Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations 25267

finds good cause that notice and public

comment are unnecessary under section

553(b)(B) of the Administrative

Procedure Act (APA), 5 U.S.C.

553(b)(B).

Effective Date

NCUA also finds good cause to

dispense with the 30-day delayed

effective date requirement under section

553(d)(3) of the APA. The rule is

technical rather than substantive. The

rule will, therefore, be effective

immediately upon publication of this

notice.

Regulatory Flexibility Act

An initial regulatory flexibility

analysis under the Regulatory

Flexibility Act is required only when an

agency is required to publish a general

notice of proposed rulemaking for any

proposed rule. 5 U.S.C. 603. As noted

previously, NCUA has determined that

it is unnecessary to publish a notice of

proposed rulemaking for this rule.

Accordingly, an initial regulatory

analysis is not required. Moreover, since

this final rule imposes no new

requirements and makes only a

technical amendment, NCUA has

determined and certifies that this rule

will not have any significant economic

impact on a substantial number of small

credit unions (primarily those under $1

million in assets).

Small Business Regulatory Enforcement

Fairness Act

Title II of the Small Business

Regulatory Enforcement Fairness Act

(SBREFA) of 1996 (Pub. L. 104–121)

provides, generally, for congressional

review of agency rules. A reporting

requirement is triggered in instances

where NCUA issues a final rule as

defined by section 551 of the

Administrative Procedures Act. 5 U.S.C.

551. The Office of Management and

Budget has reviewed this rule and has

determined that for purposes of the

Small Business Regulatory Enforcement

Fairness Act of 1996 it is not a major

rule.

Paperwork Reduction Act

NCUA has determined that the final

rule does not increase paperwork

requirements under the Paperwork

Reduction Act of 1995 (44 U.S.C. 3501

et seq.) and regulations of the Office of

Management and Budget.

Executive Order 13132 Statement

Executive Order 13132 encourages

independent regulatory agencies to

consider the impact of their regulatory

actions on state and local interests. In

adherence to fundamental federalism

principles, NCUA, an independent

regulatory agency as defined in 44

U.S.C. 3502(5), voluntarily complies

with the executive order. NCUA has

determined that this final rule does not

constitute a policy that has federalism

implications for purposes of the

executive order.

List of Subjects in 12 CFR Part 790

Credit unions.

By the National Credit Union

Administration Board on April 13, 2000.

Becky Baker,

Secretary of the Board.

For the reasons stated in the

preamble, NCUA amends 12 CFR

chapter VII as set forth below:

PART 790—DESCRIPTION OF NCUA;

REQUESTS FOR AGENCY ACTION

1. The authority citation for part 790

continues to read as follows:

Authority: 12 U.S.C. 1766, 1789, 1795f.

§ 790.2 [Amended]

2. Amend § 790.2 as follows:

a. In paragraph (b)(7), remove

‘‘Technology and Information Systems’’

and add, in its place, ‘‘Chief Information

Officer’’.

b. In paragraph (b)(10), remove

‘‘Office of Technology and Information Services’’ in the heading and add, in

its place, ‘‘Office of the Chief

Information Officer’’.

c. In paragraph (b)(10), remove

‘‘Director of the Office of Technology

and Information Services’’ in the first

sentence and add, in its place, ‘‘Chief

Information Officer’’.

[FR Doc. 00–10616 Filed 4–28–00; 8:45 am]

BILLING CODE 7535–01–U

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 917 and 940

[No. 2000–14]

RIN 3069–AA90

Powers and Responsibilities of Federal

Home Loan Bank Boards of Directors

and Senior Management

AGENCY: Federal Housing Finance

Board.

ACTION: Final rule.

SUMMARY: The Federal Housing Finance

Board (Finance Board) is promulgating

new regulations to set forth the

responsibilities of the boards of

directors and senior management of the

Federal Home Loan Banks (Banks) as a

means of ensuring that they fulfill their

duties to operate the Banks in a safe and

sound manner and in furtherance of the

Banks’ housing finance and community

lending mission.

EFFECTIVE DATE: This final rule is

effective on May 31, 2000.

FOR FURTHER INFORMATION CONTACT:

James L. Bothwell, Director and Chief

Economist, (202) 408–2821; Scott L.

Smith, Deputy Director, (202) 408–2991;

Julie Paller, Senior Financial Analyst

(202) 408–2842; Office of Policy,

Research and Analysis; Eric M.

Raudenbush, Senior Attorney-Advisor,

(202) 408–2932; Office of General

Counsel, Federal Housing Finance

Board, 1777 F Street, NW., Washington,

DC 20006.

SUPPLEMENTARY INFORMATION:

I. The Proposed Rule

On January 3, 2000, the Finance

Board published for comment a

proposed rule to add to its regulations

a new part 917, setting forth a state-ofthe-art corporate governance framework

for the Banks’ boards of directors and

senior management. See 65 FR 81

(2000). The 30-day public comment

period closed on February 2, 2000. The

Finance Board received a total of sixteen

comment letters: eleven from Banks,

three from trade associations and one

from a Bank director.

II. Comments on the Proposed Rule and

Analysis of Changes Made in the Final

Rule

A. General

While all commenters suggested

modifications to the proposed rule, six

expressed general support for the

overall purpose of the rule. No

commenters expressed general

opposition to the rule, but two

commenters believed that the rule as a

whole was too detailed. Specifically,

one commenter (a Bank) opposed the

proposed rule’s detailed allocation of

responsibilities between Banks’ boards

of directors and senior management and

recommended that each Bank’s board of

directors be permitted to determine the

appropriate allocation of responsibilities

between itself and the Bank’s senior

management. Another commenter (a

trade association) stated that the rule

would create unnecessary

administrative burdens and operational

complexities.

It is the opinion of the Finance Board

that an active and informed board of

directors is one of the cornerstones of

safe and sound Bank operation. The

agency understands that, as is the case

with any bank or corporation, most of a

Bank’s day-to-day operational functions

will be undertaken by management and

other Bank personnel. However, while a

25268 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations

Bank’s board of directors may the

delegate the execution of managerial

functions to Bank employees, the

responsibility for seeing that these

functions are properly executed may not

be delegated. Part of the reason for the

detailed nature of the rule is to make

these responsibilities clear.

Now that the Banks have been given

full responsibility for their own

corporate governance, the ability of the

Finance Board to ensure the safety and

soundness of the Banks lies primarily in

its ability to examine the Banks and to

take action pursuant to Bank

examinations. The material set forth in

part 917 also is intended in part to make

clear the standards against which Banks

will be examined. Although the rule is

detailed in some respects, the Finance

Board believes that it is preferable to

state explicitly the standards to which

the Bank’s boards of directors and

management will be held than to

promulgate a more general governance

rule the application of which would

remain ambiguous until specific

examination concerns arise.

B. Renumbering of Certain Provisions

As part of a proposed rule to amend

its advances regulation, 12 CFR part

950, the Finance Board will be

proposing to add to part 917 a

requirement that each Bank have in

place at all times a member products

policy to address various aspects of the

financial products that the Bank

provides to its members and associates.

In this final rule, the Finance Board has

reserved § 917.4 for the member

products policy provision.

In addition, the strategic planning

provision, which appeared in the

proposed rule as § 917.9, has been

moved to § 917.5 in the final rule. This

was done in order to give part 917 a

more logical structure by placing the

provisions requiring Banks’ board of

directors to adopt major written policies

or plans (i.e., the risk management

policy, the member products policy and

the strategic plan) in consecutive

sections. Consequently, the sections

numbered as 917.4 through 917.8 in the

proposed rule have been redesignated as

§§ 917.6 through 917.10 in the final

rule.

C. Definitions—§§ 900.1 and 917.1

As reflected in the proposed rule, the

Finance Board has begun the process of

revising its regulations to refer to

nonmember mortgagees who are eligible

under section 10b of the Federal Home

Loan Bank Act (Bank Act), 12 U.S.C.

1430b, to obtain advances from the

Banks as ‘‘associates.’’ In addition to a

desire to use less cumbersome

terminology, this change arises from the

Finance Board’s concern that, to those

not familiar with the nuances of the

Bank System, the use of the term

‘‘nonmember mortgagee’’ could imply

that the Banks are transacting business

with entities beyond those authorized

by statute. The term ‘‘associate’’ more

accurately reflects the fact that these

entities have a Congressionallysanctioned relationship with the Banks,

albeit one that falls short of full Bank

membership.

In its recent regulatory reorganization

rulemaking, the Finance Board

established in its regulations a new part

900, to contain definitions of terms that

are used often throughout the Finance

Board’s regulations. See 65 FR 8253

(2000). By creating this part, the Finance

Board intended both to standardize

common terms used in the regulations

and to eliminate repetitive definitions

and excessive definitional crossreferences throughout the regulations.

Although this is the first rulemaking in

which the term ‘‘associate’’ has been

used, the Finance Board intends

eventually to use the term throughout

its regulations. Accordingly, the term,

which appeared in § 917.1 of the

proposed rule, has been moved to part

900 (§ 900.1) in the final rule.

