[Federal Register Volume 75, Number 227 (Friday, November 26, 2010)]
[Proposed Rules]
[Pages 72751-72761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29739]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1278

RIN 2590-AA37


Voluntary Mergers of Federal Home Loan Banks

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed rulemaking; request for comment.

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SUMMARY: Section 1209 of the Housing and Economic Recovery Act of 2008 
(HERA) amended section 26 of the Federal Home Loan Bank Act (Bank Act) 
to permit any Federal Home Loan Bank (Bank) to merge with another Bank 
with the approval of its board of directors, its members, and the 
Director of the Federal Housing Finance Agency (FHFA). This proposed 
rule would establish the conditions and procedures for the 
consideration and approval of voluntary Bank mergers.

DATES: Written comments must be received on or before January 25, 2011.

ADDRESSES: You may submit your comments, identified by regulatory 
information number (RIN) 2590-AA37, by any of the following methods:
    <bullet> E-mail: Comments to Alfred M. Pollard, General Counsel may 
be sent by e-mail to <a href="/cdn-cgi/l/email-protection#7624131135191b1b1318020536101e101758111900"><span class="__cf_email__" data-cfemail="aefccbc9edc1c3c3cbc0daddeec8c6c8cf80c9c1d8">[email protected]</span></a>. Please include ``RIN 2590-
AA37'' in the subject line of the message.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at <a href="/cdn-cgi/l/email-protection#f0a29597b39f9d9d959e8483b096989691de979f86"><span class="__cf_email__" data-cfemail="5e0c3b391d3133333b302a2d1e3836383f70393128">[email protected]</span></a> to ensure timely receipt by FHFA. 
Please include ``RIN 2590-AA37'' in the subject line of the message.
    <bullet> U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA37, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552.
    <bullet> Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA37, 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. The package should be logged at the Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: John P. Foley, Senior Financial 
Analyst, Policy and Program Development, <a href="/cdn-cgi/l/email-protection#2943464147074f46454c50694f414f48074e465f"><span class="__cf_email__" data-cfemail="c4aeabacaaeaa2aba8a1bd84a2aca2a5eaa3abb2">[email protected]</span></a>, (202) 
408-2828 (this is not a toll-free number), Federal Housing Finance 
Agency, 1625 Eye Street, NW., Washington, DC 20006; Eric M. Raudenbush, 
Assistant General Counsel, <a href="/cdn-cgi/l/email-protection#7f1a0d161c510d1e0a1b1a111d0a0c173f1917191e51181009"><span class="__cf_email__" data-cfemail="f297809b91dc80938796979c9087819ab2949a9493dc959d84">[email protected]</span></a>, (202) 414-6421 
(this is not a toll-free number); Federal Housing Finance Agency, 
Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The telephone 
number for the Telecommunications Device for the Hearing Impaired is 
(800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Comments

    FHFA invites comments on all aspects of the proposed rule and will 
take all comments into consideration before issuing the final rule. 
Copies of all comments will be posted without change, including any 
personal information you provide, such as your name and address, on the 
FHFA Internet Web site at http://www.fhfa.gov. In addition, copies of 
all comments received will be available for examination by the public 
on business days between the hours of 10 a.m. and 3 p.m. at the Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552. To make an appointment to inspect comments, please call the 
Office of General Counsel at (202) 414-6924.

II. Background

A. The Federal Home Loan Bank System

    The twelve regional Banks are instrumentalities of the United 
States

[[Page 72752]]

organized under the Bank Act.\1\ The Banks are cooperatives; only 
members of a Bank may purchase the capital stock of a Bank, and only 
members or certain eligible housing associates (such as state housing 
finance agencies) may obtain access to secured loans, known as 
advances, or other products provided by a Bank.\2\ Each Bank is managed 
by its own board of directors and serves the public interest by 
enhancing the availability of residential mortgage and community 
lending credit through its member institutions.\3\ Any eligible 
institution (generally a federally insured depository institution or 
state-regulated insurance company) may become a member of a Bank if it 
satisfies certain criteria and purchases a specified amount of the 
Bank's capital stock.\4\
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    \1\ See 12 U.S.C. 1423, 1432(a).
    \2\ See 12 U.S.C. 1426(a)(4), 1430(a), 1430b.
    \3\ See 12 U.S.C. 1427.
    \4\ See 12 U.S.C. 1424; 12 CFR part 1263.
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B. HERA Provisions Addressing Voluntary Mergers

    Section 1209 of HERA added new paragraphs (b)(1) and (b)(2) to 
section 26 of the Bank Act to address voluntary mergers of Banks. 
Section 26(b)(1) authorizes any Bank to merge voluntarily with another 
Bank with the approval of the Director of FHFA and the boards of 
directors of the Banks involved in the merger. Section 26(b)(2) 
requires FHFA to promulgate regulations establishing the conditions and 
procedures for the consideration and approval of voluntary mergers, 
including approval by Bank members.\5\ The HERA amendments do not 
provide any further details about the terms on which Banks may merge or 
on which FHFA may approve such mergers.
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    \5\ See 12 U.S.C. 1446(b)(1), (2).
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    As required by section 26(b)(2), the proposed rule would establish 
the conditions and procedures for the consideration and approval of 
voluntary mergers of Banks. The proposed rule does not relate to 
liquidations, reorganizations, conservatorships, or receiverships 
undertaken by the Director of FHFA pursuant to the authority set forth 
at section 26(a) of the Bank Act and section 1367 of the Federal 
Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety 
and Soundness Act).\6\
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    \6\ See 12 U.S.C. 1446(a), 4617.
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C. Considerations of Differences Between the Banks and the Enterprises

    Section 1313 of the Safety and Soundness Act, as amended by HERA, 
requires the Director of FHFA, when promulgating regulations relating 
to the Banks, to consider the following differences between the Banks 
and the other Housing Enterprises (Fannie Mae and Freddie Mac): 
Cooperative ownership structure; mission of providing liquidity to 
members; affordable housing and community development mission; capital 
structure; and joint and several liability.\7\ 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. FHFA requests comments from the public about whether 
differences related to these factors should result in any revisions to 
the proposal.
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    \7\ See 12 U.S.C. 4513.
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III. The Proposed Rule

