36290 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations

1Pub. L. 106–102, 113 Stat. 1338 (Nov. 12, 1999).

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 905, 965, 966, 969,

985 and 989

[No. 2000–24]

RIN 3069–AA88

Office of Finance; Authority of Federal

Home Loan Banks To Issue

Consolidated Obligations

AGENCY: Federal Housing Finance

Board.

ACTION: Final rule.

SUMMARY: The Federal Housing Finance

Board (Finance Board) is amending its

regulations governing the operations of

the Office of Finance (OF), a joint office

of the Federal Home Loan Banks (Bank

or Banks), and the issuance of debt for

the Federal Home Loan Bank System.

The final rule authorizes the Banks to

issue joint debt, i.e., bonds, notes or

debentures, on which the Banks are

jointly and severally liable, to be called

consolidated obligations (COs), under

section 11(a) of the Federal Home Loan

Act (Act). This action is intended to

more closely reflect the reality of the

Banks’ current funding operations by

allowing the Banks to be responsible for

accessing the capital markets through

the OF to fund their own operations,

rather than having the Finance Board

issue COs on behalf of the Banks as is

currently the case. The final rule does

not have a substantive effect on the debt

issuance process or on the joint-andseveral liability of the Banks on

outstanding COs or COs to be issued in

the future. This action is consistent with

devolutionary actions taken by Congress

to give the Banks greater autonomy over

the management of their business and to

remove the Finance Board from

involvement in Bank management

functions.

The final rule also incorporates

changes to the leverage limit that were

originally proposed as a part of

conforming amendments to the policy

statement entitled ‘‘Financial

Management Policy of the Federal Home

Loan Bank System’’ (FMP). Specifically,

the final rule deletes the Bank Systemwide leverage limit, recasts the Bank-byBank leverage limit from a liabilitybased limit to an asset-based limit and

incorporates into regulation expanded

leverage originally permitted for year

2000 liquidity purposes, all as

consistent with the Act provisions of the

recently enacted Gramm-Leach-Bliley

Act.1

The final rule also authorizes the

Finance Board to continue to issue COs

under the authority of section 11(c) of

the Act. At some point to be determined

by the Finance Board and the OF, the

issuance of debt under the authority of

section 11(c) of the Act will cease and

all COs will be issued under the

authority of section 11(a) of the Act. The

final rule makes clear that OF ultimately

will be responsible for performing all

CO issuance functions, including

preparation of combined financial

reports, for the Banks. The final rule

also effects a number of other corporate

governance changes to maximize the

operating efficiency of the OF.

The Finance Board is also adopting in

final form certain conforming

amendments to the FMP. A Notice

describing the FMP amendments in

detail is published elsewhere in this

issue of the Federal Register.

DATES: This final rule is effective July 1,

2000.

FOR FURTHER INFORMATION CONTACT:

Joseph A. McKenzie, Deputy Chief

Economist, Office of Policy, Research

and Analysis, 202/408–2845,

mckenziej@fhfb.gov, Deborah F.

Silberman, General Counsel, Office of

General Counsel, 202/408–2570,

silberman@fhfb.gov, or Charlotte A.

Reid, Special Counsel, Office of General

Counsel, 202/408–2510, reidc@fhfb.gov.

Staff also can be reached by regular mail

at the Federal Housing Finance Board,

1777 F Street, NW, Washington, DC

20006.

SUPPLEMENTARY INFORMATION:

I. The Proposed Rule

On January 4, 2000, the Finance

Board published for comment a

proposed rule to amend parts 910 and

941 of the Finance Board’s regulations

governing operation of the OF and

issuance of COs, to enable the OF to

issue debt on behalf of the Banks

pursuant to section 11(a) of the Act,

require the OF to prepare the quarterly

and annual combined financial reports

of the Bank System, and provide

services at the request of two or more

Banks related to joint asset activities

undertaken by the requesting Banks,

including the administration of Member

Mortgage Asset programs and liquidity

management. The proposed rule also

would have amended § 900.30 of the

Finance Board’s regulations to provide

for the termination as of December 31,

2000, of the OF’s authority to act as

agent for the Finance Board in the

issuance of COs under section 11(c) of

the Act. By this provision, the Finance

Board intended to transition itself out

of, and the Banks into, the debt issuance

function under the provisions of section

11(a) of the Act as soon as practicable.

See 65 FR 324 (Jan. 4, 2000). The

proposed rule described a new structure

for the OF to accommodate additional

functions proposed to address new

challenges faced by the Bank System.

The 60-day public comment period

closed on March 6, 2000. The Finance

Board received a total of 22 comments,

15 from Banks, 5 from trade

associations, 1 from a Bank member,

and 1 from a group of Bank members.

A majority of the commenters generally

supported the concept of devolving the

debt issuance from the Finance Board to

the Banks, but opposed the proposed

restructuring of the OF.

II. Comments on the Proposed Rule and

Analysis of Changes Made in the Final

Rule

A. Joint Asset Activity Management and

Restructuring of the Office of Finance

The proposed rule would have

amended part 941 of the regulations to

authorize the OF, as the only statutorily

recognized joint office of the Banks, to

operate as a centralized facility through

which Bank assets could be efficiently

administered on a joint basis. The

proposed rule provided that, to the

extent requested by two or more Banks

pursuant to any agreement or contract,

the OF shall facilitate or provide

services to the Banks in connection with

any Bank joint asset activities

authorized by law. With regard to the

joint asset activities of the Banks, the OF

would have been required to provide

administrative and technical support for

the origination, purchase, management,

servicing or sale of any asset owned by

one or more Banks pursuant to any

contract, including acquired member

assets; provide market information to

the Banks concerning acquired member

assets and other assets or investments of

the Banks; conduct and provide

research on such assets and

investments; develop effective systems

to monitor credit exposure and manage

counter-party risk; adopt procedures to

assist the Banks in managing their

liquidity; and adopt procedures to

facilitate the inter-Bank sale of

participation interests in advances and

investments. This section would not

have required the Banks to make use of

the OF in this capacity, but it would

have required the OF to provide the

services outlined if two or more Banks

wished the OF to do so. The OF would

have been authorized to establish a

reasonable fee structure or charge for its

services by contract or otherwise. It also

would have been authorized to mediate

among competing Bank demands, in

accordance with its specified duties and

responsibilities.