Section 917.1 of the rule continues to

contain definitions of terms that are

used in the substantive provisions of

part 917, but that are not used

frequently enough throughout the

Finance Board’s regulations to warrant

inclusion in part 900. Changes made to,

and comments regarding, these

definitions are discussed below in the

context of the substantive provisions to

which the definitions relate.

D. General Authorities and Duties of

Bank Boards of Directors—§ 917.2

Section 917.2(b)(1) of the rule requires

that each director carry out his or her

duties in good faith, in a manner such

director believes to be in the best

interests of the Bank, and with such

care, including reasonable inquiry, as an

ordinarily prudent person in a like

position would use under similar

circumstances. One commenter (a

Bank), while supporting this regulatory

statement of the standard of care,

suggested that the Finance Board state

explicitly in the final rule that Bank

directors and management are subject to

the same standard of care as directors of

ordinary corporations are under state

law.

Overall, part 917 charges Bank

directors and management with many

specific duties and responsibilities in

connection with the operation of the

Banks. In addition, § 917.2(b)(1) sets

forth a general standard of care with

which the specific duties are to be

executed. While the Finance Board

believes that this regulatory standard of

care is equivalent to the legal standard

that normally applies to officers and

directors of state-chartered corporations

under state law, the Finance Board

declines to make explicit reference to

state law in the regulation. Part 917

specifically enumerates both the

specific and general standards that the

Finance Board has determined are

appropriate, and it is by these express

standards—and not by any ambiguous

reference to state law—that the actions

of Bank directors and management will

be measured by the Finance Board.

In addition, several commenters

expressed their opinion that, while

§ 917.2(b)(1) sets forth a standard of care

identical to that which exists under the

law of most states, various specific

provisions in proposed part 917

appeared to impose a greater duty upon

directors and management by

essentially requiring them to guarantee

the outcome of actions taken by other

parties. The Finance Board has

reviewed the provisions in question and

has made amendments to several of

them (specifically, final rule

§§ 917.3(a)(2)(iv), 917.3(c), 917.6(b)(2)

and 917.7(e)(2), all discussed in greater

detail below) in order to make clear that,

while a Bank’s board of directors and

senior management are required to

adopt certain policies and order certain

actions that are ‘‘reasonably designed’’

to achieve a particular result, the

officers and directors do not have the

responsibility to guarantee that, in

executing these policies or orders, Bank

employees will achieve the precise

result specified. However, by requiring

that policies and orders be ‘‘reasonably’’

designed to achieve the desired result,

the Finance Board does intend to

require that officers and directors take

all objectively reasonable measures

necessary to design the policy or order,

and oversee its implementation, in such

a way as to maximize the chances of the

desired result being achieved.

Section 917.2(b)(3) of the proposed

rule would have required that every

Bank director ‘‘be financially literate, or

become financially literate within a

reasonable time after appointment or

election.’’ One commenter (a Bank)

suggested that the Finance Board

explicitly define the term ‘‘financially

literate’’ in the final rule, using the

explanation of the term set forth in the

preamble to the proposed rule. The

Finance Board agrees that the meaning

of the term ‘‘financially literate’’ was

unclear in the proposed rule. However,

instead of defining the term, the Finance

Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations 25269

Board has opted in the final rule to

eliminate its use altogether and to

require, more plainly, that at the time of

his or her election, or within a

reasonable time thereafter, each director

have a working familiarity with basic

finance and accounting practices,

including the ability to read and

understand the Bank’s balance sheet

and income statement and to ask

substantive questions of management

and the internal and external auditors.

Three commenters (two Banks and

one trade association) opposed this

requirement on the grounds that elected

directors—who are primarily chief

executives or senior officers of financial

institutions—are likely to meet the

standard, while appointed directors are

chosen by the Finance Board, thereby

giving the agency plenary power to

select only those individuals who have

a working familiarity with basic finance

and accounting practices. Similarly, two

other Banks questioned the requirement,

given that the Banks have no power to

lobby for the appointment or election of

any director.

The Finance Board agrees that elected

directors, as representatives of member

financial institutions, would

presumably meet the requirement of

§ 917.2(b)(3) with ease. The agency does

not agree that this fact logically leads to

the conclusion that the requirement

should not be included in the rule.

The Finance Board also agrees that,

because it is responsible for the

appointment of each Bank’s public

interest directors, it has the power to

use financial literacy as a criterion in

the appointment process. However, the

intent of the requirement set forth in

§ 917.2(b)(3) is not to eliminate from

consideration for Bank directorships

individuals who do not currently

possess a working familiarity with basic

finance and accounting practices,

regardless of any other relevant

qualifications they may possess. Instead,

the purpose of § 917.2(b)(3) is to require

that those who do not possess such

familiarity become so educated to the

extent that they can effectively carry out

their duties as directors. The Finance

Board trusts that any individual who

merits consideration as either an elected

or appointed Bank director would be

capable of learning in a very short

period of time how to read the Bank’s

income statement and balance sheet and

how the data set forth therein relate to

the general operations of the Bank. The

Finance Board also believes that this

requirement will impose little burden

on the Banks, especially if the option of

such education is made a part of

existing director orientation programs.

E. Risk Management—§ 917.3

Section 917.3(a)(1) of the rule requires

that, within 90 days of the effective date

of the final rule, each Bank have in

effect at all times a risk management

policy. Section 917.3(b) of the rule sets

forth the requirements for this policy.

As it appeared in the proposed rule,

§ 917.3(b)(1) required that the risk

management policy ‘‘describe how the

Bank will comply with its capital

structure plan, after such plan is

approved by the Finance Board.’’

Four commenters (two Banks and two

trade associations) stated that the

proposed rule was unclear as to whether

the risk management policy must

immediately state how the Bank will

comply with capital requirements that

will not be known until after the 90-day

implementation period, or whether the

policy is to be amended after the

Finance Board issues a final rule on

capital and subsequently approves that

Bank’s capital structure plan. Three of

these commenters (one Bank and two

trade associations) stated that the

Finance Board should not require a

Bank to adopt its risk management plan

until 90 days after that Bank’s capital

structure plan has been approved by the

Finance Board. The remaining Bank

stated that the Finance Board should

allow the Banks 180 days after the

publication of the final rule to adopt

their risk management policies.

Of course, the Finance Board does not

intend to require that the Banks describe

how they will comply with a capital

regulation or a capital structure plan

that will not yet exist at the end of the

90-day implementation period. In the

final rule, § 917.3(b)(1) has been revised

to more clearly state that this risk

management policy requirement will

apply only after the Finance Board has

adopted its new capital regulations and

has approved the Bank’s capital

structure plan. At that time, a Bank will

need to amend its existing policy to add

the material required under this

provision.

The Finance Board declines to extend

the risk management policy

implementation period beyond 90 days

after the effective date of the final rule.

It is the agency’s view that, pursuant to

the Federal Home Loan Bank System

Financial Management Policy (FMP)

(which is the Finance Board policy that

currently addresses Bank risk

management), Banks should already

have in place policies that largely

conform to the requirements of

§ 917.3(b). The rule does not require that

a Bank adopt a new risk management

policy if one is already in place that

meets the requirements of § 917.3(b), but

requires merely that the Bank have such

a policy ‘‘in effect at all times’’ after the

end of the 90-day period.

Even if a Bank must amend its

existing policy, or adopt an entirely new

risk management policy, in order to

conform to new § 917.3(b), the necessary

changes should be easily accomplished

by the close of the 90-day

implementation period given that,

under the FMP, the Banks have very

little discretion regarding the

management of the risk components that

must be addressed in the risk

management policy. As the substantive

requirements of the FMP are gradually

superceded in the coming year by new

regulations that are likely to give the

Banks more discretion in the area of risk

management and capital structure, each

Bank will need to make appropriate

amendments to its risk management

policy.

Proposed § 917.3(a)(2)(iv) would have

required each Bank’s board of directors

to ensure that policies and procedures

are in place to achieve Bank compliance

at all times with its risk management

policy. Four commenters (all Banks)

opposed this language on the ground

that it would be unreasonable to require

the Bank’s board of directors to act as

a guarantor that the Bank would always

be in compliance with the risk

management policy. The Finance Board

recognizes that a Bank’s board of

directors typically is not involved in the

day-to-day operations of the Bank and,

therefore, would not be in a position

constantly to monitor and enforce

employee compliance with Bank

policies and procedures. Accordingly,

the Finance Board has revised the

language of § 917.3(a)(2)(iv) to require

only that the board ensure that policies

and procedures are in place ‘‘that are

reasonably designed’’ to achieve

‘‘continuing’’ Bank compliance with its

risk management policy.

Sections 917.3(b)(3)(i) and (ii) require

that each Bank’s risk management

policy set forth standards for the Bank’s

management of credit risk and market

risk, respectively. One commenter (a

Bank) suggested that the Finance Board

amend the definitions of both market

risk and credit risk, which in proposed

§ 917.1 referred to the ‘‘market value’’ of

a Bank’s portfolio and of a particular

obligation, respectively, to refer also to

the ‘‘estimated fair value’’ of assets. In

the final rule, these two definitions have

been revised to add references to

‘‘estimated fair value if market value is

not available.’’