    The proposed rule would add a new part 1278 to the regulations of 
FHFA to govern voluntary mergers of Banks. It would establish required 
procedures for Banks to follow in order to consummate a merger, 
including authorization by the merging Banks' boards of directors, 
ratification by the Banks' member institutions, and approval by the 
Director of FHFA. In developing the proposed rule, FHFA looked to 
governance practices that are common under general principles of 
corporate law, disclosure practices that are required under the federal 
securities laws, and the approval standards required under federal 
banking laws relating to mergers of insured depository institutions as 
guidance for the key provisions of this proposal. The substance of each 
provision of the proposed rule is described in the following 
paragraphs.
    Section 1278.1--Definitions:
    Proposed Sec.  1278.1 sets forth definitions of terms used in 
proposed part 1278. As is discussed more thoroughly below, the terms 
``merge'' and ``merger'' would be defined broadly to encompass not only 
a merger in legal form--that is, a combination of two or more Banks in 
which one Bank continues its corporate existence and the other Bank 
ceases to exist as a separate legal entity by operation of law--but 
also all other types of business combinations that could conceivably 
occur between or among Banks. The proposed definition expressly 
includes three common forms of business combination: A merger; a 
consolidation, where two or more Banks combine to form one or more 
entirely new Banks; and a purchase and assumption (P&A) transaction, in 
which one or more Banks acquire substantially all of the assets and 
assume substantially all of the liabilities of another Bank or Banks. 
The definition also would include a general provision to include any 
other type of business combination of two or more Banks into one or 
more resulting Banks.
    The term ``Constituent Bank'' would be defined to refer to any 
existing Bank that is a party to a proposed merger--in other words, to 
any Bank as it exists prior to the consummation of the merger. The term 
``Continuing Bank'' would refer to any Bank that exists as a result of 
a consummated merger, regardless of whether the Bank existed prior to 
the merger or is an entirely new Bank created as part of the merger. In 
order that the provisions of this part encompass the possibility of 
mergers resulting in more than one Continuing Bank, such as a P&A 
transaction in which two Banks each acquire a portion of the assets and 
liabilities of another Bank, the term would be defined to include its 
plural form even when used in the singular.
    The term ``Disclosure Statement'' would refer to a written document 
that contains all of the items that must be included in a Form S-4 
Registration Statement (Form S-4) under the Securities Act of 1933 
(1933Act) (or any successor form promulgated by the United States 
Securities and Exchange Commission (SEC) governing disclosure required 
for securities issued in business combination transactions) when 
prepared as a prospectus as directed in Part I of the Form S-4.\8\ As 
discussed in detail below, the proposed rule requires each Constituent 
Bank to provide such a Disclosure Statement to its members in 
connection with the required vote to ratify a merger agreement between 
Banks.
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    \8\ See 17 CFR 239.25.
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    The term ``Effective Date'' would refer to the date on which a 
particular merger of Banks takes effect. Where more than two 
Constituent Banks propose to consummate a merger in multiple stages, 
the term ``Effective Date'' would refer to the date on which each of 
the component transactions takes effect.
    Finally, proposed Sec.  1278.1 would also include definitions for 
the short forms ``Bank,'' ``Bank Act,'' ``Director,'' ``FHFA,'' and 
``SEC.''
    Section 1278.2--Authority:
    Proposed Sec.  1278.2 provides that any two or more Banks may merge 
provided that the requirements of this part, as outlined in paragraphs 
(a) through (e), are met. As noted above, Sec.  1278.1 would define 
``merge'' broadly to include traditional mergers, consolidations, P&A 
transactions, and any other form of business combination in which two 
or

[[Page 72753]]

more Banks could engage. The purpose of this broad definition would be 
to subject all contemplated business combinations between Banks to the 
approval process that would be established by this part. The breadth of 
the definition does not imply that FHFA would necessarily approve all 
types of mergers, but only that regulations contained in this part 
would not preclude proposed business combinations that involve 
something other than a legal merger. As provided in the remaining 
portions of this part, FHFA would consider the merits of each proposed 
transaction, regardless of its structure, on a case-by-case basis in 
deciding whether to approve the transaction.
    Although the term ``merger'' technically refers to a transaction in 
which one business entity absorbs another entity, with the former 
continuing to exist after the consummation of the transaction, the term 
is also used in a broader sense to refer to any type of business 
combination, especially those between entities of comparable size.\9\ 
The express authorization of ``voluntary'' mergers in section 26(b) of 
the Bank Act evidences a Congressional intent to permit the Banks to 
consider business combinations that could be of benefit to their 
members and to the Bank System as a whole. FHFA recognizes that, given 
the unique characteristics of the Banks as largely tax-exempt federally 
chartered cooperatives with limited powers, it is possible that the 
Banks will not have the same motivation as depository institutions or 
other business corporations to engage in business combinations other 
than legal mergers. For example, while P&A transactions are often 
undertaken as a vehicle to achieve particular tax effects, or to avoid 
transferring some assets or liabilities, these considerations may not 
be applicable in Bank mergers. In any case, it is possible that Banks 
may determine that other business combination structures may have legal 
or business advantages over a legal merger structure in particular 
circumstances.
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    \9\ See 19 Am.Jur 2d Corporations Sec.  2169 (2010); Barron's 
Finance and Investment Handbook 343 (2d ed. 1987).
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    Accordingly, FHFA believes that it is justified in interpreting the 
statutory merger authorization broadly, especially given that, under 
the terms of the statute and the proposed rule, no business combination 
may be consummated without the approval of the Director. FHFA therefore 
requests comment on whether the final rule should set forth a broad or 
narrow definition for the terms ``merge'' and ``merger,'' and in 
particular on reasons for using types of business transactions other 
than legal mergers for the purpose of achieving combinations of 
Banks.\10\
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    \10\ As used hereinafter in this preamble, unless otherwise 
specified, the terms ``merge'' and ``merger'' shall encompass all 
types of business combination transactions.
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    Paragraphs (a) through (e) of proposed Sec.  1278.2 summarize the 
requirements of regulations in this part to which the broad 
authorization is subject: The Constituent Banks must agree upon the 
terms of the proposed merger, and the board of directors of each must 
authorize a written merger agreement; the Constituent Banks must 
jointly file a merger application with FHFA; the Director of FHFA must 
grant preliminary approval of the merger; the members of each 
Constituent Bank must vote to ratify the merger agreement; and the 
Director must grant final approval of the merger. The details of each 
of these requirements are set out in Sec. Sec.  1278.3 through 1278.7 
of the proposed rule, respectively, as noted in each of the paragraphs 
of proposed Sec.  1278.2. In order to clarify the different stages of 
the process, the proposed rule refers to ``authorization'' of a merger 
agreement by the boards of directors of the Constituent Banks, 
``approval'' of the merger by the Director of FHFA and ``ratification'' 
of the merger by the members of the Constituent Banks.
    Section 1278.3--Merger Agreement:
    Section 1278.3 of the proposed rule addresses the terms of the 
merger agreement that the Constituent Banks to any transaction must 
execute. It would provide that a merger of Banks under the authority of 
Sec.  1278.2 shall require a written merger agreement that meets the 
requirements of paragraphs (a) and (b) of Sec.  1278.3.
    Paragraph (a) of Sec.  1278.3 would require that any merger 
agreement be authorized by the affirmative vote of a simple majority of 
the board of directors of each Constituent Bank at a meeting on the 
record and executed by authorized signing officers of each Constituent 
Bank. Under this provision, a Bank's board of directors would be deemed 
to have authorized the execution of a merger agreement if a majority of 
directors present at the meeting, at which a quorum was present, voted 
in favor of the authorization. The proposed rule would require that the 
board meet on the record, meaning that the votes and matters discussed 
must be fully and accurately reflected in an electronic recording, a 
written transcript, or written minutes of the meeting.
    Section 26(b)(1) of the Bank Act requires that the board of 
directors of each merging Bank approve the merger transaction, but does 
not address the details of the boards' approval, such as the percentage 
of votes required or the method of voting. Given the absence of any 
statutory requirements regarding the details of the board approval, as 
well as the mandate to establish the conditions and procedures for a 
merger, FHFA has broad authority to establish an appropriate model for 
board approval of mergers, including models that might differ from that 
reflected in the proposed rule.
    FHFA has considered several alternatives in developing the proposed 
rule, and has opted to use the traditional corporate approach for board 
approval. This approach corresponds with the manner in which board 
decisions currently are made under the by-laws of all of the Banks. To 
the extent that a higher standard of deliberation may be desirable for 
a decision as significant as a merger, FHFA believes that the required 
ratification by each Banks' members, the required approval of the 
Director of FHFA, and the other detailed requirements of the proposed 
rule (all discussed below) provide for sufficient deliberation by the 
various constituencies. In addition, nothing in the text or legislative 
history of section 26(b) of the Bank Act evidences any Congressional 
intent to establish a standard for board approval that is different 
from that traditionally used by the Banks, or by corporations 
generally. To the contrary, the addition of the Banks' voluntary merger 
authority to the Bank Act appears intended to enable and encourage the 
Banks to develop merger proposals based on their own assessments of 
their business needs. To require authorization by something more than a 
simple majority of each board could discourage Bank management and 
directors from developing and considering merger proposals that could 
be of benefit to the Bank's members and to the Bank System as a whole. 
Nevertheless, FHFA requests comment upon whether the standard for 
approval by the Constituent Banks' boards of directors should differ 
from that set forth in the proposed rule and, if so, which standard 
should be made to apply.
    Proposed Sec.  1278.3(b) generally would require that a merger 
agreement set forth all material terms and conditions of the proposed 
merger and also that it include provisions addressing certain 
enumerated issues. The enumeration is not intended as a safe harbor 
regarding whether a merger agreement sets forth all material terms and 
conditions of the