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations 36291

2 Indeed, the General Accounting Office (GAO)

foresaw this need, stating that ‘‘there may be a need

for a central coordinating mechanism . . . [that]

should reside in the [Bank] System itself. See report

commissioned by Congress in section 1393 of the

Housing and Community Development Act of 1992,

issued on December 8, 1993 (GAO/GGD–94–38)

(GAO Report), at 113. The GAO Report observed

that there were certain positive goals that could be

attained by relieving the Finance Board of certain

Bank System governance functions, including

enhanced cost control and the centralization of

‘‘certain business functions.’’ Id. at 114.

3See Pub.L. 101–73, tit. VII, sec. 702, 103 Stat.

183 (Aug. 9, 1989). The GAO report noted that

FIRREA made ‘‘many changes’’ to the Bank System

that ‘‘introduced significant cultural changes for the

Banks and their members.’’ GAO Report at 19–20.

Principally, after FIRREA, the Banks were no longer

involved in the oversight and supervision of their

members. The members henceforth only would

view the Banks as a credit facility, and this change

would promote the cooperative nature of the Bank

System. GAO concluded, however, that to attract

new, voluntary members and retain members, the

Banks ‘‘must provide sufficient value—through the

products and services offered and the dividends

paid—to warrant the required stock investment for

membership.’’ Id. at 21. The GAO Report noted the

need for coordination of System-wide business

issues. Id. at 117.

4The Finance Board recently reorganized and

redesignated all of its regulations. See 65 FR 8253

(Feb. 18, 2000). Part 900 of the Finance Board’s

regulations, 12 CFR part 900 (1999), was

redesignated as part 905, see 65 FR 8253, 82 (to be

codified at 12 CFR part 905); part 910,

‘‘Consolidated Bonds and Debentures,’’ was

redesignated as part 966 ‘‘Consolidated

Obligations,’’ see 65 FR 8253, 82 (to be codified at

12 CFR part 966); and part 941, ‘‘Operations of the

Office of Finance, ‘‘ was redesignated as part 985,

see 65 FR 8253, 82 (to be codified at 12 CFR part

985).

These proposed provisions were

intended primarily to address the

Finance Board’s belief that the market

has created an incentive and a business

need for a facility controlled by the

Banks and their members to provide

economies and efficiencies of scale, as

it has done for the issuance of COs by

the Finance Board, by giving the Banks

the flexibility to centralize certain of

their common business functions. As

discussed in the SUPPLEMENTARY

INFORMATION of the proposed

rulemaking, see 65 FR 324 (Jan. 4, 2000),

the Finance Board anticipates that this

need will become even more critical as

the Banks develop asset activities such

as acquired member assets as part of

their core business.2 Not only would

such a facility provide operational

benefits, it also would enhance the

safety and soundness of the operations

by providing both expertise and a

mechanism for achieving risk

management, and geographic diversity

on a joint asset portfolio basis. In light

of the recent enactment of Title VI of the

Gramm-Leach-Bliley Act, the Federal

Home Loan Bank System Modernization

Act of 1999, the Finance Board

proposed a reorganization of the OF that

would allow OF, the only joint office of

the Banks, to function in this way at the

request of the Banks and facilitate

growth in the Bank System’s business as

the Banks seek to provide their members

with new credit products and respond

to changes in the marketplace and

congressional mandates.

The Finance Board believes that

administering joint assets through a

centralized facility could offer safetyand-soundness benefits of better riskmanagement capabilities and geographic

diversity in the asset portfolio, which is

particularly important given the

national nature of the mortgage markets.

The mortgage market is no longer the

fragmented, localized market that it was

when Congress created the Bank System

in 1932. Driven by technological

improvements, the mortgage market’s

delivery systems have become more

national in scope, and the mortgage

market now plays a central role in the

national economy. The need for ‘‘an

appropriate vehicle for coordination of

System-wide business issues,’’ such as a

central facility to assist the Banks in

managing various aspects of their

operations, including mortgage-related

assets, has grown in the ten years since

Congress confirmed the OF as a joint

office of the Banks in the Financial

Institutions Reform, Recovery and

Enforcement Act of 1989 (FIRREA).3

A majority of the commenters

opposed this portion of the proposal, as

well as the provisions of proposed

§ 941.4 4 concerning the restructuring of

the OF board of directors to significantly

alter both the size and composition of

the OF board of directors by including

representatives from each Bank, elected

members of the Bank System, and

appointed representatives of the general

public with relevant experience, and

other proposed changes designed to

provide the structure, additional

functions and operational capacity the

OF would have to possess in order to

accommodate the joint assets activities

function. Because the Finance Board

does not wish to delay adoption of the

debt issuance provisions in final form,

the Finance Board has decided to

remove the joint asset activity

management and restructuring

provisions from the text of this final

rule. The proposals regarding joint asset

activity management functions for the

OF and the necessity to adapt the

structure of the OF for the addition of

such functions, however, remain under

active consideration and analysis by the

Finance Board. It is anticipated that the

Finance Board will respond to the

comments and adopt those provisions in

a future separate notice of final

rulemaking.

