Federal Register / Vol. 75, No. 227 / Friday, November 26, 2010 / Proposed Rules 72751 

(2) Consultation. In the case of a 

banking entity that is primarily 

supervised by another Federal banking 

agency, the Securities and Exchange 

Commission, or the Commodity Futures 

Trading Commission, the Board will 

consult with such agency prior to 

imposing conditions on the approval of 

a request by the banking entity for an 

extension under paragraph (a)(3) or 

(b)(1) of this section. 

§ 225.182 Conformance period for 

nonbank financial companies supervised by 

the board engaged in proprietary trading or 

private fund activities. 

(a) Divestiture requirement. A 

nonbank financial company supervised 

by the Board shall come into 

compliance with all applicable 

requirements of section 13 of the Bank 

Holding Company Act (12 U.S.C. 1851) 

and this subpart, including any capital 

requirements or quantitative limitations 

adopted thereunder and applicable to 

the company, not later than 2 years after 

the date the company becomes a 

nonbank financial company supervised 

by the Board. 

(b) Extensions. The Board may, by 

rule or order, extend the two-year 

period under paragraph (a) of this 

section by not more than three one-year 

periods, if, in the judgment of the Board, 

each such one-year extension is 

consistent with the purposes of section 

13 of the Bank Holding Company Act 

(12 U.S.C. 1851) and this subpart and 

would not be detrimental to the public 

interest. 

(c) Approval required to hold interests 

in excess of time limit. A nonbank 

financial company supervised by the 

Board that seeks the Board’s approval 

for an extension of the conformance 

period under paragraph (b) of this 

section must— 

(1) Submit a request in writing to the 

Board at least 90 days prior to the 

expiration of the applicable time period; 

(2) Provide the reasons why the 

nonbank financial company supervised 

by the Board believes the extension 

should be granted; and 

(3) Provide a detailed explanation of 

the company’s plan for conforming the 

activity or investment(s) to any 

applicable requirements established 

under section 13(a)(2) or (f)(4) of the 

Bank Holding Company Act (12 U.S.C. 

1851(a)(2) and (f)(4)). 

(d) Factors governing Board 

determinations. In reviewing any 

application for an extension under 

paragraph (b) of this section, the Board 

may consider all the facts and 

circumstances related to the nonbank 

financial company and the request 

including, to the extent determined 

relevant by the Board, the factors 

described in § 225.181(d)(1). 

(e) Authority to impose restrictions on 

activities or investments during any 

extension period. The Board may 

impose conditions on any extension 

approved under paragraph (b) of this 

section as the Board determines are 

necessary or appropriate to protect the 

safety and soundness of the nonbank 

financial company or the financial 

stability of the United States, address 

material conflicts of interest or other 

unsound practices, or otherwise further 

the purposes of section 13 of the Bank 

Holding Company Act (12 U.S.C. 1851) 

and this subpart. 

By order of the Board of Governors of the 

Federal Reserve System, November 16, 2010. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 2010–29277 Filed 11–24–10; 8:45 am] 

BILLING CODE 6210–01–P 

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. 

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: 

• E-mail: Comments to Alfred M. 

Pollard, General Counsel may be sent by 

e-mail to RegComments@fhfa.gov. 

Please include ‘‘RIN 2590–AA37’’ in the 

subject line of the message. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. If 

you submit your comment to the 

Federal eRulemaking Portal, please also 

send it by e-mail to FHFA at 

RegComments@fhfa.gov to ensure 

timely receipt by FHFA. Please include 

‘‘RIN 2590–AA37’’ in the subject line of 

the message. 

• 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. 

• 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, 

john.foley@fhfa.gov, (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, eric.raudenbush@fhfa.gov, 

(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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
72752 Federal Register / Vol. 75, No. 227 / Friday, November 26, 2010 / Proposed Rules 

1See 12 U.S.C. 1423, 1432(a). 

2See 12 U.S.C. 1426(a)(4), 1430(a), 1430b. 

3See 12 U.S.C. 1427. 