[[Page 72754]]

merger, but is merely a list of issues that must be addressed in all 
cases.
    Thus, paragraph (b)(1) would require the Banks to include in an 
agreement the proposed Effective Date of the merger, which should be 
established with sufficient regard for amount of time that it will take 
to fulfill the requirements of the regulations in this part. FHFA does 
not intend that an agreement must specify in advance a particular date 
on which the merger will occur, but does expect that an agreement will 
include provisions from which the effective date can be reasonably 
determined, such as within a specified period after the occurrence of a 
particular event, such as the receipt of final FHFA approval or the 
satisfaction of all required conditions. In cases where more than two 
Constituent Banks are a party to a merger agreement that governs two or 
more component combinations to be consummated at different times, the 
Banks would be required to include in the agreement the Effective Dates 
for each component combination.
    Paragraph (b)(2) would require the Banks to include in an agreement 
a description of the main features of the proposed organization 
certificate and the proposed by-laws for the Continuing Bank. In the 
case of the proposed organization certificate, the main feature to be 
addressed would be the listing of states that will make up the district 
of the Continuing Bank. FHFA recognizes the possibility that certain 
mergers could involve, as an incident to the initial transaction, the 
subsequent transfer of states located within the district of one or 
more of the initial Constituent Banks to the districts of other Banks 
that are not parties to the initial merger transaction. In such cases 
the agreement should describe the proposed organization certificate as 
it would exist immediately after the initial transaction, as well as 
after any subsequent transactions. Even if those subsequent 
transactions are not governed by the same merger agreement, they must 
be described in the merger application filed with FHFA.
    Paragraph (b)(3) would require the Banks to include in an agreement 
a description of the main features of the proposed capital structure 
plan for the Continuing Bank. Under section 6 of the Bank Act, as 
implemented by the regulations of the Finance Board, each Bank is 
required to develop and operate under a capital structure plan that 
governs the issuance and redemption of, and the rights attached to, the 
capital stock held by the Bank's members.\11\ By statute, all new 
capital structure plans and modifications to any existing capital 
structure plan must be approved by FHFA.\12\ Consequently, review and 
approval of the proposed capital structure plan of the Continuing Bank 
will be a major component of the overall merger approval process. FHFA 
believes that it is important that the Constituent Banks address the 
capital structure of the Continuing Bank early in the process and that 
this should not be left for negotiation after the execution of a merger 
agreement. Thus, a merger agreement should set forth the main features 
of the contemplated capital structure plan, including the par value and 
transferability of the Continuing Bank's capital stock; minimum stock 
purchase requirements, including both membership and activity-based 
stock purchase requirements; the various classes of stock and the 
rights attached to each; and the redemption and repurchase of shares, 
both from a member and upon termination of or withdrawal from 
membership.
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    \11\ See 12 U.S.C. 1426; 12 CFR part 933. Currently, all but one 
of the Banks operate under a capital structure plan approved by FHFA 
pursuant to section 6 of the Bank Act.
    \12\ See 12 U.S.C. 1426(b).
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    Paragraph (b)(4) would require the Banks to address in a merger 
agreement the proposed size and structure of the Continuing Bank's 
board of directors. New part 1278 refers to the ``proposed'' board size 
and structure in recognition of the fact that section 7 of the Bank Act 
generally requires the Director of FHFA to establish the size and 
structure of the board of directors of each Bank and gives the Director 
additional discretion to adjust the board size in connection with any 
Bank merger.\13\ FHFA believes that the Constituent Banks should 
address this issue at an early stage in the merger process even though 
the ultimate responsibility for determining the size and composition of 
the board of the Continuing Bank lies with the Director, acting within 
the confines of the Bank Act. FHFA requests comments on how best to 
address the transition from the separate boards of the Constituent 
Banks to the combined board of the Continuing Bank, and the manner in 
which it should establish the size and composition of the board for the 
Continuing Bank, such as immediately on the Effective Date of the 
merger or gradually through the annual designation of directorships 
process in the years subsequent to the merger. FHFA also requests 
comment on how effective corporate governance of a Continuing Bank 
could be best achieved, whether through increased reliance on board 
committees or otherwise, if the requirements of section 7 of the Bank 
Act were to mandate a board size that is significantly larger than 
those that currently exist.\14\
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    \13\ See 12 U.S.C. 1427.
    \14\ All Banks currently have between 14 and 18 directors, with 
the majority having between 15 and 17 directors.
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    Paragraphs (b)(5) through (b)(8) of proposed Sec.  1278.3 would 
require, respectively, that a merger agreement: Set forth the formula 
to be used to exchange the stock of one or more Constituent Banks for 
that of the Continuing Bank and prohibit the issuance of fractional 
shares of Bank stock; set forth any conditions that must be satisfied 
prior to the Effective Date of the proposed merger; set forth any 
representations or warranties made by any of the Constituent Banks or 
their officers, directors or employees; and describe any legal opinions 
or rulings, whether generated internally, by outside counsel, by FHFA, 
or another government agency, in connection with the proposed merger. 
The prohibition on the issuance of fractional shares is consistent with 
the capital plans of the majority of the Banks, some of which already 
prohibit fractional shares explicitly, and others of which do so 
implicitly, either by requiring all stock purchase requirements to be 
rounded up to the nearest whole number of shares or by requiring that 
all stock be issued only at its stated par value. The prohibition would 
not conflict with any Bank's capital plan, as no capital plan expressly 
authorizes the issuance of fractional shares. The conditions that would 
be required to be enumerated under paragraph (b)(6) would include, in 
all cases, ratification of the merger by the members of the Constituent 
Banks and approval of the merger by the Director of FHFA.
    Finally, paragraph (b)(9) would require that a merger agreement 
contain a provision permitting the board of directors of any 
Constituent Bank, with the concurrence of the Director of FHFA, to 
terminate the agreement after the members of the Banks have voted to 
ratify the agreement in cases where: Information disclosed to members 
contained material errors or omissions; material misrepresentations 
were made to members regarding the impact of the proposal; fraudulent 
activities were used to obtain the members' ratification of the merger; 
or an event occurred between the time of the member vote and the 
Effective Date of the merger that would have a significant adverse 
impact

[[Page 72755]]