B. Authorization of Banks To Issue Joint

Debt Under Section 11(a) of the Act

As discussed in the SUPPLEMENTARY

INFORMATION of the proposed

rulemaking, section 11(a) of the Act

provides that the Banks may issue

bonds, debentures or other obligations

‘‘upon such terms and conditions’’ as

the Finance Board may approve and

‘‘subject to the rules and regulations

prescribed by’’ the Finance Board. 12

U.SC. 1431(a). Proposed § 910.2(b)

(redesignated as § 966.2(b) in the final

rule) expressly authorizes the OF to

undertake the issuance of joint Bank

debt pursuant to section 11(a) of the Act

as COs on which all of the Banks would

be jointly and severally liable subject to

§ 966.9 of the Finance Board regulations

(which governs the joint-and-several

liability of the Banks on COs issued

under section 11(c) of the Act). As

adopted, § 966.2(b) also provides that

the authorization contained therein

shall be deemed to constitute

satisfaction of the requirement for

Finance Board approval of the ‘‘terms

and conditions’’ pursuant to section

11(a) of the Act (12 U.S.C. 1431(a)).

As discussed in the SUPPLEMENTARY

INFORMATION of the proposed

rulemaking, the Finance Board wishes

to achieve the goals of continuing to

give the Banks the autonomy to manage

and run their own businesses by

authorizing the Banks to issue the COs,

while eliminating the continued

potential for conflict with the Finance

Board in its roles as regulator of the OF

and the Banks and issuer of the COs.

See 65 FR 324 at 325 (Jan. 4, 2000).

A majority of the commenters

generally supported the concept of

devolution of the CO issuance function

to the Banks. However, almost all of the

commenters expressed varying degrees

of apprehension about recent market

volatility and about how

implementation of the final rule would

be perceived in the capital markets, and

many recommended delaying adoption

of the final rule because of those

concerns. Several commenters

questioned whether the Finance Board

had a legal basis to require, as a

condition of authorizing the Banks to

issue debt under section 11(a) of the

Act, that the Banks be jointly and

severally liable on the debt. One Bank

commenter questioned whether COs

issued by the OF as agent for the Banks

would be afforded the same treatment

under the Federal securities laws as COs

issued by the Finance Board under

section 11(c).

36292 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations

5 Generally, Congress has authorized Federal

agencies to issue binding rules through the use of

the notice and comment procedure set forth in

section 553 of the Administrative Procedure Act, 5

U.S.C. 551 et seq. See generally, 1 Kenneth Culp

Davis & Richard J. Pierce, Jr., Administrative Law

Treatise § 6.3 at 236 (3rd ed. 1994 and Supp. 1999).

6 Id. (citing Fawcus Machine Co. v. United States,

282 U.S. 375, 378 (1931); Maryland Casualty Co. v.

United States, 251 U.S. 342, 349 (1920)).

7See Op. Gen. Counsel (May 22, 2000).

There are no conditions or restrictions

attached to the Finance Board’s

authority to prescribe the rules and

regulations or to approve the terms and

conditions of issuance of Bank debt

under section 11(a). So long as the

Finance Board exercises its power to

promulgate its rules in a form

authorized by Congress,5 and the rules

are reasonable and consistent with the

statute, the rules will be valid and

enforceable, and will have the force and

effect of law.6

As proposed, the final rule applies the

same rules governing the apportionment

of joint-and-several liability to COs

issued by the Finance Board pursuant to

section 11(c) of the Act as to COs issued

by the Banks pursuant to section 11(a).

By requiring joint-and-several liability

as a condition of authorizing the Banks

to issue debt under section 11(a), the

Finance Board is implementing by

regulation an issuance scheme that is

identical to the issuance scheme

established by Congress elsewhere in

section 11 of the Act, and the Banks will

be subject to the same payment

provisions (i.e., the joint-and-several

liability provisions) currently

established in the Finance Board’s

regulations. Nothing in the Finance

Board’s regulatory action requiring the

Banks to be jointly and severally liable

on debt issued under section 11(a) is

inconsistent with any existing statutory

or regulatory requirement.

The Finance Board has concluded

that it has the authority both to

promulgate this rule and to require, as

a condition of authorizing the Banks to

issue debt under section 11(a) of the

Act, that the Banks be jointly and

severally liable on that debt. Further,

the Finance Board has concluded that

the technical change in the issuer of the

COs from the Finance Board to the

Banks will have no effect on the

treatment of COs under the Federal

securities laws.7

C. Authorized Liabilities

Proposed § 910.2(a) (redesignated as

§ 965.2 in the final rule) set forth an

exclusive list of liabilities authorized for

Bank business operations, which was

designed to replace the Funding

Guidelines section of the FMP. See 65

FR 324 at 328; 65 FR 339 (Jan. 4, 2000).

Five commenters expressed opposition

to various aspects of this provision.

Two Bank commenters and one trade

association commenter objected to

limiting the purchase of Federal funds

and the use of repurchase agreements to

meet the short-term liquidity needs of

the Banks, stating that the standard was

ambiguous or that the limits would

make liquidity management more

difficult. The Finance Board has

reconsidered the need for the limit in

light of the comments and in light of its

change to the leverage limit from a

liability-based limit to an asset-based

limit, and has determined not to limit

the purchase of Federal funds or the use

of repurchase agreements in the final

rule.

Proposed § 910.2(a)(2) (redesignated

as § 965.2(b) in the final rule) was

designed to continue each Bank’s

authority to accept deposits from

members, other Banks and

instrumentalities of the United States,

but provided that deposit transactions

may not be conducted in such a way as

to result in the offer or sale of a security

in a public offering as those terms are

defined under the Federal securities

laws. See 65 FR at 328. Three

commenters criticized this provision,

noting that it was unclear as proposed

whether deposits from categories of

financial institutions from which the

Banks now accept deposits still would

be permitted, and that there was no

justification for limiting or eliminating a

significant, low-cost source of funds for

the Banks. The Finance Board did not

intend to preclude the Banks from

accepting deposits or cash accounts

from any category of financial

institution from which the Banks are

currently authorized by statute or

regulation to do so. The final rule has

been revised in light of the comments to

remedy this. Two commenters objected

to the ‘‘no public offering’’ provision

relating to deposits and recommended

that it be eliminated as difficult to apply

in light of the rate posting practices of

the Banks and unnecessary given the

nature of the Banks’ depositors. The

Finance Board agrees with the

comments and has eliminated that

restriction from the final rule.

