for its review a copy of the executed independent director application form for each individual being considered by the board to fill a vacant independent directorship, as well as a summary of the results of the background check. If within two weeks of such delivery FHFA provides comments to the Bank on any of those individuals, the board of directors of the Bank shall consider FHFA’s comments in determining whether to elect a director from among those individuals or to seek additional individuals for consideration. (4) The Bank shall retain the information it receives pursuant to this paragraph (b) for at least seven years after the date of the election in question and, in the case of any information about a specific director, for at least seven years after that director leaves the board. (c) Notification. Promptly after allowing the individual to assume the directorship, as provided in paragraph (b) of this section, a Bank shall notify FHFA and each member located in the Bank’s district in writing of the following: (1) For each member directorship filled by the board of a Bank, the name of the director, the name, location, and FHFA ID number of the member the director serves, the director’s title or position with the member, the voting State that the director represents, and E:\FR\FM\04NOP2.SGM 04NOP2 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules the expiration date of the director’s term of office; and (2) For each independent directorship filled by the board of a Bank, the name of the director, the name and location of the organization with which the director is affiliated, if any, the director’s title or position with such organization, and the expiration date of the director’s term of office. § 1261.15 Minimum number of member directorships. Except with respect to member directorships of a Bank resulting from the merger of any two or more Banks, the number of member directorships allocated to each State shall not be less than the number of directorships allocated to that State on December 31, 1960. The following table sets forth the States within Bank districts not created from the merger of two or more Banks whose members held more than one directorship on December 31, 1960: TABLE 1 TO § 1261.15 State Number of elective directorships on December 31, 1960 California ......................... Colorado ......................... Illinois .............................. Indiana ............................ Kansas ............................ Kentucky ......................... Louisiana ........................ Massachusetts ................ Michigan ......................... New Jersey ..................... New York ........................ Ohio ................................ Oklahoma ....................... Pennsylvania .................. Tennessee ...................... Texas .............................. Wisconsin ....................... 3 2 4 5 3 2 2 3 3 4 4 4 2 6 2 3 4 Subpart C—Federal Home Loan Bank Directors’ Compensation and Expenses lotter on DSK11XQN23PROD with PROPOSALS2 § 1261.20 Definitions. As used in this subpart: Compensation means any payment of money or the provision of any other thing of current or potential value in connection with service as a director. Compensation includes all direct and indirect payments of benefits, both cash and non-cash, granted to or for the benefit of any director. Expenses means necessary and reasonable travel, subsistence and other related expenses incurred in connection with the performance of official duties as are payable to senior officers of the VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 Bank under the Bank’s travel policy, except gift or entertainment expenses. § 1261.21 General. (a) Standard. Each Bank may pay its directors reasonable compensation for the time required of them, and their necessary expenses, in the performance of their duties, as determined by a resolution adopted by the board of directors of the Bank and subject to the provisions of this subpart. The Director may establish and provide notice of an annual amount of compensation determined to be reasonable. (b) Reporting—(1) Following calendar year. By December 31 of each calendar year, each Bank shall report to the Director the compensation it anticipates paying to its directors for the following calendar year. (2) Preceding calendar year. No later than the tenth business day of each calendar year, each Bank shall report to the Director the following information relating to director compensation, expenses, and meeting attendance for the immediately preceding calendar year: (i) The total compensation paid to each director; (ii) The total expenses paid to each director; (iii) The total compensation paid to all directors; (iv) The total expenses paid to all directors; (v) The total of all expenses incurred at group functions that are not reimbursed to individual directors, such as the cost of group meals in connection with board and committee meetings; (vi) The total number of meetings held by the board and its designated committees; and (vii) The number of board and designated committee meetings each director attended in-person or remotely, through video conferencing or teleconferencing, and in accordance with § 1261.24(b). § 1261.22 Directors’ compensation policy. (a) General. Each Bank’s board of directors annually shall adopt a written compensation policy to provide for the payment of reasonable compensation and expenses to the directors for the time required of them in performing their duties as directors. Payments under the directors’ compensation policy may be based on any factors that the board of directors determines reasonably to be appropriate, subject to the requirements in this subpart. (b) Minimum contents. (1) The compensation policy shall address the activities or functions for which director attendance or participation is necessary PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 87757 and which may be compensated, and shall explain and justify the methodology used to determine the amount of compensation to be paid to the Bank directors. (2) The compensation policy shall require that any compensation paid to a director reflect the amount of time the director has spent on official Bank business and shall require that compensation be reduced or a director removed, as necessary, to reflect lesser attendance or performance at board or committee meetings during a given year. (3) In addition to attendance, the compensation policy shall establish a fair and impartial process for annually evaluating individual director performance and participation, including, but not limited to, an assessment of whether each director: (i) Demonstrated understanding of the Bank System; (ii) Demonstrated knowledge of the Bank’s policies and governance documents; (iii) Demonstrated understanding of his or her legal and ethical responsibilities as a board member; (iv) Made suggestions congruent with the Bank’s mission, vision and values (even if divergent from majority opinion); and (v) Acted in support of Board decisions, regardless of initial position. (c) Prohibited payments. A Bank shall not pay a director who regularly fails to attend board or committee meetings, and shall not pay fees to a director that do not reflect the director’s performance of official Bank business conducted prior to the payment of such fees. (d) Submission requirements. No later than the tenth business day after adopting its annual policy for director compensation and expenses, and at least 30 days prior to disbursing the first payment to any director, each Bank shall submit to the Director a copy of the policy, along with all studies or other supporting materials upon which the board relied in determining the level of compensation and expenses to pay to its directors. § 1261.23 Director disapproval. The Director may determine, based upon his or her review of a Bank’s director compensation policy, methodology and/or other related materials, that the compensation and/or expenses to be paid to the directors are not reasonable. In such case, the Director may order the Bank to refrain from making any further payments under that compensation policy. Any such order shall apply prospectively only and will not affect either compensation or expenses that have E:\FR\FM\04NOP2.SGM 04NOP2 87758 Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / Proposed Rules been earned but not yet paid or reimbursed or payments that had been made prior to the date of the Director’s determination and order. § 1261.24 Board meetings. (a) Number of meetings. The board of directors of each Bank shall hold as many meetings each year as necessary and appropriate to carry out its fiduciary responsibilities with respect to the effective oversight of Bank management and such other duties and obligations as may be imposed by applicable laws, provided the board holds a minimum of six meetings in any year. (b) Site of meetings. (1) A Bank’s board of directors and its committees may conduct meetings in-person, through video conferencing or teleconferencing, or in a hybrid format, provided that all directors have an opportunity to communicate and have access to all written documents and presentations. (2) Each Bank should generally hold board and committee meetings within the district served by the Bank. A Bank shall not hold board or committee meetings in any location that is not within a State, as defined by 12 CFR 1201.1. A director must be located within a State when attending a meeting remotely through video conferencing or teleconferencing. (c) Quorum. A quorum, for purposes of meetings of a Bank’s board of directors, shall require a majority of sitting directors, which must include a majority of sitting independent directors. PART 1273—OFFICE OF FINANCE 4. The authority citation for part 1273 continues to read as follows: ■ lotter on DSK11XQN23PROD with PROPOSALS2 Authority: 12 U.S.C. 1431, 1440, 4511(b), 4513, 4514(a), 4526(a). VerDate Sep<11>2014 18:16 Nov 01, 2024 Jkt 265001 5. Amend § 1273.5 by revising paragraph (b)(1) to read as follows: ■ § 1273.5 Funding of the OF. * * * * * (b) * * * (1) At the direction of and pursuant to policies and procedures adopted by the OF board of directors, the Banks shall periodically reimburse the OF in order to maintain sufficient operating funds under the budget approved by the OF board of directors. The OF operating funds shall be: (i) Available for expenses of the OF and the OF board of directors, according to their approved budgets; and (ii) Subject to withdrawal by check, draft, wire transfer, or other funds transfer methods with written authorization by the CEO or other persons designated by the CEO or OF board of directors in accordance with OF governance documents. * * * * * ■ 6. Amend § 1273.8 by revising paragraphs (b) and (d) to read as follows: § 1273.8 General duties of the OF board of directors. * * * * * (b) Meetings and quorum–(1) Meeting frequency. The OF board of directors shall conduct its business by majority vote of its members at meetings convened in accordance with its bylaws, and shall hold no fewer than six meetings annually, which may be conducted in-person, through video conferencing or teleconferencing, or in a hybrid format, provided that all directors have an opportunity to communicate and have access to all written documents and presentations. (2) Meeting location. The OF shall not hold board or committee meetings in any location that is not within a State, as defined by 12 CFR 1201.1. A director PO 00000 Frm 00030 Fmt 4701 Sfmt 9990 must be located within a State when attending a meeting remotely through videoconferencing or teleconferencing. (3) Notice. Due notice shall be given to FHFA by the Chair prior to each meeting. (4) Quorum. A quorum, for purposes of meetings of the OF board of directors, shall require a majority of sitting board members, which must include a majority of sitting Independent Directors. * * * * * (d) Other duties. The OF board of directors shall: (1) Set policies for management and operation of the OF; (2) Approve a strategic business plan for the OF in accordance with the provisions of 12 CFR 1239.14, as appropriate; (3) Select, employ, determine the compensation for, and assign the duties and functions of a CEO of the OF who shall— (i) Be head of the OF and direct the implementation of the OF board of directors’ policies; (ii) Serve as a member of the Directorate of the FICO, pursuant to section 21(b)(1)(A) of the Bank Act (12 U.S.C. 1441(b)(1)(A)); and (iii) Serve as a member of the Directorate of the REFCORP, pursuant to section 21B(c)(1)(A) of the Bank Act (12 U.S.C. 1441b(c)(1)(A)); (4) Review and approve contracts of the OF, as specified in OF governance documents; and (5) Assume any other responsibilities that may from time to time be assigned to it by FHFA. * * * * * Sandra L. Thompson, Director, Federal Housing Finance Agency. [FR Doc. 2024–24767 Filed 11–1–24; 8:45 am] BILLING CODE 8070–01–P E:\FR\FM\04NOP2.SGM 04NOP2

Agencies

FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 89, Number 213 (Monday, November 4, 2024)]
[Proposed Rules]
[Pages 87730-87758]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-24767]



[[Page 87729]]

Vol. 89

Monday,

No. 213

November 4, 2024

 Part II





Federal Housing Finance Agency





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12 CFR Parts 1239, 1261, 1273





Federal Home Loan Bank System Boards of Directors and Executive 
Management; Proposed Rule

Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 / 
Proposed Rules

[[Page 87730]]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1239, 1261, and 1273

RIN 2590-AB24


Federal Home Loan Bank System Boards of Directors and Executive 
Management

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is 
proposing to revise regulations addressing boards of directors and 
overall corporate governance of the Federal Home Loan Banks (Banks) and 
the Bank System's Office of Finance (OF) to update and clarify 
regulatory requirements on a variety of topics including: FHFA's annual 
designation of Bank directorships; Bank director eligibility and 
professional qualifications; nomination, election, and removal of Bank 
directors; the conduct of System board and committee meetings; 
conflicts of interest; and the respective responsibilities of System 
boards of directors and executive management.

DATES: Written comments must be received on or before February 3, 2025.

ADDRESSES: You may submit your comments on the proposed rule, 
identified by regulatory information number (RIN) 2590-AB24, by any one 
of the following methods:
     Agency Website: https://www.fhfa.gov/regulation/federal-register?comments=open.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by email 
to FHFA at [email protected] to ensure timely receipt by FHFA. 
Include the following information in the subject line of your 
submission: Comments/RIN 2590-AB24.
     Hand Delivered/Courier: The hand delivery address is: 
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB24, 
Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 
20219. Deliver the package at the Seventh Street entrance Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Clinton Jones, 
General Counsel, Attention: Comments/RIN 2590-AB24, Federal Housing 
Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please 
note that all mail sent to FHFA via U.S. Mail is routed through a 
national irradiation facility, a process that may delay delivery by 
approximately two weeks. For any time- sensitive correspondence, please 
plan accordingly.

FOR FURTHER INFORMATION CONTACT: Lindsay Spadoni, Assistant General 
Counsel, Office of General Counsel, (202) 649-3634, 
[email protected]; or Janna Bruce, Senior Financial Analyst, 
Division of Bank Regulation, (202) 649-3202, [email protected]. 
These are not toll-free numbers. For TTY/TRS users with hearing and 
speech disabilities, dial 711 and ask to be connected to any of the 
contact numbers above.

SUPPLEMENTARY INFORMATION:

I. Comments

    FHFA invites comments on all aspects of the proposed rule and will 
take all comments into consideration before issuing a final rule. 
Comments will be posted to the electronic rulemaking docket on the FHFA 
public website at https://www.fhfa.gov, except as described below. 
Commenters should submit only information the commenter wishes to make 
available publicly. FHFA may post only a single representative example 
of identical or substantially identical comments, and in such cases 
will generally identify the number of identical or substantially 
identical comments represented by the posted example. FHFA may, in its 
discretion, redact or refrain from posting all or any portion of any 
comment that contains content that is obscene, vulgar, profane, or 
threatens harm. All comments, including those that are redacted or not 
posted, will be retained in their original form in FHFA's internal 
rulemaking file and considered as required by all applicable laws. 
Commenters that would like FHFA to consider any portion of their 
comment exempt from disclosure on the basis that it contains trade 
secrets, or financial, confidential or proprietary data or information, 
should follow the procedures in section IV.D. of FHFA's Policy on 
Communications with Outside Parties in Connection with FHFA 
Rulemakings, see https://www.fhfa.gov/sites/default/files/documents/Ex-Parte-Communications-Public-Policy_3-5-19.pdf. FHFA cannot guarantee 
that such data or information, or the identity of the commenter, will 
remain confidential if disclosure is sought pursuant to an applicable 
statute or regulation. See 12 CFR 1202.8 and 1214.2 and the FHFA FOIA 
Reference Guide at https://www.fhfa.gov/about/foia-reference-guide for 
additional information.

II. Background

A. Statutory Requirements on Bank System Governance

    The Bank System consists of eleven district Banks and the OF. The 
Banks are wholesale, cooperatively owned financial institutions, the 
debt of which is the joint and several obligation of all eleven Banks. 
They are organized under authority of the Federal Home Loan Bank Act 
(Bank Act) to serve the public interest by enhancing the availability 
of residential housing finance and community lending credit through 
their member institutions and, to a very limited extent, through 
certain eligible nonmembers. In general, only members may obtain 
advances (low-cost secured loans) and access other products and 
services provided by a Bank.
    The Bank Act vests the management of each Bank in its board of 
directors.\1\ As required by statute, each Bank's board comprises two 
types of directors: (1) member directors, who are drawn from the 
officers and directors of member institutions located in the Bank's 
district and who are elected to represent members in each respective 
state in that district; and (2) independent directors, who are 
unaffiliated with any of the Bank's member institutions or borrowing 
housing associates,\2\ but who reside in the Bank's district and are 
elected on an at-large basis.\3\ The Bank Act specifies that a majority 
of seats on each Bank's board of directors must be member 
directorships, while not less than 40 percent must be independent 
directorships.\4\ Both types of directors serve four-year terms, which 
must be staggered so that approximately one-quarter of a Bank's total 
directorships are up for election every year.\5\ The Bank Act 
establishes the eligibility requirements for both types of Bank 
directors, including the professional qualifications required for 
independent directors, and sets forth requirements for their nomination 
and election.\6\ The statute requires the FHFA Director to annually 
designate the size and composition of each Bank's board of directors 
for the following calendar

[[Page 87731]]

year, including by establishing the number of member and independent 
directorships and allocating member directorships among the states of 
the Bank district.\7\
---------------------------------------------------------------------------

    \1\ See 12 U.S.C. 1427(a)(1).
    \2\ FHFA's regulations refer to eligible nonmember borrowers as 
``housing associates.'' See 12 CFR part 1264.
    \3\ See 12 U.S.C. 1427(a)(4), (b), and (d).
    \4\ See 12 U.S.C. 1427(a)(2).
    \5\ See 12 U.S.C. 1427(d).
    \6\ See 12 U.S.C. 1429, 1430(a)(1), 1430b.
    \7\ See 12 U.S.C. 1427(b)(1), (c).
---------------------------------------------------------------------------

    The Bank Act requires that at least two of a Bank's independent 
directors qualify as ``public interest'' independent directors, each of 
which must ``have more than 4 years of experience in representing 
consumer or community interests on banking services, credit needs, 
housing, or financial consumer protections.'' \8\ Each independent 
director that is not a public interest independent director (referred 
to in this proposed rule as a ``regular independent director'') must 
``have demonstrated knowledge of, or experience in, financial 
management, auditing and accounting, risk management practices, 
derivatives, project development, or organizational management, or such 
other knowledge or expertise as the [FHFA] Director may provide by 
regulation.'' \9\ By regulation, FHFA has added ``the law'' to that 
list of qualifying knowledge and experience.\10\
---------------------------------------------------------------------------

    \8\ 12 U.S.C. 1427(a)(3)(B)(ii).
    \9\ 12 U.S.C. 1427(a)(3)(B)(i).
    \10\ See 12 CFR 1261.7(e)(1).
---------------------------------------------------------------------------

B. Existing Regulations on Corporate Governance of Banks and OF

    Part 1261 of FHFA's regulations, entitled ``Federal Home Loan Bank 
Directors,'' implements the statutory provisions and otherwise 
establishes requirements and processes relating to the composition and 
operations of Bank boards of directors. With respect to the former, 
sections in subpart B of the regulation (Sec. Sec.  1261.2 through 
1261.15) cover the annual designation of Bank directorships by the FHFA 
Director, director eligibility, the nomination and election processes, 
reporting and record retention requirements, handling conflicts of 
interest, and the filling of vacancies. Sections in subpart C 
(Sec. Sec.  1261.20 through 1261.24) address director compensation and 
expenses and the conduct of board and committee meetings.\11\
---------------------------------------------------------------------------

    \11\ Subpart A of the existing regulation, entitled 
``Definitions,'' has no content.
---------------------------------------------------------------------------

    In addition to the corporate governance issues addressed in part 
1261, part 1239 of FHFA's regulations, entitled ``Responsibilities of 
Boards of Directors, Corporate Practices, and Corporate Governance,'' 
addresses duties and responsibilities of directors, required board 
committees, and programs and policies each Bank must establish and 
maintain. Although part 1239 generally applies to all of FHFA's 
regulated entities, subpart E of the regulation sets forth requirements 
that are specific to the Banks. Part 1273 of FHFA's regulations governs 
the Bank System's OF, with governance issues--including composition and 
meetings of the OF board of directors--being addressed primarily in 
Sec.  1273.8.

III. Overview of the Proposed Rule

    The proposed rule would make numerous revisions to part 1261, as 
well as more limited revisions to parts 1239 and 1273 to address 
various issues related to the corporate governance of the Banks and the 
OF. While the greater portion of the proposed changes to existing 
regulatory text are intended merely to restate existing requirements 
more clearly, many of the proposed revisions are substantive. The 
latter are being proposed primarily to ensure that the Banks maintain 
strong corporate governance that enables them to effectively fulfill 
their public policy mission while maintaining safe and sound 
operations. New proposed requirements and authorities would help ensure 
the Banks have the leadership and resources to forestall avoidable 
difficulties and to address challenges that may arise in the years 
ahead. The proposed revisions reflect FHFA's view that corporate 
governance of the Banks is strengthened when: the public interest is 
adequately represented; Bank boards have the collective knowledge and 
expertise to guide the Bank through new and emerging risks and complex 
problems; independent directors represent a true independent voice; 
each Bank has the tools to ensure that its directors are fit to serve 
in a fiduciary role with the Bank; and Bank directors and management 
are incentivized to carry out their duties and responsibilities 
conscientiously.
    As discussed further below, several of the proposed changes 
implement action items from FHFA's FHLBank System at 100: Focusing on 
the Future Report (FHLBank System at 100 Report or Report), published 
in November 2023. The proposed rule would also address issues raised in 
comments received in response to FHFA's April 2023 Notice of Regulatory 
Review, which was published pursuant to FHFA's Regulatory Review 
Plan.\12\ Other substantive changes are intended to increase 
transparency by codifying existing guidance or practices or to provide 
clarity on issues for which there currently exists no formal guidance, 
but on which FHFA has received inquiries. Finally, FHFA is also 
proposing many non-substantive revisions to part 1261, which are 
intended merely to address existing requirements, processes, and 
authorities pertaining to Bank boards and directors more clearly than 
does the existing regulation.
---------------------------------------------------------------------------

    \12\ See 88 FR 22919 (Apr. 14, 2023) (FHFA Notice of Regulatory 
Review). The Regulatory Review Plan establishes a process by which, 
at least every five years, FHFA issues a notice of the regulatory 
review in the Federal Register and requests comments on how its 
regulations may be made more effective and less burdensome in 
achieving the Agency's regulatory objectives. See 77 FR 10351 (Feb. 
22, 2012) (FHFA Regulatory Review Plan).
---------------------------------------------------------------------------

    The FHLBank System at 100 Report provides a blueprint for 
innovative and prudent steps to bolster and improve the Bank System 
over the next several years, with the goal of ensuring that the Banks 
remain well positioned to meet the needs of their members and the 
communities they serve as they approach their 100th anniversary. The 
Report was informed by a year-long review of the Bank System involving 
significant stakeholder outreach, a historical review of the role of 
the Banks, and detailed analysis of both the strengths and areas for 
improvement in the System's current structure. As stated in the Report, 
FHFA's vision for the future is to have an effectively governed Bank 
System that efficiently provides stable and reliable funding to 
creditworthy members and delivers innovative products and services to 
support the housing and community development needs of the communities 
its members serve, all in a safe and sound manner. The Report noted 
that each Bank's ``effectiveness in achieving its mission and safety 
and soundness goals is influenced by its governance.'' \13\
---------------------------------------------------------------------------

    \13\ See FHLBank System at 100 Report at 64.
---------------------------------------------------------------------------

    The Report laid out four regulatory actions to be taken by FHFA to 
strengthen Bank boards of directors and enable them to effectively 
address emerging risks and to oversee the safety and soundness and 
mission achievement of the Banks in today's financial market 
environment: (1) clarify required qualifications for public interest 
independent directors; (2) expand the list of qualifying experience for 
regular independent directors to reflect business developments in 
housing finance and new and emerging risks and complex problems; (3) 
encourage the Banks to evaluate potential gaps in board knowledge and 
pursue opportunities to address these gaps by nominating individuals 
with particular skills, backgrounds, and experience; and (4) facilitate 
the nomination of individuals with

[[Page 87732]]

technical subject matter expertise.\14\ The proposed rule would address 
each of those four action items.
---------------------------------------------------------------------------

    \14\ See FHLBank System at 100 Report at 67.
---------------------------------------------------------------------------