on the future viability of the Continuing Bank.
    Section 1278.4--merger application:
    Section 1278.4 of the proposed rule would govern the application 
that the Constituent Banks must file jointly with FHFA to obtain 
approval for any proposed merger. Although Part 1278 would require an 
application to include certain specified items, FHFA expects that, even 
prior to filing a formal application with FHFA, the Constituent Banks 
will have discussed the possibility of a merger with agency staff on an 
informal basis to determine whether a merger would present any 
significant supervisory concerns or involve novel aspects that might 
require the submission of other categories of information for the 
Director to appropriately assess the merits of the proposed merger.
    Proposed Sec.  1278.4(a) would enumerate the minimum required 
contents of a merger application. Paragraph (a)(1) would address the 
written statement that the Constituent Banks would be required to file 
as the main part of the application. Part 1278 would require that this 
statement contain: a summary of the material features of the proposed 
merger; the reasons for the proposed merger; the effect of the proposed 
merger on the Constituent Banks and their members; the planned 
Effective Date of the merger; A summary of the material features of any 
related transactions and the bearing that the consummation of, or 
failure to consummate, the related transactions is expected to have 
upon the merger; the names of the persons proposed to serve as 
directors and senior executive officers of the Continuing Bank; a 
description of all proposed material operational changes; information 
demonstrating that the Continuing Bank will comply with all applicable 
capital requirements after the Effective Date; a statement explaining 
all officer and director indemnification provisions; and an undertaking 
that the Constituent Banks will continue to disclose all material 
information, and update all items, as appropriate. In demonstrating 
future compliance with applicable capital requirements, the Banks 
should correlate the data in the pro forma financial statements of the 
Continuing Bank to the capital calculations required under part 932 of 
the regulations of the Finance Board.\15\
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    \15\ 12 CFR part 932.
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    Paragraph (a)(2) would require an application to include a copy of 
an executed merger agreement, accompanied by a certified copy of the 
resolution of the board of directors of each Constituent Bank 
authorizing the execution of the merger agreement. In addition, 
paragraphs (a)(3) through (a)(5) would require the Banks to provide, 
respectively, copies of the proposed organization certificate, the 
proposed by-laws, and the proposed capital structure plan of the 
Continuing Bank. Each of those items should have been approved by the 
board of directors of each of the Constituent Banks prior to submission 
to FHFA, which will evaluate them and include any necessary approvals 
as part of the approval of the merger transaction.
    Paragraphs (a)(6) and (a)(7) would require the Banks to include as 
part of the application the most recent audited financial statements 
for each Bank and pro forma financial statements for the Continuing 
Bank in such forms as would be required to be included in the 
Disclosure Statement that the Banks must provide to their members in 
connection with the member vote under proposed Sec.  1278.6 (discussed 
in detail below). Depending upon the option chosen by the Constituent 
Banks, the pro forma financial statements appearing in the Disclosure 
Statement could include forecasted results for up to twelve (12) months 
following the date of the most recent balance sheet included in the 
Disclosure Statement. FHFA is considering whether it should require the 
Constituent Banks to provide as part of the merger application pro 
forma forecasted results for as many as three years following the date 
of the most recent balance sheet in order to better assess the long-
term prospects of the Continuing Bank. FHFA requests comment on whether 
it is advisable to include a different pro forma timeframe for the 
merger application than that which must be followed in the Disclosure 
Statement and whether a three-year forecast is appropriate.
    Paragraph (b) of proposed Sec.  1278.4 provides that FHFA may 
require the Constituent Banks to submit any additional information that 
it determines is required to assess a particular merger. This 
information may be requested at any time, even after a merger 
application has been deemed complete under paragraph (c). If FHFA has 
determined that an application is complete, any subsequent requests for 
additional information must relate to matters that are derived from or 
prompted by the information previously submitted, or matters of a 
material nature that were not reasonably available previously, such as 
in the case of developments occurring after the determination of 
completeness or in the case of materials concealed by one of the Banks. 
Under the proposed rule, FHFA may use a Constituent Bank's failure to 
provide the required information in a timely manner as grounds to deny 
a merger application.
    Paragraph (c) would govern the timing for determining whether a 
merger application is complete. Under this provision, FHFA would have 
thirty (30) days after the receipt of a merger application to determine 
whether it is complete or whether FHFA needs any additional information 
for the Director to evaluate the proposed merger. This part would 
require FHFA to inform the Constituent Banks in writing if the agency 
determines that an application is complete and that it has all 
information necessary to evaluate the proposed merger. This part also 
requires FHFA to inform the Constituent Banks in writing if it 
determines that an application is incomplete, or that it requires 
additional information in order to evaluate the application. In that 
case, FHFA would specify the number of days within which the 
Constituent Banks must provide any additional information or materials, 
giving due regard to the nature and extent of the information or 
materials requested. Part 1278 would require that, within fifteen (15) 
days of receipt of the additional information or materials, FHFA again 
determine whether a merger application is complete and so inform the 
Banks.
    Section 1278.5--Preliminary Approval by Director:
    With respect to the approval that the Constituent Banks must obtain 
from the Director of FHFA before a merger may be consummated, the 
proposed rule contemplates a two-stage process. The first stage would 
encompass a review of all substantive aspects of a proposed merger, 
followed by either a preliminary approval or a denial of the merger 
application. If the Director grants preliminary approval, the second 
stage would be an abbreviated review after the members of each 
Constituent Bank have ratified the merger, followed by a final 
decision. Section 1278.5 of the proposed rule addresses the first stage 
of the process and includes the standards that the Director would apply 
in deciding whether to grant or deny preliminary approval and the 
process for notifying the Constituent Banks of the decision. The 
proposed rule anticipates that after the Director has granted 
preliminary approval of a merger, the Constituent Banks will present 
the terms of the approved merger to their members for ratification. 
Thus, at the time that the matter is presented to the members they will 
know that FHFA has granted preliminary approval of the transaction and 
the nature of any conditions that

[[Page 72756]]

FHFA has imposed in connection with the preliminary approval. As 
provided in proposed Sec.  1278.7(b)(2), which is discussed in more 
detail below, at the second stage the scope of the Director's review 
would be limited to considering whether: The member vote was carried 
out in accordance with Sec.  1278.6; all conditions of the preliminary 
approval have been met; and no material adverse events have occurred.
    The standards set forth in the proposed rule which the Director 
would apply in determining whether to approve a merger of Banks are 
similar to those used by the federal depository institution regulators 
in considering mergers and acquisitions of federally insured depository 
institutions.\16\ Proposed Sec.  1278.5(a) provides that the Director 
must take into consideration the financial and managerial resources of 
each of the Constituent Banks, the future prospects of the Continuing 
Bank, and the effect of the proposed merger on the safety and soundness 
of the Continuing Bank and the Bank System. Each of these would be 
assessed based upon the materials and information provided as part of 
the merger application and in response to any subsequent requests for 
information. In order for the Director to approve a merger, the 
information and materials submitted must demonstrate that the financial 
condition of the Continuing Bank will be sound, the management and 
governance structure of the Continuing Bank will be capable of 
integrating the operations of the Constituent Banks in a safe and sound 
manner, that the Continuing Bank will be adequately capitalized 
subsequent to the merger and that the combination of the Constituent 
Banks will not present any undue risks to the other Banks. FHFA 
believes that the ``financial and managerial resources and future 
prospects'' standard applied under the federal banking statutes is well 
understood and provides a body of law and practice that can inform the 
assessment of potential mergers among Banks.
---------------------------------------------------------------------------

    \16\ See 12 U.S.C. 1467a(e)(2) (acquisitions of savings 
associations); 12 U.S.C. 1817(j)(7)(C),(D) (bank change in control); 
12 U.S.C. 1828(c)(5) (bank mergers).
---------------------------------------------------------------------------

    Proposed Sec.  1278.5(b) addresses procedural aspects of the merger 
application process and provides that, after FHFA determines that a 
merger application is complete, the Director shall have thirty (30) 
days to consider the information and materials provided in the 
application and either grant or deny preliminary approval of the 
merger. Certain merger proposals may present novel policy issues, 
complex financial or accounting analyses, or unprecedented legal 
issues, any of which may require extended periods of time to resolve. 
In such cases, the Banks should consult with FHFA about those matters 
in advance to assure that they may receive an approval within the 
defined time.
    Under paragraph (b)(1), if the Director decides to grant 
preliminary approval of the merger transaction, FHFA would provide 
written notice of the approval to each Constituent Bank, as well as to 
each other Bank and the Office of Finance. The notice provided would 
include any conditions that FHFA requires to be met prior to the final 
approval of the merger. In all cases, one of these conditions would be 
the ratification of the merger by the affirmative vote of the members 
of each Constituent Bank. The notice provided to the other Banks and to 
the Office of Finance under this provision would be solely for 
informational purposes. FHFA believes that the possibility of a merger 
would be a material development about which the other Banks, which are 
jointly and severally liable with the Constituent Banks on the System's 
consolidated obligations,\17\ and the Office of Finance, which prepares 
the combined financial statements for the Bank System, should be 
informed. The Bank Act does not, and the proposed rule would not, give 
Banks that are not parties to a merger, or their members, any rights 
with respect to a contemplated merger, and the inclusion of the notice 
provision in the proposed rule should not be construed as granting any 
such right.
---------------------------------------------------------------------------