The same Bank also suggested that the

Finance Board define the terms ‘‘market

value’’ and ‘‘estimated fair value’’ in the

final rule. Because these terms are

25270 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations

standard accounting terms, see, e.g.,

Financial Accounting Standards Board

(FASB) Statement of Financial

Accounting Standards No. 133, App. D,

¶ 534(j), the Finance Board has

determined that they need not be

defined in the final rule.

The same Bank also suggested that the

definition of ‘‘market risk’’ be amended

to include changes in interest rate

volatility as an underlying causal factor.

Because the Finance Board believes that

the concept of changes in interest rate

volatility are subsumed within the

general term ‘‘changes in interest rates,’’

which is included in the definition of

market risk, it finds the suggested

revision to be unnecessary.

Section 917.3(b)(3)(iii) of the rule

requires that each Bank’s risk

management policy set forth standards

for the Bank’s management of day-today operational liquidity needs and

contingency liquidity needs. One

commenter (a Bank) recommended that

the definition of ‘‘contingency

liquidity,’’ set forth in § 917.1, include

both maturing advances and off-balance

sheet sources of funds that a Bank can

use to help meet liquidity needs if

access to capital markets is impeded.

Because the Finance Board considers

maturing advances to be included

within paragraph (2) of the definition of

‘‘contingency liquidity’’ (self-liquidating

assets with a maturity of seven days or

less), it has chosen not to list maturing

advances separately in the definition.

Regarding off-balance sheet items,

during a funding crisis, a Bank may be

expected to lose access to normal

sources of unsecured borrowings such

as deposits or federal funds. However,

even if, due to a funding crisis, a Bank

were to lose access to its normal sources

of unsecured borrowing, it is expected

that the Bank would continue to have

access to previously-established

irrevocable lines of credit from AAA- or

AA-rated financial institutions, through

either deposits or the federal funds

market. Accordingly, the Finance Board

has amended the definition of

‘‘contingency liquidity’’ in the final rule

to include these sources of funds.

One commenter (a Bank), noting that

the proposed rule contained a definition

of ‘‘contingency liquidity,’’ but did not

define ‘‘operational liquidity,’’

requested that a definition of

‘‘operational liquidity’’ be added to the

final rule. In response, the Finance

Board has, in final § 917.1, defined

‘‘operational liquidity’’ as including

sources of cash from both a Bank’s

ongoing access to the capital markets

and its holding of liquid assets to meet

operational requirements in a Bank’s

normal course of business.

Section 917.3(c) of the rule requires

that each Bank’s senior management

perform an annual risk assessment to

identify and evaluate all material risks

that could adversely affect the

achievement of the Bank’s performance

objectives and compliance

requirements. One commenter (a Bank)

requested that the Finance Board

include in the final rule a definition of

the word ‘‘material.’’ The same Bank

opposed the requirement that a Bank

identify and evaluate ‘‘all’’ material

risks, stating that the ‘‘innocent failure’’

to identify a risk that is deemed by a

Finance Board examiner to be

‘‘material’’ could expose the Bank’s

board and management to criticism.

Because ‘‘material risk’’ is a standard

accounting concept, see, e.g., FASB

Statement of Financial Accounting

Concepts No. 2; SEC Staff Accounting

Bulletin No. 99, the Finance Board finds

it unnecessary to define the term in the

final rule. Additionally, because the

Finance Board would consider the

failure of a Bank’s management to

identify any material risk—whether

innocent or intentional—to be a matter

of supervisory concern, the agency

declines to eliminate the word ‘‘all’’

from § 917.3(c). However, so as not to

set an unreasonable regulatory standard,

the Finance Board has amended

§ 917.3(c) in the final rule to require

only that the risk assessment be

‘‘reasonably designed’’ to identify and

evaluate all material risks.

F. Strategic Planning Requirement and

Mission—§ 917.5 and Part 940

Section 917.5 of the final rule (§ 917.9

in the proposed rule) requires that,

beginning 90 days after the effective

date of the final rule, each Bank’s board

of directors have in effect at all times a

strategic business plan that describes

how the Bank’s business activities will

achieve the mission of the Bank. In the

proposed rule, the ‘‘mission of the

Banks’’ was defined in paragraph (a) of

the strategic business plan section. In

the final rule, this mission provision

remains substantively unchanged, but is

moved from part 917 and to a new part

940, entitled ‘‘Mission of the Banks.’’

The mission provision describes the

mission of the Banks as providing to

their members and associates financial

products and services, including but not

limited to advances, that assist and

enhance their members’ and associates’

financing of housing and community

lending. Three commenters (all Banks)

stated their belief that individual Banks

should have the responsibility for

establishing their own mission

statements. One Bank stated that each

Bank’s mission statement should be a

reflection of how the Bank, its board, its

management and shareholders construe

the authority granted under the Federal

Home Loan Bank Act (Bank Act). The

Bank further stated that the Bank Act

does not explicitly define the mission of

the Banks and does not require that the

Finance Board do so. Another Bank

commented that the drafting of a

mission statement is fundamentally a

management responsibility that should

be exercised by the entity’s board of

directors and not by the entity’s

regulator.

The Bank Act authorizes the Finance

Board to supervise the Banks and to

promulgate and enforce such

regulations and orders as are necessary

from time to time to carry out the

provisions of the Bank Act. See 12

U.S.C. 1422b(a)(1). Among the

provisions of the Bank Act are those

outlining the duties of the Finance

Board, which include the duty to

‘‘ensure’’ that the Banks carry out their

housing finance mission. See id. at

1422a(a)(3)(B)(ii). Many of the comment

letters received in response to the

proposed rule criticized the Finance

Board for using the word ‘‘ensure’’ in

some of the provisions setting forth

specific duties of Bank directors, noting

that the word implies that the directors

would have a duty to ‘‘guarantee’’ that

Bank employees would carry out the

board’s directives with precision. The

Finance Board agrees that the word

‘‘ensure’’ connotes an affirmative

obligation that carries a high degree of

responsibility. Thus, the use of the word

‘‘ensure’’ in section 2A(a)(3)(B)(ii) of the

Bank Act makes clear that, consistent

with the safe and sound operation of the

Banks, the Finance Board has the duty

to take active measures, using all

available avenues, to see to it that the

Banks carry out their housing finance

mission.

Because Congress has not expressly

defined the term ‘‘housing finance

mission,’’ it is the responsibility and the

privilege of the Finance Board—as the

body charged with the duty to ensure

that the Banks fulfill that mission and,

more generally, as the supervisory

regulator of the Banks and the agency

charged with the administration of the

Bank Act—to construe the term

reasonably in light of the totality of the

Act. It is the position of the Finance

Board that, when Congress amended the

Bank Act in 1989 to require the Banks

to offer Affordable Housing Programs

(AHP) and Community Investment

Programs (CIP) and authorized the

Banks to offer Community Investment

Cash Advance Programs (CICA), the

Banks’ ‘‘housing finance mission,’’ as

referenced in section 2A(a)(3)(B)(ii),

Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations 25271

came to include support not only for the

financing of traditional housing-related

activities, but also for those types of

community lending that the Banks are

authorized by statute to support and

that indirectly enhance traditional

housing finance by helping to create and

sustain thriving and livable

communities. See 12 U.S.C. 1430(i), (j).

Section 940.2 of the final rule

implements in regulation this

description of the Banks’ ‘‘housing

finance mission.’’ Although, as

discussed, the Finance Board believes

that support of community lending is an

integral part of the Banks’ statutory

housing finance mission, it has used the

terms ‘‘housing’’ and ‘‘community

lending’’ separately in § 940.2 and in

other parts of the regulations in order to

make clear that the Banks’ housing

finance mission goes beyond the

parameters that the term ‘‘housing

finance’’ would traditionally connote.

Regarding the substance of the

mission provision, seven commenters

(five Banks and two trade associations)

stated that the scope of the provision

was too narrow. Specifically, several

commenters noted that the mission

provision does not reference the Banks’

new authority to extend advances to

CFIs for the purpose of funding loans to

small businesses, small farms and small

agri-businesses. One of the Banks stated

that, if the Finance Board must enact a

mission provision, the agency should

draft the provision broadly enough to

support all activities explicitly allowed

by the Bank Act. Similarly, two of the

Banks opined that the mission provision

does not include sufficient reference to

other types of investments, products

and services that may directly

contribute to mission achievement. Yet

another Bank stated that the mission

provision should recognize the need to

use member’s capital prudently and

effectively, particularly in light of the

recent statutory change to an allvoluntary membership base.