    The proposed rule would clarify required qualifications for public 
interest independent directors, including by specifying criteria for a 
Bank to consider when determining if an individual has ``represented'' 
consumer or community interests on banking services, credit needs, 
housing, or financial consumer protections, as required by statute to 
qualify as a public interest independent director. The rule would 
codify existing guidance that a person must have advocated for, or 
otherwise acted primarily on behalf of or for the direct benefit of, 
consumers or the community to meet the representation requirement.
    The revised regulation would require each Bank to take affirmative 
measures to ensure that its board of directors has the knowledge and 
experience needed to adequately oversee the management of the Bank. 
Based on input received during the FHLBank System at 100 outreach, the 
proposed rule would add artificial intelligence, information technology 
and security, climate-related risk, Community Development Financial 
Institution (CDFI) business models, and modeling to the list of 
qualifying experience for regular independent directors. To ensure 
coverage of critical areas, each Bank's board would be required to 
conduct an annual assessment of the skills and experience possessed by 
its incumbents and those for which the board has a need. ``Skills and 
experience'' assessments are authorized, but not required, under the 
existing regulation.\15\
---------------------------------------------------------------------------

    \15\ See 12 CFR 1261.9(a).
---------------------------------------------------------------------------

    Banks would be required to take active steps to seek independent 
directorship nominees--and to encourage member directorship nominees--
who possess needed skills and experience. The revised regulation also 
would require the Banks to prioritize knowledge and experience relevant 
to the business, programs, and mission of the Bank and gained primarily 
through full time paid executive, management, or other senior positions 
when considering potential independent directorship nominees. To 
provide Banks with more flexibility to address critical needs when 
filling board vacancies, the proposed rule would add a provision 
expressly permitting Banks to fill a vacant public interest independent 
directorship by redesignating a qualifying incumbent regular 
independent director as a public interest independent director and vice 
versa. The Bank could then find new nominees to fill the resulting 
independent directorship vacancy (a practice FHFA currently permits).
    At several points during the outreach phase of the FHLBank System 
at 100 initiative, stakeholders stressed the importance of independent 
voices on a Bank's board. The proposed rule includes provisions 
addressing director independence. It would make modest changes to 
increase the separation between independent directors and Bank members 
by extending ``independence'' requirements (which currently only apply 
to seated directors) to independent directorship nominees and 
prohibiting former member directors from serving as an independent 
director until they have been off the board for at least two years.
    In response to a Notice of Regulatory Review comment, the proposed 
rule includes a new provision clarifying the definition of ``advances'' 
for purposes of the prohibition against an independent director serving 
as an officer, employee, or director of any ``recipient of advances'' 
from the Bank. This issue is of particular relevance for independent 
directors who lead or work for entities certified as housing 
associates.\16\ As proposed, the word ``advances'' would refer to any 
loan from a Bank to the recipient, regardless of form or nomenclature, 
except for debt securities traded in the public capital markets. This 
definition strikes a balance between preventing circumvention of the 
independence requirements and allowing Banks to tap into their housing 
associates' valuable expertise without having to relinquish, or decline 
to make, investments in their debt securities.
---------------------------------------------------------------------------

    \16\ See 12 CFR part 1264. A Bank may make an advance to an 
entity, such as a state housing finance agency, that is certified as 
a housing associate, but housing associates cannot become bank 
members.
---------------------------------------------------------------------------

    The proposed rule would codify requirements and authorities 
relating to the ``fitness'' of an individual to serve as a director. It 
would require that a Bank decline to nominate or seat as a director any 
individual it knows to be ``unfit'' to serve and authorize each Bank's 
board to adopt bylaws or policies under which it may remove directors 
``for cause'' upon a two-thirds vote of the board. As proposed, 
``cause'' for removal would include code of ethics or policy 
violations, violations of the law, posing a risk of material harm to 
the Bank, conduct or a mental condition indicating an inability to 
oversee the Bank, and poor performance or lack of participation. The 
proposed rule would also require that each Bank's board conduct an 
annual assessment of director performance and participation to 
determine whether each director is contributing positively to the 
board's ability to adequately oversee the operations of the Bank. The 
proposed rule would require that director compensation reflect 
performance, as determined through the annual assessment, and permit 
the board to remove a director where the assessment reveals that a 
director's continuous poor performance or lack of participation is 
compromising the board's ability to adequately oversee the operations 
of the Bank. Additionally, the proposed rule would allow the FHFA 
Director to establish and provide notice of an annual amount of 
director compensation determined to be reasonable.
    As further assurance that all Bank directors are fit to serve, the 
proposed rule would codify as a regulatory requirement the Banks' 
existing practice of conducting thorough background checks on 
independent directorship nominees, as well as individuals under 
consideration to fill a vacant directorship. It would also for the 
first time expressly require the Banks to conduct background checks for 
their member directorship nominees. The revised regulation would 
prohibit a Bank from including any individual on the ballot without 
having first confirmed, based on the background check, the individual's 
fitness to serve in a fiduciary role with the Bank.
    With respect to directorship terms and term limits, the proposed 
rule would expressly provide that FHFA may continue, as part of the 
annual designation of directorships process, to adjust downward the 
length of terms from time to time where required to maintain the even 
staggering of directorship terms on a Bank's board. The proposed rule 
would make clear that such truncated terms do not count as ``full 
terms'' for purposes of the statutory term limit provisions, but that 
full terms on either side of a truncated term must be counted as 
consecutive for those purposes.
    In one of only a few revisions to address corporate governance 
issues below the board level, the proposed rule would require each Bank 
to adopt and implement a conflicts of interest policy covering all Bank 
employees. The required policy would establish appropriate limitations, 
standards, and procedures on the holding of outside positions and 
financial interests by Bank employees and close family members and 
associates. Although the treatment of different types of employees 
under such a policy may be

[[Page 87733]]

calibrated to the risk presented, each Bank's policy would be required 
to prohibit its executive officers and senior management from holding 
paid positions with any entity that is, or may be eligible to become, a 
member or housing associate of any Bank or with any affiliate of such 
entity.
    Finally, the proposed rule would revise the regulation's existing 
provisions on record retention. Changes would increase the amount of 
time a Bank must retain materials pertaining to its directors and the 
director nomination and election process from two years to the longer 
of seven years or seven years after the director to which the 
information pertains leaves the board. This requirement is consistent 
with recognized best practices and should not be burdensome to 
implement in an electronic environment.
    Although the proposed rule would impose new requirements (in 
addition to codifying some existing expectations), it would also 
implement new, or make permanent previously temporary, flexibilities. 
As requested in a Notice of Regulatory Review comment, the proposed 
rule would remove the requirement that Bank boards satisfy their six 
meeting per year minimum only through in-person meetings. The proposed 
revision would codify the substance of a waiver that has been in place 
since early in the COVID-19 pandemic by permitting Bank and OF board 
and committee meetings to be held by video or teleconferencing, or in a 
hybrid format, provided all directors have an opportunity to 
communicate, have access to all written documents and presentations, 
and all participants are within a state or U.S. Territory that is part 
of a Bank district.
    To reduce burden in other areas, the proposed rule would also 
implement a number of other recommendations received as comments on the 
Notice of Regulatory Review. These changes include expanding the range 
of arms-length transactions not considered to be a prohibited 
``financial interest'' for purposes of the Bank director conflicts-of-
interest requirements, updating and expanding the authorized methods 
for withdrawal of OF operating funds, and allowing the OF board of 
directors to delegate review and approval of contracts as specified in 
applicable governance documents.
    In addition to these substantive revisions, the proposed rule would 
make non-substantive revisions throughout part 1261 to improve the 
readability of the regulatory text and provide greater clarity on the 
requirements, processes, and authorities pertaining to Bank directors. 
In particular, provisions governing the annual designation of 
directorships, director eligibility, the nomination and election 
processes, and the filling of vacant directorships would be updated. 
These proposed non-substantive revisions include substitution of 
clearer phrasing, changes to assure consistent use of terminology, 
consolidation of related subject matter, replacement of statutory 
cross-references with either substantive text or regulatory cross-
references, reorganization of sections and revision of headings, and 
removal of transitional material that is no longer needed.

IV. Section-by-Section Analysis of the Proposed Rule

A. Revisions to 12 CFR Part 1261

1. Definitions--Sec.  1261.2
    Section 1261.2 of the existing regulation sets forth definitions 
applicable to subpart B of part 1261, which consists of the provisions 
governing Bank director eligibility, nominations, and elections. 
Existing Sec.  1261.2 includes definitions for ``independent 
directorship,'' ``member directorship,'' ``public interest director,'' 
and ``public interest directorship.'' As described below, the proposed 
rule would add to and revise the regulatory terms describing the Bank 
directorship types and sub-types. The proposals are intended to provide 
clarity, and revisions to existing definitions are not intended to 
change the scope of the defined terms.
    The existing regulation defines the terms ``independent 
directorship'' and ``member directorship'' by means of cross-references 
to the relevant provisions of the Bank Act. The proposed rule would 
replace these statutory references with cross-references to the 
regulatory provisions establishing the eligibility and designation 
requirements for those two types of Bank directorships. FHFA believes 
it is preferable to define terms with reference to the regulation 
itself, as opposed to requiring reference to the statute the regulation 
is intended to implement. Because part 1261 addresses both 
``directorships'' (the designated seats comprising a Bank's board) and 
``directors'' (the individuals filling those seats), those variants 
would be defined together for each directorship type.
    While both the Bank Act and the existing regulation define ``public 
interest directorship'' (referring to an independent directorship to be 
filled by an individual meeting the ``representing consumer or 
community interests'' qualification requirement), both refer to an 
independent directorship to be filled by an individual meeting the 
``knowledge and experience'' qualification requirement of the statute 
with such undefined terms as ``an independent directorship, other than 
a public interest directorship'' and ``an independent director that is 
not a public interest director.'' The proposed rule would establish a 
joint definition for ``regular independent directorship and regular 
independent director'' to refer to those types of independent 
directorships and directors, and would define the terms with a cross-
reference to the new provision addressing the qualifications 
requirements for such directors under the proposed rule (Sec.  
1261.5(c)(1), discussed below).
    The existing regulation defines ``public interest directorship'' as 
``an independent directorship filled by an individual with more than 
four years of experience representing consumer or community interests 
in banking services, credit needs, housing or consumer financial 
protections.'' The regulation separately defines ``public interest 
director'' to mean ``an individual serving in a public interest 
directorship.'' The proposed rule would revise the former term to 
``public interest independent directorship'' to make clear that it 
refers to a sub-type of independent directorship and so the 
construction of the term parallels that of its counterpart, ``regular 
independent directorship.'' The proposed rule would also combine the 
``directorship'' and ``director'' definitions into one paragraph and 
define the terms with a cross-reference to the new provision addressing 
the qualifications requirements for such directors under the proposed 
rule (Sec.  1261.5(c)(2), also discussed below), so that the 
definitions parallel those of the other directorship types.
    The proposed rule would also add a definition for the term 
``nominee,'' referring to an individual formally nominated by a Bank's 
members or board of directors, as appropriate, to stand for election 
for a Bank directorship. This change is intended to allow a clearer 
distinction in the regulatory text between requirements that apply to 
persons requesting or being considered for nomination for a 
directorship and requirements that apply only to those that have been 
duly nominated.
    Existing Sec.  1261.2 defines the term ``voting State'' to mean 
``the District of Columbia, Puerto Rico, or the State of the United 
States in which a member's principal place of business, as determined 
in accordance with 12 CFR part 1263, is located as of the record 
date,'' and further clarifies that ``[t]he

[[Page 87734]]

voting State of a member with a principal place of business located in 
the U.S. Virgin Islands as of the record date is Puerto Rico, and the 
voting State of a member with a principal place of business located in 
American Samoa, Guam, or the Commonwealth of the Northern Mariana 
Islands as of the record date is Hawaii.'' The proposed rule would 
amend this definition to eliminate the unnecessary references to the 
District of Columbia and Puerto Rico in the first clause. Section 
1201.1 of FHFA's regulations, which defines terms that are used 
frequently throughout the regulations, already defines the term 
``State'' to include the District of Columbia and Puerto Rico (as well 
as American Samoa, the Commonwealth of the Northern Mariana Islands, 
Guam, and the United States Virgin Islands), so there is no reason to 
specify their inclusion in the definition of ``voting State.''
    Where appropriate, the proposed rule would also revise numerous 
references to a ``State'' in existing part 1261 to refer to a ``voting 
State.'' This is especially important with respect to provisions on the 
allocation of member directorships and member directorship nominations 
and voting, as the latter term includes the concept that members in 
U.S. Virgin Islands nominate, vote for, and are represented by member 
directors for Puerto Rico, while members in American Samoa, Guam, or 
the Northern Mariana Islands nominate, vote for, and are represented by 
member directors for Hawaii.
2. General Provisions--Sec.  1261.3
    Section 1261.3 of the existing regulation sets forth ``General 
provisions'' addressing board size and composition, length of term of 
directorships, annual elections, location of members for purposes of 
voting to fill member directorships, and the calculation of dates for 
purposes of determining compliance with deadlines required under the 
regulation. The proposed rule would remove the material on board size 
and composition in existing Sec.  1261.3(a), the substance of which 
would be consolidated with related material on the designation of 
directorships in revised Sec.  1261.4. The remaining paragraphs of 
Sec.  1261.3 would be redesignated as appropriate and revised to remove 
or replace statutory references and streamline language for greater 
clarity and consistency. No change in substantive meaning is intended.
3. Annual Designation of Directorships--Sec.  1261.4
    Section 1261.4 of the existing regulation addresses the annual 
``designation of directorships'' process which results in the issuance 
of an order by the FHFA Director designating the size and composition 
of each Bank's board of directors for the following calendar year. The 
proposed rule would make various revisions to this section to 
consolidate provisions relating to the designation of directorships and 
to provide clarity regarding the methods through which FHFA determines 
the appropriate size and composition for each Bank's board and the 
requirements and procedures associated with the process. The proposed 
rule would also change the heading of Sec.  1261.4 to ``Annual 
designation of directorships'' to reflect that the process is annual 
and that the Director designates not only member directorships, but 
also independent directorships for each Bank. The proposed revisions 
are not intended to change any current procedure or requirement.
    The proposed rule would redesignate existing Sec.  1261.4(a) as 
Sec.  1261.4(b) and would add a new paragraph (a) providing that the 
Director will annually issue a written order designating for each 
Bank's board of directors for the following calendar year: (1) the 
total number of member directorships and their allocation among the 
voting States of the Bank's district; (2) the total number of 
independent directorships; and (3) the directorships for which an 
election will be held for terms beginning on January 1 of the following 
year, and the length of those terms.\17\ The designation of 
directorships has been carried out by means of a Director's order since 
the inception of FHFA and the new regulatory text would make this 
explicit and would more accurately describe the content of the 
designations order than existing Sec.  1261.3(a). Consistent with 
current practice, the proposed rule would provide that the Director 
will issue the designation of directorships order by June 1 of each 
year.
---------------------------------------------------------------------------

    \17\ Bank directorship terms, for both member and independent 
directors, are generally four years but, as discussed below, FHFA 
may on rare occasions truncate the term length for a Bank 
directorship to maintain the equal staggering of terms.
---------------------------------------------------------------------------

    Redesignated Sec.  1261.4(b), requiring each Bank to submit a 
capital stock report to provide data for the allocation of member 
directorships and the determination of the number of votes each member 
may cast in the election, would remain substantively unchanged. For 
clarity, however, the sentence providing that ``[i]f a Bank has issued 
more than one class of stock, it shall report the total shares of stock 
of all classes required to be held by members'' would be revised to 
refer to ``the total shares of each class of stock required to be held 
by the members.''
    Paragraphs (b) and (c) of existing Sec.  1261.4--entitled 
``Designation of member directorships'' and ``Allocation of 
directorships,'' respectively--would be replaced by a new Sec.  
1261.4(c), which is intended to describe the process through which FHFA 
sets the total number of member directorships for each Bank and 
allocates them among the respective States of the Bank district.
    Proposed paragraph (c)(1) would describe the first part of the 
statutorily required process, whereby member directorships are 
allocated among the States of each district based on the relative 
amount of Bank stock the members in each respective state were required 
to hold as of December 31 of the preceding year. As described in the 
proposed regulatory text, FHFA begins by choosing for each Bank a 
``base'' number of member directorships to allocate among the states of 
the district. For practical reasons, the base number is typically 
eight,\18\ but may differ where there is a legal or policy reason for 
selecting a different number. For example, where the number of states 
comprising a Bank district exceeds eight, FHFA must begin with a higher 
base number for that Bank because the Bank Act requires that each state 
have a minimum of one member directorship. In other cases, for example 
where application of the statutory ``grandfather provision'' (discussed 
below) would otherwise result in an excessively large board size, FHFA 
may start with a base number lower than eight.\19\
---------------------------------------------------------------------------

    \18\ Among other things, a base number of eight seats has been 
shown to result in most cases in a board that is not excessively 
large, but is large enough so that the board's composition meets all 
statutory requirements.
    \19\ The Bank Act provides that each Bank is to have a board of 
13 directors, ``or such other number as the Director determines 
appropriate.'' See 12 U.S.C. 1427(a)(1).
---------------------------------------------------------------------------

    Proposed Sec.  1261.4(c)(1)(i) provides that FHFA will then use the 
``method of equal proportions'' to allocate those member directorships 
among the voting States of the Bank district, based on the ratio of the 
number of shares of Bank stock required to be held by the members in 
each State to the number of shares required to be held by all members 
of the Bank. As required by statute,\20\ proposed Sec.  
1261.4(c)(1)(ii) makes clear that each State must be allocated at least 
one, but no more than

[[Page 87735]]

six, member directorships. As does the existing regulation, proposed 
Sec.  1261.4(c)(1)(iii) provides that, for those Banks that have issued 
more than one class of stock, member directorships will be allocated 
based on the combined number of shares required to be held by members. 
Proposed Sec.  1261.4(c)(1)(iv) would make clear that the required 
stock amounts on which the allocations are based shall be the amounts 
as of the record date (December 31 of the preceding calendar year, as 
defined in Sec.  1261.2) shown in the capital stock report required to 
be submitted by the Banks under redesignated Sec.  1261.4(b).
---------------------------------------------------------------------------

    \20\ See 12 U.S.C. 1427(c).
---------------------------------------------------------------------------

    In practice, when allocating member directorships for a Bank, FHFA 
first allocates one member directorship to each State in the Bank 
district to fulfill the minimum statutory requirement. Any remaining 
seats are then allocated using the ``method of equal proportions,'' 
which is the method that has been used to apportion seats in the United 
States House of Representatives since 1941.\21\ The use of the method 
of equal proportions is intended to result in the stock-based 
allocation of member directorships having the closest possible 
correlation with the relative amounts of stock required to be held by 
Bank members in each respective state of the district.
---------------------------------------------------------------------------

    \21\ The method of equal proportions has been the required 
method for the stock-based allocation of Bank member directorship 
seats since 1998. See 63 FR 65683, 65685, 65688 (Nov. 30, 1998) 
(final rule); 63 FR 26532, 26533 (May 13, 1998) (proposed rule).
---------------------------------------------------------------------------

    Under the method of equal proportions, after each state has been 
allocated one seat, a priority value is calculated for each potential 
subsequent seat a state could be allocated--out to the maximum of six 
member directorships that may be allocated to each State--based on the 
following formula:
[GRAPHIC] [TIFF OMITTED] TP04NO24.000

     V represents a priority value.
     P represents the total shares of Bank stock required to be 
held by members in a particular State.
     n represents the number of member directorships the state 
would have if it gained a seat.
    The remaining seats are then allocated sequentially among the 
states of the district based on those priority values.
    For example, if FHFA were to allocate eight member directorships 
among the states of a Bank district including three states having 
required member stock holdings of 20 million, 12.5 million, and 5 
million shares, respectively, the priority values for potential seats 
#2 through #6 for each state would be as follows:

----------------------------------------------------------------------------------------------------------------
                    Seat # >                       2nd Seat     3rd Seat     4th Seat     5th Seat     6th Seat
----------------------------------------------------------------------------------------------------------------
                  Multiplier >                    0.7071068    0.4082483    0.2886751    0.2236068    0.1825742
----------------------------------------------------------------------------------------------------------------
State A (20,000,000 sh)........................   14,142,136    8,164,966    5,773,503    4,472,136    3,651,484
State B (12,500,000 sh)........................    8,838,835    5,103,104    3,608,439    2,795,085    2,282,177
State C (5,000,000 sh).........................    3,535,534    2,041,241    1,443,376    1,118,034      912,871
----------------------------------------------------------------------------------------------------------------

    This would result in a priority order for the allocation of seats 
#2 through #6 for each state as follows:

------------------------------------------------------------------------
            Seat # >                2nd     3rd     4th     5th     6th
------------------------------------------------------------------------
State A.........................       1       3       4       6       7
State B.........................       2       5       8      10      11
State C.........................       9      12      13      14      15
------------------------------------------------------------------------

    Assuming a base number of eight total member directorships are to 
be allocated, there would be five remaining seats after each state has 
been allocated one seat. Based on the priority order reflected in the 
table above, State A would be allocated the first of the remaining 
seats, State B the second, State A the third and fourth, and State B 
the fifth, resulting in an overall allocation of four seats to State A, 
three seats to State B, and one seat to State C.
    The Bank Act generally requires that FHFA allocate member 
directorships based on the ratio of required stock holdings. However, 
the statute also requires that, whenever the number of member 
directorships representing the members located in any State would not 
be at least equal to the total number representing that State on 
December 31, 1960, FHFA ``shall add to the board of directors'' such 
additional seats as are necessary to bring the total number being 
allocated to that State up to the 1960 total (the ``grandfather 
provision'').\22\ The minimum number of member directorships that must 
be allocated to each State to meet the requirements of the grandfather 
provision is specified in a table set forth in existing Sec.  1261.15, 
which would not be revised as part of this rulemaking.
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 1427(c). By its express terms, the statutory 
grandfather provision does not apply to the directorships of any 
Bank resulting from the merger of two or more Banks--currently only 
the Federal Home Loan Bank of Des Moines.
---------------------------------------------------------------------------

    Existing Sec.  1261.4(c) implements the grandfather provision 
through a bare cross-reference to the statute. In contrast, proposed 
Sec.  1261.4(c)(2) would expressly provide that, where the stock-based 
allocation has resulted in a state being allocated fewer member 
directorships than shown for that State in Sec.  1261.15, FHFA will 
allocate it as many additional member directorships as are necessary to 
increase the total number of member directorships for that State to the 
number shown on the table in that section. Only those states that have 
been ``grandfathered'' at more than one member directorship appear on 
the table in Sec.  1261.15. Proposed Sec.  1261.4(c)(2) would deem the 
minimum number of member directorships required to fulfill the 
``grandfather provision'' to be one for those States not appearing on 
the table. In the example above, if all three States had been 
represented by three member directorships in 1960, FHFA would need to 
allocate two additional seats to State C, beyond the one earned in the 
stock-based allocations, increasing the total number of member 
directorships for the Bank to 10.