    \17\ The Banks fund their operations principally through the 
issuance of consolidated obligations, which are debt instruments 
issued on behalf of the Banks by the Office of Finance, a joint 
office of the Banks, and under which the Banks are jointly and 
severally liable for the timely payment of principal and interest 
when due. See 12 CFR 966.2(b), 966.9(a).
---------------------------------------------------------------------------

    Under paragraph (b)(2), if the Director decides to deny preliminary 
approval of the merger, FHFA would provide similar written notice of 
the denial to each Constituent Bank, as well as to each other Bank and 
the Office of Finance. FHFA would include in the written notice to the 
Constituent Banks a statement of the reasons for the denial. These 
reasons would be tied to the standards that the Director would be 
required to apply under proposed Sec.  1278.5(a), or to a Bank's 
failure to provide information required under this rule. The proposed 
rule contains no specific provision for reconsideration of a denial of 
preliminary approval, although nothing therein would prohibit the 
Constituent Banks from agreeing to an amended merger agreement and re-
submitting an application for approval.
    Section 1278.6--Ratification by Bank Members:
    Section 1278.6 of the proposed rule would set forth the 
requirements for the ratification of a merger agreement by the 
Constituent Banks' member institutions. Section 26(b) of the Bank Act 
explicitly authorizes Banks to merge, provided they obtain the approval 
of their respective boards of directors and the Director of FHFA, and 
separately directs FHFA to promulgate regulations to establish the 
conditions and procedures for consideration and approval of voluntary 
mergers, which regulations are to include procedures for member 
approval.\18\ Thus, the Bank Act does not make the exercise of the 
voluntary merger authority explicitly contingent on obtaining the 
approval of the members, but appears to leave to FHFA the authority to 
determine whether member approval is required and, if so, to determine 
the procedures for obtaining member approval. Although the concept of 
requiring shareholder approval for significant corporate transactions 
is a well-established principle of general corporate law, the 
governance structure of the Banks differs in certain key aspects from 
that of a publicly traded business corporation. For example, each Bank 
is a cooperative that is owned by its members, which elect their own 
representatives to the board on a state-wide basis, as well as a 
minority of independent directors, who are elected from the district at 
large.\19\ Given that the members of a Bank have a more direct 
representation on the board of directors than do the shareholders of a 
typical business corporation, FHFA could deem the members' interests to 
be adequately represented by the individual board members. 
Notwithstanding that possibility, FHFA believes that the statutory 
directive to promulgate regulations governing member approval also 
implies that members would have a direct role in approving a merger, 
and for that reason has included such a member approval provision in 
the proposed rule.
---------------------------------------------------------------------------

    \18\ See 12 U.S.C. 1446(b)(2).
    \19\ See 12 U.S.C. 1427.
---------------------------------------------------------------------------

    Other than requiring FHFA to promulgate regulations addressing the 
matter of member approval, the Bank Act is silent on what form the Bank 
member approval process should take. For this reason, FHFA has modeled 
the proposed voting process for member ratification of a merger after 
the statutory requirements for member

[[Page 72757]]

voting on the election of Bank directors, which is the only member 
voting scheme addressed by the Bank Act. Because the statute is silent 
on the requirements for member approval of mergers, FHFA could mandate 
voting procedures other than those set forth in the proposed rule. 
Although FHFA believes that the proposed voting process recognizes the 
cooperative nature of the Banks' corporate structure and is otherwise 
sound, FHFA requests comment on what other voting schemes may be 
appropriate for obtaining member approval of a proposed merger 
transaction, how those may best be structured, and the rationale for 
adopting them.
    Proposed Sec.  1278.6(a) would govern the member ratification 
voting process. The introductory portion of paragraph (a) would 
establish the general requirement that no merger may be consummated 
unless and until the merger agreement has been ratified by the 
affirmative vote of the members of each Constituent Bank, carried out 
in accordance with the requirements of paragraphs (a)(1) through 
(a)(4).
    Paragraph (a)(1) would govern the notice requirements pertaining to 
the member vote on ratification of the merger. To initiate the voting 
process, paragraph (a)(1) would require each Constituent Bank to 
deliver to each of its members a ballot permitting the member to vote 
for or against the merger, or to abstain. It would require each Bank to 
deliver with the ballot a Disclosure Statement containing all of the 
items that would be included in a Form S-4 if the Bank were required 
under the federal securities laws and SEC regulations to deliver a Form 
S-4 proxy statement/prospectus to its members in connection with the 
proposed merger. Because the shares of capital stock issued by each 
Bank are exempted securities under the 1933 Act, a Bank would not be 
required to file a Form S-4 registration statement with the SEC, or to 
deliver a Form S-4 proxy statement/prospectus to its shareholders in 
connection with a merger, even if the Bank issues stock or holds a 
shareholder vote as part of the process.\20\ Nevertheless, FHFA 
believes that Bank members should be as fully informed about the 
details of any proposed merger and the manner in which it would affect 
their rights and interests as any shareholder of a publicly held 
corporation. FHFA believes that it is appropriate to model the 
Disclosure Statement upon the Form S-4 proxy statement/prospectus both 
because all of the Banks already comply with the periodic reporting 
regime required under the Securities Exchange Act of 1934 (1934 Act) 
\21\ and because the Form S-4 provides a model for comprehensive 
shareholder disclosure in a merger transaction that is widely accepted 
in the business community.
---------------------------------------------------------------------------

    \20\ See 12 U.S.C. 1426a(c)(1)(A) (Bank Act provision stating 
that shares of Bank capital stock are exempted securities under the 
1933 Act); 15 U.S.C. 77c(a)(2) (1933 Act provision stating that 
provisions of 1933 Act do not apply to exempted securities, except 
as otherwise provided therein); 15 U.S.C. 77e (1933 Act provision 
requiring filing of registration statement and delivery of 
prospectus in interstate sale of securities, which does not apply to 
exempted securities).
    \21\ The Finance Board adopted regulations in 2004 requiring 
each Bank to register a class of its capital stock (which is issued 
only to its members) with the SEC under section 12(g) of the 1934 
Act, 15 U.S.C. 781(g). See 12 CFR part 998; 69 FR 38811 (June 29, 
2004). Each Bank subsequently registered a class of its stock with 
the SEC in compliance with that regulation. Separately, HERA 
included a provision requiring the Banks to register their stock 
under section 12(g) of the 1934 Act, and to maintain that 
registration. See 15 U.S.C. 78oo(b). As a result, the Banks are 
subject to the periodic reporting requirements of section 13(a) of 
the 1934 Act and must file with the SEC annual reports on Form 10-K, 
quarterly reports on Form 10-Q, and current reports on Form 8-K. 
However, the Banks and their securities are exempted from most other 
requirements of the federal securities laws, based both on specific 
no-action relief from the SEC obtained at the time the Banks first 
registered their stock and subsequent amendments made by HERA to the 
Bank Act which exempts the Banks from many requirements of the 
federal securities laws. See 12 U.S.C. 1426a.
---------------------------------------------------------------------------