4See 12 U.S.C. 1424; 12 CFR part 1263. 

5See 12 U.S.C. 1446(b)(1), (2). 

6See 12 U.S.C. 1446(a), 4617. 7See 12 U.S.C. 4513. 8See 17 CFR 239.25. 

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

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. 

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

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. 

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 § 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. 

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 § 1278.1 would also 

include definitions for the short forms 

‘‘Bank,’’ ‘‘Bank Act,’’ ‘‘Director,’’ ‘‘FHFA,’’ 

and ‘‘SEC.’’ 

Section 1278.2—Authority: 

Proposed § 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, § 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 


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9See 19 Am.Jur 2d Corporations § 2169 (2010); 

Barron’s Finance and Investment Handbook 343 (2d 

ed. 1987). 

10As used hereinafter in this preamble, unless 

otherwise specified, the terms ‘‘merge’’ and ‘‘merger’’ 

shall encompass all types of business combination 

transactions. 

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. 

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

Paragraphs (a) through (e) of proposed 

§ 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 §§ 1278.3 

through 1278.7 of the proposed rule, 

respectively, as noted in each of the 

paragraphs of proposed § 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 § 1278.2 shall require a 

written merger agreement that meets the 

requirements of paragraphs (a) and (b) of 

§ 1278.3. 

Paragraph (a) of § 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 § 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
72754 Federal Register / Vol. 75, No. 227 / Friday, November 26, 2010 / Proposed Rules 

11See 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. 

12See 12 U.S.C. 1426(b). 

13See 12 U.S.C. 1427. 

14All Banks currently have between 14 and 18 

directors, with the majority having between 15 and 

17 directors. 

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. 

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

Paragraphs (b)(5) through (b)(8) of 

proposed § 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 75, No. 227 / Friday, November 26, 2010 / Proposed Rules 72755 

15 12 CFR part 932. 

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 § 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

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 § 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 § 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 


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72756 Federal Register / Vol. 75, No. 227 / Friday, November 26, 2010 / Proposed Rules 

16See 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). 

17The 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). 

18See 12 U.S.C. 1446(b)(2). 

19See 12 U.S.C. 1427. 

FHFA has imposed in connection with 

the preliminary approval. As provided 

in proposed § 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 § 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 § 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. 

Proposed § 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. 

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 

§ 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 resubmitting 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 statewide 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. 

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 


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20See 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). 

21The 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. 

22See 12 U.S.C. 1427(b)(1); 12 CFR 1261.6. 

23See 12 CFR 1261.8(d). 

24See id. 

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 § 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. 

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 § 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

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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
72758 Federal Register / Vol. 75, No. 227 / Friday, November 26, 2010 / Proposed Rules 

25See 12 CFR 1261.8(e). 

26See 12 CFR 1261.8(f)(5). 

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 § 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 

§ 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 

§ 1261.8(f)(5) of FHFA’s regulations 

pertaining to the retention of ballots in 

the election of Bank directors.26

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 § 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 § 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 § 1278.5 have 

been satisfied. 

Paragraph (b) of proposed § 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 § 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 § 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 § 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: 


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Federal Register / Vol. 75, No. 227 / Friday, November 26, 2010 / Proposed Rules 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. 

§ 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. 

§ 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 § 1278.3; 

(b) The Constituent Banks have jointly 

filed a merger application with FHFA to 

obtain the approval of the Director, as 

provided under § 1278.4; 

(c) The Director has granted 

preliminary approval of the merger as 

provided under § 1278.5; 

(d) The members of each Constituent 

Bank have ratified the merger agreement 

as provided under § 1278.6; and 

(e) The Director has granted final 

approval of the merger as provided 

under § 1278.7. 

§ 1278.3 Merger agreement. 

A merger of Banks under the authority 

of § 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. 

§ 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; 


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72760 Federal Register / Vol. 75, No. 227 / Friday, November 26, 2010 / Proposed Rules 

(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. 

§ 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 

§ 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. 

§ 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 § 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. 