D. Powers and Responsibilities of the OF

Proposed § 941.2 stated that the OF is

a joint office of the Banks under section

2B of the Act; set out a two-pronged

purpose for the OF; provided that, as a

part of its purpose, OF shall issue COs

on behalf of the Banks or the Finance

Board and shall support the Banks upon

the request of two or more Banks

undertaking joint asset activities that the

Banks are otherwise authorized by law

to undertake individually; and set out

the functions the OF was authorized to

undertake in support of the issuance of

debt and the support to be provided to

the Banks engaged in joint asset

activities. See 65 FR 324 at 329. As

previously discussed, because only the

CO issuance provisions of the proposal

are being adopted in final form at this

time, only those comments are being

addressed here. Three Banks, two trade

associations, and one individual

commented on some aspect of this

provision of the proposed rule.

Proposed § 941.2(c) (redesignated as

§ 985.6(b) of the final rule) assigned to

the OF the function of preparing the

combined Bank System annual and

quarterly financial reports as a part of

the CO issuance or debt management

function. The proposal codified current

Finance Board policy (See Res. No. 98–

27 (June 24, 1998)) (Policy Statement)

and set forth the standards under which

the OF would be required to prepare

Bank System financial reports,

including requiring that the scope, form

and content of the disclosure contained

in such financial reports generally be

consistent with the requirements of the

Securities and Exchange Commission’s

(SEC) Regulations S–K (specific

narrative disclosure requirements) and

S–X (accounting and financial statement

disclosure requirements) (17 CFR parts

229 and 210) and be presented in

accordance with the Statement Of

Financial Accounting Standards No.

131, ‘‘Disclosures about Segments of an

Enterprise and Related Information’’

(FAS 131).

The proposed rule included an

Appendix listing exceptions to the

standards set forth in proposed

§ 941.2(c)(1)(iv)(A) and (B), derived

from the Finance Board’s Policy

Statement, which included certain

disclosures concerning related-party

transactions, biographical information,

compensation, submission of matters to

a vote of shareholders, exhibits, pershare information and beneficial

ownership. The proposed rule also

required the OF to file and distribute

combined Bank System financial reports

according to a schedule that mirrors the

filing requirements applicable to

corporate registrants under the

Securities Exchange Act of 1934 (1934

Act) (i.e., annual reports within 90 days

after the end of the fiscal year and

quarterly reports within 45 days after

the end of each of the first 3 fiscal

quarters). The proposal expressly

confirmed the Finance Board’s sole

authority to determine compliance with

the standards of proposed part 941

(redesignated as part 985) and provided

an explicit compliance mechanism by

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations 36293

requiring the OF to promptly comply

with any Finance Board directive

pertaining to the preparation, filing,

amendment or distribution of financial

reports.

Two commenters objected to the

timeframes within which the financial

statements are required to be prepared

and recommended that those deadlines

be relaxed. One commenter also

suggested that the provision governing

the preparation of the system financial

statements make clear that the Finance

Board would make its determination as

to whether the reports conform to the

appropriate disclosure and accounting

requirements prior to the release of the

financial statement by the OF. Two

commenters suggested the addition of a

provision stating that the failure to

comply with the rule would not create

any private right of action that would

not have existed in the absence of the

regulation’s reporting requirement.

Section 985.6(b) is adopted as

proposed, with only minor changes, in

the final rule. With respect to the

comments concerning relaxing the

timeframes for preparation of financial

reports, the Finance Board continues to

believe that, just as disclosure

concerning the Bank System should

conform to industry standards, so too

should the Bank System provide that

information to interested parties within

the timeframes applicable in the

industry. In this regard, the Finance

Board prepared and completed both the

1999 combined annual financial report

and the first quarter 2000 combined

financial report within the applicable

timeframes. There does not appear to be

any reason why the OF could not and

should not continue to meet this

standard. Therefore, no changes have

been made in the final rule to the

proposed timeframes.

With respect to the comment

concerning Finance Board review of

disclosure prior to release of financial

reports, the Finance Board does not

wish to impose any delay in the

issuance or distribution process, nor to

have the process of review of these

reports differ from the process of review

practiced by the SEC. When the SEC

reviews 1934 Act reports, it does not

generally do so prior to issuance.

Therefore, the Finance Board has

adopted the review provision as

proposed.

A provision stating that the failure to

comply with the rule would not create

any private right of action that would

not have existed in the absence of the

regulation’s reporting requirement has

been added to the rule in § 985.6(b)(7),

in response to a concern expressed by

the commenters. The Finance Board has

no intention by engaging in this

rulemaking of creating any private right

of action that would not have existed in

the absence of this rule. It should be

noted that the Finance Board does not

believe that the Banks, the OF or the OF

board of directors will incur any

different or greater liability under any

aspect of the final rule than existed

previously. See Op. Gen. Counsel (May

22, 2000).

Proposed § 941.2(c)(ii)(C)

(redesignated as § 985.8(c)(3) of the final

rule) would have required OF to define,

implement and maintain investor

suitability standards, and assure that

these standards are met. Several

commenters noted that investor

suitability is more properly dealt with

by underwriters than by issuers. The

Finance Board agrees with these

comments and has revised the final rule

to address suitability by requiring OF to

require that underwriters of COs have

and maintain adequate suitability sales

practices and policies governing the

distribution of Bank debt that are

acceptable to, and subject to review by,

the OF.