    By referencing Part I of the Form S-4 (entitled ``Information 
Required in the Prospectus'') the proposed rule would require that the 
Disclosure Statement include information about: The transaction, 
including the terms of the transaction, associated risk factors and pro 
forma financial information; the Constituent Banks, including financial 
statements and discussion of the Banks' business, which may be supplied 
in large part through incorporation by reference of the Banks' recent 
periodic reports filed under the 1934 Act; the voting process; and the 
proposed management of the Continuing Bank. It is contemplated that, in 
most cases, the Constituent Banks to a particular transaction would be 
able to use substantially similar Disclosure Statements and, therefore, 
that the Banks could prepare the document jointly, with each Bank 
making any modifications necessary to customize the presentation to its 
own members. FHFA requests comment on whether a disclosure regime based 
on the model of the Form S-4 is an appropriate means of ensuring that 
the members are fully informed about the nature of the proposed merger, 
or whether some other standard for determining the scope and content of 
the disclosures would be appropriate.
    Paragraph (a)(2) of proposed Sec.  1278.6 would govern the 
calculation of the number of votes that each member of a Constituent 
Bank may cast in voting to ratify a merger agreement. The proposed rule 
provides that each member of each Constituent Bank shall be entitled to 
cast the same number of votes that the member may cast in that year's 
election of Bank directors, as set forth in the Bank Act and the 
implementing regulations.\22\ As is required in the case of voting for 
directors, this part would require each member to cast all of its votes 
either for or against the ratification of the merger agreement or to 
abstain with respect to all of its votes.\23\ Paragraph (a)(2) would 
require that each member's vote be made by resolution of its governing 
body, either authorizing the specific vote or delegating to an 
individual the authority to vote, as is required in the voting for 
directors.\24\
---------------------------------------------------------------------------

    \22\ See 12 U.S.C. 1427(b)(1); 12 CFR 1261.6.
    \23\ See 12 CFR 1261.8(d).
    \24\ See id.
---------------------------------------------------------------------------

    By statute, in the election of Bank directors, a member is entitled 
to cast one vote for each share of Bank stock the member was required 
to hold as of the record date (December 31 of the previous year), 
subject to a cap which is equal to the average number of shares of Bank 
stock required to be held by all members located in the same state. The 
effect of these provisions is that not all Bank stock carries the right 
to vote for directors. For example, a Bank member is not entitled to 
vote stock owned in excess of its minimum stock purchase requirement 
because it is not ``required to be held'' by the member under the 
statute. Similarly, stock held by a member in excess of the statutory 
cap, i.e., the average required stock holdings for members within its 
state, is not entitled to be voted in the election of directors. The 
latter provision reflects a determination by Congress that in a 
cooperative system a small number of large stockholders should not be 
able to control the board of directors of a Bank. Lastly, an 
institution that owns Bank stock, but that is not a member of the Bank, 
such as an institution that acquired its stock in connection with the 
acquisition of a Bank member, is not entitled to vote its stock in an 
election for directors because it is not a member of the cooperative.
    FHFA has decided to employ this approach for the proposed rule 
because it is the only member voting method enshrined in the Bank Act 
and, therefore, is the only manifestation of general Congressional 
intent on the subject. In addition, FHFA believes that whatever voting 
approach is used for

[[Page 72758]]

approving Bank mergers must be consistent with the cooperative model 
established by Congress, and thus should not allow for the possibility 
that a few large stockholders, some of which may not even be members of 
the cooperative, may control the outcome of a vote on a merger. FHFA 
requests comment on whether there are alternative voting schemes that 
may be appropriate in the context of a merger vote, including the legal 
basis for any alternative and the manner in which such an alternative 
would reflect the cooperative nature of the Bank System.
    Paragraph (a)(3) of proposed Sec.  1278.6 would provide that no 
Bank may review any ballot until after the closing date established in 
the Disclosure Statement and may not include in the tabulation any 
ballot received after the closing date. It would also require that a 
Constituent Bank tabulate the votes cast in a merger ratification vote 
immediately after the closing date. Again, these requirements are 
similar to those that apply to the election of member directors, as 
provided in Sec.  1261.8(e) of the FHFA's regulations.\25\ Paragraph 
(a)(3) would provide that a proposed merger will be considered to be 
ratified by a Bank's members if a majority of votes cast in the 
election have been cast in favor of the ratification of the merger 
agreement. Finally, paragraph (a)(3) would also require that the 
Constituent Banks (in the case of a rejected merger proposal), or 
Continuing Bank (in the case of a ratified merger proposal) retain all 
ballots for at least two years after the date of the election and would 
prohibit the Bank from disclosing how any member voted. This 
requirement is similar to that contained in Sec.  1261.8(f)(5) of 
FHFA's regulations pertaining to the retention of ballots in the 
election of Bank directors.\26\
---------------------------------------------------------------------------

    \25\ See 12 CFR 1261.8(e).
    \26\ See 12 CFR 1261.8(f)(5).
---------------------------------------------------------------------------

    Paragraph (a)(4) would require that, within ten (10) calendar days 
of the closing date, a Constituent Bank deliver to its members, to each 
Constituent Bank with which it proposes to merge, and to FHFA a 
statement of: the total number of eligible votes; the number of members 
voting in the election; and the total number of votes cast both for and 
against ratification of the merger agreement, as well as those that 
were eligible to be cast by members that abstained and by members who 
failed to return completed ballots.
    Paragraph (b) of proposed Sec.  1278.6 would state that, in 
connection with a proposed merger, no Bank, or any director, officer, 
or employee thereof, shall make any statement, written or oral, which, 
at the time and in the light of the circumstances under which it is 
made, is false or misleading with respect to any material fact, or 
which omits to state any material fact necessary in order to make the 
statement not false or misleading, or necessary to correct any earlier 
statement that has become false or misleading.
    Section 1278.7--Final Approval by Director:
    Section 1278.7 of the proposed rule would govern the process by 
which the Director of FHFA would either grant or deny final approval of 
merger transactions.
    Paragraph (a) of proposed Sec.  1278.7 would provide that, upon 
ratification of a merger agreement by the members of the Constituent 
Banks, each Constituent Bank must provide to FHFA: A certified copy of 
the members' resolution ratifying the merger agreement; a certification 
of the member vote from the corporate secretary or from an independent 
third party; and any required evidence that any conditions imposed as 
part of the preliminary approval granted under Sec.  1278.5 have been 
satisfied.
    Paragraph (b) of proposed Sec.  1278.7 would set forth the 
procedures for the Director's final determination to grant or deny 
approval of the merger transaction. The introductory portion would 
provide that, after FHFA has received all of the materials required to 
be provided under paragraph (a), the Director shall, within thirty (30) 
days, either grant or deny final approval of the merger.
    Under paragraph (b)(1), if the Director grants final approval of 
the merger, FHFA would provide written notice of the approval to each 
Constituent Bank as well as to each Bank and the Office of Finance. The 
Constituent Banks then would file with FHFA an organization certificate 
for the Continuing Bank in the form approved by the Director as part of 
the preliminary approval process and executed by the individuals who 
will constitute the board of directors of the Continuing Bank. Upon the 
acceptance of the organization certificate by FHFA, the Continuing Bank 
would be a body corporate operating under the approved organization 
certificate, as of the Effective Date, with all powers granted to a 
Bank under the Bank Act. Paragraph (b)(1) would also provide that, with 
respect to mergers that meet the definition set forth in paragraph (1) 
or (2) of the definition of ``merger'' set forth in Sec.  1278.1, the 
corporate existence of any Constituent Bank that is not a Continuing 
Bank would cease as of the Effective Date and the Continuing Bank would 
succeed to all rights, titles, powers, privileges, books, records, 
assets and liabilities of the Constituent Banks, as provided in the 
merger agreement.
    Paragraph (b)(2) of proposed Sec.  1278.7 would prohibit the 
Director of FHFA from denying final approval of a merger except 
pursuant to a determination that either: the member vote was not 
carried out in accordance with the requirements of Sec.  1278.6; one or 
more Constituent Banks failed to fulfill a condition of the preliminary 
approval; or an event has occurred since the time of the preliminary 
approval that would have a significant adverse impact on the future 
viability of the Continuing Bank.
    If the Director makes one of the required determinations and denies 
final approval of a merger, FHFA would be required to provide written 
notice of the denial to each Constituent Bank and to each other Bank 
and the Office of Finance. In addition, paragraph (b)(2) would require 
that FHFA provide to the Constituent Banks a written statement of the 
reasons for the denial, which reasons must be related to one of the 
determinations that the Director must make in order to deny final 
approval.