[[Page 87736]]

    Proposed Sec.  1261.4(d) would state that, after the total number 
of member directorships and their allocation have been determined for 
each Bank, FHFA will set the number of independent directorships at a 
number within the statutorily prescribed range of at least 40 percent, 
but less than 50 percent, of total directorships. In the example above, 
with 10 member directorships, FHFA could choose to designate seven, 
eight, or nine independent directorships (with independent directors 
representing 41 percent, 44 percent, or 47 percent of boards comprising 
17, 18, or 19 directors). That decision is based on a variety of 
general and Bank-specific considerations, including the number of 
independent directorships designated for the current year.
    Under the designation of directorships process, year-to-year 
changes in the relative level of required stock holdings for the 
members in the various States of a Bank district may result in the 
redesignation of one or more member directorships from one state to 
another. In some cases, the interaction of changes in the relative 
level of required stockholdings with the requirements of the 
grandfather provision may result in the addition of a new member 
directorship to a Bank's board. This could also lead to the addition of 
a new independent directorship if needed to maintain the required ratio 
of independent directorships to total directorships. In other 
instances, FHFA may simply choose to add a new independent directorship 
for policy reasons or at the request of a Bank's board.
    Proposed Sec.  1261.4(e) would address these redesignations and 
additions. Proposed paragraph (e)(1) (like existing Sec.  1261.4(e)) 
would make clear that the member directorship representing the state 
that is losing a seat terminates as of December 31 of the year the 
designation of directorships order is issued and a new directorship is 
created as of January 1 of the following year to represent the state 
that is gaining a seat. The Bank would need to hold an election to fill 
the newly added member directorship during the year the designation of 
directorships order is issued, with the duly elected director to begin 
serving on the following January 1. The individual occupying the member 
directorship being terminated would cease to be a director after 
December 31 of the current year.
    As does the existing regulation, proposed paragraph (e)(1) would 
further provide that the length of the initial term of the newly added 
member directorship shall be adjusted to equal the remaining term of 
the directorship being terminated, to ensure that the terms of the 
Bank's directorships remain staggered with approximately one quarter of 
the terms expiring each year, as required by statute.\23\ Similarly, 
proposed paragraph (e)(2) would provide that the Director may truncate 
the initial term of any new directorship added to a Bank's board if 
needed to maintain the even staggering of terms. As under the existing 
regulation, such truncated terms would not be counted in determining 
term limits for Bank directors (this is discussed further below).
---------------------------------------------------------------------------

    \23\ See 12 U.S.C. 1427(d).
---------------------------------------------------------------------------

    Finally, proposed Sec.  1261.4(f) would provide that the board of 
directors of each Bank shall determine the number of public interest 
independent directorships to be included among its designated 
independent directorships for the following year, a requirement that 
appears in Sec.  1261.3(a) of the existing regulation. Under the 
proposed provision, a Bank would now also be expressly permitted to 
change the number of public interest independent directorships during 
the year (a practice which FHFA has permitted). As required by statute, 
a Bank would at all times need to have at least two such directorships.
4. Director Eligibility--Sec.  1261.5
    The proposed rule would make numerous revisions to Sec.  1261.5 of 
the existing regulation, which governs director eligibility, including 
qualifications for independent directors and term limits. These 
revisions are intended to consolidate provisions relating to director 
eligibility, strengthen eligibility requirements to encourage strong 
corporate governance, fill in gaps in the coverage of the existing 
regulation, and provide greater overall clarity than the existing 
regulation.
    The proposed rule would make clarifying revisions to Sec.  
1261.5(a), which implements the statutory eligibility requirements for 
member directors, with no intended change to the substance. The heading 
to the provision would be revised to make clear (as does the existing 
text) that the eligibility requirements apply not just to sitting 
directors, but to nominees as well. Proposed paragraph (a)(1) would 
provide that each member director, and each nominee for a member 
directorship must be: (i) a citizen of the United States; and (ii) an 
officer or director of a member institution that is located in the 
voting State of the Bank district to which the directorship being 
occupied, sought, or filled has been allocated under proposed Sec.  
1261.4(c). As required by statute, paragraph (a)(1)(ii) would make 
clear that the member institution with which any member director or 
member directorship nominee is associated must meet all minimum capital 
requirements established by its appropriate Federal banking agency or 
appropriate State regulator. As does existing Sec.  1261.5(a), 
paragraph (a)(2) would provide that the institution with which the 
director is associated must have been a member as of the ``record 
date'' (that is, December 31 of the year preceding the election) or, in 
the case of a director chosen by a Bank's board of directors to fill a 
vacancy, as of the time the board acts.
    Existing Sec.  1261.5(b) provides that each member director, and 
each nominee to a member directorship, must be an officer or director 
of a member located in the State to which the Director has allocated 
the directorship. Because its substance would be incorporated into 
proposed Sec.  1261.5(a), the proposed rule would delete this 
provision.
    Existing Sec.  1261.5(c), entitled ``Eligibility requirements for 
independent directors,'' provides that each independent director and 
each nominee to an independent directorship shall be: (1) a citizen of 
the United States; and (2) a bona fide resident of the district in 
which the Bank is located. The Bank Act actually sets forth a total of 
four requirements each independent director must meet to be eligible to 
serve. In addition to the two covered by existing Sec.  1261.5(c), an 
independent director may not serve as an officer of any Bank or as a 
director, officer, or employee of any member of a Bank, or of any 
recipient of advances from a Bank \24\ and must possess certain 
professional qualifications, which differ depending on whether the 
individual is filling a public interest independent directorship or a 
regular independent directorship.\25\ While the latter two requirements 
are covered in separate provisions of the existing regulation 
(Sec. Sec.  1261.10 and 1261.7, respectively), they are not identified 
as ``eligibility requirements'' in Sec.  1261.5(c).
---------------------------------------------------------------------------

    \24\ 12 U.S.C. 1427(a)(3)(B)(iii).
    \25\ 12 U.S.C. 1427(a)(3)(B)(i), (ii).
---------------------------------------------------------------------------

    The proposed rule would redesignate Sec.  1261.5(c) as Sec.  
1261.5(b) and would expand the list of eligibility requirements set 
forth therein to include the independence and qualifications 
requirements. This proposed revision is intended to provide clarity by 
itemizing in one provision all of the requirements an individual must 
meet to be eligible for nomination and service as an independent 
director. In the case of the

[[Page 87737]]

independence and qualifications requirements, proposed Sec.  1261.5(b) 
would cross-reference other provisions of the revised regulation 
(Sec. Sec.  1261.10 and 1261.5(c), respectively) providing more detail 
on how a Bank must determine whether an individual meets those 
requirements. Under proposed Sec.  1261.5(b), all four requirements 
would apply to both sitting independent directors and to independent 
directorship nominees. While the citizenship, residency, and 
qualifications requirements apply to nominees as well as sitting 
directors under the existing regulation, the independence requirement 
currently applies only to seated directors. The extension of this 
requirement to nominees is discussed below in the analysis of proposed 
Sec.  1261.10.
    The proposed rule would add a new paragraph (c) to Sec.  1261.5 to 
address the required professional qualifications for both regular and 
public interest independent directors. Under the existing regulation, 
both sets of required qualifications are fully or partially stated in 
multiple provisions, which FHFA believes is a potential source of 
confusion.\26\ Under the proposed rule, the required qualifications for 
regular and public interest independent directors would be described 
once--in proposed Sec.  1261.5(c)--which would, in turn, simply be 
cross-referenced where relevant in other provisions of the revised 
regulation. As explain below, the proposed rule would also make 
substantive revisions to the regulatory text describing the 
qualifications.
---------------------------------------------------------------------------

    \26\ See 12 CFR 1261.5(c)(2), 1261.7(d)(1)(i) and (e)(2) (public 
interest independent director qualifications); 12 CFR 
1261.7(d)(1)(ii) and (e)(1), 1261.8(a)(1)(iii) (regular independent 
director qualifications).
---------------------------------------------------------------------------

    The existing regulation, at Sec.  1261.7(e), provides that each 
independent director that is not a public interest independent director 
(i.e., a ``regular independent director'' under the proposed rule) must 
``have experience in, or knowledge of, one or more of the following 
areas: auditing and accounting, derivatives, financial management, 
organizational management, project development, risk management 
practices, and the law.'' \27\ To that list of qualifying knowledge and 
experience, which would now appear in proposed Sec.  1261.5(c)(1), the 
proposed rule would add artificial intelligence, information technology 
and security, climate-related risk, CDFI business models, and modeling.
---------------------------------------------------------------------------

    \27\ See 12 CFR 1261.7(e).
---------------------------------------------------------------------------

    These additions were developed both from input on critical areas of 
expertise that should be covered by a Bank's board of directors sought 
and received during the FHLBank System at 100 initiative and from 
understanding of the Banks' corporate governance needs developed 
through FHFA's general supervisory efforts. Their inclusion is intended 
to encourage each Bank's board to take active steps to ensure it has 
sufficient knowledge and expertise regarding recent business 
developments in housing finance and new and emerging risks and complex 
problems that could affect Bank operations. To allow FHFA and the Banks 
to respond more rapidly to evolving conditions and risks going forward, 
the list of qualifying knowledge or expertise for regular independent 
directors in proposed Sec.  1261.5(c)(1) would also include ``such 
other areas as the Director shall determine,'' thus allowing FHFA to 
add other areas to the list, as appropriate, without going through the 
rulemaking process. Such additions would be conveyed through guidance.
    FHFA requests comment on whether these areas of qualifying 
experience are appropriate and whether other specific areas should be 
included.
    Proposed Sec.  1261.5(c)(2) would implement the statutory 
requirement that each public interest independent director qualify by 
having ``more than four years of experience representing consumer or 
community interests in banking services, credit needs, housing, or 
consumer financial protection.'' The application of this requirement 
has been a frequent subject of inquiry and discussion between FHFA and 
Bank boards of directors and staff, potential directors, and trade 
groups since it was adopted as part of the Housing and Economic 
Recovery Act of 2008 (HERA).\28\ In early 2022, FHFA issued a revised 
version of the Bank Independent Director Application Form (FHFA Form 
#129), the instructions for which provide guidance on how to determine 
whether an applicant for a public interest independent directorship 
meets the statutory qualifications.\29\ The guidance provided on the 
Form is consistent with advice given by FHFA in individual cases over 
the years. In addition to restating the statutory requirement, proposed 
Sec.  1261.5(c)(2) would include the substance of this material to 
provide clarity on the implementation of the statutory standard in the 
regulation itself.
---------------------------------------------------------------------------

    \28\ Under existing Sec. Sec.  1261.7(f) and 1261.14(b), FHFA 
has an opportunity to review the completed Independent Director 
Application Forms and other supporting materials for each Bank's 
proposed independent directorship nominees and to provide comments 
to the Bank where warranted. For public interest independent 
directorship nominees, FHFA's review includes evaluation of whether 
the individual's professional experience meets the statutory 
standard.
    \29\ FHFA released an updated version of the Form with some 
additional minor revisions in 2023.
---------------------------------------------------------------------------

    The new provision would stipulate that, for purposes of determining 
compliance with the public interest qualification requirements, 
``representing'' means advocating for, or otherwise acting primarily on 
behalf of or for the direct benefit of, consumers or the community in 
one of the four enumerated areas. Those who have not advocated for or 
acted on behalf of or for the direct benefit of consumers and the 
community in any material capacity cannot reasonably be viewed as 
representatives of those constituencies. Industry-side interests are 
more than adequately represented among the Banks' member and regular 
independent directors. Among other things, FHFA believes that 
experience related to fair housing, fair lending, consumer protection, 
affordable housing, community development, and diversity and inclusion 
that otherwise meets the requirements of the statute and regulation 
would be qualifying experience for public interest independent 
directors.
    Proposed Sec.  1261.5(c)(2) would also provide that qualifying 
experience in one of the four enumerated areas may have been acquired 
in professional, public service, or significant volunteer positions, so 
long as the work done was substantial in terms of time commitment and 
responsibility and that the experience was accrued from activities 
personally undertaken by the director or nominee, as opposed to being 
attributed based solely on the activities of organizations with which 
the person was associated.
    Prior to 2008, the Bank Act required the appointment of at least 
two ``community interest'' directors at each Bank ``chosen from 
organizations with more than a 2-year history of representing consumer 
or community interests on banking services, credit needs, housing, or 
financial consumer protections.'' In 2008, HERA substituted the current 
language focusing on the personal experience of the individual in 
representing community or consumer interests, as opposed to the mission 
of the organization with which they were affiliated. The additional 
clarifying regulatory text is intended to ensure that nominees meet the 
statutory requirement of personal experience and have the kind of 
knowledge, experience, and perspective necessary to oversee a Bank and 
guide it in the safe and sound fulfillment of its public policy 
mission. Experience gained through full-time paid employment is almost 
always qualifying. FHFA has generally viewed experience with 
nonprofits, community

[[Page 87738]]

organizations, state and local housing finance agencies, and non-member 
CDFIs, or service as an elected, appointed, or career government 
official, to be qualifying. Ultimately, determinations as to 
qualification to serve as a public interest independent director must 
be made on a case-by-case basis, given the numerous ways in which a 
person could conceivably meet the statutory standard.
    Both regular and public interest independent directors need to have 
the capacity to challenge Bank management on important issues, 
including the sufficiency and effectiveness of its mission programs. 
While Bank boards can benefit from a wide variety of viewpoints, FHFA 
has observed that the most effective directors possess knowledge and 
experience that are relevant to the business, programs, and mission of 
the Bank and that provide a basis for understanding the actual and 
potential impact of the Bank's activities on its members and on 
communities within the Bank's district. FHFA also believes that service 
in full-time executive, management, or other senior paid professional 
positions generally provides the most valuable experience for a Bank 
director. Proposed Sec.  1261.5(c)(3) would require that Banks' boards 
prioritize those characteristics when soliciting and choosing Bank 
independent directorship nominees.
    With respect to length of board service, the Bank Act limits Bank 
directors to ``three consecutive full terms'' and requires former 
directors who have termed out to sit out for a minimum of two years 
before seeking to serve again as a Bank director.\30\ Section 1261.5(d) 
of the existing regulation, entitled ``Restrictions,'' implements the 
statutory term limit provisions by setting forth principles for 
determining whether a director has been elected to and served three 
consecutive full terms. In general, under the existing regulation, 
four-year terms to which a director has been elected and has served any 
part count as full terms, while terms that have been truncated to 
maintain board staggering and terms served out by a vacancy electee do 
not. Much of the material in existing Sec.  1261.5(d) is intended to 
address issues arising from the transition from the pre-HERA regime, 
under which directors served three-year terms and independent directors 
were appointed by the Bank System regulator, to the current regime, 
under which directors serve four-year terms and independent directors 
are nominated by Bank boards and elected by Bank members.
---------------------------------------------------------------------------

    \30\ 12 U.S.C. 1427(d). (The Bank Act provides that ``[i]f any 
person . . . has been elected to each of three consecutive full 
terms as a director of a [Bank] and has served for all or part of 
each of said terms, such person shall not be eligible for election 
to a directorship of such [Bank] for a term which begins earlier 
than two years after the expiration of the last expiring of said 
three terms'').
---------------------------------------------------------------------------

    Proposed Sec.  1261.5(d) (which would be re-titled ``Term limits'') 
would continue to address director term limits using the principles 
reflected in the existing regulation. The proposed rule, however, would 
remove from the regulatory text the post-HERA transition material, 
which is no longer needed because all directors who were serving at the 
time of the statutory change have now termed out, and otherwise 
streamline the language and structure of the provision. Consistent with 
other revisions, the proposed rule would replace cross-references to 
the Bank Act with either an express substantive statement or a cross-
reference to a substantive regulatory provision. As proposed, Sec.  
1261.5(d) would continue to provide that truncated terms do not count 
as full terms, but would make clear that two full terms on either side 
of a truncated term count as consecutive full terms; that is, while a 
truncated term may not count in the term limit calculation, it cannot 
re-set the term limit calculation back to zero.
    Existing Sec.  1261.5(e) explains that a director shall become 
ineligible to remain in office if, during their incumbency, the 
directorship to which they have been elected is eliminated. The 
proposed rule would add to this provision a cross-reference to the 
section of the proposed rule (Sec.  1261.4, governing the designation 
of directorships) under which a seat could be eliminated. As under the 
existing regulation, proposed Sec.  1261.5(e) would continue to provide 
that the incumbent director shall become ineligible after the close of 
business on December 31 of the year in which the directorship is 
eliminated.
    Section 1261.6 of the existing regulation, governing the 
determination of members votes, would not be changed by the proposed 
rule.
5. Nominations for Member and Independent Directorships--Sec.  1261.7
    Section 1261.7 of the existing regulation governs nominations for 
member and independent directorships, including election announcements, 
the submission and acceptance of member directorship nominations, 
independent directorship qualifications and nominations, and 
eligibility verification. The proposed rule would make numerous textual 
and structural revisions to Sec.  1261.7, most of which are non-
substantive and intended only to provide clarity.
    Existing Sec.  1261.7(a) requires that ``[w]ithin a reasonable time 
in advance of an election,'' a Bank provide notice to each member in 
its district of the commencement of the election process to include: 
(1) the number of member directorships designated for each voting State 
and the total number of independent directorships; (2) the name of, and 
pertinent information about, each incumbent Bank director; (3) a brief 
statement of the skills and experience the Bank believes are most 
likely to add strength to its board; (4) an attachment identifying 
every member, its voting state, and the number of votes it is eligible 
to cast; and (5) a certificate to be used by member institutions to 
make any desired nominations.
    The proposed rule would make three substantive revisions to the 
list of information to be included in or with the election 
announcement, each of which FHFA believes is consistent with the 
current practice of most Banks. First, the proposed rule would require 
that the statement regarding the number of member and independent 
directorships include the number of independent directorships 
designated by the Bank as public interest independent directorships for 
the following calendar year. Second, the proposed rule would require 
that the election notice identify the member directorships, regular 
independent directorships, and public interest independent 
directorships, respectively, for which the Bank will be holding an 
election in the current year. Finally, while the existing regulation 
makes inclusion of a brief statement of sought-after skills and 
experience contingent on the Bank having carried out the assessment of 
board skills and experience permitted under existing Sec.  1261.9, the 
proposed rule would make the inclusion of the statement mandatory 
because, as discussed below, the annual assessment would also be made 
mandatory. In addition to these substantive revisions, the proposed 
rule would also move a misplaced heading and renumber the paragraphs to 
accommodate the additional material.
    The proposed rule would combine into proposed Sec.  1261.7(b) 
material that appears in existing paragraphs (b) and (c) governing 
member directorship nominations by members and the acceptance of such 
nominations by a Bank's board. The one substantive change would be the 
removal in two places of the requirement that election and nomination 
records be retained for at least two years after the date of the 
election. These provisions would be replaced by a new Sec.  1261.7(f), 
requiring

[[Page 87739]]

each Bank to retain all information received under proposed Sec.  
1261.7 for at least seven years after the date of the election in 
question and, in the case of any information about a specific director, 
for at least seven years after that director leaves the board 
(discussed below). The remaining changes consist of non-substantive 
paragraph redesignations, revised headings, and minor textual changes 
to provide clarity.
    In the existing regulation, Sec.  1261.7(d) and (e) address 
independent director nominations and independent director required 
qualifications, respectively. The proposed rule would remove Sec.  
1261.7(e) in its entirety because, under the revised regulation, the 
required qualifications for regular and public interest independent 
directors would be stated in only one provision--proposed Sec.  
1261.5(c). Further duplicative statements regarding the required 
qualifications would also be removed from existing Sec.  1261.7(d), 
which would be redesignated as Sec.  1261.7(c). The proposed rule would 
also remove from the redesignated provision language indicating that an 
interested individual may not submit, and a Bank may not consider, an 
Independent Director Application Form that does not demonstrate that 
the applicant is both eligible and qualified to serve; these 
restrictions are not consistent with the intended use of the completed 
Form as a means through which eligibility may be determined. Instead, 
the proposed rule would include in proposed Sec.  1261.7(d)(3), 
discussed below, a new express provision prohibiting a Bank's board 
from nominating any individual for an independent directorship or 
accepting the nomination of any individual for a member directorship if 
it has not concluded based on the appropriate completed Form and 
supplementary materials that the individual is eligible to serve.
    The proposed rule would also remove the language in existing Sec.  
1261.7(d)(3) requiring that each Bank determine and announce to its 
members the number of public interest independent directorships to be 
included among its authorized independent directorships for the 
following year, because this requirement would be covered by proposed 
Sec.  1261.4(f). The proposed rule would also remove language requiring 
each Bank to retain all completed Independent Director Application 
Forms for at least two years after the date of the election because, as 
mentioned, the record retention requirements for all records related to 
the nomination and election of directors would now be governed by 
proposed Sec.  1261.7(f). The remaining changes to the existing 
provisions on the nomination of independent directors would be non-
substantive textual and organizational revisions (including the 
division of different topical material into paragraphs) for better 
readability.
    Existing Sec.  1261.7(f) addresses the steps each Bank must take to 
verify the eligibility of its member and independent director nominees. 
It requires each Bank to use the information provided on the Member 
Director Eligibility Certification Form or the Independent Director 
Application Form, as applicable, to verify that each nominee meets the 
relevant eligibility requirements and, for independent directorship 
nominees, possesses the required qualifications. The provision further 
requires that, before announcing any independent director nominee, the 
Bank deliver to FHFA for review a copy of the proposed nominee's 
executed Independent Director Application Form. Although the existing 
regulation does not generally require FHFA approval of Bank independent 
directorship nominees, existing Sec.  1261.7(f) requires a Bank's board 
to consider any comments on a proposed nominee provided by FHFA within 
two weeks of FHFA's receipt of the Application Form for that 
individual.\31\
---------------------------------------------------------------------------

    \31\ In 2022, in conjunction with FHFA's issuance of the revised 
Bank Independent Director Application and Certification Forms, 
FHFA's Division of Bank Regulation issued a Supervisory Letter on 
the proper submission of Independent Director Application Forms and 
pertinent supplementary material to FHFA for review. This guidance 
would remain in effect under the proposed rule.
---------------------------------------------------------------------------

    The proposed rule would redesignate Sec.  1261.7(f) as Sec.  
1261.7(d) and, for clarity, would break the existing text into topical 
paragraphs and revise references to the member and independent director 
eligibility requirements to add cross-references to the applicable 
substantive provisions of the revised regulation (proposed Sec.  
1261.5(a) and (b) respectively). The proposed rule would also add a new 
paragraph (d)(3) expressly prohibiting a Bank's board from nominating 
any individual for an independent directorship or including on the 
ballot any individual nominated for a member directorship except where 
it has concluded that the individual meets the applicable eligibility 
requirements and is not term limited. Although this concept is implicit 
in the existing regulation, FHFA believes it is preferable for the 
regulation to set forth a clear statement to this effect.
    The proposed rule would add a new Sec.  1261.7(e), which would 
prohibit a Bank's board from nominating any person for an independent 
directorship or including on the election ballot any individual 
nominated for a member directorship without having first conducted a 
thorough background check and concluding that the individual is fit to 
serve in a fiduciary role with the Bank. The proposed rule would 
require each Bank to include a discussion of the results of the 
background check for each independent directorship nominee when 
submitting its Independent Director Application Forms to FHFA, 
including any potentially concerning information that was revealed and 
how the Bank's concerns were allayed. In recent years, the Banks have 
typically conducted background checks on independent directorship 
nominees and addressed the results of those checks in their submissions 
to FHFA; the proposed rule would codify this practice. The rule would 
also require each Bank to conduct a background check on nominees for a 
member directorship, as the risks background checks are designed to 
mitigate are no less of a concern for member directors than they are 
for independent directors.
    Although the Bank Act clearly vests in a Bank's members the 
authority to nominate and elect their own representatives on a Bank's 
board, the continued safe and sound operation of every Bank depends 
upon the reservation of some mechanism for identifying and addressing 
potential risks to the institution that could be posed by its own 
directors. Bank directors not only have a unique opportunity to 
influence a Bank's course of action, they also are privy to the most 
sensitive inside information, including confidential supervisory 
information (CSI), about the operations, finances, and personnel of the 
Bank. It is critical that a Bank's board retain the ability to police 
itself and prevent individuals whose history of criminality, 
malfeasance, poor judgment, or other concerning behavior indicates they 
are not fit to fulfill a fiduciary role with the Bank from being or 
remaining seated as directors. Conducting a background investigation in 
support of a director's nomination, whether for a member or independent 
directorship, is a common-sense way to prevent problems before they 
start.
    In July 2020, FHFA's Division of Bank Regulation issued a 
Supervisory Letter discussing the importance of conducting a thorough 
background check on any individual a Bank's board intends to nominate 
for an independent directorship. The guidance given in the letter 
remains applicable to background checks to be carried out under 
proposed Sec.  1261.7(e).