Proposed § 941.2(c)(2)(iv)

(redesignated as § 985.6 of the final rule)

would have required the OF to have

systems in place for timely monitoring

the unsecured credit exposure of the

Banks, and appropriate systems to

manage the Banks’ counterparty risk.

While the monitoring of counterparty

risk is an existing function of the OF,

management of counterparty risk, as at

least two commenters pointed out, is a

function more appropriately left to the

Banks. The final rule has been revised

to delete the requirement that the OF

manage the Banks’ counterparty risk,

but retains the requirement that the OF

timely monitor each Bank’s and the

Bank System’s unsecured credit

exposure to individual counterparties.

Proposed § 941.2(c)(1)(i) and (iii)

(redesignated as § 985.8(c)(4) of the final

rule) required the OF to consider or

promote the cooperative nature of the

Bank System, and be mindful of and

preserve the relationship between the

Banks and their members, which are

also issuers of debt in the capital

markets. Several commenters objected

to the inclusion of these concepts as

ambiguous, onerous, confusing and

lacking clarity as standards. One

commenter suggested that this rule was

not the optimal forum for addressing the

matter of retail debt issuance by the

Banks vis a vis Bank members. Another

commenter, while acknowledging that

Bank System debt is not currently

distributed directly to retail level

investors, speculated that such

distributions could raise a policy issue

of ‘‘competition with the retail deposit

offering of member institutions.’’

The Finance Board agrees that this

regulation is the appropriate place to

address the issue. The Finance Board

agrees with the commenter that,

ultimately, it should be up to the boards

of directors of the Banks to determine

such matters involving their members.

Therefore, the final rule has been

revised to prohibit the issuance of COs

intended to be privately placed with or

sold without the participation of an

underwriter to retail investors, or issued

with a concession structure designed to

facilitate the placement of the COs in

retail accounts, unless the OF has given

notice to the board of directors of each

of the Banks describing a policy

permitting such issuances, soliciting

comments from each Bank’s board of

directors, and considering the

comments received before adopting a

policy permitting such issuance

activities. The language of the rule has

been designed so as to have no effect on

current debt issuance practices, which

as noted above are not currently

directed at retail level investors. Only

departures from current practices would

subject the issuance process to the

notice procedure described in the rule.

All other references to considering or

promoting the cooperative nature of the

Bank System have been deleted from the

final rule.

E. Leverage Limit

The proposed rule, and corresponding

proposed changes to the FMP, did not

include the 20-to-1 leverage limit from

§ 910.1(b) of the Finance Board’s

regulations, or the 20-to-1 leverage limit

on each Bank contained in the FMP.

Instead, the proposed amendments to

the FMP recast the leverage limit

applicable to each Bank from a liabilitybased limit to an asset-based limit, and

required that each Bank maintain

capital in an amount equal to at least

4.76 percent of the Bank’s total assets.

See 65 FR at 328, 339. This limit

required that the assets of a Bank not

exceed 21 times its capital.

The Finance Board did not believe

that either the elimination of the Bank

System-wide leverage limit from the

Finance Board’s regulations, or the

proposed revision to the leverage limit

contained in the FMP, would have any

practical effect on the Bank System or

its bondholders. The Finance Board, as

the regulator of the Banks, would

continue to monitor each Bank for

compliance with the individual leverage

limit included in the FMP. The existing

FMP provision prohibits a Bank from

participating in COs if such transactions

would cause the Bank’s liabilities to

36294 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations

8By resolution the Board of Directors of the

Finance Board directed that, through June 30, 2000,

a Bank may have leverage up to 25 to 1 as long as

that Bank’s ratio of non-mortgage investments to

COs does not exceed 12 percent. The Finance Board

adopted this additional leverage flexibility on an

interim basis to allow the Banks to provide Year

2000 funding to their members. See Res. No. 99–

33 (May 28, 1999).

9On May 3, 2000, the Finance Board published

for notice and comment a proposed rule that

included a listing of activities that would qualify as

core mission activities. See 65 FR 25676 at 25688

(May 3, 2000).

10Without conceding that the terms of the current

rule apply, but in an abundance of caution, so as

to be in compliance with the terms of the current

rule, a written opinion from an NRSRO that the

changes to the leverage limit would not have a

materially adverse effect on the creditworthiness of

COs outstanding or next to be issued was obtained

prior to adoption of the final rule.

11The Finance Board annually adopts a debtissuance authorization to the OF that includes

parameters to which the debt must conform. See

Res. No. 2000–11 (Feb. 23, 2000).

exceed 20 times the Bank’s capital.8 The

proposed revision to the FMP

established an equivalent leverage

standard, stated as a percentage of

assets, which would require each Bank

to maintain capital of at least 4.76

percent of its total assets. The

imposition of the proposed standard on

each Bank would ensure that the Bank

System itself stays within the leverage

limit, rendering any retention of a Bank

System-wide leverage limit

unnecessary. Further, the Finance Board

noted that with the recent passage of the

Gramm-Leach-Bliley Act, the Banks

would be subject to asset-based

statutory leverage limits and risk-based

capital requirements. When

implemented, the new risk-based capital

regime would provide an additional

safeguard to the Bank System and its

bondholders by requiring Banks to hold

capital in proportion to the risks they

assume.

The final rule incorporates the

leverage change that originally was

proposed to be part of the FMP. In

addition, the final rule extends and

makes permanent the additional

leverage authority originally permitted

to the Banks for Year 2000 liquidity. In

particular, the final rule allows a Bank

to have asset-based leverage of up to 25

to 1 if the Bank’s non-mortgage assets

after deducting deposits and capital, do

not exceed 11 percent of its total assets.

For the purpose of the final rule, nonmortgage assets equal the total assets

after deducting core mission activity

assets and assets described in sections

II.B.8 through II.B.11 of the FMP.9 The

Year 2000 leverage provision allowed a

Bank to have liability-based leverage of

up to 25 to 1 if its ratio of non-mortgage

investments did not exceed 12 percent

of the liabilities for which the Bank was

the primary obligor. This 25 to 1

leverage requirement is consistent with

the leverage requirements of the

Gramm-Leach-Bliley Act.