IV. Paperwork Reduction Act

    The proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.). Therefore, FHFA has not submitted any information to the Office 
of Management and Budget for review.

V. Regulatory Flexibility Act

    The proposed rule applies only to the Banks, which do not come 
within the meaning of small entities as defined in the Regulatory 
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance 
with section 605(b) of the RFA, FHFA certifies that this proposed rule, 
if promulgated as a final rule, will not have significant economic 
impact on a substantial number of small entities.

List of Subjects in 12 CFR Part 1278

    Banks, banking, Federal home loan banks, mergers.

    For the reasons stated in the preamble, and under the authority of 
12 U.S.C. 4526, the Federal Housing Finance Agency proposes to amend 
subchapter D of chapter XII of title 12 of the Code of Federal 
Regulations by adding part 1278 to read as follows:

[[Page 72759]]

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY SUBCHAPTER D--FEDERAL HOME 
LOAN BANKS

PART 1278--VOLUNTARY MERGERS OF FEDERAL HOME LOAN BANKS

Sec.
1278.1 Definitions.
1278.2 Authority.
1278.3 Merger agreement.
1278.4 Merger application.
1278.5 Preliminary approval by Director.
1278.6 Ratification by Bank members.
1278.7 Final approval by Director.

    Authority:  12 U.S.C. 1432(a), 1446, and 4511.


Sec.  1278.1  Definitions.

    As used in this part:
    Bank, written in title case, means a Federal Home Loan Bank 
established under section 12 of the Bank Act (12 U.S.C. 1432).
    Bank Act means the Federal Home Loan Bank Act, as amended (12 
U.S.C. 1421 through 1449).
    Constituent Bank means a Bank that is proposing to merge with one 
or more other Banks. Each Bank entering into a merger is a Constituent 
Bank, regardless of whether it is also a Continuing Bank.
    Continuing Bank means a Bank that will exist as the result of a 
merger of one or more Constituent Banks, and when used in the singular 
shall include the plural.
    Director, written in title case, means the Director of FHFA or his 
or her designee.
    Disclosure Statement means a written document that contains all of 
the items that a Bank would be required to include in a Form S-4 
Registration Statement Under the Securities Act of 1933 (or any 
successor form promulgated by the United States Securities and Exchange 
Commission governing disclosure required for securities issued in 
business combination transactions) when prepared as a prospectus as 
directed in Part I of the form, if the Banks were required to provide 
such a prospectus to their shareholders in connection with a merger.
    Effective Date means the date on which the Constituent Banks 
consummate the merger, or, in the case of a merger encompassing two or 
more component transactions, the date on which the relevant Constituent 
Banks consummate each component transaction.
    FHFA means the Federal Housing Finance Agency.
    Merge or Merger means--
    (1) A merger of one or more Banks into another Bank;
    (2) A consolidation of two or more Banks resulting in a new Bank;
    (3) A purchase of substantially all of the assets, and assumption 
of substantially all of the liabilities, of one or more Banks by 
another Bank or Banks; or
    (4) Any other business combination of two or more Banks into one or 
more resulting Banks.


Sec.  1278.2  Authority.

    Any two or more Banks may merge, provided:
    (a) The Constituent Banks have agreed upon the terms of the 
proposed merger and the board of directors of each Constituent Bank has 
authorized the execution of a written merger agreement as provided 
under Sec.  1278.3;
    (b) The Constituent Banks have jointly filed a merger application 
with FHFA to obtain the approval of the Director, as provided under 
Sec.  1278.4;
    (c) The Director has granted preliminary approval of the merger as 
provided under Sec.  1278.5;
    (d) The members of each Constituent Bank have ratified the merger 
agreement as provided under Sec.  1278.6; and
    (e) The Director has granted final approval of the merger as 
provided under Sec.  1278.7.


Sec.  1278.3  Merger agreement.

    A merger of Banks under the authority of Sec.  1278.2 shall require 
a written merger agreement that:
    (a) Has been authorized by the affirmative vote of a majority of a 
quorum of the board of directors of each Constituent Bank at a meeting 
on the record and has been executed by authorized signing officers of 
each Constituent Bank; and
    (b) Sets forth all material terms and conditions of the merger, 
including, without limitation, provisions addressing each of the 
following matters--
    (1) The proposed Effective Date of the merger;
    (2) The proposed organization certificate and by-laws of the 
Continuing Bank;
    (3) The proposed capital structure plan for the Continuing Bank;
    (4) The proposed size and structure of the board of directors for 
the Continuing Bank;
    (5) The formula to be used to exchange the stock of the Constituent 
Banks for the stock of the Continuing Bank, and a provision prohibiting 
the issuance of fractional shares of stock;
    (6) Any conditions that must be satisfied prior to the Effective 
Date of the proposed merger, which must include ratification by members 
of the Constituent Banks and approval by the Director;
    (7) A statement of the representations or warranties, if any, made 
or to be made by any Constituent Bank, or its officers, directors, or 
employees;
    (8) A description of the legal opinions or rulings, if any, that 
have been obtained or furnished by any party in connection with the 
proposed merger; and
    (9) A statement that the board of directors of a Constituent Bank 
can terminate the merger agreement before the Effective Date upon a 
determination by the Constituent Bank, with the concurrence of FHFA, 
that:
    (i) The information disclosed to members contained material errors 
or omissions;
    (ii) Material misrepresentations were made to members regarding the 
impact of the merger;
    (iii) Fraudulent activities were used to obtain members' approval; 
or
    (iv) An event occurred between the time of the members' vote and 
the merger that would have a significant adverse impact on the future 
viability of the Continuing Bank.


Sec.  1278.4  Merger application.

    (a) Contents of application. Any two or more Banks that wish to 
merge shall submit to FHFA a merger application that describes all 
material aspects of the proposed merger and that includes, at a 
minimum, the following:
    (1) A written statement that includes--
    (i) A summary of the material features of the proposed merger;
    (ii) The reasons for the proposed merger;
    (iii) The effect of the proposed merger on the Constituent Banks 
and their members;
    (iv) The planned Effective Date of the merger;
    (v) if the Constituent Banks contemplate that the proposed merger 
will be one of two or more related transactions, a summary of the 
material features of any related transactions and the bearing that the 
consummation of, or failure to consummate, the related transactions is 
expected to have upon the merger;
    (vi) the names of the persons proposed to serve as directors and 
senior executive officers of the Continuing Bank;
    (vii) A description of all proposed material operational changes 
including, but not limited to, reductions in the existing staffs of the 
Constituent Banks, whether and how Bank operations will be combined, 
and whether any Constituent Bank will continue to operate as a branch 
of the Continuing Bank;

[[Page 72760]]