[[Page 87740]]

    Without a background investigation, a Bank could not reasonably 
determine whether a potential nominee meets its own standards, 
including codes of conduct, codes of ethics, conflicts of interest 
policies, and anti-fraud policies. A background check also gives a Bank 
an opportunity to verify that eligibility requirements have been met 
and that the employment and educational history shown on nominee's 
Application Forms is accurate. On occasion, a background check may 
reveal information that calls into question the validity of the 
responses on the Application Form, or the fitness of the nominee to 
serve in a fiduciary role with a large financial institution like the 
Bank. Examples that may give rise to concerns about the latter include 
a criminal record, past bankruptcy, or failure to pay taxes. A Bank 
should evaluate the circumstances surrounding each issue of concern and 
take appropriate steps to determine whether the risk can be 
satisfactorily mitigated or whether the board should decline to the 
nominate an individual for an independent directorship or post a 
member-nominated individual on the ballot for a member directorship. In 
either case, the board should thoroughly document its decision-making 
process.
    Finally, the proposed rule would add a new Sec.  1261.7(f), which 
would require each Bank to retain all information received under 
proposed Sec.  1261.7 for at least seven years after the date of the 
election in question and, in the case of any information about a 
specific director, for at least seven years after that director leaves 
the board. Each Bank would be required to maintain those records 
pursuant to a duly adopted policy. As mentioned above, existing Sec.  
1261.7 includes a number of separate provisions requiring that a Bank 
retain various documents for at least two years after an election.\32\ 
FHFA believes that all material documentation regarding a Bank's 
nomination and election process should be subject to the same retention 
requirements and that two years is not a sufficient length of time to 
retain those types of important records. Seven years is a conservative 
retention period that is frequently required by law or corporate 
policy,\33\ and one that is an appropriate minimum for Bank nomination 
and election records and not burdensome for a Bank to fulfill given the 
ease with which electronic records are stored.\34\
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    \32\ See 12 CFR 1261.7(b)(3), (c), (d)(2) (nominating 
certificates, executed Membership Director Certification Forms, and 
Independent Directorship Application Forms, respectively).
    \33\ See, e.g., 17 CFR 210.2-06 (Securities and Exchange 
Commission rule requiring records of an audit or review of an 
issuer's financial statements to be retained for seven years).
    \34\ FHFA's regulations at 12 CFR part 1235 establish general 
minimum requirements for record retention for the Agency's regulated 
entities, including the Banks and the OF. The standards established 
require that the regulated entities maintain adequate records in 
accordance with consistent accounting policies and practices that 
enable the Director to evaluate the financial condition of each 
regulated entity and the OF and such other operational and 
management standards as the Director determines to be appropriate.
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    Where information involves an individual that was elected to the 
board, proposed Sec.  1261.7(f) would require the information to be 
retained for the duration of that director's service and then for at 
least seven years after that director leaves the board. Issues 
regarding sitting Bank directors arise from time to time that call for 
reference to information or materials submitted years earlier as part 
of the nomination process and these materials should remain accessible 
until well after the directors to which they pertain have left the 
board.
6. Election Process--Sec.  1261.8
    Section 1261.8 of the existing regulation governs the various 
aspects of the Bank director election process. The proposed rule would 
make several substantive revisions to this section, including revisions 
regarding the required contents of a Bank's director election ballot, 
the authority of a Bank's board to decline to seat a director-elect for 
cause, and the length of time ballots need to be retained.
    Existing Sec.  1261.8(b) provides that if a Bank has conducted an 
annual assessment of the skills and experience possessed by the board 
permitted by Sec.  1261.9 and has included the results of the 
assessment as part of the election notice, it may include with each 
ballot a statement of the results of that assessment or any subsequent 
assessment. As discussed below, the proposed rule would revise Sec.  
1261.9 to make the now optional assessment mandatory for each Bank. The 
proposed rule would also require that the results of that assessment be 
included as part of the election notice required under Sec.  1261.7(a).
    Consistent with those changes, the proposed rule would delete 
existing Sec.  1261.8(b) and revise Sec.  1261.8(a) to require that a 
Bank include on the ballot a statement of the results of the 
assessment, including an explanation for any differences between the 
statement on the ballot and that appearing on the earlier election 
notice. Revised Sec.  1261.8(a) would also require that each Bank 
include on its election ballot a brief description of the skills and 
experience of each nominee for a member directorship. This is permitted 
but not required under the existing regulation, which does require that 
that qualifying areas of expertise for independent directorship 
nominees be noted on the ballot (a requirement that would be retained 
under the proposed rule). To accommodate these substantive revisions, 
the provisions within Sec.  1261.8(a) would be redesignated as 
paragraphs (a)(1) through (6).
    Given the ever changing business and societal landscape within 
which the Banks operate, it is prudent to look beyond the four to six 
regular independent directors they are likely to have on their 
respective boards and find ways to promote the nomination and election 
to member directorships of individuals that have the experience to 
cover some of the critical areas of board expertise. For example, if 
the Chief Technology Officer (CTO) of a Bank member were to be elected 
as a member director, that individual would likely be able to provide 
the board with necessary expertise in information technology and 
security and possibly in other critical areas enumerated in proposed 
Sec.  1261.5(c).
    Even if the nomination and election of member directors is largely 
within the control of Bank members in the respective voting States of 
the district, the required statement of needed skills and expertise on 
the election notice and ballot and the required inclusion on the ballot 
of a statement on the knowledge and skills possessed by individual 
member directorship nominees would encourage Bank members to take into 
account the expertise needed to allow the board to most effectively 
supervise the operations of the Bank. The coverage of vital areas of 
expertise through member directors, where possible, would allow the 
Bank to seek independent directors to cover some of the areas of 
expertise that senior officers and directors of Bank member 
institutions would be less likely to have.
    Existing Sec.  1261.8(f)(4) provides that a ``[b]ank shall not 
declare elected a nominee that it has reason to know is ineligible to 
serve, nor shall it seat a director-elect that it has reason to know is 
ineligible to serve.'' This provision, which would be redesignated as 
Sec.  1261.8(e)(4), would be revised also to prohibit a Bank's board 
from declaring elected a nominee or seating any director-elect it has 
reason to know is ``unfit'' to serve. As discussed above with respect 
to the background check required under Sec.  1261.7(e), a Bank's board 
must retain the ability to address the directorship status of 
individuals

[[Page 87741]]

who may pose a material risk to the Bank to fulfill its fiduciary duty 
to protect the Bank's interests. Proposed Sec.  1261.8(e)(4) would 
authorize and require a Bank to prevent the seating of a director if it 
obtains information indicating the individual poses a material and 
unacceptable risk to the Bank that was not available to it at the time 
it conducted the required background check.
    Because Sec.  1261.8(b) would be eliminated, the proposed rule 
would redesignate existing paragraphs (c) though (h) as paragraphs (b) 
through (g). It would also make multiple non-substantive changes 
throughout the section by adding cross-references to appropriate 
provisions of the revised regulation, removing redundant statements of 
the required qualifications for independent directors, and making other 
minor changes to nomenclature and phrasing.
7. Actions Affecting Director Elections--Sec.  1261.9
    Existing Sec.  1261.9 addresses actions affecting director 
elections. Paragraph (a) authorizes each Bank to ``conduct an annual 
assessment of the skills and experience possessed by its board of 
directors as a whole and [to] determine whether the capabilities of the 
board would be enhanced through the addition of individuals with 
particular skills and experience.'' The proposed rule would make this 
annual assessment mandatory and require that the results of the 
assessment be reflected in the election announcement under proposed 
Sec.  1261.7(a) and the election ballot under proposed Sec.  1261.8(a), 
as discussed above. It would also require that the assessment be 
undertaken ``pursuant to policies adopted by the board.''
    To effectively oversee a Bank's operations, its board should be 
balanced and includes a diversity of experience and perspectives across 
member and independent directors. Periodic assessment of the knowledge 
and skills possessed by sitting board directors and identification of 
areas that require better coverage is critical to ensuring that a 
Bank's board of directors is able to effectively oversee and guide the 
operations of the Bank.
    FHFA requests comment on whether requiring that such an assessment 
be completed on a less frequent cadence than annually would compromise 
a Bank's ability to plan effectively.
    Aside from this, to plan effectively, Bank boards of directors 
should develop and maintain a director's service timeline to track all 
directors' terms from beginning to end; develop and annually review and 
update a director position description for member directors, regular 
independent directors, and public interest independent directors; and 
focus recruiting on addressing gaps in knowledge and skills identified 
by the assessment. Insufficient board succession planning can lead to a 
lack of experience and expertise needed to effectively oversee a Bank's 
operations. For example, if several long-tenured directors were to 
vacate a Bank's board simultaneously, the board may face a critical 
loss of institutional knowledge. Without appropriate succession 
planning, a Bank's board may find itself lacking knowledge, skills, and 
abilities that are critical to providing effective strategic direction 
and oversight.
    The remaining revisions to Sec.  1261.9(a) would be non-substantive 
clarifying revisions to change the heading from the cryptic ``Banks'' 
to the more descriptive ``Annual assessment of skills and experience,'' 
add cross-references to appropriate provisions of the revised 
regulation, remove redundant statements of the required qualifications 
for independent directors, and make other minor changes to nomenclature 
and phrasing. Existing Sec.  1261.9(b) and (c) would remain unchanged.
8. Independent Director Independence--Sec.  1261.10
    Section 1261.10 is currently entitled ``Independent director 
conflict of interests.'' Because the focus of the section is to 
elaborate on the ``independence'' requirements for independent 
directors, the proposed rule would revise the heading of Sec.  1261.10 
to read ``Independent director independence.'' Conflicts-of-interest 
policies for all Bank directors are covered separately from 
independence requirements, in Sec.  1261.11.
    Existing Sec.  1261.10(a) prohibits any independent director from 
serving as an officer, employee, or director of any member of the Bank, 
or of any recipient of advances from the Bank, or as an officer of any 
Bank, during that director's term of service on the Bank's board. The 
proposed rule would redesignate paragraph (a) as paragraph (a)(1) and 
revise the provision to prohibit an independent director from serving 
not only as an officer, but also as any kind employee, of another Bank. 
Permitting even a non-executive employee of one Bank to serve on the 
board of another Bank could not only compromise the independence of the 
board on which the individual sits, but could also give rise to 
internal control concerns for the Bank employing the individual.
    The proposed rule would further revise newly-redesignated Sec.  
1261.10(a)(1) to prohibit not just the seating, but also the nomination 
of individuals with any of the impermissible connections. Under the 
existing regulation, FHFA has permitted Banks to nominate individuals 
with a prohibited connection for an independent directorship, provided 
the nominee agrees to relinquish the impermissible position prior to 
being seated on the board. Extending the independence requirement to 
the nomination phase creates greater separation between a director's 
term of service and pursuit of possible conflicting interests and helps 
ensure that anyone wishing to serve as an independent director is 
committed to being a true outside voice.\35\
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    \35\ Notwithstanding FHFA's approach to this issue since the 
post-HERA requirements were implemented, the extension of the 
independence requirements to independent directorship nominees is 
consistent with section 7(b)(2)(B) of the Bank Act, which provides 
that ``[n]ominees shall meet all applicable requirements prescribed 
in this section.'' See 12 U.S.C. 1427(b)(2)(B).
---------------------------------------------------------------------------

    The proposed rule would also create a new paragraph (a)(2), which 
would define the term ``advances'' for purposes of applying the 
prohibition against the seating or nomination of any officer, employee, 
or director of any ``recipient of advances'' from the Bank. As 
proposed, the term would include any loan from a Bank to the recipient, 
regardless of form or nomenclature, except for debt securities traded 
in the public capital markets. This definition is intended to prevent 
Banks and housing associates such as state housing finance agencies 
(SHFAs) from skirting the independence requirements by creating bespoke 
lending terms for the housing associate by which an independent 
director or nominee is employed in an arrangement called something 
other than an ``advance.'' At the same time, the definition would allow 
Banks to support their housing associates through the purchase of debt 
securities on the open market on the same terms and conditions as are 
applicable to other market participants even where an employee of the 
housing associate is serving as an independent director. Providing 
clarity regarding the meaning of the word ``advances'' in this context 
was suggested in the Bank System's joint letter in response to FHFA's 
Spring 2023 Notice of Regulatory Review. FHFA requests comment on 
whether the proposed definition adequately addresses the relevant legal 
and policy concerns or whether a different definition would be more 
appropriate.

[[Page 87742]]

    The proposed rule would make no revisions to existing Sec.  
1261.10(b).
    Existing Sec.  1261.10(c) provides that, for purposes of 
determining compliance with the independence requirements, a Bank shall 
attribute to the independent director any officer position, employee 
position, or directorship of the director's spouse. The proposed rule 
would further strengthen independence requirements by extending the 
attribution requirement to all ``immediate family members'' of the 
director or nominee. Existing Sec.  1261.11(f) defines ``immediate 
family member'' to include a ``parent, sibling, spouse, child, or 
dependent, or any relative sharing the same residence as the director'' 
for purposes of the director conflicts-of-interest requirements; under 
the proposed rule, the same definition would apply for purposes of the 
independence provisions. The proposed change recognizes that director 
independence can be compromised through the activities and financial 
interests of close family members other than a spouse, seeks to prevent 
circumvention of the spirit of the independence requirement, and aligns 
the standards for the independence requirement with those of the 
conflicts-of-interest requirements.
    In line with the extension of the independence requirements to 
nominees under proposed Sec.  1261.10(a), the rule would also add a new 
paragraph (d) to Sec.  1261.10 to require any former member director to 
wait at least two years after leaving a member directorship before 
returning to the board as an independent director (assuming all 
eligibility requirements are met for the position). The two-year 
requirement parallels the two-year requirement set forth in the 
statutory provision at 18 U.S.C. 207 that is the primary source of 
post-employment restrictions applicable to officers and employees of 
the executive branch of the Federal Government and the two year period 
during which former Bank directors who have termed out are prohibited 
from serving.\36\ These types of transitions have happened on occasion 
and FHFA has typically permitted a member director to transition to an 
independent directorship upon relinquishing the impermissible position, 
without any ``cooling off'' period. By requiring a two-year sit out 
period FHFA intends to create greater separation between the seating of 
an independent director and the individual's employment with a member. 
The Agency requests comments on whether a different length of time 
would more effectively ensure board independence.
---------------------------------------------------------------------------

    \36\ See 12 U.S.C. 1427(d).
---------------------------------------------------------------------------

9. Conflicts of Interest Policy for Bank Directors--Sec.  1261.11
    In Sec.  1261.11, the proposed rule would revise the section 
heading to read ``Conflicts of interest'' instead of ``Conflict of 
interests'' and would make related conforming changes throughout the 
section. The only other changes to Sec.  1261.11 would be to revise the 
definition of ``financial interest'' in paragraph (f) and to list 
definitions in alphabetical order.
    Existing Sec.  1261.11(b) requires a Bank director to disclose any 
``financial interests,'' as well as those of any immediate family 
member or business associate, in any matter to be considered by the 
Bank's board of directors and in any other proposed or actual business 
matter involving the Bank and any other person or entity and to refrain 
from considering or voting on any issue in which the director, any 
immediate family member, or any business associate has any financial 
interest. For purposes of those requirements, existing Sec.  1261.11(f) 
defines ``financial interest'' to mean ``a direct or indirect financial 
interest in any activity, transaction, property, or relationship that 
involves receiving or providing something of monetary value, and 
includes, but is not limited to any right, contractual or otherwise, to 
the payment of money, whether contingent or fixed.'' The provision 
further states that the term ``does not include a deposit or savings 
account maintained with a member, nor does it include a loan or 
extension of credit obtained from a member in the normal course of 
business on terms that are available generally to the public.''
    In its letter in response to FHFA's Spring 2023 Notice of 
Regulatory Review, the Bank System commented that the list of 
exclusions in the definition of ``financial interest'' found in 
existing Sec.  1261.11 is too narrow in scope and should be broadened 
to reflect other financial services products obtained under similar 
circumstances. In response to the comment, FHFA is proposing to revise 
the exclusion from the definition of ``financial interest'' in Sec.  
1261.11(f) to refer to ``a deposit or savings account, loan or 
extension of credit, or other accounts and products obtained in the 
normal course of business on non-preferential terms generally available 
to the public from a member institution or from a non-member 
counterparty to the Bank on whose board the director sits.''
    In the same letter, the Bank System recommended that FHFA harmonize 
the standard for what constitutes a conflict under FHFA's Affordable 
Housing Program (AHP) regulation \37\ with the standard for Bank 
directors under Sec.  1261.11--specifically, that the definitions of 
``financial interest'' and ``immediate family member'' be made 
identical for both regulations. Existing Sec.  1261.11 defines 
``immediate family member'' as a parent, sibling, spouse, child, or 
dependent, or any relative sharing the same residence as the director. 
That definition would remain unchanged under the proposed rule and 
would also be used, along with the revised definition of ``financial 
interest,'' in the new provision on Bank employee conflicts under 
proposed 12 CFR 1239.31 (discussed below). FHFA anticipates that the 
Bank System's request regarding the AHP regulation will be addressed in 
a subsequent rulemaking.
---------------------------------------------------------------------------

    \37\ The AHP regulation prohibits Bank directors, employees, and 
advisory council members from participating in decisions regarding 
AHP projects in which they or a family member have a financial 
interest and requires each Bank to adopt a conflicts-of-interest 
policy for its AHP. See 12 CFR 1291.16. For purposes of these 
requirements, the regulation defines ``family member'' as ``any 
individual related to a person by blood, marriage, or adoption,'' 
see 12 CFR 1291.1, but does not define ``financial interest.''
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    The proposed rule would not make any other revisions to Sec.  
1261.11.
10. Reporting Requirements for Bank Directors--Sec.  1261.12
    The proposed rule would make only one change to Sec.  1261.12, 
which establishes reporting requirements for Bank directors. Existing 
Sec.  1261.12(b) provides that at any time a director believes or has 
reason to believe that they no longer meet the eligibility requirements 
set forth in the Bank Act or the regulation, the director shall 
promptly notify the Bank and FHFA in writing. The proposed rule would 
eliminate the requirement that a director submit the notification to 
FHFA, requiring only that it be submitted to the Bank. The last 
sentence of Sec.  1261.12(b) requires a Bank to promptly notify FHFA in 
writing any time it believes or has reason to believe that any director 
no longer meets the eligibility requirements, and this has typically 
been the method through which FHFA has been informed of director 
ineligibility. Director eligibility is an issue for a Bank to monitor 
and address in the first instance and there is no reason for an 
individual director to contact FHFA directly about eligibility issues.

[[Page 87743]]

11. Ineligibility and Removal of Bank Directors--Sec.  1261.13
    Existing Sec.  1261.13 addresses the ineligibility of Bank 
directors. It provides that upon a determination by FHFA or a Bank that 
any director of the Bank no longer satisfies the statutory or 
regulatory eligibility requirements, or has failed to comply with the 
reporting requirements, the directorship shall immediately become 
vacant. The proposed rule would retain this provision without revision, 
other than to redesignate it as paragraph (a), with the heading 
``Ineligibility.''
    The proposed rule would also create a new paragraph (b) to 
establish the authority of a Bank's board to remove directors for good 
cause, which may be based upon: (i) a material violation of the Bank's 
code of ethics or other applicable Bank policy; (ii) a material 
violation of the Bank Act, FHFA regulations or other criminal or civil 
law; (iii) a determination by the board that continuation in office of 
such director would be materially harmful to the Bank; (iv) conduct, or 
a mental or physical condition, that raises substantial questions 
concerning the director's ability to fulfill their duties and 
obligations; or (v) a determination under proposed Sec.  1261.22(b)(3) 
(discussed below, requiring that the board assess director performance 
annually) that the director's continuous poor performance or lack of 
participation is compromising the board's ability to adequately oversee 
the operations of the Bank. Under the proposed rule, a Bank would also 
be required to promptly notify FHFA in writing of any pending or final 
removal actions taken pursuant to this authority.
    As stated above with respect to the required background check for 
directorship nominees, the safe and sound operation of every Bank 
depends, in part, upon the existence of some mechanism for identifying 
and addressing potential risks to a Bank that could be posed by its own 
directors. It is important that a Bank's board have clear authority to 
address risks posed by sitting directors, as well as potential risks 
posed by those seeking to become directors. FHFA believes that the 
prescribed list of ``good cause'' bases for removal, as well as the 
requirements that two-thirds of disinterested Bank directors vote to 
remove and that a Bank carry out any actions pursuant to policies 
adopted by the Bank's board should minimize the chance that any removal 
authority would be abused or applied in anything other than an 
objective fashion in the best interests of the Bank.
    Some Banks already have a policy providing for the good cause 
removal of directors, which FHFA believes is appropriate. FHFA believes 
it is important to make clear that each Bank's board retains this 
limited authority and requests comment on whether it would be 
appropriate to require each Bank to adopt policies on good cause 
removal. The Agency also requests comment on whether any factors should 
be added or eliminated from the list of ``good cause'' bases for 
removal and on whether the revised regulation should require separate 
votes by member and independent directors or something other than a 
two-thirds vote for removal.
12. Vacant Bank Directorships--Sec.  1261.14
    Section 1261.14 of the existing regulation establishes the 
requirements and procedures for the filling of vacant Bank 
directorships by the Bank's board of directors. The proposed rule would 
make numerous clarifying edits to this section.
    Existing Sec.  1261.14(a), entitled ``Filling of unexpired terms,'' 
requires that, when a directorship vacancy occurs, the Bank's board 
elect an individual to complete the unexpired term of office of the 
vacant directorship. The election is determined by a majority vote of 
the remaining Bank directors sitting as a board, regardless of whether 
the remaining Bank directors constitute a quorum.\38\ The regulation 
permits a Bank's board to fill an anticipated vacancy prior to its 
occurrence, but it may do so no sooner than the regularly scheduled 
board meeting immediately prior to the effective date of the 
vacancy.\39\ To fill a particular vacancy, a Bank's board may elect 
only an individual who satisfies all the statutory and regulatory 
eligibility requirements ``that applied to his or her predecessor'' 
and, for independent directorships, also satisfies any of the 
independent director qualifications. If a Bank does not have at least 
two sitting public interest independent directors, its board must 
designate the vacant directorship as a public interest independent 
directorship and elect an eligible and qualified individual to fill 
it.\40\
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    \38\ 12 CFR 1261.14(a)(1).
    \39\ 12 CFR 1261.14(a)(2).
    \40\ 12 CFR 1261.14(a)(3).
---------------------------------------------------------------------------