A number of commenters objected to

the proposed change on the basis that

secured liabilities, principally

repurchase agreements, are not now

subject to a capital requirement. Under

the proposed FMP, however, assets

funded by repurchase agreements and

other secured liabilities would be

subject to capital charges.

Repurchase agreements are a de

minimis portion of Bank funding. At

December 31, 1999, repurchase

agreements were less than one-tenth of

one percent of the total funding of the

Banks, eight of the Banks had no

repurchase agreements, and one Bank

accounted for a majority of the Bank

System’s repurchase agreements.

The Finance Board agrees with the

recommendation that the leverage

requirement be included in the Finance

Board’s regulations rather than in the

FMP. The final rule incorporates the

leverage limit provision into § 966.3(a).

The proposed rule deleted provisions

of the Finance Board’s regulations that

purported to limit the Finance Board’s

ability to change the leverage limit only

if the Finance Board received either

written evidence from at least one major

Nationally Recognized Securities Rating

Organization (NRSRO) that the

proposed change will not result in the

lowering of that rating agency’s thencurrent rating or assessment on senior

bonds outstanding or next to be issued;

or a written opinion from an investment

banking firm that the proposed change

would not have a materially adverse

effect on the creditworthiness of senior

bonds outstanding or next to be issued.

See 65 FR 324 at 328–329. As proposed,

these provisions are deleted by the final

rule.10 Instead, § 966.3(b) of the final

rule requires the Banks to seek, obtain

and maintain a rating on the COs from

an NRSRO. It requires each Bank to

operate in such a manner and take

whatever actions are necessary to ensure

that the COs receive and maintain the

highest rating from an NRSRO. Section

966.3(c) of the final rule requires each

Bank to obtain a rating, such as a longterm credit issuer rating from Standard

and Poor’s or a financial strength rating

from Moody’s that is no lower than the

second highest credit rating. Each of the

Banks now has an Aaa long-term issuer

credit rating from Standard and Poor’s.

Therefore, the ratings requirements in

the final rule merely reflect current

practice and will impose no new costs

or burdens on the Banks.

The ratings requirements in the final

rule will enhance the protections

afforded the holders of COs. Requiring

each of the Banks on an ongoing basis

to take whatever action may be

necessary to maintain the rating of COs

at the highest level is a substantially

stronger protection than the current

requirement of a one-time written

statement from a rating agency or

investment banking firm that a change

in the leverage limit would not

adversely affect the rating or

creditworthiness of COs.

F. Other Changes

1. Amendments to Part 900

As proposed, the duplicative

definitions in part 966 of the terms

‘‘Board’’ and ‘‘Bank,’’ which are now

defined in part 900, have been deleted.

The definition of ‘‘consolidated

obligation’’ is adopted as proposed, with

minor edits, in § 900.1 of the final rule

to clarify that it includes any bond,

debenture or note authorized under part

966 to be issued jointly by the Banks

under section 11(a) of the Act, or any

bond or note issued by the Finance

Board on behalf of all Banks pursuant to

section 11(c) of the Act, on which the

Banks are jointly and severally liable.

2. Amendment to Part 905

The proposal would have amended

§ 905.30 to add a new paragraph (a)(3)

to provide for the termination as of

December 31, 2000, of the OF’s

authority to act as agent for the Finance

Board in the issuance of COs under

section 11(c) of the Act. By this

provision, the Finance Board intended

to transition itself out of, and the Banks

into, the debt issuance function under

the provisions of section 11(a) of the Act

as soon as practicable.

The Finance Board has determined

that it can accomplish the same goal by

deleting § 905.30 in its entirety, and

providing in § 966.2 that the Finance

Board may in its discretion from time to

time delegate its issuance of COs under

section 11(c) of the Act by resolution of

the Board of Directors of the Finance

Board.11 The Finance Board anticipates

working with the OF to determine a

mutually acceptable date on which the

OF will begin issuing COs under the

authority of section 11(a) of the Act and

ceasing to issue COs under the authority

of section 11(c) of the Act.

3. Amendments to Part 966—

Consolidated Obligations

Part 910 of the Finance Board’s

regulations was redesignated as part

966. The part has been reorganized and

renumbered, terms have been modified

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations 36295

as proposed in the final rule for

regulatory consistency (such as by

substituting ‘‘Finance Board’’ for

‘‘Board,’’ ‘‘Bank’’ for ‘‘Federal Home

Loan Bank,’’ and ‘‘consolidated

obligation’’ for ‘‘consolidated bond’’),

and a new § 966.10 has been added.

a. Definitions—§ 966.1. As proposed,

the definitions of the terms ‘‘Board’’ and

‘‘Bank,’’ which are now defined in part

900, and of the term ‘‘unsecured senior

liabilities’’ have been deleted. The

definition of ‘‘Nationally Recognized

Statistical Rating Organizations’’ has

been adopted as proposed in § 966.1.

b. Sections 966.2 through 966.10. The

negative pledge requirement is adopted

as proposed, in § 966.2(c), retaining the

negative pledge requirement for debt

previously issued by the OF on behalf

of the Finance Board under section

11(c), and expressly requiring each Bank

to maintain the specified assets free of

pledge in an amount equal to the Bank’s

pro rata share in COs issued by the OF

on behalf of the Banks under section

11(a) in which the Bank participated.

Proposed § § 910.3 through 910.7 are

adopted as proposed, with minor

changes, in the final rule, but

redesignated as § § 966.4 through 966.8.

One commenter argued that the

provision in proposed § 910.3, reserving

to the Finance Board the authority to

prescribe the form of each CO, runs

counter to the devolution of

management issues. The Finance Board

agrees and has therefore deleted that

provision from § 966.4 of the final rule.