As drafted, the mission provision

does not appear to consider as missionrelated activities related to those

purposes addressed by the

Modernization Act–namely facilitating

the funding of loans by CFIs to small

businesses, small farms and small agribusinesses. However, the Finance Board

has recently approved for publication a

proposed rule to amend its advances

regulation to incorporate the new CFIrelated advance authorities. As part of

this rule, the Finance Board is

proposing to amend the term

‘‘community lending,’’ as defined in

part 952 of the regulations, to include

these authorities. Because the mission

provision incorporates the term

‘‘community lending,’’ it will also

encompass the new CFI-related

authorities once the Finance Board

promulgates a final rule amending its

advances regulation, most likely in the

third quarter of 2000. Presently, the

Finance Board is in the midst of an

ambitious regulatory agenda intended to

implement in a timely manner the

statutory changes brought about by the

Modernization Act. In order to

accomplish these changes effectively,

the agency must necessarily proceed

one step at a time. With many

interrelated regulations, it will in some

cases take two or more rulemakings

before a change can be fully integrated

into all relevant aspects of the Finance

Board’s regulatory scheme. In order to

make clear immediately that the CFIrelated authorities, as well as support

for the financing of multi-family

housing, are considered to be part of

each Bank’s mission, the Finance Board

has added to § 917.5(a) a requirement

that performance goals for these areas be

included in each Bank’s strategic plan.

It should also be noted that the

mission provision is not intended to be

an all-encompassing description of

every function that a Bank is authorized

to undertake. As mentioned in several of

the comment letters, there are many

ways in which a Bank may serve its

members and associates that do not fall

within the parameters of the mission

provision. The point of the mission

provision, in combination with the

strategic planning requirement, is to

require the Banks to focus primarily

upon carrying out their housing finance

mission and to do so in a profitable

manner.

Finally one commenter (a trade

association) expressed concern that the

Finance Board’s promulgation of the

mission provision, in combination with

the strategic planning requirement, is

inconsistent with the content of an

October 18, 1999 letter from Finance

Board Chairman Bruce Morrison to

Senator Phil Gramm and Congressman

Jim Leach. In that letter, Chairman

Morrison stated that, upon the

enactment of the Modernization Act, the

Finance Board would withdraw its

Financial Management and Mission

Achievement (FMMA) proposed

rulemaking, see 64 FR 52163 (1999), and

would take no action to promulgate

proposed or final regulations limiting

Bank assets or advances beyond those

regulations currently in effect, except to

the extent necessary to protect the safety

and soundness of the Banks. As

discussed, this rule does nothing to

limit Bank assets or advances of any

kind, but merely requires the Banks to

adopt a strategic plan setting forth how

their assets, advances and other

products and services will contribute to

fulfillment of the Banks’ mission.

The requirements regarding the

content of the Banks’ strategic plans

remain in part 917, at § 917.5. Regarding

the actual strategic plan requirement,

one commenter (a Bank) expressly

opposed specific strategic planning

requirements, stating that each Bank

should be permitted to determine the

strategic planning methodology most

appropriate for the Bank to pursue its

mission. As mentioned above, it is the

duty of the Finance Board to ensure that

the Banks carry out their statutory

mission. The Finance Board has

determined that, in order to fulfill this

duty, it must require the Banks to focus

upon the development of profitable

products and services that enhance the

carrying out of this mission. This is the

intent behind the strategic planning

requirement.

One commenter (a Bank) asked

whether the strategic business plan may

consist of multiple documents generated

and approved by a Bank’s board of

directors in a sequential manner.

Nothing in the rule prohibits the Banks

from drafting and approving elements of

the strategic business in a sequential

fashion, so long as: (1) It is clear which

documents comprise the strategic

business plan; and (2) these documents,

as a whole, meet the requirements set

forth in § 917.5.

Five commenters (three Banks and

two trade associations) opposed the 90-

day time limit the Banks have been

given to adopt their strategic business

plans. Two of the Banks suggested that

the rule be revised to permit the Banks

to adopt the plan during their next

scheduled annual planning process.

Another of the Banks requested that the

Banks be given one year to adopt their

plans. The trade associations suggested

that the Finance Board delay imposition

of the strategic planning requirement

until the implementation of each Bank’s

new capital structure. The Finance

Board believes that, under current

requirements, the Banks should already

have most elements of the strategic plan

in place and that, therefore, the

adoption of the full plan under § 917.5

within 90 days should not be overly

burdensome. Accordingly, the 90-day

requirement remains unchanged in the

final rule.

G. Internal Control System—§ 917.6

Section 917.6 of the final rule (§ 917.4

of the proposed rule) sets forth

requirements pertaining to the

establishment and maintenance of a

Bank’s internal control system. Section

917.6(a)(1) enumerates the areas of

25272 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations

concern that each Bank’s internal

control system should be designed to

address. Section 917.6(a)(2) sets forth

several of the ongoing internal control

activities that the Finance Board has

determined are necessary in order to

adequately address the concerns

referred to in paragraph (a)(1). One

commenter (a Bank) opposed the nonexclusive listing of required ongoing

internal control activities in

§ 917.6(a)(2), stating that the list added

little, if anything, to the regulation.

In determining whether a Bank’s

internal control system adequately

addresses the areas of concern set forth

in paragraph (a)(1), Finance Board

examiners will be looking to determine

whether the Bank is effectively carrying

out the ongoing internal control

activities listed in paragraph (a)(2).

Accordingly, the Finance Board finds it

preferable to list explicitly some of the

internal control activities on which

examiners will focus so that each Bank

will be aware in advance of the

standards that will be applied in the

examination of its internal control

system.

Section 917.6(b) of the rule lists the

internal control responsibilities of each

Bank’s board of directors. In the

proposed rule, paragraph (b)(2) would

have required that each Bank’s board

ensure that an effective and

comprehensive internal audit of the

internal control system is performed

annually. Four commenters (three Banks

and one Bank director) objected to the

proposed rule language on the ground

that it appeared to require Bank boards

of directors to ‘‘guarantee’’ that

employees carrying out an internal

control audit would do so effectively

and comprehensively. The commenters

argued that this regulatory standard

would exceed the legal standard that

normally applies to corporate directors

under state law. In response to these

concerns, and to emphasize that the

regulatory standard of care applicable to

Bank directors is equivalent to the legal

standard that normally applies to

corporate directors under state law, the

Finance Board has revised § 917.6(b)(2)

in the final rule to require only that: (1)

The board require an annual internal

audit of the Bank’s internal control

system; and (2) the audit plan is

reasonably designed to be effective and

comprehensive.

Two commenters (one Bank and one

trade association) suggested that the

Finance Board modify § 917.6(b)(2) to

enable Banks to distinguish between

high- and low-risk internal control areas

and that audits of low-risk areas be

required less frequently than annually.

The Federal Deposit Insurance Act

(FDIA) requires that each insured

depository institution prepare annually,

among other things, a report signed by

the chief executive officer and the chief

accounting or financial officer of the

institution that contains: (A) A

statement of the management’s

responsibilities for (i) preparing

financial statements; (ii) establishing

and maintaining an adequate internal

control structure and procedures for

financial reporting; and (iii) complying

with the laws and regulations relating to

safety and soundness; and (B) an

assessment, as of the end of the

institution’s most recent fiscal year, of

(i) the effectiveness of such internal

control structure and procedures; and

(ii) the institution’s compliance with the

laws and regulations relating to safety

and soundness. See 12 U.S.C.

1831m(b)(2); see also 12 CFR part 363

(FDIC implementing regulations). These

FDIA provisions essentially require that

each FDIC-insured financial institution

perform an annual comprehensive audit

of its internal control system. Section

917.6(b)(2) of the rule is intended to

apply a similar requirement to the

Banks and therefore remains unchanged

in the final rule.

One commenter (a Bank) also objected

to the requirement, set forth in

§ 917.6(b)(6), that a Bank’s board of

directors report to the Finance Board in

a timely manner any internal control

deficiencies found and the corrective

action taken. The commenter suggested

that the Banks be required to report only

significant internal control deficiencies

that have the potential to impact a

Bank’s safety and soundness. As the

entity charged by statute with ensuring

the safety and soundness of the Banks,

see 12 U.S.C. 1422a(a)(3)(A), it is

ultimately the statutory responsibility of

the Finance Board to determine which

deficiencies may impact upon the safety

and soundness of a Bank. As such, final

§ 917.6(b)(6) continues to hold each

Bank’s board of directors responsible for

reporting all known internal control

deficiencies to the Finance Board.

Section 917.6(b)(8) of the rule requires

that each Bank’s board of directors

review all delegations of authority to

specific personnel or committees and

require that such delegations state the

extent of the authority and

responsibilities delegated. One

commenter (a Bank) requested

clarification as to whether, under this

provision, it would be permissible for a

Bank’s management to make particular

delegation decisions, so long as the

Bank’s board of directors reviews the

delegations. The Finance Board

understands that decisions regarding

delegations of authority among specific

Bank personnel will most likely be

made by a Bank’s management as part

of its responsibility for the day-to-day

operations of the Bank. Such

management decisions are permissible

under § 917.6(b)(8), provided that the

Bank’s board of directors reviews the

delegations and requires that the

delegations state the extent of the power

delegated.