    While retaining the same basic approach, the proposed rule would 
restate the standards for determining who is eligible to fill a 
particular vacancy and expressly allow Banks some flexibility in 
filling vacant independent directorships. The proposed rule would also 
reconfigure existing paragraph (a)(1) into the introductory paragraph 
to Sec.  1261.14(a) and redesignate the succeeding paragraphs 
accordingly.
    With respect to determining who is an eligible successor to a 
director that has left the board, the existing regulation provides that 
the board ``shall elect only an individual who satisfies all the 
eligibility requirements in the Bank Act and in this subpart that 
applied to his or her predecessor and, for independent directorships, 
also satisfies any of the qualifications in the Bank Act or this 
subpart.'' The proposed rule would delete this language and state, 
simply, in Sec.  1261.14(a)(2) that a Bank's board must: (i) fill a 
vacant member directorship only with an individual who meets the member 
director eligibility requirements set forth in proposed Sec.  1261.5(a) 
(including by being an officer or director of a member located in the 
voting state to which the vacant member directorship is allocated); and 
(ii) fill a vacant independent directorship only with an individual who 
meets the eligibility requirements for independent directors set forth 
in proposed Sec.  1261.5(b).
    By statute, a Bank's board must at all times have at least two 
seats designated as public interest independent directorships. If one 
of those seats becomes vacant, it should be filled as expeditiously as 
possible. Proposed Sec.  1261.14(a)(3) would provide more express 
flexibility in filling a vacant public interest independent 
directorship than the existing regulation by permitting a Bank's board 
either to: (i) elect an individual who is qualified under Sec.  
1261.5(c)(2) to serve as a public interest independent director to fill 
the vacancy; or (ii) elect to redesignate as a public interest 
independent director a sitting regular independent director who is 
qualified under Sec.  1261.5(c)(2) to serve as a public interest 
independent director. In the latter case, the board would elect another 
individual who is qualified under Sec.  1261.5(c)(1) to serve as a 
regular independent director to fill the resulting vacant regular 
independent directorship. The proposed change would also make it 
possible for the board of directors to redesignate a public interest 
independent director as a regular independent director. This may occur, 
for example, if the Bank already has more than two sitting public 
interest independent directors on its board. Although FHFA views such 
scenarios as permissible under the existing language and has permitted 
Banks to fill vacant public interest and regular independent 
directorships in that way, the proposed revisions would

[[Page 87744]]

make it clear that the Banks have this flexibility.
    Proposed Sec.  1261.14(a)(4) would make clear that a Bank's board 
of directors must consult with the Bank's Advisory Council before 
considering any individual to fill a vacant independent directorship, 
just as is required under existing Sec.  1261.7(d)(2) (proposed Sec.  
1261.7(c)(3)) when a board is considering independent directorship 
nominations during the regular election cycle.
    Existing Sec.  1261.14(b), entitled ``Verifying eligibility,'' 
requires that prior to any election to fill a board vacancy, the Bank 
obtain an executed Application or Certification Form (as appropriate) 
from each individual being considered to fill the vacancy and use the 
Forms to verify each individual's eligibility and qualifications. The 
existing provision also requires that the Bank deliver to FHFA for its 
review a copy of the Application Form of each individual being 
considered by the board.
    The proposed rule would make several clarifications to Sec.  
1261.14(b), as well as breaking the revised material into four 
paragraphs for better readability. Proposed Sec.  1261.14(b)(1) would 
continue to require that a Bank obtain the appropriate executed 
Application or Certification Form from each individual being considered 
to fill a vacancy and would clarify that this requirement applies even 
when a Bank's board is contemplating the redesignation of a sitting 
regular independent director as a public interest independent director 
or vice versa.
    Proposed Sec.  1261.14(b)(2) would require that a Bank conduct a 
background check on any individual being considered to fill a vacant 
directorship in the same manner as required for nominees in the regular 
election cycle under proposed Sec.  1261.7(e).
    Proposed Sec.  1261.14(b)(3) would continue to require that a 
Bank's board deliver to FHFA for review the executed Independent 
Director Application Form for each individual being considered by the 
board to fill a vacant independent directorship and would clarify that 
(as is the case for its review of Independent Director Application 
Forms during the regular election cycle) FHFA has two weeks within 
which to provide comments to the Bank. The proposed provision would 
also require a Bank to provide a summary of the background check.
    Finally, proposed Sec.  1261.14(b)(4) would require a Bank to 
retain all information obtained under Sec.  1261.14(b) for at least 
seven years after the date of the election in question and, in the case 
of any information about a specific director, for at least seven years 
after that director leaves the board. This parallels the retention 
requirements that would apply to materials received during the regular 
nomination and election cycles under Sec. Sec.  1261.7(f) and 
1261.8(e)(5).
    Existing Sec.  1261.14(c), governing notification, would remain 
unchanged under the proposed rule.
    In the remainder of subpart B of part 1261, the proposed rule would 
make no changes to existing Sec.  1261.15 (setting forth the table for 
``grandfathered'' member directorships) and would remove Sec.  1261.16, 
which contains no regulatory text and is designated as reserved.
13. (Directors' Compensation) General--Sec.  1261.21
    In subpart C of the existing regulation, Sec.  1261.21 addresses 
Bank and OF director compensation.\41\ Existing Sec.  1261.21(a) 
authorizes each Bank and OF to pay its directors reasonable 
compensation and necessary expenses. This authority is subject to 
further provisions of subpart C requiring each Bank and the OF to 
compensate its directors pursuant to an annually adopted and FHFA-
reviewed written compensation policy \42\ and authorizing the Director 
to disapprove compensation or expenses determined not to be 
reasonable.\43\ Existing Sec.  1261.21(b) requires that each Bank and 
OF report to the Director annually about the compensation it 
anticipates paying out in the following year and director compensation, 
expenses, and meeting attendance for the immediately preceding calendar 
year. FHFA is proposing changes to both paragraphs (a) and (b) of 
existing Sec.  1261.21, as described below.
---------------------------------------------------------------------------

    \41\ Section 1261.21 applies to OF independent directors by 
operation of 12 CFR 1273.7(f)(2). Bank presidents serve as ex 
officio directors of the OF but are not compensated for such 
service. 12 CFR 1273.7(f)(1).
    \42\ See 12 CFR 1261.22(a) and (d).
    \43\ See 12 CFR 1261.23.
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    Proposed amendment to paragraph (a), ``Standard.'' By statute, the 
Banks and OF are authorized to pay their directors reasonable 
compensation for the time required of them and necessary expenses they 
incurred in performing their duties, provided the Bank System regulator 
approves such compensation.\44\ As did predecessor Bank System 
regulators, FHFA interprets its statutory obligation to approve 
reasonable director compensation as conferring authority to establish a 
maximum amount or level of reasonable compensation and to provide prior 
notice of that amount to each Bank and the OF. FHFA now proposes to 
state that authority in the regulation.
---------------------------------------------------------------------------

    \44\ See 12 U.S.C. 1427(i)(1). FHFA has applied section 7(i) to 
OF pursuant to the Director's authorities under 12 U.S.C. 
4511(b)(2).
---------------------------------------------------------------------------

    Current section 7(i)(1) of the Bank Act is identical to the 
provision regarding director compensation originally enacted as section 
7(h) of the Bank Act in 1932, providing that ``[e]ach bank may pay its 
directors reasonable compensation for the time required of them, and 
their necessary expenses, in the performance of their duties, in 
accordance with the resolutions adopted by such directors, subject to 
the approval of the board.'' \45\ Although the current statutory 
provision does not expressly identify FHFA as the approving authority, 
review of the Bank Act demonstrates that ``board,'' as used in the 
approval proviso, must be read to refer to FHFA.
---------------------------------------------------------------------------

    \45\ Compare 12 U.S.C. 1427(i)(1) with Public Law 72-304, sec. 
7(h), 47 Stat. 725, 730 (July 22, 1932).
---------------------------------------------------------------------------

    When originally enacted in 1932, the Bank Act defined ``board'' as 
the Federal Home Loan Bank Board (FHLBB), the original regulator of the 
Bank System.\46\ Thus, through use of the word ``board,'' section 7(h) 
as originally enacted unambiguously provided the FHLBB authority to 
approve Bank director compensation. When section 7 of the original Bank 
Act is read as a whole, it is apparent that Congress used the term 
``board'' standing alone to mean the Bank System regulator, and used 
``board of directors'' or a clear derivative of that term (e.g., a 
``board of eleven directors,'' or ``such board'') when referring to a 
Bank's board of directors.\47\ Moreover, that approach is evident 
throughout the Bank Act as originally enacted \48\ and across 
amendments over time.\49\
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    \46\ Public Law 72-304, sec. 2(1), 47 Stat. 725.
    \47\ Public Law 72-304, sec. 7(a) and (b), 47 Stat. 730.
    \48\ See generally, Public Law 72-304, secs. 12, 17, 18, and 20, 
47 Stat. 735-38.
    \49\ Amendments from 1935 also used ``Board'' in uppercase to 
refer to the FHLBB. Among other changes, amendments to section 7 in 
1935 provided for the election of ``[t]wo of such [Bank] directors'' 
by Bank members without regard to classes, under ``rules and 
regulations to be prescribed by the Board.'' Public Law 74-76, sec. 
3(b), 49 Stat. 293, 294 (May 28, 1935) (emphasis added). As later 
examples, see Public Law 84-345, sec. 109(a)(2), 69 Stat. 635, 640 
(Aug. 11, 1955), and Public Law 86-349, sec. 1 and 2, 73 Stat. 625 
(Sept. 22, 1959). The 1935 amendments also added a new paragraph 
(d), such that original paragraph (h) on Bank director compensation 
was re-lettered paragraph (i), as it is today.
---------------------------------------------------------------------------

    Original section 7(h) was redesignated as section 7(i) in 1935.\50\ 
When Congress amended sections 7(a) through (h) in 1961 to revise 
provisions governing the

[[Page 87745]]

election and appointment of Bank directors it added a clause stating 
that ``Federal Home Loan Bank Board'' would be ``hereinafter in this 
section referred to as the Board'' to paragraph (a).\51\ Section 7(i) 
on director compensation and section 7(j) on administration of the 
affairs of each Bank by its board of directors were not addressed in 
the 1961 amendments, and section 2(1) of the Bank Act, defining 
``board'' as the FHLBB, also was not amended or repealed. As a result, 
after the 1961 amendments, section 7 used both ``Board'' and ``board'' 
standing alone, and each term was identified or defined as--and 
understood to refer to--the Bank System regulator.
---------------------------------------------------------------------------

    \50\ Public Law 74-76, sec. 3(b), 49 Stat. 294.
    \51\ Public Law 87-211, 75 Stat. 486 (Sept. 8, 1961).
---------------------------------------------------------------------------

    Reading ``board'' otherwise--as referring to a Bank's board of 
directors--leads to an implausible outcome. For example, the Bank's 
board of directors would then be statutorily required to act twice on 
the matter of directors' compensation--once by resolution and once by 
``approval''--or one of the two actions (resolution or approval) is 
unnecessary, because it would be redundant.\52\ Moreover, such a 
reading also requires assuming that in 1961 Congress intended to 
withdraw authority from the Bank System regulator and confer it on each 
Bank's board of directors through a new practice, used in only one 
place in the Bank Act, of referring to the Bank's board of directors as 
``board,'' standing alone in lowercase and as distinguished from 
``Board,'' meaning the Bank System regulator, standing alone in 
uppercase. The correct reading of section 7 after the 1961 amendments 
is that either ``board'' or ``Board,'' when standing alone in section 
7, meant the ``Federal Home Loan Bank Board.'' This conclusion is also 
supported by the Bank System regulator's contemporaneous understanding, 
as evidenced by the fact that following the 1961 amendments, the FHLBB 
did not revise its Bank director compensation regulation adopted in 
1958, which stated that Bank directors' fees were subject to the 
approval of the FHLBB.\53\
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    \52\ ``Every clause and word of a statute should, if possible, 
be given effect.'' United States v. Menasche, 348 U.S. 528, 538-539 
(1955) (internal citations omitted). ``The presence of statutory 
language cannot be regarded as mere surplusage; it means 
something.'' Potter v. U.S., 155 U.S. 438, 446 (1894).
    \53\ See 23 FR 9878, 9885 (Dec. 23, 1958). Presumably Congress 
was aware of this interpretation in 1961, when it chose not to amend 
paragraph (i). The FHLBB did not amend its Bank directors' 
compensation regulation again until 1978, when it codified its 
policy, first established in 1974, of imposing supervisory limits on 
Bank director compensation. See 43 FR 46835 (Oct. 11, 1978).
---------------------------------------------------------------------------

    In 1989, the Financial Institutions Reform, Recovery, and 
Enforcement Act (FIRREA) established the Federal Housing Finance Board 
(Finance Board) to replace the FHLBB as the Bank System regulator and 
revised the Bank Act to replace all uses of ``board'' except in section 
7 with ``Board,'' which FIRREA defined as the Finance Board.\54\ 
Because this change in terms did not cover section 7 (plausibly to 
avoid changing ``board'' in the term ``board of directors'' to 
``Board''), in sections 7(a) through (h) ``Board'' continued to connote 
the Bank System regulator while section 7(i) continued to use the 
lowercase ``board.'' There is no evidence that FIRREA's failure to 
change the word ``board'' in section 7(i) as part of the conforming 
amendments to reflect the name of the new System regulator, however, 
was intended to change the long-held understanding that the word refers 
to the Bank System regulator. In contrast, FHLBB regulations in effect 
immediately prior to FIRREA's enactment and later regulations of the 
Finance Board demonstrate that those agencies understood ``board'' in 
the approval proviso to refer to the System regulator.\55\
---------------------------------------------------------------------------

    \54\ Public Law 101-73, secs. 401(a)(2), 702(a), and 703, 103 
Stat. 354, 413, and 415 (Aug. 9, 1989); see also Public Law 101-73, 
sec. 701(a)(1) and (b), 103 Stat. 411, 412.
    \55\ See 12 CFR 522.60 (1989), as originally adopted in 1978, 43 
FR 46837. This regulatory provision was not thereafter amended by 
the FHLBB but was transferred without change by the Finance Board 
after FIRREA's enactment, see 54 FR 36757, 36758 (Sept. 5, 1989). 
See also 61 FR 43151, 43153 (Aug. 21, 1996) (wherein the Finance 
Board determined that a dollar cap on Bank director compensation was 
appropriate considering ``the agency's statutory responsibility to 
`approve' Bank directors' compensation, see 12 U.S.C. 1427(i), the 
Bank Act's requirement that such compensation be `reasonable,' see 
id., and the preference for providing a clear regulatory 
standard.'').
---------------------------------------------------------------------------

    Most recently, section 7(i) of the Bank Act was amended by HERA in 
2008, when section 7(i)(2), which was added by the Gramm-Leach-Bliley 
Act (GLBA) in 1999 and imposed statutory limits on Bank director 
compensation, was repealed.\56\ The 2008 amendment thus returned 
section 7(i)(1) to the same language as section 7(i) before GLBA was 
enacted, providing that director compensation was subject to the 
approval of the ``board''--in lowercase but standing alone. Because 
HERA also made FHFA the Bank System regulator, replacing the Finance 
Board, HERA included a number of general amendments changing references 
to the ``Board'' or the ``Finance Board'' to the ``Director'' of 
FHFA.\57\ Likely because ``board'' in the section 7(i)(1) approval 
proviso was not capitalized, it was not identified as a reference in 
need of updating. Once again however, the fact that the proviso was not 
changed indicates that Congress did not intend to change its meaning. 
And, as has been consistently demonstrated from the enactment of the 
Bank Act in 1932 through its many amendments and in the regulations of 
successive System regulators, the proviso means that the Bank System 
regulator--now FHFA--has authority to approve Bank director 
compensation.\58\
---------------------------------------------------------------------------

    \56\ Public Law 110-289, sec. 1202(7), 122 Stat. 2783 (July 30, 
2008); see also Public Law 106-102, sec. 606(b), 113 Stat. 1450, 
1453 (Nov. 12, 1999). Even after GLBA's imposition of statutory 
limits the Bank System regulator continued to assert approval 
authority by regulation, see 12 CFR 932.17(f) (2000) (``Payments 
made to directors in compliance with the limits on annual directors' 
compensation and the standards set forth in this section are deemed 
to be approved by the Finance Board for purposes of section 7(i) of 
the [Bank] Act, as amended.'').
    \57\ Public Law 110-289, sec. 1204, 122 Stat. 2785.
    \58\ Consistent statutory interpretation by the administrative 
regulator ``is of persuasive force,'' U.S. v. Madigan, 300 U.S. 500, 
505 (1937); see also Skidmore v. Swift & Co., 323 U.S. 134, 140 
(1944).
---------------------------------------------------------------------------

    The legislative and regulatory history that substantiates FHFA's 
authority to approve Bank director compensation also affirms its 
authority to establish limits on ``reasonable'' compensation. As early 
as 1974, the Bank System regulator limited Bank director compensation 
by policy, exercising statutory authority identical to that in existing 
section 7(i)(1).\59\ Thereafter, the Bank System regulator's authority 
to determine a level of ``reasonable'' Bank director compensation was 
codified in regulation, first in 1978 and again in 1989, 1996, 1999, 
2000, 2002, and 2010.\60\
---------------------------------------------------------------------------

    \59\ See 61 FR 17603 (Apr. 22, 1996).
    \60\ See 43 FR 46837 (Oct. 11, 1978), 54 FR 36757 (Sept. 5, 
1989), 61 FR 43151 (Aug. 21, 1996), 64 FR 71278 (Dec. 21, 1999), 65 
FR 8260 (Feb. 18, 2000), 67 FR 12846 (Mar. 20, 2002), and 75 FR 
17040 (Apr. 5, 2010).
---------------------------------------------------------------------------

    In common with earlier Bank System regulators, FHFA views its 
express statutory authority to approve Bank director compensation on 
the basis that it is reasonable as conferring authority to establish 
and provide to the Banks and OF an amount of director compensation that 
FHFA has determined would be reasonable. After administering the 
existing regulation for almost 15 years, FHFA believes it could be 
useful to provide the Banks and OF information on a level or amount of 
director compensation FHFA has determined to be reasonable, for 
consideration when each Bank and OF develops its directors' 
compensation policy.
    The existing regulation requires each Bank and OF to submit its 
director compensation policy to FHFA for prior

[[Page 87746]]

review and addresses FHFA's obligation to disapprove director 
compensation that is not reasonable. The Bank Act does not define 
``reasonable,'' but FHFA relies on concepts and processes similar to 
those used in its review of Bank executive officer compensation (where, 
by statute, FHFA is required to prohibit the regulated entities from 
providing executive officers compensation that is not reasonable and 
comparable to compensation paid by similar institutions for the 
performance of similar duties \61\). When determining if proposed 
compensation of Bank or OF directors is ``reasonable,'' FHFA considers 
a variety of factors including compensation of directors at other 
banking institutions; the Banks' status as government-sponsored 
enterprises and features of their statutory charters, governance, and 
businesses that may distinguish them from other institutions; their 
statutory purposes and mission; and the fact that they were created to 
serve a public purpose.
---------------------------------------------------------------------------

    \61\ See 12 U.S.C. 4518(a); see also 12 CFR part 1230.
---------------------------------------------------------------------------

    Currently, if FHFA determines that proposed director compensation 
is not reasonable, it does not provide the relevant Bank or OF 
information on an alternative amount of compensation that FHFA would 
deem to be reasonable. Instead, the Bank or OF must submit a new 
proposal, subject to a new FHFA review. FHFA believes this process 
imposes a burden on the Banks and OF which could be reduced or avoided 
if FHFA provided notice of a maximum amount of annual director 
compensation FHFA has determined would be reasonable. Because FHFA has 
not previously exercised that authority, and for consistency with 
earlier System regulators which stated such authority in regulation, 
FHFA now believes it should state its authority to establish an amount 
of ``reasonable'' director compensation and to provide prior notice of 
that amount to the Banks and OF in regulation.
    FHFA does not propose to establish a maximum amount or level of 
compensation in this regulatory action. In the future, FHFA may 
establish such an amount and may do so through a regulatory amendment 
or an order. FHFA may also provide guidance on an amount of Bank or OF 
director compensation it believes would be reasonable. In any case, 
FHFA expects any amount or level of ``reasonable'' compensation so 
established would reflect consideration factors such as those set forth 
above.
    Likewise, FHFA does not propose to amend other provisions of 
existing subpart C that currently require each Bank and OF, when 
submitting its directors' compensation policy to FHFA, to include all 
studies or other supporting materials upon which the board relied in 
determining the level of compensation and expenses to pay to its 
directors; require FHFA to review the policy; and acknowledge FHFA's 
authority to disapprove the policy if FHFA determines that compensation 
and/or expenses to be paid to the directors are not reasonable.\62\ 
Should FHFA in the future provide the Banks and OF prior notice of a 
maximum amount of director compensation determined to be reasonable, 
FHFA does not intend that each Bank or OF simply adopt that amount in 
its policy. Instead, FHFA expects that the board of directors of each 
Bank and OF would continue to evaluate and affirmatively determine 
reasonable director compensation and that each annual policy submission 
would continue to provide studies, supporting materials, and 
justification for such determinations. As it does currently, FHFA 
expects to review each submission in full and may disapprove proposed 
compensation that is not supported as reasonable. FHFA may also approve 
a proposal to pay compensation that exceeds the amount FHFA has 
communicated by prior notice if the Bank or OF provides appropriate 
support.
---------------------------------------------------------------------------

    \62\ See 12 CFR 1261.22 and 1261.23.
---------------------------------------------------------------------------

    Proposed amendment to paragraph (b), ``Reporting.'' As noted above, 
existing Sec.  1261.21(b) requires that each Bank report to the 
Director annually about the compensation it anticipates paying out in 
the following year and director compensation, expenses, and meeting 
attendance for the immediately preceding calendar year. One of the 
items required to be included in the latter category under the existing 
regulation is ``[t]he number of board and designated committee meetings 
each director attended in-person or through electronic means such as 
video or teleconferencing.'' In order to conform more closely to the 
language that would be used in revised Sec.  1261.24 (discussed below), 
the proposed rule would revise the description of this item to refer to 
``meetings each director attended in person or remotely, through video 
or teleconferencing, and in accordance with Sec.  1261.24(b).''
14. Directors' Compensation Policy--Sec.  1261.22
    Existing Sec.  1261.22 requires that a Bank adopt a written 
compensation policy to ``provide for the payment of reasonable 
compensation and expenses to the directors for the time required of 
them in performing their duties as directors.'' The policy must 
``address the activities or functions for which director attendance or 
participation is necessary and which may be compensated, and . . . 
explain and justify the methodology used to determine the amount of 
compensation to be paid to the Bank director.'' A Bank's compensation 
policy must require that compensation be reduced, as necessary, to 
reflect lesser attendance or performance at board or committee meetings 
during a given year.
    The proposed rule would split paragraph (b), addressing minimum 
contents for Bank compensation plans, into two paragraphs. It would 
also add a third paragraph, Sec.  1261.22(b)(3), requiring each Bank to 
establish, as part of its compensation policy, a fair and impartial 
process for annually evaluating individual director performance and 
participation, including, but not limited to, an assessment of whether 
each director: (i) demonstrated understanding of the Bank System; (ii) 
demonstrated knowledge of the Bank's policies and governance documents; 
(iii) demonstrated understanding of his or her legal and ethical 
responsibilities as a board member; (iv) made suggestions congruent 
with the Bank's mission, vision and values (even if divergent from 
majority opinion); and (v) acted in support of Board decisions, 
regardless of initial position. The proposed rule would also revise 
newly designated Sec.  1261.22(b)(2) to stipulate that, as a 
consequence for poor performance or participation, a Bank's board may 
not only reduce a director's pay, but may also remove a director whose 
lack of performance or participation is compromising the board's 
ability to adequately oversee the operations of the Bank. This 
authority is also referenced in proposed Sec.  1261.13, which addresses 
a board's authority to remove a director for good cause.
    Bank directors hold positions of trust and are well compensated for 
their time and efforts. Each Bank needs all of its directors to devote 
the time, attention, and thought necessary to properly oversee the Bank 
and its operations. It is a matter of strong corporate governance for a 
Bank's board of directors to have an effective process for assessing 
the performance of board directors; this process can help improve 
individual and collective board performance.\63\ It is just as 
essential that