Proposed § 910.7, redesignated as

§ 966.8 in the final rule, provided the

conditions under which the OF board of

directors shall authorize the issuance of

COs. As adopted, § 966.8 provides that

the OF board of directors shall authorize

the offering for current and forward

settlement (not to exceed 12 months) or

the reopening of COs as necessary and

authorize the maturities, rates of

interest, terms and conditions thereof,

subject to the provisions of 31 U.S.C.

9108. It also provides that COs may be

offered for sale only to the extent that

the Banks are committed to take the

proceeds, and continues the existing

prohibition on directly placing COs

with another Bank. As discussed

previously, the requirements in the

proposal that the OF board of directors

shall implement investor suitability

standards and adopt a policy addressing

the relationship between the Banks and

their members as debt issuers, have

been deleted from the final rule.

Proposed § 910.8 (joint-and-several

liability) has been redesignated as

§ 966.9 without change.

One commenter recommended the

inclusion in the final rule of a provision

stating that agreements and instruments

entered into in connection with the

issuance of COs prior to implementation

of the final rule will continue to be

effective with respect to the issuance of

COs issued under the authority of the

final rule by operation of law, and that

references to COs in those agreements

and instruments shall be deemed to

refer to all COs by whomever issued.

The Finance Board agrees that such a

savings clause would be prudent and

would further its goal of effecting a

smooth and seamless transition of the

CO issuance process between it and the

Banks. Accordingly, the Finance Board

has added such a savings clause as

§ 966.10 in the final rule.

4. Amendments to Part 985—the Office

of Finance

The final rule has been significantly

reorganized in form, but not in

substance, from the proposed rule. The

most important conceptual difference

between the proposed and final rules is

that certain powers and duties proposed

to be powers and duties of the OF board

of directors have been recast as

authorities and responsibilities of the

OF itself in the final rule. Part 941 has

been redesignated as part 985.

a. Definitions, oversight, authority of

the Office of Finance, functions and

funding. i. Definitions. Section 985.1 of

the final rule defines ‘‘OF’’ as the Office

of Finance, a joint office of the Banks

pursuant to section 2B of the Act. See

12 U.S.C. 1422b(b)(2).

ii. Authority of the OF. Proposed

§ 941.5 (redesignated as § 985.2(a)),

which was entitled ‘‘Powers of the OF

board of directors,’’ has been adopted as

‘‘Authority of the OF,’’ but otherwise is

enacted substantively as proposed. It

provides that the OF shall have the

incidental powers under section 12(a) of

the Act as are necessary, convenient and

proper to accomplish the efficient

operation and management of the OF,

including having authority to contract

with a Bank or Banks for the use of Bank

facilities or personnel in order to

perform its functions or duties. The rule

empowers the OF to act as agent (rather

than the OF board of directors) for the

Banks in issuing COs pursuant to

section 11(a) of the Act, for the Finance

Board, by delegation, in issuing COs

pursuant to section 11(c) of the Act, and

in making principal and interest

payments on COs issued in either

capacity. Finally, § 985.2 gives the OF

authority to assess the Banks for the

funding of its operations in accordance

with the provisions of § 985.5.

iii. Functions of the OF. Proposed

§ 941.2(b)(1) expressly provided that the

OF could issue COs on which the Banks

would be jointly and severally liable, on

behalf of the Banks and the Finance

Board under sections 11(a) and 11(c) of

the Act, respectively. 12 U.S.C. 1431(a)

and (c). That proposal has been adopted

in § 985.3(a) of the final rule. Section

985.3 of the final rule goes on to provide

that the OF shall prepare and issue the

combined annual and quarterly

financial reports for the Bank System,

shall function as the Fiscal Agent for the

Banks, and shall perform such duties

and responsibilities for the Financing

Corporation and the Resolution Funding

Corporation as may be required under

the Finance Board’s regulations or the

Act.

iv. Finance Board oversight. Proposed

§ 941.3 has been redesignated as § 985.4

and adopted without other changes from

the proposal.

v. Funding of the OF. Proposed

§ 941.7 incorporated, with modest

revisions, the existing provisions of the

Finance Board’s regulations regarding

the responsibility of the Banks to fund

the operations of the OF. That section

has been redesignated as § 985.5 in the

final rule and revised to eliminate

unnecessary provisions and to more

fully devolve the responsibility for this

process. As adopted, § 985.5 retains the

requirement that the Banks are

responsible for jointly funding the OF,

and makes explicit that this shall

include the cost of indemnifying the

members of the OF board of directors,

the Managing Director, and other

officers and employees of the OF. This

requirement was added at the urging of

several commenters, with whom the

Finance Board agrees. As proposed,

§ 985.5(b) of the final rule provides that,

at the direction of and pursuant to

policies and procedures adopted by the

OF board of directors, the Banks are

required periodically to reimburse the

OF to maintain sufficient operating

funds under the budget approved by the

OF board of directors. Also as proposed,

the final rule provides that each Bank’s

respective pro rata share of the

reimbursement must be based on the

ratio of the total paid-in value of its

capital stock relative to the total paidin value of all capital stock in the Bank

System. The final rule adopts the

provision of the proposed rule

providing authority for the OF board of

directors, with the prior approval of the

Finance Board, to implement an

alternative formula for determining each

Bank’s respective share of the OF

expenses or, by contract with a Bank or

Banks, to choose to be reimbursed

through a fee structure in lieu of or in

addition to assessment, for services

provided to the Bank or Banks for the

36296 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations

issuance or servicing of COs or for other

activities.

One commenter suggested not using

the Banks’ paid-in capital as the

allocation method for assessments on

the Banks for the OF operating expense,

stating that soon there would no longer

exist any direct connection between the

paid-in capital of a member of a Bank

and the member’s advances outstanding.