Section 917.6(c) of the rule addresses

the responsibilities of each Bank’s

senior management for the

establishment, implementation and

maintenance of the Bank’s internal

control system. As it appeared in the

proposed rule, this provision would

have required that senior management

ensure that Bank personnel fully

understand and comply with all

policies, procedures and legal

requirements. One commenter (a trade

association) requested that the Finance

Board amend this provision to require

only that management ensure that Bank

personnel understand and comply with

policies, procedures and requirements

applicable to their positions and

responsibilities. Although this was

implicit in the proposed rule, the

Finance Board agrees that the provision

may have appeared to be overlyburdensome as written. Therefore, the

agency has revised § 917.6(c)(2) to add

the requested clarification.

In addition, one commenter (a Bank)

objected to the use of the word ‘‘ensure’’

in § 917.6(c)(2), and also to its use in

§ 917.6(c)(6), which requires that senior

management ensure adherence to the

lines of authority and responsibility

established by the Bank’s board of

directors. Contrary to the role of the

Bank’s board of directors, which sets

overall policy and oversees the

operations of the Bank in a general

sense, the management of the Bank is

responsible for day-to-day operations,

including the direct supervision of Bank

employees. As such, Bank management

should be in a position: (1) To educate

employees regarding policies,

procedures and legal requirements

related to their positions and regarding

lines of authority and responsibility

relevant to their positions; (2) to

determine on a regular basis whether

employees are complying with these

policies, procedures and requirements

and lines of authority and

responsibility; and (3) to take prompt

corrective action when it is discovered

that they are not so complying.

Accordingly, the Finance Board has

determined that use of the word

‘‘ensure’’ in §§ 917.6(c)(2) and (6) is

appropriate.

Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations 25273

H. Audit Committees—§ 917.7

Section 917.7 of the final rule (§ 917.5

in the proposed rule) addresses the

powers and responsibilities of Bank

audit committees. One commenter (a

Bank) stated generally that the language

of the rule suggests that audit

committees will interact directly with

Bank management as an independent

source of authority, while, under

traditional notions of corporate

governance, the audit committee acts as

an agent of the full board. Nothing in

the audit committee provisions of the

rule is intended to suggest that the

authority of a Bank’s audit committee

derives other than from its status as

agent of the full board of directors.

References in the rule to direct audit

committee supervision of, or authority

over, the internal auditor or other Bank

employees are to powers that the

Finance Board has determined a Bank

audit committee must possess in order

to be effective. These powers would be

delegated by the full board of directors

to the audit committee as part of the

audit committee charter.

Section 917.7(b) of the rule addresses

the required composition of Bank audit

committees. Specifically, § 917.7(b)(1)

requires that the audit committee

comprise at least five persons drawn

from the Bank’s board of directors. One

commenter (a trade association)

opposed this requirement, stating that

the rule contradicts Report and

Recommendations of the Blue Ribbon

Committee on Improving the

Effectiveness of Corporate Audit

Committees (Feb. 8, 1999) (Blue Ribbon

Committee Report), which establishes a

minimum of three directors.

Section 917.7(b)(2) requires that each

Bank’s audit committee include a

balance of representatives of: (i)

community financial institutions (CFIs)

and other members; and (ii) appointive

and elective directors of the Bank. One

commenter (a Bank) opposed the

diversity requirement, stating that the

safety and soundness issues that face

the Banks are straightforward and that

the requirement adds to the complexity

of the audit committee without adding

to its ability to deal with issues of safety

and soundness. Another commenter (a

trade association) opposed the diversity

requirement, stating that it has no basis

in the Blue Ribbon Committee Report.

Two commenters (both Banks)

suggested that the Finance Board

remove the provision requiring a

balance between representatives of CFIs

and other members, stating that there

can be no assurance that a particular

Bank’s board of directors will have any

elected directors representing a CFI.

Finally, one commenter (a trade

association) opposed the diversity

requirement as written, suggesting that

large borrowers be precluded from

serving on the audit committee.

As stated in the proposed rule, the

Finance Board included the diversity

requirement in the rule in order to

prevent dominance of the audit

committee by any particular interest.

Section 917.7(a)(1) sets the minimum

audit committee membership at five

(instead of the three established by the

Blue Ribbon Committee Report) because

the Finance Board has determined that

this is the minimum number required to

achieve adequately diverse

representation on a Bank’s audit

committee. The Finance Board rejects

suggestions that it eliminate the

requirement that there be a balance of

representation between CFIs and other

members. If there are no CFI

representatives on a Bank’s board of

directors, there will obviously be no one

to serve on the audit committee in that

capacity and the Bank would not be in

violation of the regulation for failure to

appoint a non-existent CFI director to

the board. Section 917.7(b)(4) requires

that at least one member of each Bank’s

audit committee have extensive

accounting or related financial

management experience. Three

commenters (two Banks and one trade

association) expressly supported this

requirement. One of the Banks

requested that the Finance Board clarify

the meaning of the phrase ‘‘extensive

accounting or related financial

management experience.’’ The Blue

Ribbon Committee Report uses the

phrase ‘‘accounting or related financial

management expertise,’’ where

‘‘expertise’’ signifies ‘‘past employment

experience in finance or accounting,

requisite professional certification in

accounting, or any other comparable

experience or background which results

in the individual’s financial

sophistication, including being or

having been a CEO or other senior

officer with financial oversight

responsibilities.’’ Although the Finance

Board has chosen to use the word

‘‘experience’’ in order to express the

standard more clearly, the explanation

contained in the Blue Ribbon

Committee Report is equally applicable

to the standard set forth in final

§ 917.7(b)(4).

In the proposed rule, the Finance

Board requested comment on two

specific questions regarding the

composition of a Bank’s audit

committee. First, the Finance Board

asked whether, in the final rule, the

provision requiring that at least one

member of the audit committee have

extensive accounting or related financial

management experience should be made

to apply specifically to the chair of the

audit committee. Eight commenters (six

Banks and two trade associations)

opposed, and no commenters

supported, the inclusion of this

requirement in the final rule. The

primary objection to this idea was that

such a requirement might prevent an

individual with other important

qualifications, such as proven

administrative ability, from serving as

chair. Most commenters expressed a

belief that, so long as at least one

member of the committee has extensive

financial or accounting experience, it

would add little to the effectiveness of

the audit committee to require that the

chair specifically possess such

experience. The Finance Board agrees

with these arguments and, therefore, has

not included this requirement in the

final rule.

Second, the Finance Board asked

whether the final rule should require

that the vice chair of the board of

directors serve as chair of the audit

committee, to enable Banks to pay the

audit committee chair at a higher rate of

compensation. Twelve commenters

(nine Banks and three trade

associations) opposed, and no

commenters supported, the inclusion of

this requirement in the final rule. Most

commenters believed that this decision

properly should be left to a Bank’s board

of directors. Others expressed concern

that, far from being an incentive, service

as vice chair would only distract the

audit committee chair from his or her

audit committee duties. The Finance

Board also agrees with these comments

and, therefore, has not included this

requirement in the final rule.

Section 917.7(c) of the rule prohibits

any member of a Bank’s board of

directors from serving on the audit

committee if he or she has a

disqualifying relationship with the Bank

or its management that would interfere

with the exercise of that director’s

independent judgment. This section

includes a non-exclusive list of

relationships that would disqualify a

board director for audit committee

service regardless of the attendant

circumstances. In the proposed rule,

paragraph (4) of this list deemed as

disqualifying ‘‘being an immediate

family member of an individual who is,

or has been in any of the past five years,

employed by the Bank.’’ Two

commenters (both Banks) suggested that

the Finance Board amend this provision

to refer only to family members who are

employed by the Bank ‘‘as an executive

officer.’’ The commenters pointed out

that the suggested language conforms to

25274 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations

the standard set forth in the Blue Ribbon

Committee Report and that a director’s

familial relationship with a low-ranking

Bank employee would be likely to have

little effect on the director’s

independent judgment.

The Finance Board agrees that, on its

face, a familial relationship with a lowranking Bank employee should not

disqualify a director from service on the

Bank’s audit committee and, therefore,

has added the requested language to

final § 917.7(c)(4). However, if

circumstances surrounding the

relationship were to cast doubt upon the

director’s ability to act independently,

that director would still be prohibited

from serving on the audit committee

pursuant to the general prohibition

against disqualifying relationships set

forth in the introductory paragraph of

§ 917.7(c).

In addition, one commenter (a Bank)

requested clarification that the concept

of ‘‘independence’’ does not in any way

preclude elected directors associated

with Bank members from serving on the

audit committee. Given that, under

§ 917.7(b)(2), a Bank is expressly

required to have on its audit committee

elective directors that represent both

CFI and non-CFI members, § 917.7(c)

should not be read as overriding this

requirement. Only if an industry

representative were to have a direct

personal or financial relationship with

the Bank or its senior employees would

that director’s independence be called

into question under § 917.7(c).

Section 917.7(e) enumerates the

duties applicable to Bank audit

committees. Under the proposed rule,

paragraph (2) of this section would have

required, among other things, that each

Bank’s audit committee ensure that

policies are in place to achieve

disclosure and transparency regarding

the Bank’s true financial performance

and governance practices. One

commenter (a Bank) requested that the

Finance Board modify the language of

this paragraph to refer instead to

policies that are ‘‘reasonably designed’’

to achieve disclosure and transparency

regarding the Bank’s true financial

performance and governance practices.