§ 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 


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Federal Register / Vol. 75, No. 227 / Friday, November 26, 2010 / Proposed Rules 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 

§ 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 

§ 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 § 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 

DEPARTMENT OF THE INTERIOR 

Bureau of Ocean Energy Management, 

Regulation and Enforcement 

30 CFR Part 250 

[Docket ID: BOEM–2010–0033] 

RIN 1010–AD53 

Production Measurement Documents 

Incorporated by Reference 

AGENCY: Bureau of Ocean Energy 

Management, Regulation and 

Enforcement (BOEMRE), Interior. 

ACTION: Proposed rule. 

SUMMARY: BOEMRE proposes to 

incorporate by reference 15 new 

production measurement industry 

standards into the regulations governing 

oil, gas, and sulphur operations in the 

Outer Continental Shelf. Incorporation 

of the production measurement 

standards provides industry with up-todate guidance for measuring oil and gas 

production volumes. This will result in 

more efficient measurement of oil and 

gas production. 

DATES: Submit comments by January 25, 

2011. BOEMRE may not fully consider 

comments received after this date. 

ADDRESSES: You may submit comments 

on the rulemaking by any of the 

following methods. Please use the 

Regulation Identifier Number (RIN) 

1010–AD53 as an identifier in your 

message. See also Public Availability of 

Comments under Procedural Matters. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. In the entry titled 

‘‘Enter Keyword or ID,’’ enter docket ID 

BOEM–2010–0033 then click search. 

Under the tab ‘‘View By Docket Folder’’ 

you can submit public comments and 

view supporting and related materials 

available for this rulemaking. BOEMRE 

will post all comments. 

• Mail or hand-carry comments to the 

Department of the Interior; Bureau of 

Ocean Energy Management, Regulation 

and Enforcement; Attention: 

Regulations and Standards Branch 

(RSB); 381 Elden Street, MS–4024, 

Herndon, Virginia 20170–4817. Please 

reference ‘‘Production Measurement 

Documents Incorporated by Reference, 

1010–AD53’’ in your comments and 

include your name and return address. 

Availability of Incorporated Documents 

for Public Viewing 

When a copyrighted technical 

industry standard is incorporated by 

reference into our regulations, BOEMRE 

is obligated to observe and protect that 

copyright. BOEMRE provides members 

of the public with Web site addresses 

where these standards may be accessed 

for viewing—sometimes for free and 

sometimes for a fee. The decision to 

charge a fee is decided by standard 

developing organizations. The American 

Petroleum Institute (API) will provide 

free online public access to 160 key 

industry standards, including a broad 

range of technical standards once 

changes to the API Web site are 

complete. The standards represent 

almost one-third of all API standards 

and will include all that are safetyrelated or have been incorporated into 

Federal regulations, including the 

standards in this rule. The newly 

accessible standards will be available 

for review, and hardcopies and 

printable versions will continue to be 

available for purchase. We are 

proposing to incorporate both API and 

American Gas Association (AGA) 

standards, and the addresses to these 

Web site locations are: 

API Standard/Document Contact IHS 

at 1–800–854–7179 or 303–397–7956 

Local and International, http:// 

www.global.ihs.com and; AGA 

Standard/Document 1–800–699–9277— 

Toll free in US & Canada http:// 

www.techstreet.com/contact.tmpl. 

For the convenience of the viewing 

public who may not wish to purchase or 

view these proposed documents online, 

they may be inspected at the Bureau of 

Ocean Energy Management, Regulation 

and Enforcement, 381 Elden Street, 

Room 3313, Herndon, Virginia 20170; 

phone: 703–787–1587; or at the National 

Archives and Records Administration 

(NARA). For information on the 

availability of this material at NARA, 

call 202–741–6030, or go to: http:// 

www.archives.gov/federal_register/ 

code_of_federal_regulations/ 

ibr_locations.html. 

These documents, if incorporated in 

the final rule, will continue to be made 

available to the public for viewing when 

requested. Specific information on 

where these documents can be 

inspected or purchased can be found at 


srobinson on DSKHWCL6B1PROD with PROPOSALS