[[Page 87747]]

a Bank's board have an effective mechanism for addressing lack of 
performance. In extreme cases, where a director's performance is so 
poor or detrimental that it poses a risk to the board's ability to 
effectively oversee the Bank's operations, this could include removal 
of a director using the procedures established under proposed Sec.  
1261.13(b).
---------------------------------------------------------------------------

    \63\ See PwC's, Governance Insights Center, Individual director 
assessments, (August 2023), available at https://www.pwc.com/us/en/services/governance-insights-center/library/assets/pwc-individual-director-assessments.pdf.
---------------------------------------------------------------------------

15. Board Meetings--Sec.  1261.24
    The proposed rule would make multiple substantive changes to codify 
a waiver FHFA first issued in 2020 permitting Bank System board and 
committee meetings to be held in virtual formats.
    Existing Sec.  1261.24(a) requires that the board of directors of 
each Bank hold as many meetings each year as are necessary and 
appropriate to carry out its fiduciary duties regarding its oversight 
of the Bank, provided that each board must hold a minimum of six in-
person meetings during each calendar year. A similar regulatory 
requirement applies to the board of directors of the OF.\64\ As 
mentioned above, FHFA regulations also require that each Bank annually 
adopt a written compensation policy to provide for the payment of 
reasonable compensation and expenses to the directors for the time 
required of them in performing their duties as directors.\65\ The OF is 
required to pay reasonable compensation to independent directors in 
accordance with the requirements of part 1261 applying to the 
compensation of Bank directors, including the requirement that 
compensation be reduced to reflect lesser attendance or performance at 
board or committee meetings.\66\
---------------------------------------------------------------------------

    \64\ See 12 CFR 1273.8(b).
    \65\ See 12 CFR 1261.22.
    \66\ See 12 CFR 1273.7(f)(2).
---------------------------------------------------------------------------

    The requirements for Bank and OF boards to hold at least six in-
person meetings are prudential measures adopted by FHFA as an aid to 
promoting sound governance; they are not required by statute. In 
response to the COVID-19 pandemic, the FHFA Director issued a letter in 
March 2020 waiving the need to comply with the in-person board meeting 
regulatory requirements and with provisions of compensation policies 
tying compensation to attendance at in-person board and committee 
meetings. Over the course of the pandemic, the waiver was extended nine 
times and the last extension remains in effect without an expiration 
date.
    Although the COVID-19 public health emergency has ended and FHFA 
prefers that Banks and OF hold in-person board meetings whenever 
possible, it also recognizes the benefits of allowing greater 
flexibility in fulfilling the Agency's regulatory requirement to hold 
at least six board meetings a year, particularly in times of emergency. 
The proposed revisions allowing boards to meet remotely at their 
discretion without seeking prior Agency approval could promote 
efficiency by minimizing delays in response to urgent issues and 
reducing travel costs and unexpected travel disruptions while fostering 
greater board participation for directors unable to attend in person. 
Additionally, the Bank System has already demonstrated its ability to 
use electronic platforms to engage in discourse and conduct business 
over the past four years. The proposed rule would permanently address 
the issue by codifying the substance of the existing waiver into 
regulation.
    The principal effect of modifying the regulation would be to allow 
the Banks and OF an alternative means of holding a board meeting that 
would otherwise be held in person. The interests of the members and the 
public should be equally represented through either type of board 
meeting. Expectations for attendance and performance at meetings and 
the compensation methodology should be communicated to board members in 
the compensation policy, which, with supporting materials, must be 
submitted to the FHFA Director annually.\67\ Consequently, the Agency 
would expect the Banks and OF to keep adequate meeting records to 
sufficiently document board member attendance and performance. FHFA 
also expects the Banks and OF to appropriately mitigate any security 
risks that may arise from meeting in a virtual setting.
---------------------------------------------------------------------------

    \67\ See 12 CFR 1261.22(d).
---------------------------------------------------------------------------

    The proposed rule would revise existing Sec.  1261.24(a) to remove 
the requirement that the six minimum board meetings be ``in-person.'' 
In conjunction with this, the proposed rule would revise Sec.  
1261.24(b) to provide that ``[a] Bank's board of directors and its 
committees may conduct meetings in-person, through video conferencing 
or teleconferencing, or in a hybrid format, provided that all directors 
have an opportunity to communicate and have access to all written 
documents and presentations.'' Any meeting of the type described can be 
counted as one of the minimum six meetings required under Sec.  
1261.24(a).
    Proposed Sec.  1261.24(b)(2) would state an expectation that that 
each Bank will ``generally'' hold board and committee meetings within 
the Bank district and would retain the prohibition against holding any 
board or committee meeting that is not within a ``State'' as defined by 
12 CFR 1201.1. This definition includes ``United States, American 
Samoa, the Commonwealth of the Northern Mariana Islands, the District 
of Columbia, Guam, Puerto Rico, or the United States Virgin Islands.'' 
\68\ It would further require that all directors be located within a 
State, as so defined, when attending a board or committee meeting via 
video conference or teleconference.
---------------------------------------------------------------------------

    \68\ See 12 CFR 1201.1.
---------------------------------------------------------------------------

    The proposed rule would also add to Sec.  1261.24 a new paragraph 
(c) to define ``quorum'' to mean ``for purposes of meetings of a Bank's 
board of directors, . . . a majority of sitting directors, which must 
include a majority of sitting independent directors.'' This provision 
would better ensure that independent voices are heard on critical Bank 
issues and provide consistency within the Bank System. The proposed 
provision parallels the definition of ``quorum'' as it is currently 
stated in the OF regulation at 12 CFR 1273.8(b).

B. Revisions to 12 CFR Part 1239

    Although each Bank is required under existing Sec.  1261.11 to 
adopt a conflicts-of-interest policy to cover all of its board 
directors, there is currently no equivalent requirement with respect to 
Bank employees, many of whom are in no less a position of trust at the 
Bank than are its board directors.
    Part 1239 of FHFA's regulations addresses responsibilities of 
boards of directors, corporate practices, and corporate governance for 
FHFA's regulated entities. The proposed rule would add to part 1239 a 
new Sec.  1239.31 requiring each Bank to adopt a conflicts-of-interest 
policy covering its employees and establishing the requirements for 
those policies. The content and format of the new section is based on 
that of Sec.  1261.11, which addresses the Bank director conflicts-of-
interest policy requirement, appropriately modified to be applicable to 
Bank employees.
    Proposed Sec.  1239.31(a) would require that each Bank's board of 
directors adopt a written conflicts-of-interest policy covering all 
employees, which must, at a minimum: (1) require that all employees of 
the Bank discharge their official responsibilities in an objective and 
impartial manner in furtherance of the interests of the Bank's 
membership as a whole and consistent with the public interest; (2) 
establish appropriate limitations, standards, and procedures

[[Page 87748]]

regarding the holding of outside positions and financial interests by 
Bank employees and close family members and associates; (3) prohibit 
executive officers and senior management from holding paid positions 
with any entity that is, or may be eligible to become, a member or 
housing associate of any Bank or with any affiliate of such entity; (4) 
prohibit employees from participating in any particular matter in which 
the employee or any immediate family member or business associate has a 
financial interest; (5) prohibit employees from otherwise holding 
financial interests that conflict with the conscientious performance of 
duty; (6) require employees to disclose actual or apparent conflicts of 
interests and establish procedures for addressing such conflicts, 
including recusal; (7) require the establishment of internal controls 
to ensure that conflicts-of-interest reports are made and filed and 
that conflicts-of-interest issues are disclosed and resolved; and (8) 
establish procedures to monitor compliance with the conflicts-of-
interest policy. While the proposed rule would require each Bank's 
policy to set appropriate guidelines for all of its personnel, FHFA 
would expect a Bank to appropriately calibrate the treatment of 
different types of employees under the policy according to the risk 
presented, including by setting more stringent standards for executives 
and officers.
    Paralleling Sec.  1261.11, paragraphs (b) and (c) of proposed Sec.  
1239.31 would prohibit employees in most cases from disclosing or using 
confidential information they receive by reason of their position with 
the Bank and discourage Bank employees from accepting gifts that appear 
to be intended to influence the employee's actions.
    Proposed paragraph (d) would employ the same definitions that are 
used in proposed Sec.  1261.11(f). For purposes of attribution, 
``immediate family member'' means a parent, sibling, spouse, child, or 
dependent, or any relative sharing the same residence as the director 
and the term ``business associate'' means any individual or entity with 
whom a director has a business relationship, including, but not limited 
to: (1) Any corporation or organization of which the employee is an 
officer or partner, or in which the employee beneficially owns ten 
percent or more of any class of equity security, including subordinated 
debt; (2) Any other partner, officer, or beneficial owner of ten 
percent or more of any class of equity security, including subordinated 
debt, of any such corporation or organization; and (3) Any trust or 
other estate in which an employee has a substantial beneficial interest 
or as to which the employee serves as trustee or in a similar fiduciary 
capacity. The definition of ``financial interest'' matches the revised 
definition of that term in proposed Sec.  1261.11(f).

C. Revisions to 12 CFR Part 1273

    The proposed rule would also make several revisions to part 1273, 
which governs the OF. Primarily, the proposed rule would amend part 
1273 to revise the provision governing the minimum number and site of 
OF board meetings to match the revised language with respect to the 
Bank's boards in Sec.  1261.24. The remaining proposed revisions are in 
response to comments provided by the Bank System in response to FHFA's 
Spring 2023 Notice of Regulatory Review.
1. Funding of the OF--Sec.  1273.5
    Existing Sec.  1273.5 addresses the funding of the OF. Existing 
Sec.  1273.5(b)(1)(ii) limits OF operating funds withdrawals to check, 
wire transfer, or draft signed by the Chief Executive Officer (CEO) or 
other persons designated by the OF board of directors.
    In its letter sent in response to FHFA's Spring 2023 Notice of 
Regulatory Review, the Bank System commented that the existing 
regulation governing the withdrawal of OF operating funds is both 
limited and outdated. It suggested that the regulation be modernized to 
permit the use of other widely accepted fund transfer methods that have 
been or will be developed in the future and that the regulation be 
expanded to allow CEO delegation of authority to achieve greater 
operational efficiency. In response, FHFA is proposing to revise Sec.  
1273.5(b)(1)(ii) to expand the range of permissible OF withdrawal 
methods to include ``draft[s]'' and ``other funds transfer methods with 
written authorization by the CEO or other persons designated by the CEO 
or OF board of directors in accordance with OF governance documents.''
2. General Duties of the OF Board of Directors--Sec.  1273.8
    Existing Sec.  1273.8 addresses the ``general duties of the OF 
board of directors.'' Paragraph (b) of this section establishes 
requirements for OF board meetings, requiring that the OF board of 
directors conduct its business by majority vote of its members at 
meetings convened in accordance with its by-laws, and hold no fewer 
than six in-person meetings annually.
    The proposed rule would subdivide Sec.  1273.8(b) into four 
paragraphs for clarity and would revise the existing text concerning 
meeting frequency and location in a manner paralleling the proposed 
changes to the board meeting requirements for the Banks set forth in 
Sec.  1261.24. The reasons for these revisions are discussed in depth 
in the discussion of proposed Sec.  1261.24, above.
    Proposed Sec.  1273.8(b)(1) would allow the OF board of directors 
and its committees to conduct meetings ``in person, through video 
conferencing or teleconferencing, or in a hybrid format, provided that 
all meeting attendees have an opportunity to communicate and have 
access to all written documents and presentations.'' Under the proposed 
rule, all such meetings could be counted toward the minimum of six 
board meetings per year that is required under the existing regulation 
and as proposed. The proposed rule, in Sec.  1273.8(b)(2), would 
prohibit the OF from holding any board or committee meeting that is not 
within a ``State'' as defined by 12 CFR 1201.1 and would also require 
that all directors be located within a State, as so defined, when 
attending the meeting via teleconference or video conference. Proposed 
Sec.  1273.8(b)(3) and (4) would retain the meeting notice and quorum 
provisions, respectively, of the existing regulation.
    In existing Sec.  1273.8, paragraph (d) enumerates duties of the OF 
board, other than those relating to Bank System consolidated 
obligations, among which is included the duty to review and approve all 
contracts of the OF, except for contracts for which exclusive authority 
is provided to the Audit Committee by regulation. In its letter sent in 
response to FHFA's Spring 2023 Notice of Regulatory Review the Bank 
System commented that the current requirement seems impractical and 
unnecessary, as those activities generally fall under management's 
responsibilities. In response, FHFA is proposing to eliminate the 
requirement that the OF board of directors review and approve all 
contracts of the OF, except for those reserved to the audit committee 
by regulation. Instead, proposed Sec.  1273.8(d)(4) would state that 
the OF board of directors will review and approve contracts of the OF, 
as specified in OF governance documents.

V. Considerations of Differences Between the Banks and the Enterprises

    Section 1313(f) of the Safety and Soundness Act requires the 
Director of FHFA, when promulgating regulations relating to the Banks, 
to consider the differences between the Banks and the Enterprises 
(Fannie Mae and Freddie Mac) as they relate to: the Banks' cooperative 
ownership structure; the

[[Page 87749]]

mission of providing liquidity to members; the affordable housing and 
community development mission; their capital structure; and their joint 
and several liability on consolidated obligations.\69\ The Director 
also may consider any other differences that are deemed appropriate. In 
preparing this proposed rule, the Director considered the differences 
between the Banks and the Enterprises as they relate to the above 
factors, and determined that the rule is appropriate. FHFA requests 
comments regarding whether differences related to those factors should 
result in any revisions to the proposed rule.
---------------------------------------------------------------------------

    \69\ 12 U.S.C. 4513(f).
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

    The proposed rule would not contain any changes to information 
collection requirements that would require the approval of the Office 
of Management and Budget (OMB) under the Paperwork Reduction Act.\70\ 
Therefore, FHFA has not submitted any information to OMB for review.
---------------------------------------------------------------------------

    \70\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act \71\ (RFA) 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.\72\ FHFA has considered the impact of the proposed rule under 
the RFA. FHFA certifies that the proposed rule, if adopted as a final 
rule, would not have a significant economic impact on a substantial 
number of small entities because the proposed rule applies only to the 
Banks and OF, which are not small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \71\ 5 U.S.C. 601 et seq.
    \72\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

VIII. Providing Accountability Through Transparency Act of 2023

    The Providing Accountability Through Transparency Act of 2023 (5 
U.S.C. 553(b)(4)) requires that a notice of proposed rulemaking include 
the internet address of a summary of not more than 100 words in length 
of a proposed rule, in plain language, that shall be posted on the 
internet website under section 206(d) of the E-Government Act of 2002 
(44 U.S.C. 3501 note) (commonly known as Regulations.gov). FHFA's 
proposal and the required summary can be found at https://www.regulations.gov.

List of Subjects

12 CFR Part 1239

    Administrative practice and procedure, Federal home loan banks, 
Government-sponsored enterprises, Reporting and recordkeeping 
requirements.

12 CFR Part 1261

    Administrative practice and procedure, Compensation, Conflicts of 
interest, Directors, Elections, Eligibility, Federal home loan banks, 
Meetings, Reporting and recordkeeping requirements.

12 CFR Part 1273

    Administrative practice and procedure, Audit committee, 
Consolidated obligations, Directors.

    Accordingly, for the reasons stated in the preamble, under the 
authority of 12 U.S.C. 4511, 4513, and 4526, FHFA proposes to amend 
parts 1239, 1261, and 1273 of chapter XII of title 12 of the Code of 
Federal Regulations, as follows:

PART 1239--RESPONSIBILITIES OF BOARDS OF DIRECTORS, CORPORATE 
PRACTICES, AND CORPORATE GOVERNANCE

0
1. The authority citation for part 1239 continues to read as follows:

    Authority: 12 U.S.C. 1426, 1427, 1432(a), 1436(a), 1440, 
4511(b), 4513(a), 4513(b), 4526, and 15 U.S.C. 78oo(b).

0
2. Add Sec.  1239.31 to read as follows:


Sec.  1239.31  Conflicts of interest policy for Bank employees.

    (a) Adoption of conflicts-of-interest policy. Each Bank's board of 
directors shall adopt a written conflicts-of-interest policy covering 
all Bank employees. At a minimum, the conflicts-of-interest policy of 
each Bank shall:
    (1) Require that all Bank employees discharge their official 
responsibilities in an objective and impartial manner in furtherance of 
the interests of the Bank's membership as a whole and consistent with 
the public interest;
    (2) Establish appropriate limitations, standards, and procedures 
regarding the holding of outside positions and financial interests by 
Bank employees and close family members and associates;
    (3) Prohibit Bank executive officers and senior management from 
holding paid positions with any entity that is, or may be eligible to 
become, a member or housing associate of any Bank or with any affiliate 
of such entity;
    (4) Prohibit Bank employees from participating in any particular 
matter in which the employee or any immediate family member or business 
associate has a financial interest;
    (5) Prohibit Bank employees from otherwise holding financial 
interests that conflict with the conscientious performance of duty;
    (6) Require Bank employees to disclose actual or apparent conflicts 
of interests and establish procedures for addressing such conflicts, 
including recusal;
    (7) Require the establishment of internal controls to ensure that 
conflicts-of-interest reports are made and filed and that conflicts-of-
interest issues are disclosed and resolved; and
    (8) Establish procedures to monitor compliance with the conflicts-
of-interest policy.
    (b) Confidential information. Bank employees shall not disclose or 
use confidential information they receive solely by reason of their 
position with the Bank to obtain any benefit for themselves or for any 
other individual or entity.
    (c) Gifts. No Bank employee shall accept, and each Bank employee 
shall discourage the employee's immediate family members from 
accepting, any gift that the employee believes or has reason to believe 
is given with the intent to influence the employee's actions, or where 
acceptance of such gift would have the appearance of intending to 
influence the employee's actions. Any insubstantial gift would not be 
expected to trigger this prohibition.
    (d) Definitions. For purposes of this section:
    Business associate means any individual or entity with whom a Bank 
employee has a business relationship, including, but not limited to:
    (i) Any corporation or organization of which the employee is an 
officer or partner, or in which the employee beneficially owns ten 
percent or more of any class of equity security, including subordinated 
debt;
    (ii) Any other partner, officer, or beneficial owner of ten percent 
or more of any class of equity security, including subordinated debt, 
of any such corporation or organization; and
    (iii) Any trust or other estate in which an employee has a 
substantial beneficial interest or as to which the employee serves as 
trustee or in a similar fiduciary capacity.
    Financial interest means a direct or indirect financial interest in 
any activity, transaction, property, or

[[Page 87750]]

relationship that involves receiving or providing something of monetary 
value, and includes, but is not limited to any right, contractual or 
otherwise, to the payment of money, whether contingent or fixed. It 
does not include a deposit or savings account, loan or extension of 
credit, or other accounts and products obtained in the normal course of 
business on non-preferential terms generally available to the public 
from a member institution or from a non-member counterparty to the Bank 
by which the individual is employed.
    Immediate family member means a parent, sibling, spouse, child, or 
dependent of a Bank employee, or any relative sharing the same 
residence as a Bank employee.
0
3. Revise and republish part 1261 to read as follows:

PART 1261--FEDERAL HOME LOAN BANK DIRECTORS

Subpart A--Definitions
Sec.
1261.1 [Reserved]
Subpart B--Federal Home Loan Bank Boards of Directors: Eligibility and 
Elections
1261.2 Definitions.
1261.3 General provisions.
1261.4 Annual designation of directorships.
1261.5 Director eligibility.
1261.6 Determination of member votes.
1261.7 Nominations for member and independent directorships.
1261.8 Election process.
1261.9 Actions affecting director elections.
1261.10 Independent director independence.
1261.11 Conflicts of interest policy for Bank directors.
1261.12 Reporting requirements for Bank directors.
1261.13 Ineligibility and removal of Bank directors.
1261.14 Vacant Bank directorships.
1261.15 Minimum number of member directorships.
Subpart C--Federal Home Loan Bank Directors' Compensation and Expenses
1261.20 Definitions.
1261.21 General.
1261.22 Directors' compensation policy.
1261.23 Director disapproval.
1261.24 Board meetings.

    Authority: 12 U.S.C. 1426, 1427, 1432, 4511 and 4526.

Subpart A--Definitions


Sec.  1261.1  [Reserved]

Subpart B--Federal Home Loan Bank Boards of Directors: Eligibility 
and Elections


Sec.  1261.2  Definitions.

    As used in this subpart:
    Advisory Council means the Advisory Council each Bank is required 
to establish pursuant to section 10(j)(11) of the Bank Act (12 U.S.C. 
1430(j)(11)), and part 1291 of this chapter.
    Bona fide resident of a Bank district means an individual who:
    (1) Maintains a principal residence in the Bank district; or
    (2) If serving as an independent director, owns or leases in his or 
her own name a residence in the Bank district and is employed in a 
voting State in the Bank district.
    FHFA ID number means the number assigned to a member by FHFA and 
used by FHFA and the Banks to identify a particular member.
    Independent directorship and independent director mean, 
respectively, a directorship designated as provided under Sec.  1261.4 
to be filled by an individual meeting the eligibility requirements of 
Sec.  1261.5(b) and an individual serving in such a directorship.
    Member directorship and member director mean, respectively, a 
directorship designated as provided under Sec.  1261.4 to be filled by 
an individual meeting the requirements of Sec.  1261.5(a) and an 
individual serving in such a directorship.
    Method of equal proportions means the mathematical formula used by 
FHFA to allocate member directorships among the States in a Bank's 
district based on the relative amounts of Bank stock required to be 
held as of the record date by members located in each State.
    Nominee means an individual who has been nominated for a Bank 
directorship under the applicable provision of Sec.  1261.7.
    Public interest independent directorship and public interest 
independent director mean, respectively, an independent directorship 
designated by a Bank to be filled by an individual having the 
qualifications specified in Sec.  1261.5(c)(2) and an individual 
serving in such a directorship.
    Record date means December 31 of the calendar year immediately 
preceding the election year.
    Regular independent directorship and regular independent director 
mean, respectively, an independent directorship designated by a Bank to 
be filled by a person having the qualifications specified in Sec.  
1261.5(c)(1) and an individual serving in such a directorship.
    Voting State means the State in which a member's principal place of 
business, as determined in accordance with 12 CFR part 1263, is located 
as of the record date. The voting State of a member with a principal 
place of business located in the U.S. Virgin Islands as of the record 
date is Puerto Rico, and the voting State of a member with a principal 
place of business located in American Samoa, Guam, or the Commonwealth 
of the Northern Mariana Islands as of the record date is Hawaii.