The commenter argued that the

language of the proposed rule appeared

to require that audit committee

members ‘‘guarantee’’ that Bank

employees would implement these

policies without error and that the

precise result intended would be

achieved. The Finance Board agrees

that, in the proposed rule, this provision

appeared to impose upon audit

committee members a regulatory

requirement that exceeds the legal

standard that normally applies to

corporate directors under state law.

Accordingly, the Finance Board has

amended § 917.7(e)(2) in the final rule

to include the requested language.

I. Budgets, Dividends and Bylaws—

§§ 917.8, 917.9 and 917.10

Sections 917.8, 917.9 and 917.10 of

the final rule address the power and

responsibilities of Banks’ boards of

directors and senior management

regarding, respectively, budget

preparation and reporting requirements,

dividends and Bank bylaws. These

provisions already appear in existing

part 917 as §§ 917.6, 917.7 and 917.8,

respectively, having been redesignated

from old §§ 934.7, 934.16 and 934.17,

respectively, in the recent final

rulemaking that reorganized and

renumbered the Finance Board’s

regulations. See 65 FR 8253 (2000). Each

of these provisions has also been

substantively amended as part of the

Finance Board’s recent rulemaking that

devolved various corporate governance

authorities to the Banks in response to

statutory changes made by the Federal

Home Loan Bank Modernization Act of

1999 (Modernization Act), Pub. L. No.

106–102, Title VI (1999). See 64 FR

71275 (1999) (interim final rule); 65 FR

13663 (2000) (final rule). As such, no

further amendments are made to these

provisions in this final rule, other than

their redesignation as §§ 917.8, 917.9

and 917.10.

III. Regulatory Flexibility Act

The final 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, see id. at 605(b), the Finance

Board hereby certifies that this final rule

will not have a significant economic

impact on a substantial number of small

entities.

IV. Paperwork Reduction Act

The final rule does not contain any

collections of information pursuant to

the Paperwork Reduction Act of 1995.

See 44 U.S.C. 3501 et seq. Consequently,

the Finance Board has not submitted

any information to the Office of

Management and Budget for review.

List of Subjects in 12 CFR Parts 900,

917 and 940

Community development, Credit,

Federal home loan banks, Housing.

Accordingly, the Finance Board

hereby amends title 12, chapter IX, Code

of Federal Regulations as follows:

PART 900—GENERAL DEFINITIONS

1. The authority citation for part 900

continues to read as follows:

Authority: 12 U.S.C. 1422b(a).

2. In § 900.1, add a definition of

‘‘associate’’ to read as follows:

§ 900.1 Definitions applying to all

regulations.

* * * * *

Associate means an entity that has

been approved as a nonmember

mortgagee pursuant to subpart B of part

950 of this chapter.

* * * * *

3. In subchapter C, revise part 917 to

read as follows:

PART 917—POWERS AND

RESPONSIBILITIES OF BANK

BOARDS OF DIRECTORS AND

SENIOR MANAGEMENT

Sec.

917.1 Definitions.

917.2 General authorities and duties of

Bank boards of directors.

917.3 Risk management.

917.4 Bank member products policy.

[Reserved]

917.5 Strategic business plan.

917.6 Internal control system.

917.7 Audit committees.

917.8 Budget preparation.

917.9 Dividends.

917.10 Bank bylaws.

Authority: 12 U.S.C. 1422a(a)(3),

1422b(a)(1), 1427, 1432(a), 1436(a), 1440.

§ 917.1 Definitions.

As used in this part:

Business risk means the risk of an

adverse impact on a Bank’s profitability

resulting from external factors as may

occur in both the short and long run.

Capital structure plan means the plan

establishing and implementing a capital

structure that each Bank is required to

submit to the Finance Board under 12

U.S.C. 1426(b).

Community financial institution has

the meaning set forth in § 925.1 of this

chapter.

Contingency liquidity means the

sources of cash a Bank may use to meet

its operational requirements when its

access to the capital markets is

impeded, and includes:

(1) Marketable assets with a maturity

of one year or less;

(2) Self-liquidating assets with a

maturity of seven days or less;

(3) Assets that are generally accepted

as collateral in the repurchase

agreement market; and

(4) Irrevocable lines of credit from

financial institutions rated not lower

than the second highest credit rating

category by a credit rating organization

Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations 25275

regarded as a Nationally Recognized

Statistical Rating Organization by the

Securities and Exchange Commission.

Credit risk means the risk that the

market value, or estimated fair value if

market value is not available, of an

obligation will decline as a result of

deterioration in creditworthiness.

Immediate family member means a

parent, sibling, spouse, child,

dependent, or any relative sharing the

same residence.

Internal auditor means the individual

responsible for the internal audit

function at the Bank.

Liquidity risk means the risk that a

Bank will be unable to meet its

obligations as they come due or meet

the credit needs of its members and

associates in a timely and cost-efficient

manner.

Market risk means the risk that the

market value, or estimated fair value if

market value is not available, of a

Bank’s portfolio will decline as a result

of changes in interest rates, foreign

exchange rates, equity and commodity

prices.

Operational liquidity means sources

of cash from both a Bank’s ongoing

access to the capital markets and its

holding of liquid assets to meet

operational requirements in a Bank’s

normal course of business.

Operations risk means the risk of an

unexpected loss to a Bank resulting

from human error, fraud,

unenforceability of legal contracts, or

deficiencies in internal controls or

information systems.

Reportable conditions means matters

that represent significant deficiencies in

the design or operation of the internal

control system that could adversely

affect a Bank’s ability to record, process,

summarize and report financial data

consistent with the assertions of

management.

§ 917.2 General authorities and duties of

Bank boards of directors.

(a) Management of a Bank. The

management of each Bank shall be

vested in its board of directors. While

Bank boards of directors may delegate

the execution of operational functions to

Bank personnel, the ultimate

responsibility of each Bank’s board of

directors for that Bank’s management is

non-delegable.

(b) Duties of Bank directors. Each

Bank director shall have the duty to:

(1) Carry out his or her duties as

director in good faith, in a manner such

director believes to be in the best

interests of the Bank, and with such

care, including reasonable inquiry, as an

ordinarily prudent person in a like

position would use under similar

circumstances;

(2) Administer the affairs of the Bank

fairly and impartially and without

discrimination in favor of or against any

member;

(3) At the time of appointment or

election, or within a reasonable time

thereafter, have a working familiarity

with basic finance and accounting

practices, including the ability to read

and understand the Bank’s balance

sheet and income statement and to ask

substantive questions of management

and the internal and external auditors;

and

(4) Direct the operations of the Bank

in conformity with the requirements set

forth in the Act and this chapter.

(c) Authority regarding staff and

outside consultants. (1) In carrying out

its duties and responsibilities under the

Act and this chapter, each Bank’s board

of directors and all committees thereof

shall have authority to retain staff and

outside counsel, independent

accountants, or other outside

consultants at the expense of the Bank.

(2) Bank staff providing services to the

board of directors or any committee of

the board under paragraph (c)(1) of this

section may be required by the board of

directors or such committee to report

directly to the board or such committee,

as appropriate.

§ 917.3 Risk management.

(a) Risk management policy. (1)

Adoption. Beginning August 29, 2000,

each Bank’s board of directors shall

have in effect at all times a risk

management policy that addresses the

Bank’s exposure to credit risk, market

risk, liquidity risk, business risk and

operations risk and that conforms to the

requirements of paragraph (b) of this

section and to all applicable Finance

Board regulations and policies.

(2) Review and compliance. Each

Bank’s board of directors shall:

(i) Review the Bank’s risk

management policy at least annually;

(ii) Amend the risk management

policy as appropriate;

(iii) Re-adopt the Bank’s risk

management policy, including interim

amendments, not less often than every

three years; and

(iv) Ensure that policies and

procedures are in place that are

reasonably designed to achieve

continuing Bank compliance with the

risk management policy.

(b) Risk management policy

requirements. In addition to meeting

any other requirements set forth in this

chapter, each Bank’s risk management

policy shall:

(1) After the Bank’s capital structure

plan is approved by the Finance Board,

describe how the Bank will comply with

its capital structure plan;

(2) Set forth the Bank’s tolerance

levels for the market and credit risk

components; and

(3) Set forth standards for the Bank’s

management of each risk component,

including but not limited to:

(i) Regarding credit risk arising from

all secured and unsecured transactions,

standards and criteria for, and timing of,

periodic assessment of the

creditworthiness of issuers, obligors, or

other counterparties including

identifying the criteria for selecting

dealers, brokers and other securities

firms with which the Bank may execute

transactions; and

(ii) Regarding market risk, standards

for the methods and models used to

measure and monitor such risk;

(iii) Regarding day-to-day operational

liquidity needs and contingency

liquidity needs:

(A) An enumeration of specific types

of investments to be held for such

liquidity purposes; and

(B) The methodology to be used for

determining the Bank’s operational and

contingency liquidity needs;

(iv) Regarding operations risk,

standards for an effective internal

control system, including periodic

testing and reporting; and

(v) Regarding business risk, strategies

for mitigating such risk, including

contingency plans where appropriate.