    (viii) Information demonstrating that the Continuing Bank will 
comply with all applicable capital requirements after the Effective 
Date;
    (ix) A statement explaining all officer and director 
indemnification provisions; and
    (x) An undertaking that the Constituent Banks will continue to 
disclose all material information, and update all items, as 
appropriate;
    (2)(i) A copy of the executed merger agreement; and
    (ii) A certified copy of the resolution of the board of directors 
of each Constituent Bank authorizing the merger agreement;
    (3) A copy of the proposed organization certificate of the 
Continuing Bank;
    (4) A copy of the proposed by-laws of the Continuing Bank;
    (5) A copy of the proposed capital structure plan of the Continuing 
Bank;
    (6) The most recent annual audited financial statements for each 
Constituent Bank; and
    (7) Pro forma financial statements for the Continuing Bank in such 
form as would be required to be included in the Disclosure Statement.
    (b) Additional information. FHFA may require the Constituent Banks 
to submit any additional information it deems necessary to evaluate the 
proposed merger. If FHFA has determined a merger application to be 
complete as provided in paragraph (c) of this section, FHFA may require 
the Constituent Banks to submit additional information only with 
respect to matters derived from or prompted by the materials already 
submitted, or matters of a material nature that were not reasonably 
apparent previously, including matters concealed by the Banks or 
relating to developments that arose after the determination of 
completeness. If the Constituent Banks fail to provide the additional 
information in a timely manner, FHFA may deem the failure to provide 
the required information as grounds to deny the application.
    (c) Completion of application. Within thirty (30) days of the 
receipt of a merger application, FHFA shall determine whether the 
application is complete and whether FHFA has all information necessary 
for the Director to evaluate the proposed merger.
    (1) If FHFA determines that the application is complete and that it 
has all information necessary to evaluate the proposed merger, it shall 
so inform the Constituent Banks in writing.
    (2) If FHFA determines that the application is incomplete, or that 
it requires additional information in order to evaluate the 
application, it shall so inform the Constituent Banks in writing, and 
shall specify the number of days within which the Constituent Banks 
must provide any additional information or materials. Within fifteen 
(15) days of receipt of the additional information or materials, FHFA 
shall inform the Constituent Banks in writing whether the merger 
application is complete.


Sec.  1278.5  Preliminary approval by Director.

    (a) Standards. In determining whether to approve a merger of any 
two or more Banks, the Director shall take into consideration the 
financial and managerial resources of the Constituent Banks, the future 
prospects of the Continuing Bank, and the effect of the proposed merger 
on the safety and soundness of the Continuing Bank and the Bank System.
    (b) Determination by Director. After FHFA determines that a merger 
application is complete as provided in Sec.  1278.4(c), the Director 
shall, within thirty (30) days, either grant or deny preliminary 
approval of the merger.
    (1) If the Director grants preliminary approval of the merger, FHFA 
shall provide written notice of the approval to each Constituent Bank, 
as well as to each other Bank and the Office of Finance. The notice 
shall set forth any conditions that must be met prior to the final 
approval of the merger.
    (2) If the Director denies preliminary approval of the merger:
    (i) FHFA shall provide written notice of the denial to each 
Constituent Bank, as well as to each other Bank and the Office of 
Finance; and
    (ii) The notice provided to the Constituent Banks shall include a 
statement of the reasons for the denial.


Sec.  1278.6  Ratification by Bank members.

    (a) Requirements for member vote. No merger of two or more Banks 
may be consummated unless the merger agreement authorized by the boards 
of directors of the Constituent Banks has been ratified by the 
affirmative vote of the members of each Constituent Bank in a voting 
process that meets the following requirements:
    (1) Each Constituent Bank shall submit the authorized merger 
agreement to its members for ratification by delivering to each of its 
members--
    (i) A ballot that permits the member to vote for or against the 
ratification of the merger agreement, or to abstain from such vote; and
    (ii) A Disclosure Statement that establishes a closing date for the 
Bank's receipt of completed ballots that is no earlier than thirty (30) 
days after the date that the ballot and Disclosure Statement are 
delivered to its members.
    (2) In the vote to ratify the merger agreement, each member of each 
Constituent Bank shall be entitled to cast the same number of votes 
that the member may cast in that year's election of Bank directors, as 
set forth in Sec.  1261.6 of this chapter. A member must cast all of 
its votes either for or against the ratification of the merger 
agreement, or may abstain with respect to all of its votes. Each 
member's vote shall be made by resolution of its governing body, either 
authorizing the specific vote, or delegating to an individual the 
authority to vote.
    (3) No Constituent Bank shall review any ballot until after the 
closing date established in the Disclosure Statement and shall not 
include in the tabulation any ballot received after the closing date. A 
Constituent Bank shall tabulate the votes cast immediately after the 
closing date. The members of a Constituent Bank shall be considered to 
have ratified a merger agreement if a majority of votes cast in the 
election have been cast in favor of the ratification of the merger 
agreement. The Constituent Bank, or the Continuing Bank, as 
appropriate, shall retain all ballots received for at least two years 
after the date of the election, and shall not disclose how any member 
voted.
    (4) Within ten (10) days of the closing date, a Constituent Bank 
shall deliver to its members, to each Constituent Bank with which it 
proposes to merge, and to FHFA a statement of--
    (i) The total number of eligible votes;
    (ii) The number of members voting in the election; and
    (iii) The total number of votes cast both for and against 
ratification of the merger agreement, as well as those that were 
eligible to be cast by members that abstained and by members who failed 
to return completed ballots.
    (b) False and misleading statements. In connection with a proposed 
merger, no Bank, nor any director, officer, or employee thereof, shall 
make any statement, written or oral, which, at the time and in the 
light of the circumstances under which it is made, is false or 
misleading with respect to any material fact, or which omits to state 
any material fact necessary in order to make the statement not false or 
misleading, or necessary to correct any earlier statement that has 
become false or misleading.


Sec.  1278.7  Final approval by Director.

    (a) Proof of member ratification. Upon ratification of a merger 
agreement by the members of the Constituent Banks, the

[[Page 72761]]

Constituent Banks shall provide to FHFA:
    (1) A certified copy of the members' resolution ratifying the 
merger agreement, on which the members cast their votes, from each 
Constituent Bank;
    (2) A certification of the member vote from the corporate secretary 
of each Constituent Bank or from an independent third party;
    (3) Any required evidence that any conditions imposed as part of 
the preliminary approval granted under Sec.  1278.5 have been 
satisfied; and
    (4) The Disclosure Statement for each Constituent Bank.
    (b) Final determination. After FHFA has received all materials 
required to be provided under paragraph (a) of this section, the 
Director shall, within thirty (30) days, either grant or deny final 
approval of the merger.
    (1) If the Director grants final approval of the merger:
    (i) FHFA shall provide written notice of the approval to each 
Constituent Bank, as well as to each other Bank and the Office of 
Finance;
    (ii) The Constituent Banks shall file with FHFA an organization 
certificate for the Continuing Bank, executed by the individuals who 
will constitute the board of directors of the Continuing Bank. Upon the 
acceptance of the organization certificate by FHFA, the Continuing Bank 
shall be a body corporate operating under the approved organization 
certificate, as of the Effective Date, with all powers granted to a 
Bank under the Bank Act; and
    (iii) With respect to mergers that meet the definition set forth in 
paragraph (1) or (2) of the definition of ``merger'' in Sec.  1278.1, 
the corporate existence of any Constituent Bank that is not a 
Continuing Bank shall cease as of the Effective Date and the Continuing 
Bank shall succeed to all rights, titles, powers, privileges, books, 
records, assets and liabilities of the Constituent Banks, as provided 
in the merger agreement.
    (2)(i) If preliminary approval has been granted, the Director shall 
not deny final approval of a merger other than pursuant to a 
determination that--
    (A) The member vote was not carried out in accordance with the 
requirements of Sec.  1278.6;
    (B) One or more Constituent Banks failed to fulfill a condition of 
the preliminary approval; or
    (C) An event has occurred since the time of the preliminary 
approval that would have a significant adverse impact on the future 
viability of the Continuing Bank.
    (ii) If the Director denies final approval of a merger:
    (A) FHFA shall provide written notice of the denial to each 
Constituent Bank, as well as to each other Bank and the Office of 
Finance; and
    (B) The notice provided to the Constituent Banks shall include a 
statement of the reasons for the denial.

    Dated: November 19, 2010.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2010-29739 Filed 11-24-10; 8:45 am]
BILLING CODE 8070-01-P


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