Sec.  1261.3  General provisions.

    (a) Term of directorships. The term of office of each directorship 
shall be four years, except as adjusted pursuant to Sec.  1261.4(e) or 
(f) to achieve a staggered board, and shall commence on January 1 of 
the calendar year so designated by FHFA.
    (b) Annual elections. Each Bank annually shall conduct an election 
the purpose of which is to fill all directorships designated by FHFA as 
commencing on January 1 of the calendar year immediately following the 
year in which such election is commenced. Subject to the provisions of 
the Bank Act and in accordance with the requirements of this subpart, 
the disinterested directors of each Bank, or a committee of 
disinterested directors, shall administer and conduct the annual 
election of directors. In so doing, the disinterested directors may use 
Bank staff or independent contractors to perform ministerial and 
administrative functions concerning the elections process.
    (c) Location of members. For purposes of the election of member 
directors, a member is deemed to be located in its voting State, unless 
otherwise specified by the Director.
    (d) Dates. If any date specified in this subpart for action by a 
Bank, or specified by a Bank pursuant to this subpart, falls on a 
Saturday, Sunday, or Federal holiday, the relevant time period is 
deemed to be extended to the next calendar day that is not a Saturday, 
Sunday, or Federal holiday.


Sec.  1261.4  Annual designation of directorships.

    (a) Designation of directorships order. As provided in this 
section, the Director will by June 1 of each year issue a written order 
designating for each Bank's board of directors for the following 
calendar year:
    (1) The total number of member directorships and their allocation 
among the voting States of the Bank's district;
    (2) The total number of independent directorships; and
    (3) The directorships for which an election will be held for terms 
beginning on the January 1 of the following year, and the length of 
those terms.

[[Page 87751]]

    (b) Capital stock reports. (1) On or before April 10 of each year, 
each Bank shall deliver to FHFA a capital stock report that indicates, 
as of the record date, the number of members located in each voting 
State in the Bank's district, the number of shares of Bank stock that 
each member (identified by its FHFA ID number) was required to hold, 
and the number of shares of Bank stock that all members located in each 
voting State were required to hold. If a Bank has issued more than one 
class of stock, it shall report the total shares of each class of stock 
required to be held by the members. The Bank shall certify to FHFA 
that, to the best of its knowledge, the information provided in the 
capital stock report is accurate and complete, and that it has notified 
each member of its minimum capital stock holding requirement as of the 
record date.
    (2) The number of shares of Bank stock that any member was required 
to hold as of the record date shall be determined in accordance with 
the minimum investment established by the capital plan for that Bank.
    (c) Allocation of member directorships. For each Bank's board of 
directors, the Director will designate a total number of member 
directorships and allocate them among the voting States of the Bank's 
district as follows:
    (1) Method of equal proportions. (i) FHFA will choose a base number 
of member directorships and, using the method of equal proportions, 
allocate those among the voting States of the Bank district according 
to the ratio of the number of shares of Bank stock required to be held 
by the members in each State to the number of shares required to be 
held by all members of the Bank.
    (ii) In no case shall the number of member directorships allocated 
to a voting State be fewer than one or more than six.
    (iii) If a Bank has issued more than one class of stock, the 
Director will allocate the member directorships based on the combined 
number of shares required to be held by members.
    (iv) The Director will allocate a Bank's member directorships based 
upon members' minimum required stock holdings as of the record date, as 
shown in the Bank's capital stock report required by paragraph (b) of 
this section.
    (2) Grandfather provision. If, after completing the process 
described in paragraph (c)(1) of this section for a Bank, the number of 
member directorships allocated to any voting State is not at least 
equal to the minimum number shown for that voting State on the table in 
Sec.  1261.15, the Director will allocate to that voting State such 
number of additional member directorships as are necessary to increase 
the total number of member directorships allocated to that voting State 
to the number shown on the table. If a voting State does not appear on 
the table in Sec.  1261.15, the minimum number of member directorships 
for that voting State is deemed to be one for purposes of this 
paragraph (c)(2).
    (d) Independent directorships. After designating the member 
directorships for a Bank's board of directors as provided in paragraph 
(c) of this section, the Director will designate a number of 
independent directorships for the Bank's board that is at least 40 
percent, but less than 50 percent, of the total number of directorships 
on the board.
    (e) Adjustments--(1) Redesignated member directorships. If the 
annual designation of directorships results in an existing member 
directorship being redesignated as representing members in a different 
voting State, that directorship shall be deemed to terminate in the 
previous voting State as of December 31 of the current year, and a new 
directorship to begin in the succeeding voting State as of January 1 of 
the next year. The new directorship shall be filled by vote of the 
members in the succeeding voting State and, in order to maintain the 
staggered terms of directorships, shall be adjusted to a term equal to 
the remaining term of the previous directorship if it had not been 
redesignated to another State.
    (2) New directorships. If the annual designation of directorships 
results in the addition of one or more directorships to a Bank's board, 
the Director may truncate the initial term of any such new directorship 
if required to ensure that the terms of the Bank's directorships are 
staggered with approximately one quarter of the terms expiring each 
year.
    (f) Public interest independent directorships. Annually, the board 
of directors of each Bank shall determine the number of public interest 
independent directorships to be included among its designated 
independent directorships for the following year, ensuring that at all 
times the Bank will have at least two such directorships. In its 
discretion, a Bank's board may change the number of public interest 
independent directorships during the year, provided that there are at 
all times at least two such directorships.


Sec.  1261.5  Director eligibility.

    (a) Eligibility requirements for member directors and nominees. (1) 
Each member director, and each nominee for a member directorship, shall 
be:
    (i) A citizen of the United States; and
    (ii) An officer or director of a member that is located in the 
voting State of the Bank district to which the directorship being 
occupied, sought, or filled has been allocated under Sec.  1261.4(c) 
and that meets all minimum capital requirements established by its 
appropriate Federal banking agency or appropriate State regulator.
    (2) In the case of a director elected by a Bank's members under 
Sec.  1261.8, the institution of which the director is an officer or 
director must have been a member as of the record date. In the case of 
a director elected by a Bank's board of directors to fill a vacancy 
under Sec.  1261.14, the institution of which the director is an 
officer or director must be a member at the time the board acts.
    (b) Eligibility requirements for independent directors and 
nominees. Each independent director, and each nominee for an 
independent directorship, shall at all times:
    (1) Be a citizen of the United States;
    (2) Be a bona fide resident of the district in which the Bank is 
located;
    (3) Meet the independence requirements of Sec.  1261.10; and
    (4) Meet the applicable qualifications requirements specified in 
paragraph (c) of this section.
    (c) Independent director qualifications--(1) Regular independent 
directors. Each regular independent director and each nominee for a 
regular independent directorship shall have experience in, or knowledge 
of, one or more of the following areas: auditing and accounting; 
derivatives; financial management; organizational management; project 
development; risk management practices; artificial intelligence; 
information technology and security; climate-related risk; Community 
Development Financial Institution (CDFI) business models; modeling; the 
law; and such other areas as the Director shall determine. Before 
nominating any individual for a regular independent directorship, the 
board of directors of a Bank shall determine that such knowledge or 
experience of the nominee is commensurate with that needed to oversee a 
financial institution with a size and complexity that is comparable to 
that of the Bank.
    (2) Public interest independent directors. Each public interest 
independent director and each nominee for a public interest independent 
directorship shall have more than four years of experience representing 
consumer or community interests in banking services, credit needs, 
housing, or consumer financial protection. For

[[Page 87752]]

purposes of this paragraph (c)(2), representing means advocating for, 
or otherwise acting primarily on behalf of or for the direct benefit 
of, consumers or the community. Qualifying experience in one of the 
four enumerated areas may have been acquired in professional, public 
service, or significant volunteer positions, so long as the work done 
was substantial in terms of time commitment and responsibility. Such 
experience must have accrued from activities personally undertaken by 
the director or nominee, as opposed to being attributed based solely on 
the activities of organizations with which the person was associated.
    (3) Relevance of experience to be considered. In considering 
potential nominees for independent directorships, a Bank's board of 
directors shall give special consideration to individuals that:
    (i) Possess knowledge and experience that are relevant to the 
business, programs, and mission of the Bank and that provide a basis 
for understanding the actual and potential impact of the Bank's 
activities on its members and on communities within the Bank's 
district; and
    (ii) Have gained their knowledge and experience primarily through 
full time paid executive, management, or other senior positions.
    (d) Term limits. (1) The following are ineligible for nomination or 
election to a directorship of a Bank:
    (i) Any incumbent director whose term of office would not expire 
before the new term of office would begin; and
    (ii) Any person that has been elected to each of three consecutive 
full terms as a director of a Bank and has served for all or part of 
each of those terms, unless the term of the directorship to be filled 
begins at least two years after the expiration of the third consecutive 
term.
    (2) For purposes of determining whether a person is ineligible 
under the term limit provision of paragraph (d)(1)(ii) of this section:
    (i) A four-year term of office shall count as a full term;
    (ii) A term of office that is adjusted to a period of fewer than 
four years as provided in Sec.  1261.4(e) shall not count as a full 
term;
    (iii) Any full term of office that ends immediately before a term 
of office that is adjusted to a period of fewer than four years as 
provided in Sec.  1261.4(e), and any full term of office commencing 
immediately following such adjusted term of office, shall count as 
consecutive full terms of office; and
    (iv) Any period of time served by a director who has been elected 
by the board of directors to fill a vacancy under Sec.  1261.14 shall 
not count as a full term.
    (e) Loss of eligibility. A director shall become ineligible to 
remain in office if, during the director's term of office, the 
directorship to which the director has been elected is eliminated 
through the annual designation of directorships process described in 
Sec.  1261.4. The incumbent director shall become ineligible after the 
close of business on December 31 of the year in which the directorship 
is eliminated.


Sec.  1261.6  Determination of member votes.

    (a) In general. Each Bank shall determine, in accordance with this 
section, the number of votes that each member of the Bank may cast for 
each directorship that is to be filled by the vote of the members.
    (b) Number of votes. For each member directorship and each 
independent directorship that is to be filled in an election, each 
member shall be entitled to cast one vote for each share of Bank stock 
that the member was required to hold as of the record date. 
Notwithstanding the preceding sentence, the number of votes that any 
member may cast for any one directorship shall not exceed the average 
number of shares of Bank stock required to be held as of the record 
date by all members located in the same State as of the record date. If 
a Bank has issued more than one class of stock, it shall calculate the 
average number of shares separately for each class of stock, using the 
total number of members in a State as the denominator, and shall apply 
those limits separately in determining the maximum number of votes that 
any member owning that class of stock may cast in the election. The 
number of shares of Bank stock that a member was required to hold as of 
the record date shall be determined in accordance with the minimum 
investment requirement established by the Bank's capital plan.
    (c) Voting preferences. If the board of directors of a Bank 
includes any voting preferences as part of its approved capital plan, 
those preferences shall supersede the provisions of paragraph (b) of 
this section that otherwise would allow a member to cast one vote for 
each share of Bank stock it was required to hold as of the record date. 
If a Bank establishes a voting preference for a class of stock, the 
members with voting rights shall remain subject to the provisions of 
section 7(b) of the Bank Act (12 U.S.C. 1427(b)) that prohibit any 
member from casting any vote in excess of the average number of shares 
of stock required to be held by all members in its state.


Sec.  1261.7  Nominations for member and independent directorships.

    (a) Election announcement. Within a reasonable time in advance of 
an election, a Bank shall notify each member in its district of the 
commencement of the election process. Such notice shall include:
    (1) The number of member directorships designated for each voting 
State in the Bank district and the number of independent directorships 
designated for the Bank, including the number of independent 
directorships designated by the Bank as public interest independent 
directorships, for the following calendar year;
    (2) The name of each incumbent Bank director, the name and location 
of the member at which each member director serves, and the name and 
location of the organization with which each independent director is 
affiliated, if any, and the expiration date of each Bank director's 
term of office;
    (3) Identification of the member directorships, regular independent 
directorships, and public interest independent directorships for which 
an election will be held;
    (4) A brief statement describing the skills and experience the Bank 
believes are most likely to add strength to the board of directors, as 
determined through the annual assessment required under Sec.  1261.9;
    (5) An attachment indicating the name, location, and FHFA ID number 
of every member in the member's voting State, and the number of votes 
each such member may cast for each directorship to be filled by such 
members, as determined in accordance with Sec.  1261.6; and
    (6) If a member directorship is to be filled by members in a voting 
State, a nominating certificate for those members.
    (b) Member directorship nominations--(1) Nominating certificates. 
(i) Any member that is entitled to vote in the election may nominate an 
eligible individual to fill each available member directorship for its 
voting State by delivering to its Bank, prior to a deadline to be 
established by the Bank and set forth in the notice required in 
paragraph (a) of this section, a nominating certificate duly adopted by 
the member's governing body or by an individual authorized by the 
member's governing body to act on its behalf.
    (ii) The nominating certificate shall include the name of the 
nominee and the name, location, and FHFA ID number of the member the 
nominee serves as an officer or director.
    (iii) The Bank shall establish a deadline for delivery of 
nominating

[[Page 87753]]

certificates, which shall be no earlier than 30 calendar days after the 
date on which the Bank delivers the notice required by paragraph (a) of 
this section, and the Bank shall not accept certificates received after 
that deadline.
    (2) Accepting member directorship nominations. Promptly after 
receipt of any nominating certificate, a Bank shall notify in writing 
any individual nominated for a member directorship. An individual may 
accept the nomination only by delivering to the Bank, prior to a 
deadline established by the Bank and set forth in its notice, an 
executed member director eligibility certification form prescribed by 
FHFA. A Bank shall allow each nominee at least 30 calendar days after 
the date the Bank delivered the notice of nomination within which to 
deliver the executed form. A nominee may decline the nomination by so 
advising the Bank in writing, or by failing to deliver a properly 
executed member director eligibility certification form prior to the 
deadline.
    (c) Independent directorship nominations--(1) Potential nominees. 
Any individual may request to be considered for nomination to an 
independent directorship of the board of directors of a Bank by 
delivering to the Bank, on or before the deadline set by the Bank for 
delivery of nominating certificates, an executed independent director 
application form prescribed by FHFA. Any other interested party also 
may recommend to the Bank that it consider a particular individual as a 
nominee for an independent directorship, but the Bank shall not 
nominate any individual unless the individual has delivered to the 
Bank, on or before the date the Bank has set for delivery of nominating 
certificates, an executed independent director application form 
prescribed by FHFA.
    (2) Application form. The independent director application form 
prescribed by FHFA will provide a means by which an individual can 
indicate an intent to be considered for a public interest independent 
directorship. The board of directors of the Bank shall nominate for a 
public interest independent directorship only an individual who 
indicates on the application form a desire to be considered for a 
public interest independent directorship.
    (3) Advisory Council. The board of directors of the Bank shall 
consult with the Bank's Advisory Council before nominating any 
individual for any independent directorship.
    (4) Procedures. Each Bank shall include in its bylaws the 
procedures it intends to use for the nomination and election of the 
independent directors.
    (5) Minimum number of nominees. Each Bank shall nominate at least 
as many individuals as there are respective regular and public interest 
independent directorship to be filled in that year's election.
    (d) Eligibility verification--(1) Member directorship nominees. 
Using the information provided on executed member director eligibility 
certification forms prescribed by FHFA, each Bank shall verify that 
each nominee for each member directorship meets all the eligibility 
requirements of Sec.  1261.5(a).
    (2) Independent directorship nominees. (i) Using the information 
provided on executed independent director application forms prescribed 
by FHFA, each Bank shall verify that each nominee for each public 
interest independent directorship and each regular independent 
directorship meets the eligibility requirements of Sec.  1261.5(b).
    (ii) Before announcing any independent director nominee, the Bank 
shall deliver to FHFA for its review a copy of the independent director 
application forms executed by the individuals nominated for independent 
directorships. If within two weeks of such delivery FHFA provides 
comments to the Bank on any independent director nominee, the board of 
directors of the Bank shall consider FHFA's comments in determining 
whether to proceed with those nominees or to reopen the nomination.
    (3) Eligible nominees. A Bank's board shall neither nominate any 
individual for an independent directorship nor include any nominee for 
a member directorship on the ballot required under Sec.  1261.8(a) if 
it has not concluded based on the submissions required under this part 
and any pertinent supplementary material that the individual meets the 
applicable eligibility requirements set forth in Sec.  1261.5(a) or (b) 
and is not term-limited as provided under Sec.  1261.5(d).
    (e) Background checks. A Bank's board shall neither nominate any 
individual for an independent directorship nor include any nominee for 
a member directorship on the ballot required under Sec.  1261.8(a), 
without having first concluded, based on a thorough background check, 
that the individual is fit to serve in a fiduciary role with the Bank. 
Each Bank shall include with its submission required under paragraph 
(d)(2)(ii) of this section a discussion of the results of the 
background check for each independent directorship nominee, including 
any potentially concerning information that was revealed and how the 
Bank's concerns were allayed.
    (f) Record retention. Subject to a duly enacted record retention 
policy, each Bank shall retain all information received under this 
section for at least seven years after the date of the election in 
question and, in the case of any information about a specific director, 
for at least seven years after that director leaves the board.


Sec.  1261.8  Election process.

    (a) Ballots. Promptly after fulfilling the requirements of Sec.  
1261.7(d), each Bank shall prepare and deliver a ballot to each member 
that was a member as of the record date. The Bank shall include with 
each ballot a closing date for the Bank's receipt of voted ballots, 
which date shall be no earlier than 30 calendar days after the date 
such ballot is delivered to the member. A ballot shall include at least 
the following provisions:
    (1) For states in which one or more member directorships are to be 
filled in the election, an alphabetical listing of the names of each 
nominee for such directorship, the name, location, and FHFA ID number 
of the member each nominee serves, the nominee's title or position with 
the member, a brief description of the skills and experience of each 
nominee, and the number of member directorships to be filled by the 
members in that voting State in the election;
    (2) An alphabetical listing of the names of each nominee for a 
public interest independent directorship and a brief description of how 
each nominee meets the qualifications requirements for public interest 
independent directors set forth in Sec.  1261.5(c)(2);
    (3) An alphabetical listing of the names of each nominee for 
regular independent directorships and a brief description of how each 
nominee meets the required qualification requirements for regular 
independent directors set forth in Sec.  1261.5(c)(1);
    (4) A statement of the results of assessments conducted under Sec.  
1261.9 and, if the statement differs from the statement provided under 
Sec.  1261.7(a)(4), an explanation of why the statements differ;
    (5) A statement that write-in candidates are not permitted; and
    (6) A confidentiality statement prohibiting the Bank from 
disclosing how any member voted.
    (b) Lack of member directorship nominees. If, for any voting State, 
the number of nominees for the member directorships for that State is 
equal to or fewer than the number of such directorships to be filled in 
that year's

[[Page 87754]]

election, the Bank shall deliver a notice to the members in the 
affected voting State (in lieu of including any member directorship 
nominees on the ballot for that State) that such nominees shall be 
deemed elected without further action, due to an insufficient number of 
nominees to warrant balloting. Thereafter, the Bank shall declare 
elected all such eligible nominees. The nominees declared elected shall 
be included as directors-elect in the report of election required under 
paragraph (f) of this section. Any member directorship that is not 
filled due to a lack of nominees shall be deemed vacant as of January 1 
of the following year and shall be filled by the Bank's board of 
directors in accordance with Sec.  1261.14.
    (c) Voting. For each directorship to be filled, a member may cast 
the number of votes determined by the Bank pursuant to Sec.  1261.6. A 
member may not split its votes among multiple nominees for a single 
directorship, and, where there are multiple directorships to be filled, 
either within the member's voting State or at large, in the case of 
independent directorships, a member may not cumulatively vote for a 
single nominee. If any member votes, it shall by resolution of its 
governing body either authorizing the voting for specific nominees or 
delegating to an individual the authority to vote for specific 
nominees. To vote, a member shall:
    (1) Mark on the ballot the name of not more than one of the 
nominees for each directorship to be filled. Each nominee so selected 
shall receive all of the votes that the member is entitled to cast.
    (2) Execute and deliver the ballot to the Bank on or before the 
closing date. A Bank shall not allow a member to change a ballot after 
it has been delivered to the Bank.
    (d) Counting ballots. A Bank shall not review any ballot until 
after the closing date, and shall not include in the election results 
any ballot received after the closing date. Promptly after the closing 
date, each Bank shall tabulate the votes cast in the election: for the 
member directorships, the Bank shall tabulate votes by each voting 
State; for the independent directorships, the Bank shall tabulate votes 
for the district at-large. Any ballots cast in violation of paragraph 
(c) of this section shall be void.
    (e) Declaring results--(1) For member directorships. The Bank shall 
declare elected the nominee receiving the highest number of votes. If 
more than one member directorship is to be filled for a particular 
State, the Bank shall declare elected each successive nominee receiving 
the next highest number of votes until all such open directorships are 
filled.
    (2) For independent directorships. (i) The bank shall tabulate 
separately the votes received for public interest independent 
directorship nominees and those received for regular independent 
directorship nominees, in each case in accordance with paragraph 
(e)(2)(ii) of this section.
    (ii) If the number of nominees exceeds the number of directorships 
to be filled, the Bank shall declare elected the nominee receiving the 
highest number of votes. If more than one directorship is to be filled, 
the Bank shall declare elected each successive nominee receiving the 
next highest number of votes for such directorship until all such open 
directorships are filled.
    (iii) If the number of nominees is no more than the number of 
directorships to be filled, the Bank shall declare elected each nominee 
receiving at least 20 percent of the number of votes eligible to be 
cast in the election. If any directorship is not filled due to any 
nominee's failure to receive at least 20 percent of the votes eligible 
to be cast, the Bank shall continue the election process for that 
directorship under the procedures in paragraph (g) of this section.
    (3) Tie votes. In the event of a tie for the last available 
directorship, the disinterested incumbent directors of the Bank, by a 
majority vote, shall declare elected one of the nominees for whom the 
number of votes cast was tied.
    (4) Eligibility. A Bank's board shall not declare elected a nominee 
that it has reason to know is ineligible or unfit to serve, nor shall 
it seat a director-elect that it has reason to know is ineligible or 
unfit to serve.
    (5) Record retention. The Bank shall retain all ballots it receives 
for at least seven years after the date of the election, and shall not 
disclose how any member voted.
    (f) Report of election. Promptly following the election, each Bank 
shall deliver a notice to its members, to each nominee, and to FHFA 
that contains the following information:
    (1) For each member directorship, the name of the director-elect, 
the name and location of the member at which he or she serves, his or 
her title or position at the member, the voting State represented, and 
the expiration date of the term of office;
    (2) For each independent directorship, the name of the director-
elect, whether the director-elect will fill a public interest or a 
regular independent directorship and, as appropriate, the consumer or 
community interest represented by such director, any qualifications 
under Sec.  1261.5(c)(1), and the expiration date of the term of 
office;
    (3) For member directorships, the total number of eligible votes, 
the number of members voting in the election, and the total number of 
votes cast for each nominee, which shall be reported by State; and
    (4) For independent directorships, the total number of eligible 
votes, the number of members voting in the election, and the total 
number of votes cast for each nominee, which shall be reported for the 
district at large.
    (g) Failure to fill all independent directorships. If any 
independent directorship is not filled due to the failure of any 
nominee to receive at least 20 percent of the eligible vote, the Bank 
shall continue the election process for that directorship under the 
following procedures:
    (1) The Bank's board of directors, after again consulting with the 
Bank's Advisory Council, shall nominate at least as many individuals as 
there are independent directorships to be filled. It may nominate 
individuals who failed to be elected in the initial vote. The Bank 
thereafter shall deliver to FHFA a copy of the independent director 
application form executed by each nominee.
    (2) The Bank then shall follow the provisions in this section that 
are applicable to the election process for independent directors, 
except for the following:
    (i) The Bank shall not place the name of any nominee on a ballot 
without prior approval of FHFA; and
    (ii) The Bank may adopt a closing date that is earlier than 30 
calendar days after delivery of the ballots to the eligible voting 
members, provided the Bank determines that an earlier closing date 
provides a reasonable amount of time to vote the ballots.