(c) Risk assessment. The senior

management of each Bank shall

perform, at least annually, a risk

assessment that is reasonably designed

to identify and evaluate all material

risks, including both quantitative and

qualitative aspects, that could adversely

affect the achievement of the Bank’s

performance objectives and compliance

requirements. The risk assessment shall

be in written form and shall be reviewed

by the Bank’s board of directors

promptly upon its completion.

§ 917.4 Bank member products policy.

[Reserved]

§ 917.5 Strategic business plan.

(a) Adoption of strategic business

plan. Beginning 90 days after the

effective date of this section, each

Bank’s board of directors shall have in

effect at all times a strategic business

plan that describes how the business

activities of the Bank will achieve the

mission of the Bank consistent with part

940 of this chapter. Specifically, each

Bank’s strategic business plan shall:

(1) Enumerate operating goals and

objectives for each major business

activity and for all new business

activities, which must include plans for

25276 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations

maximizing activities that enhance the

carrying out of the mission of the Bank,

consistent with part 940 of this chapter;

(2) Discuss how the Bank will:

(i) Address credit needs and market

opportunities identified through

ongoing market research and

consultations with members, associates

and public and private organizations;

and

(ii) Notify members and associates of

relevant programs and initiatives;

(3) Establish quantitative performance

goals for Bank products related to multifamily housing, small business, small

farm and small agri-business lending ;

(4) Describe any proposed new

business activities or enhancements of

existing activities; and (5) Be supported

by appropriate and timely research and

analysis of relevant market

developments and member and

associate demand for Bank products and

services.

(b) Review and monitoring. Each

Bank’s board of directors shall:

(1) Review the Bank’s strategic

business plan at least annually;

(2) Amend the strategic business plan

as appropriate;

(3) Re-adopt the Bank’s strategic

business plan, including interim

amendments, not less often than every

three years; and

(4) Establish management reporting

requirements and monitor

implementation of the strategic business

plan and the operating goals and

objectives contained therein.

(c) Report to Finance Board. Each

Bank shall submit to the Finance Board

annually a report analyzing and

describing the Bank’s performance in

achieving the goals described in

paragraph (a)(3) of this section.

§ 917.6 Internal control system.

(a) Establishment and maintenance.

(1) Each Bank shall establish and

maintain an effective internal control

system that addresses:

(i) The efficiency and effectiveness of

Bank activities;

(ii) The safeguarding of Bank assets;

(iii) The reliability, completeness and

timely reporting of financial and

management information and

transparency of such information to the

Bank’s board of directors and to the

Finance Board; and

(iv) Compliance with applicable laws,

regulations, policies, supervisory

determinations and directives of the

Bank’s board of directors and senior

management.

(2) Ongoing internal control activities

necessary to maintain the internal

control system required under

paragraph (a)(1) of this section shall

include, but are not limited to:

(i) Top level reviews by the Bank’s

board of directors and senior

management, including review of

financial presentations and performance

reports;

(ii) Activity controls, including

review of standard performance and

exception reports by department-level

management on an appropriate periodic

basis;

(iii) Physical and procedural controls

to safeguard, and prevent the

unauthorized use of, assets;

(iv) Monitoring for compliance with

the risk tolerance limits set forth in the

Bank’s risk management policy;

(v) Any required approvals and

authorizations for specific activities;

and

(vi) Any required verifications and

reconciliations for specific activities.

(b) Internal control responsibilities of

Banks’ boards of directors. Each Bank’s

board of directors shall ensure that the

internal control system required under

paragraph (a)(1) of this section is

established and maintained, and shall

oversee senior management’s

implementation of such a system on an

ongoing basis, by:

(1) Conducting periodic discussions

with senior management regarding the

effectiveness of the internal control

system;

(2) Ensuring that an internal audit of

the internal control system is performed

annually and that such annual audit is

reasonably designed to be effective and

comprehensive;

(3) Requiring that internal control

deficiencies be reported to the Bank’s

board of directors in a timely manner

and that such deficiencies are addressed

promptly;

(4) Conducting a timely review of

evaluations of the effectiveness of the

internal control system made by internal

auditors, external auditors and Finance

Board examiners;

(5) Directing senior management to

address promptly and effectively

recommendations and concerns

expressed by internal auditors, external

auditors and Finance Board examiners

regarding weaknesses in the internal

control system;

(6) Reporting any internal control

deficiencies found, and the corrective

action taken, to the Finance Board in a

timely manner;

(7) Establishing, documenting and

communicating an organizational

structure that clearly shows lines of

authority within the Bank, provides for

effective communication throughout the

Bank, and ensures that there are no gaps

in the lines of authority;

(8) Reviewing all delegations of

authority to specific personnel or

committees and requiring that such

delegations state the extent of the

authority and responsibilities delegated;

and

(9) Establishing reporting

requirements, including specifying the

nature and frequency of reports it

receives.

(c) Internal control responsibilities of

Banks’ senior management. Each Bank’s

senior management shall be responsible

for carrying out the directives of the

Bank’s board of directors, including the

establishment, implementation and

maintenance of the internal control

system required under paragraph (a)(1)

of this section by:

(1) Establishing, implementing and

effectively communicating to Bank

personnel policies and procedures that

are adequate to ensure that internal

control activities necessary to maintain

an effective internal control system,

including the activities enumerated in

paragraph (a)(2) of this section, are an

integral part of the daily functions of all

Bank personnel;

(2) Ensuring that all Bank personnel

fully understand and comply with all

policies, procedures and legal

requirements applicable to their

positions and responsibilities;

(3) Ensuring that there is appropriate

segregation of duties among Bank

personnel and that personnel are not

assigned conflicting responsibilities;

(4) Establishing effective paths of

communication upward, downward and

across the organization in order to

ensure that Bank personnel receive

necessary and appropriate information,

including:

(i) Information relating to the

operational policies and procedures of

the Bank;

(ii) Information relating to the actual

operational performance of the Bank;

(iii) Adequate and comprehensive

internal financial, operational and

compliance data; and

(iv) External market information about

events and conditions that are relevant

to decision making;

(5) Developing and implementing

procedures that translate the major

business strategies and policies

established by the Bank’s board of

directors into operating standards;

(6) Ensuring adherence to the lines of

authority and responsibility established

by the Bank’s board of directors;

(7) Overseeing the implementation

and maintenance of management

information and other systems;

(8) Establishing and implementing an

effective system to track internal control

weaknesses and the actions taken to

correct them; and

Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations 25277

(9) Monitoring and reporting to the

Bank’s board of directors the

effectiveness of the internal control

system on an ongoing basis.

§ 917.7 Audit committees.

(a) Establishment. The board of

directors of each Bank shall establish an

audit committee, consistent with the

requirements set forth in this section.

(b) Composition. (1) The audit

committee shall comprise five or more

persons drawn from the Bank’s board of

directors, each of whom shall meet the

criteria of independence set forth in

paragraph (c) of this section.

(2) The audit committee shall include

a balance of representatives of:

(i) Community financial institutions

and other members; and

(ii) Appointive and elective directors

of the Bank.

(3) The terms of audit committee

members shall be appropriately

staggered so as to provide for continuity

of service.

(4) At least one member of the audit

committee shall have extensive

accounting or related financial

management experience.

(c) Independence. Any member of the

Bank’s board of directors shall be

considered to be sufficiently

independent to serve as a member of the

audit committee if that director does not

have a disqualifying relationship with

the Bank or its management that would

interfere with the exercise of that

director’s independent judgment. Such

disqualifying relationships include, but

are not limited to:

(1) Being employed by the Bank in the

current year or any of the past five

years;

(2) Accepting any compensation from

the Bank other than compensation for

service as a board director;

(3) Serving or having served in any of

the past five years as a consultant,

advisor, promoter, underwriter, or legal

counsel of or to the Bank; or

(4) Being an immediate family

member of an individual who is, or has

been in any of the past five years,

employed by the Bank as an executive

officer.

(d) Charter. (1) The audit committee

of each Bank shall adopt, and the Bank’s

board of directors shall approve, a

formal written charter that specifies the

scope of the audit committee’s powers

and responsibilities, as well as the audit

committee’s structure, processes and

membership requirements.

(2) The audit committee and the board

of directors of each Bank shall:

(i) Review, assess the adequacy of

and, where appropriate, amend the

Bank’s audit committee charter on an

annual basis;

(ii) Amend the audit committee

charter as appropriate; and

(iii) Re-adopt and re-approve,

respectively, the Bank’s audit committee

charter not less often than every three

years.

(3) Each Bank’s audit committee

charter shall:

(i) Provide that the audit committee

has the responsibility to select, evaluate

and, where appropriate, replace the

internal auditor and that the internal

auditor may be removed only with the

approval of the audit committee;

(ii) Provide that the internal auditor

shall report directly to the audit

committee on substantive matters and

that the internal auditor is ultimately

accountable to the audit committee and

board of directors; and

(iii) Provide that both the internal

auditor and the external auditor shall

have unrestricted access to the audit

committee without the need for any

prior management knowledge or

approval.