Sec.  1261.9  Actions affecting director elections.

    (a) Annual assessment of skills and experience. Each Bank, acting 
through its board of directors pursuant to policies adopted by the 
board, shall conduct an annual assessment of the skills and experience 
possessed by its board of directors as a whole and may determine 
whether the capabilities of the board would be enhanced through the 
addition of individuals with particular skills and experience. If the 
board of directors determines that the Bank could benefit by the 
addition to the board of directors of individuals with particular 
qualifications such as those described in Sec.  1261.5(c)(1), it shall 
identify those qualifications and inform the members that the Bank is 
seeking

[[Page 87755]]

member and independent director nominees that have those qualifications 
as part of its election announcement pursuant to Sec.  1261.7(a).
    (b) Support for nomination or election. (1) A Bank director, 
officer, attorney, employee, or agent, acting in his or her personal 
capacity, may support the nomination or election of any individual for 
a member directorship, provided that no such individual shall purport 
to represent the views of the Bank or its board of directors in doing 
so.
    (2) A Bank director, officer, attorney, employee or agent and the 
board of directors and Advisory Council (including members of the 
Council) of a Bank may support the candidacy of any individual 
nominated by the board of directors for election to an independent 
directorship.
    (c) Prohibition. Except as provided in paragraphs (a) and (b) of 
this section, or Sec.  1223.21(b)(7) of this chapter, no director, 
officer, attorney, employee, or agent of a Bank shall:
    (1) Communicate in any manner that a director, officer, attorney, 
employee, or agent of a Bank, directly or indirectly, supports or 
opposes the nomination or election of a particular individual for a 
directorship; or
    (2) Take any other action to influence the voting with respect to 
any particular individual.


Sec.  1261.10  Independent director independence.

    (a) Employment interests. (1) An independent director, and a 
nominee for an independent directorship, shall not serve as an officer, 
employee, or director of any member of the Bank on whose board the 
individual serves or has been nominated to serve, or of any recipient 
of advances from such Bank, and shall not serve as an officer or 
employee of any Bank. An independent director or nominee for any 
independent directorship, and any individual seeking nomination for an 
independent directorship, shall disclose all such interests to the Bank 
on whose board of directors the individual serves or which is 
considering the individual for nomination to its board of directors.
    (2) For purposes of paragraph (a)(1) of this section, ``advances'' 
includes any loan from a Bank to the recipient, regardless of form or 
nomenclature, except for debt securities traded in the public capital 
markets.
    (b) Holding companies. Service as an officer, employee, or director 
of a holding company that controls one or more members of, or one or 
more recipients of advances from, the Bank on whose board an 
independent director serves is not deemed to be service as an officer, 
employee or director of a member or recipient of advances if the assets 
of all such members or all such recipients of advances constitute less 
than 35 percent of the assets of the holding company, on a consolidated 
basis.
    (c) Attribution. For purposes of determining compliance with this 
section, a Bank shall attribute to the independent director any officer 
position, employee position, or directorship of the director's 
immediate family members (as defined in Sec.  1261.11(f)).
    (d) Member director transition period. An individual who has served 
as a member director of any Bank may not serve as an independent 
director of any Bank until at least two years has elapsed since the 
date the individual officially left the member directorship, whether 
due to ineligibility or otherwise.


Sec.  1261.11  Conflicts of interest policy for Bank directors.

    (a) Adoption of conflicts of interest policy. Each Bank shall adopt 
a written conflicts of interest policy that applies to all members of 
its board of directors. At a minimum, the conflicts of interest policy 
of each Bank shall:
    (1) Require the directors to administer the affairs of the Bank 
fairly and impartially and without discrimination in favor of or 
against any member;
    (2) Require independent directors to comply with Sec.  1261.10(a);
    (3) Prohibit the use of a director's official position for personal 
gain;
    (4) Require directors to disclose actual or apparent conflicts of 
interest and establish procedures for addressing such conflicts;
    (5) Require the establishment of internal controls to ensure that 
conflicts of interest reports are made and filed and that conflicts of 
interest issues are disclosed and resolved; and
    (6) Establish procedures to monitor compliance with the conflicts 
of interest policy.
    (b) Disclosure and recusal. A director shall disclose to the Bank's 
board of directors any financial interests he or she has, as well as 
any financial interests known to the director of any immediate family 
member or business associate of the director, in any matter to be 
considered by the Bank's board of directors and in any other business 
matter or proposed business matter involving the Bank and any other 
person or entity. A director shall disclose fully the nature of his or 
her interests in the matter and shall provide to the Bank's board of 
directors any information requested to aid in its consideration of the 
director's interest. A director shall refrain from considering or 
voting on any issue in which the director, any immediate family member, 
or any business associate has any financial interest.
    (c) Confidential information. Directors shall not disclose or use 
confidential information they receive solely by reason of their 
position with the Bank to obtain any benefit for themselves or for any 
other individual or entity.
    (d) Gifts. No Bank director shall accept, and each Bank director 
shall discourage the director's immediate family members from 
accepting, any gift that the director believes or has reason to believe 
is given with the intent to influence the director's actions as a 
member of the Bank's board of directors, or where acceptance of such 
gift would have the appearance of intending to influence the director's 
actions as a member of the board. Any insubstantial gift would not be 
expected to trigger the prohibition in this paragraph (d).
    (e) Compensation. Directors shall not accept compensation for 
services performed for the Bank from any source other than the Bank for 
which the services are performed.
    (f) Definitions. For purposes of this section:
    Business associate means any individual or entity with whom a 
director has a business relationship, including, but not limited to:
    (i) Any corporation or organization of which the director is an 
officer or partner, or in which the director beneficially owns ten 
percent or more of any class of equity security, including subordinated 
debt;
    (ii) Any other partner, officer, or beneficial owner of ten percent 
or more of any class of equity security, including subordinated debt, 
of any such corporation or organization; and
    (iii) Any trust or other estate in which a director has a 
substantial beneficial interest or as to which the director serves as 
trustee or in a similar fiduciary capacity.
    Financial interest means a direct or indirect financial interest in 
any activity, transaction, property, or relationship that involves 
receiving or providing something of monetary value, and includes, but 
is not limited to any right, contractual or otherwise, to the payment 
of money, whether contingent or fixed. It does not include a deposit or 
savings account, loan or extension of credit, or other accounts and 
products obtained in the normal course of business on non-preferential 
terms generally available to the public from a member institution or 
from a non-

[[Page 87756]]

member counterparty to the Bank on whose board the director sits.
    Immediate family member means parent, sibling, spouse, child, or 
dependent, or any relative sharing the same residence as the director.


Sec.  1261.12  Reporting requirements for Bank directors.

    (a) Annual reporting. Annually, each Bank shall require each of its 
directors to execute and deliver to the Bank the appropriate director 
eligibility certification form prescribed by FHFA for the type of 
directorship held by such director. The Bank promptly shall deliver to 
FHFA a copy of the certification form delivered to it by each director.
    (b) Report of noncompliance. At any time that any director believes 
or has reason to believe that he or she no longer meets the eligibility 
requirements set forth in the Bank Act or this subpart, the director 
promptly shall so notify the Bank in writing. At any time that a Bank 
believes or has reason to believe that any director no longer meets the 
eligibility requirements set forth in the Bank Act or this subpart, the 
Bank promptly shall notify FHFA in writing.


Sec.  1261.13  Ineligibility and removal of Bank directors.

    (a) Ineligibility. Upon a determination by FHFA or a Bank that any 
director of the Bank no longer satisfies the eligibility requirements 
set forth in the Bank Act or this subpart, or has failed to comply with 
the reporting requirements of Sec.  1261.12, the directorship shall 
immediately become vacant. Any director that is determined to have 
failed to comply with any of the requirements in this paragraph (a) 
shall not continue to serve as a Bank director. Whenever a Bank makes 
such a determination, the Bank promptly shall notify the Bank director 
and FHFA in writing.
    (b) Removal for good cause. (1) A Bank's board of directors may, 
upon a vote of two-thirds of its disinterested directors, remove any 
director for good cause pursuant to policies adopted by the board. 
Removal for good cause may be based upon:
    (i) A material violation of the Bank's code of ethics or other 
applicable Bank policy;
    (ii) A material violation of the Bank Act, FHFA regulations, or 
other civil or criminal law;
    (iii) A determination by the board that continuation in office of 
such director would be materially harmful to the Bank;
    (iv) Conduct, or a mental or physical condition, that raises 
substantial questions concerning the director's ability to fulfill his 
or her duties and obligations; or
    (v) A determination under Sec.  1261.22(b)(3) that the director's 
continuous poor performance or lack of participation is compromising 
the board's ability to adequately oversee the operations of the Bank.
    (2) A Bank shall promptly notify FHFA in writing of any pending or 
final removal action under this paragraph (b).


Sec.  1261.14  Vacant Bank directorships.

    (a) Filling unexpired terms. Subject to the provisions of this 
section, when a vacancy occurs on the board of directors of a Bank, the 
board shall elect, by a majority vote of the remaining Bank directors 
sitting as a board, an individual to fill the unexpired term of office 
of the vacant directorship, regardless of whether the remaining Bank 
directors constitute a quorum of the Bank's board of directors.
    (1) The board of directors may fill an anticipated vacancy prior to 
the effective date of the vacancy, provided the board does so no sooner 
than the date of the regularly scheduled board meeting that occurs 
immediately prior to the effective date of the vacancy.
    (2) The board of directors shall:
    (i) Fill a vacant member directorship only with an individual who 
meets the requirements of Sec.  1261.5(a); and
    (ii) Fill a vacant independent directorship only with an individual 
who meets the requirements of Sec.  1261.5(b).
    (3) If a Bank does not have at least two sitting public interest 
independent directors, its board of directors shall either:
    (i) Elect an individual who is qualified under Sec.  1261.5(c)(2) 
to serve as a public interest independent director to fill the vacancy; 
or
    (ii) Elect to redesignate as a public interest independent director 
a sitting regular independent director who is qualified under Sec.  
1261.5(c)(2) to serve as a public interest independent director and 
elect another individual who is qualified under Sec.  1261.5(c)(1) to 
serve as a regular independent director to fill the resulting vacant 
regular independent directorship.
    (4) If the Bank has more than two sitting public interest 
independent directors, the board of directors may redesignate as a 
regular independent director a sitting public interest independent 
director who is qualified under Sec.  1261.5(c)(2).
    (5) The board of directors of the Bank shall consult with the 
Bank's Advisory Council before considering any individual to fill a 
vacant independent directorship.
    (b) Verifying eligibility. Prior to any election by the board of 
directors to fill a board vacancy, the Bank shall fulfill the 
requirements of this paragraph (b).
    (1) The Bank shall obtain an executed member director eligibility 
certification form prescribed by FHFA from each individual being 
considered to fill a vacant member directorship and an executed 
independent director application form prescribed by FHFA from each 
individual being considered to fill a vacant independent directorship 
(including any sitting regular independent director to be redesignated 
as public interest independent director). Using the executed forms, 
each Bank shall verify each individual's eligibility and, as to 
independent directors, also shall verify that the individual meets the 
qualifications requirements for regular independent directors under 
Sec.  1261.5(c)(1) or public interest independent directors under Sec.  
1261.5(c)(2), as appropriate.
    (2) For each individual being considered to fill a vacant 
directorship, the Bank shall conduct a background check, as provided in 
Sec.  1261.7(e).
    (3) The Bank shall deliver to FHFA for its review a copy of the 
executed independent director application form for each individual 
being considered by the board to fill a vacant independent 
directorship, as well as a summary of the results of the background 
check. If within two weeks of such delivery FHFA provides comments to 
the Bank on any of those individuals, the board of directors of the 
Bank shall consider FHFA's comments in determining whether to elect a 
director from among those individuals or to seek additional individuals 
for consideration.
    (4) The Bank shall retain the information it receives pursuant to 
this paragraph (b) for at least seven years after the date of the 
election in question and, in the case of any information about a 
specific director, for at least seven years after that director leaves 
the board.
    (c) Notification. Promptly after allowing the individual to assume 
the directorship, as provided in paragraph (b) of this section, a Bank 
shall notify FHFA and each member located in the Bank's district in 
writing of the following:
    (1) For each member directorship filled by the board of a Bank, the 
name of the director, the name, location, and FHFA ID number of the 
member the director serves, the director's title or position with the 
member, the voting State that the director represents, and

[[Page 87757]]

the expiration date of the director's term of office; and
    (2) For each independent directorship filled by the board of a 
Bank, the name of the director, the name and location of the 
organization with which the director is affiliated, if any, the 
director's title or position with such organization, and the expiration 
date of the director's term of office.


Sec.  1261.15  Minimum number of member directorships.

    Except with respect to member directorships of a Bank resulting 
from the merger of any two or more Banks, the number of member 
directorships allocated to each State shall not be less than the number 
of directorships allocated to that State on December 31, 1960. The 
following table sets forth the States within Bank districts not created 
from the merger of two or more Banks whose members held more than one 
directorship on December 31, 1960:

                        Table 1 to Sec.   1261.15
------------------------------------------------------------------------
                                                           Number of
                                                            elective
                        State                           directorships on
                                                       December 31, 1960
------------------------------------------------------------------------
California...........................................                  3
Colorado.............................................                  2
Illinois.............................................                  4
Indiana..............................................                  5
Kansas...............................................                  3
Kentucky.............................................                  2
Louisiana............................................                  2
Massachusetts........................................                  3
Michigan.............................................                  3
New Jersey...........................................                  4
New York.............................................                  4
Ohio.................................................                  4
Oklahoma.............................................                  2
Pennsylvania.........................................                  6
Tennessee............................................                  2
Texas................................................                  3
Wisconsin............................................                  4
------------------------------------------------------------------------

Subpart C--Federal Home Loan Bank Directors' Compensation and 
Expenses


Sec.  1261.20  Definitions.

    As used in this subpart:
    Compensation means any payment of money or the provision of any 
other thing of current or potential value in connection with service as 
a director. Compensation includes all direct and indirect payments of 
benefits, both cash and non-cash, granted to or for the benefit of any 
director.
    Expenses means necessary and reasonable travel, subsistence and 
other related expenses incurred in connection with the performance of 
official duties as are payable to senior officers of the Bank under the 
Bank's travel policy, except gift or entertainment expenses.


Sec.  1261.21  General.

    (a) Standard. Each Bank may pay its directors reasonable 
compensation for the time required of them, and their necessary 
expenses, in the performance of their duties, as determined by a 
resolution adopted by the board of directors of the Bank and subject to 
the provisions of this subpart. The Director may establish and provide 
notice of an annual amount of compensation determined to be reasonable.
    (b) Reporting--(1) Following calendar year. By December 31 of each 
calendar year, each Bank shall report to the Director the compensation 
it anticipates paying to its directors for the following calendar year.
    (2) Preceding calendar year. No later than the tenth business day 
of each calendar year, each Bank shall report to the Director the 
following information relating to director compensation, expenses, and 
meeting attendance for the immediately preceding calendar year:
    (i) The total compensation paid to each director;
    (ii) The total expenses paid to each director;
    (iii) The total compensation paid to all directors;
    (iv) The total expenses paid to all directors;
    (v) The total of all expenses incurred at group functions that are 
not reimbursed to individual directors, such as the cost of group meals 
in connection with board and committee meetings;
    (vi) The total number of meetings held by the board and its 
designated committees; and
    (vii) The number of board and designated committee meetings each 
director attended in-person or remotely, through video conferencing or 
teleconferencing, and in accordance with Sec.  1261.24(b).


Sec.  1261.22  Directors' compensation policy.

    (a) General. Each Bank's board of directors annually shall adopt a 
written compensation policy to provide for the payment of reasonable 
compensation and expenses to the directors for the time required of 
them in performing their duties as directors. Payments under the 
directors' compensation policy may be based on any factors that the 
board of directors determines reasonably to be appropriate, subject to 
the requirements in this subpart.
    (b) Minimum contents. (1) The compensation policy shall address the 
activities or functions for which director attendance or participation 
is necessary and which may be compensated, and shall explain and 
justify the methodology used to determine the amount of compensation to 
be paid to the Bank directors.
    (2) The compensation policy shall require that any compensation 
paid to a director reflect the amount of time the director has spent on 
official Bank business and shall require that compensation be reduced 
or a director removed, as necessary, to reflect lesser attendance or 
performance at board or committee meetings during a given year.
    (3) In addition to attendance, the compensation policy shall 
establish a fair and impartial process for annually evaluating 
individual director performance and participation, including, but not 
limited to, an assessment of whether each director:
    (i) Demonstrated understanding of the Bank System;
    (ii) Demonstrated knowledge of the Bank's policies and governance 
documents;
    (iii) Demonstrated understanding of his or her legal and ethical 
responsibilities as a board member;
    (iv) Made suggestions congruent with the Bank's mission, vision and 
values (even if divergent from majority opinion); and
    (v) Acted in support of Board decisions, regardless of initial 
position.
    (c) Prohibited payments. A Bank shall not pay a director who 
regularly fails to attend board or committee meetings, and shall not 
pay fees to a director that do not reflect the director's performance 
of official Bank business conducted prior to the payment of such fees.
    (d) Submission requirements. No later than the tenth business day 
after adopting its annual policy for director compensation and 
expenses, and at least 30 days prior to disbursing the first payment to 
any director, each Bank shall submit to the Director a copy of the 
policy, along with all studies or other supporting materials upon which 
the board relied in determining the level of compensation and expenses 
to pay to its directors.


Sec.  1261.23  Director disapproval.

    The Director may determine, based upon his or her review of a 
Bank's director compensation policy, methodology and/or other related 
materials, that the compensation and/or expenses to be paid to the 
directors are not reasonable. In such case, the Director may order the 
Bank to refrain from making any further payments under that 
compensation policy. Any such order shall apply prospectively only and 
will not affect either compensation or expenses that have

[[Page 87758]]

been earned but not yet paid or reimbursed or payments that had been 
made prior to the date of the Director's determination and order.


Sec.  1261.24  Board meetings.

    (a) Number of meetings. The board of directors of each Bank shall 
hold as many meetings each year as necessary and appropriate to carry 
out its fiduciary responsibilities with respect to the effective 
oversight of Bank management and such other duties and obligations as 
may be imposed by applicable laws, provided the board holds a minimum 
of six meetings in any year.
    (b) Site of meetings. (1) A Bank's board of directors and its 
committees may conduct meetings in-person, through video conferencing 
or teleconferencing, or in a hybrid format, provided that all directors 
have an opportunity to communicate and have access to all written 
documents and presentations.
    (2) Each Bank should generally hold board and committee meetings 
within the district served by the Bank. A Bank shall not hold board or 
committee meetings in any location that is not within a State, as 
defined by 12 CFR 1201.1. A director must be located within a State 
when attending a meeting remotely through video conferencing or 
teleconferencing.
    (c) Quorum. A quorum, for purposes of meetings of a Bank's board of 
directors, shall require a majority of sitting directors, which must 
include a majority of sitting independent directors.

PART 1273--OFFICE OF FINANCE

0
4. The authority citation for part 1273 continues to read as follows:

    Authority: 12 U.S.C. 1431, 1440, 4511(b), 4513, 4514(a), 
4526(a).

0
5. Amend Sec.  1273.5 by revising paragraph (b)(1) to read as follows:


Sec.  1273.5  Funding of the OF.

* * * * *
    (b) * * *
    (1) At the direction of and pursuant to policies and procedures 
adopted by the OF board of directors, the Banks shall periodically 
reimburse the OF in order to maintain sufficient operating funds under 
the budget approved by the OF board of directors. The OF operating 
funds shall be:
    (i) Available for expenses of the OF and the OF board of directors, 
according to their approved budgets; and
    (ii) Subject to withdrawal by check, draft, wire transfer, or other 
funds transfer methods with written authorization by the CEO or other 
persons designated by the CEO or OF board of directors in accordance 
with OF governance documents.
* * * * *
0
6. Amend Sec.  1273.8 by revising paragraphs (b) and (d) to read as 
follows:


Sec.  1273.8  General duties of the OF board of directors.

* * * * *
    (b) Meetings and quorum-(1) Meeting frequency. The OF board of 
directors shall conduct its business by majority vote of its members at 
meetings convened in accordance with its by-laws, and shall hold no 
fewer than six meetings annually, which may be conducted in-person, 
through video conferencing or teleconferencing, or in a hybrid format, 
provided that all directors have an opportunity to communicate and have 
access to all written documents and presentations.
    (2) Meeting location. The OF shall not hold board or committee 
meetings in any location that is not within a State, as defined by 12 
CFR 1201.1. A director must be located within a State when attending a 
meeting remotely through videoconferencing or teleconferencing.
    (3) Notice. Due notice shall be given to FHFA by the Chair prior to 
each meeting.
    (4) Quorum. A quorum, for purposes of meetings of the OF board of 
directors, shall require a majority of sitting board members, which 
must include a majority of sitting Independent Directors.
* * * * *
    (d) Other duties. The OF board of directors shall:
    (1) Set policies for management and operation of the OF;
    (2) Approve a strategic business plan for the OF in accordance with 
the provisions of 12 CFR 1239.14, as appropriate;
    (3) Select, employ, determine the compensation for, and assign the 
duties and functions of a CEO of the OF who shall--
    (i) Be head of the OF and direct the implementation of the OF board 
of directors' policies;
    (ii) Serve as a member of the Directorate of the FICO, pursuant to 
section 21(b)(1)(A) of the Bank Act (12 U.S.C. 1441(b)(1)(A)); and
    (iii) Serve as a member of the Directorate of the REFCORP, pursuant 
to section 21B(c)(1)(A) of the Bank Act (12 U.S.C. 1441b(c)(1)(A));
    (4) Review and approve contracts of the OF, as specified in OF 
governance documents; and
    (5) Assume any other responsibilities that may from time to time be 
assigned to it by FHFA.
* * * * *

Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2024-24767 Filed 11-1-24; 8:45 am]
BILLING CODE 8070-01-P

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