(e) Duties. Each Bank’s audit

committee shall have the duty to:

(1) Direct senior management to

maintain the reliability and integrity of

the accounting policies and financial

reporting and disclosure practices of the

Bank;

(2) Review the basis for the Bank’s

financial statements and the external

auditor’s opinion rendered with respect

to such financial statements (including

the nature and extent of any significant

changes in accounting principles or the

application therein) and ensure that

policies are in place that are reasonably

designed to achieve disclosure and

transparency regarding the Bank’s true

financial performance and governance

practices;

(3) Oversee the internal audit function

by:

(i) Reviewing the scope of audit

services required, significant accounting

policies, significant risks and exposures,

audit activities and audit findings;

(ii) Assessing the performance and

determining the compensation of the

internal auditor; and

(iii) Reviewing and approving the

internal auditor’s work plan;

(4) Oversee the external audit

function by:

(i) Approving the external auditor’s

annual engagement letter;

(ii) Reviewing the performance of the

external auditor; and

(iii) Making recommendations to the

Bank’s board of directors regarding the

appointment, renewal, or termination of

the external auditor;

(5) Provide an independent, direct

channel of communication between the

Bank’s board of directors and the

internal and external auditors;

(6) Conduct or authorize

investigations into any matters within

the audit committee’s scope of

responsibilities;

(7) Ensure that senior management

has established and is maintaining an

adequate internal control system within

the Bank by:

(i) Reviewing the Bank’s internal

control system and the resolution of

identified material weaknesses and

reportable conditions in the internal

control system, including the

prevention or detection of management

override or compromise of the internal

control system; and

(ii) Reviewing the programs and

policies of the Bank designed to ensure

compliance with applicable laws,

regulations and policies and monitoring

the results of these compliance efforts;

(8) Review the policies and

procedures established by senior

management to assess and monitor

implementation of with the Bank’s

strategic business plan and the

operating goals and objectives contained

therein; and

(9) Report periodically its findings to

the Bank’s board of directors.

(f) Meetings. The audit committee

shall prepare written minutes of each

audit committee meeting.

§ 917.8 Budget preparation.

(a) Adoption of budgets. Each Bank’s

board of directors shall be responsible

for the adoption of an annual operating

expense budget and a capital

expenditures budget for the Bank, and

any subsequent amendments thereto,

consistent with the requirements of the

Act, this section, other regulations and

policies of the Finance Board, and with

the Bank’s responsibility to protect both

its members and the public interest by

keeping its costs to an efficient and

effective minimum.

(b) No delegation of budget authority.

A Bank’s board of directors may not

delegate the authority to approve the

Bank’s annual budgets, or any

subsequent amendments thereto, to

Bank officers or other Bank employees.

(c) Interest rate scenario. A Bank’s

annual budgets shall be prepared based

upon an interest rate scenario as

determined by the Bank.

(d) Board approval for deviations. A

Bank may not exceed its total annual

operating expense budget or its total

annual capital expenditures budget

without prior approval by the Bank’s

board of directors of an amendment to

such budget.

§ 917.9 Dividends.

A Bank’s board of directors may

declare and pay a dividend only from

25278 Federal Register / Vol. 65, No. 84 / Monday, May 1, 2000 / Rules and Regulations

previously retained earnings or current

net earnings and only if such payment

will not result in a projected

impairment of the par value of the

capital stock of the Bank. Dividends on

such capital stock shall be computed

without preference.

§ 917.10 Bank bylaws.

A Bank’s board of directors shall have

in effect at all times bylaws governing

the manner in which the Bank

administers its affairs and such bylaws

shall be consistent with applicable laws

and regulations as administered by the

Finance Board.

4. In subchapter F, add a new part 940

to read as follows:

PART 940—MISSION OF THE BANKS

Sec.

940.1 Definitions.

940.2 Mission of the Banks.

Authority: 12 U.S.C. 1422a(a)(3), 1422b(a),

1430, 1430b, 1431.

§ 940.1 Definitions.

Community lending has the meaning

set forth in § 952.3 of this chapter.

§ 940.2 Mission of the Banks.

The mission of the Banks is to provide

to their members and associates

financial products and services,

including but not limited to advances,

that assist and enhance such members’

and associates’ financing of:

(a) Housing, including single-family

and multi-family housing serving

consumers at all income levels; and

(b) Community lending.

Date: March 22, 2000.

By the Board of Directors of the Federal

Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 00–10427 Filed 4–28–00; 8:45 am]

BILLING CODE 6725–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 98–NM–293–AD; Amendment

39–11705; AD 2000–08–19]

RIN 2120–AA64

Airworthiness Directives; Boeing

Model 727 and 727C Series Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule.

SUMMARY: This amendment adopts a

new airworthiness directive (AD),

applicable to certain Boeing Model 727

and 727C series airplanes, that requires

one-time inspections of the exterior

body skin located at the forward corners

of the mid-galley door hinge cutouts to

detect cracking, and corrective actions,

if necessary. This AD also requires

modification of the body skin of the

mid-galley door hinge cutouts. This

amendment is prompted by a report

indicating that, during fatigue testing on

a Boeing Model 727 series airplane, a

crack was found in the body skin at the

lower forward corners of the mid-galley

door hinge cutouts due to cabin

pressurization cycles. The actions

specified by this AD are intended to

prevent such fatigue cracking of the

body skin, which could result in

reduced structural integrity of the

fuselage and consequent loss of cabin

pressurization.

DATES: Effective June 5, 2000.

The incorporation by reference of

certain publications listed in the

regulations is approved by the Director

of the Federal Register as of June 5,

2000.

ADDRESSES: The service information

referenced in this AD may be obtained

from Boeing Commercial Airplane

Group, P.O. Box 3707, Seattle,

Washington 98124–2207. This

information may be examined at the

Federal Aviation Administration (FAA),

Transport Airplane Directorate, Rules

Docket, 1601 Lind Avenue, SW.,

Renton, Washington; or at the Office of

the Federal Register, 800 North Capitol

Street, NW., suite 700, Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Walter Sippel, Aerospace Engineer,

Airframe Branch, ANM–120S, FAA,

Transport Airplane Directorate, Seattle

Aircraft Certification Office, 1601 Lind

Avenue, SW., Renton, Washington

98055–4056; telephone (425) 227–2774;

fax (425) 227–1181.

SUPPLEMENTARY INFORMATION: A

proposal to amend part 39 of the Federal

Aviation Regulations (14 CFR part 39) to

include an airworthiness directive (AD)

that is applicable to certain Boeing

Model 727 and 727C series airplanes

was published in the Federal Register

on November 22, 1999 (64 FR 63753).

That action proposed to require onetime inspections of the exterior body

skin located at the forward corners of

the mid-galley door hinge cutouts to

detect cracking; corrective actions, if

necessary; and modification of the body

skin of the mid-galley door hinge

cutouts.

Comments

Interested persons have been afforded

an opportunity to participate in the

making of this amendment. Due

consideration has been given to the

comments received.

Airplanes Not Affected

On behalf of two of its members, the

Air Transport Association of America

(ATA) comments that no airplanes

operated by those two members are

affected by this proposal. The ATA

makes no further comment or request.

Request to Remove Airplanes From

Applicability

One commenter, the manufacturer,

requests that the FAA revise the

applicability statement of the proposed

AD to remove two airplanes. The

commenter states that, according to its

records, the airplanes having line

numbers 153 and 339 were determined

to be irreparable on August 8, 1965, and

February 16, 1968, respectively.

The FAA does not concur with the

commenter’s request. Though the

commenter states that the airplanes

were determined to be irreparable, the

FAA considers it possible that the

subject airplanes could be repaired by

an entity other than the manufacturer.

Should one of these airplanes be

repaired and added to the U.S. Register

in the future, the FAA finds that, to

ensure safe operation, the airplane must

be inspected, repaired, and modified, as

applicable, in accordance with the

requirements of this AD. No change to

the final rule is necessary.

Conclusion

After careful review of the available

data, including the comments noted

above, the FAA has determined that air

safety and the public interest require the

adoption of the rule as proposed.

Cost Impact

There are approximately 1,516 Boeing

Model 727 and 727C series airplanes of

the affected design in the worldwide

fleet. The FAA estimates that 3

airplanes of U.S. registry will be affected

by this AD.

The FAA estimates that it will take

approximately 1 work hour per airplane

to accomplish the required inspections

of the body skin at the corners of the

mid-galley door hinge cutouts, and that

the average labor rate is $60 per work

hour. Based on these figures, the cost

impact of the inspections required by

this AD on U.S. operators is estimated

to be $180, or $60 per airplane.

The FAA also estimates that it will

take approximately 28 work hours per

airplane to accomplish the repair and

modification, and that the average labor

rate is $60 per work hour. Required

parts will cost approximately $1,023 per