The commenter suggested that the

measure should more directly

approximate the issuance costs for the

Bank System and recommended further

that the measure be the Banks’

apportionment of the proceeds of

aggregate CO issuance for the prior year

or quarter. While the Finance Board

believes that there may be some merit in

these suggestions, no changes have been

made at this time to the final rule. The

Finance Board has proposed a riskbased capital rule, but it will be some

time before the new capital system is

fully in place. At such time as the new

capital system has been implemented,

the Finance Board will consider the

need to change this provision of the

rule. In the interim, the Banks can take

advantage of the provision allowing for

alternative formulae for assessments if

the current formula becomes

unworkable.

The final rule does not require, as did

the proposed rule, that the OF’s

checking account be called the Imprest

Fund. The final rule does contain new

provisions specifying that the OF’s

operating funds shall not be

commingled with any proceeds received

from the sale of COs, and that, pursuant

to the provisions of section 2B(b)(1) of

the Act, 12 U.S.C. 1422b(b)(1), none of

the OF’s operating funds or any of the

proceeds from the sale of any COs shall

be construed to be Government funds or

appropriated monies or subject to

apportionment for the purposes of

chapter 15 of title 31 of the United

States Code or any other authority.

b. Debt management activities. i. Debt

management duties of the OF. Proposed

§ 941.2(c) (redesignated as § 985.6(a) in

the final rule) set out the functions the

OF is authorized to undertake in

support of the issuance of debt; it also

set forth functions the OF is authorized

to undertake in support of joint asset

activities which are not being addressed

at this time. As adopted in § 985.6 of the

final rule, this section sets out an

abbreviated version of the debt

management duties of the OF proposed

in § 941.2(c), including: (1) That the OF

shall issue and service COs pursuant to

and in accordance with the policies and

procedures established by the OF board

of directors; (2) that the OF shall

prepare and distribute the combined

annual and quarterly financial reports

for the Bank System (discussed

previously in more detail); (3) that the

OF shall manage relationships with the

NRSROs; (4) that the OF shall conduct

research reasonably related to the

issuance or servicing of COs; and (5)

that the OF shall timely monitor each

Bank’s and the Bank System’s

unsecured credit exposure to individual

counterparties.

Proposed § 941.2(c)(3) provides that,

in accordance with policies and

procedures established by the OF board

of directors, the OF shall perform such

duties and responsibilities for the

Financing Corporation (FICO) or the

Resolution Funding Corporation

(REFCorp) on behalf of the Banks, as

may be required. This section preserves

a current function of the OF as set forth

in § 941.5(b).

ii. Structure of the OF board of

directors. The proposed rule would

have changed the current structure of

the OF board of directors to

accommodate proposed new functions

for the OF. As discussed previously, no

new functions for the OF are being

adopted at this time, except the

preparation of the Bank System’s

combined annual and quarterly

financial reports. Therefore, no changes

to the structure of the OF board of

directors are being adopted in the final

rule. Although the structure is not being

changed, provisions relating to

compensation and governance of the OF

board of directors in the final rule have

been revised to devolve responsibilities

to the OF board of directors consistent

with similar regulatory provisions

relating to the boards of directors of the

Banks.

Section 985.7 of the final rule

maintains the current three-member

structure of the OF board of directors,

composed of two Bank presidents and

one private citizen with demonstrated

expertise in financial markets, all

appointed by the Finance Board. This

structure has served the OF and the

Bank System well while the OF’s only

functions have been to issue COs and to

make CO principal and interest

payments when due. The Finance Board

believes that this structure will continue

to serve these purposes in an efficient

and effective manner, under the

oversight and supervision of the

Finance Board.

The final rule provides that the

directors shall serve three-year terms.

The initial terms are staggered so that 1⁄3

of the terms will expire each year. The

directors are subject to removal or

suspension for cause by the Finance

Board. The Finance Board fills

vacancies, but only for the remainder of

the term during which the vacancy

occurs. Section 985.7(c) provides that

the private citizen director shall serve as

the Chair, with the Vice Chair being

selected by a majority vote of the

directors. The Chair is responsible for

ensuring that the directives, resolutions

and minutes of the OF board of directors

are drafted and maintained.

Proposed § 941.4(e) (redesignated as

§ 985.7(d) in the final rule) would have

replaced the multiple provisions of the

current rule with a single standard of

compensation permitting members of

the OF board of directors to receive

compensation and reimbursement for

expenses incurred as a result of their

service on the OF board of directors.

The final rule maintains the existing

compensation provisions, with

modifications to reflect recent

amendments to the Finance Board’s

rules in light of the enactment of

Gramm-Leach-Bliley. In light of the OF’s

role, § 985.7 of the final rule also

includes a new paragraph (e) requiring,

rather than merely allowing, the OF to

indemnify its directors, the Managing

Director, and other officers and

employees of the OF under such terms

and conditions as shall be determined

by the OF board of directors, provided

that such terms and conditions shall be

generally consistent with the terms and

conditions of indemnification of

directors, officers and employees of the

Banks generally.

iii. General Duties of the OF board of

directors. Section 985.8 of the final rule

sets forth general duties of the OF board

of directors, adopting provisions from

proposed § 941.6 and applying to the OF

board of directors appropriate

provisions of the Finance Board’s

recently adopted rule on ‘‘Powers and

Responsibilities of Federal Home Loan

Bank Boards of Directors and Senior

Management’’ at part 917. See 65 FR

25267 (May 1, 2000). It retains existing

requirements that the OF board of

directors shall adopt bylaws, but

provides that it shall do so in

accordance with the provisions of

§ 917.10 of the Finance Board’s

regulations, 12 CFR 917.10. It also

retains existing requirements that the

OF board of directors shall conduct its

business by majority vote of its members

convened at a meeting in accordance

with its bylaws, but goes on to require,

consistent with recently adopted

provisions of § 918.7, that the OF board

of directors shall hold no fewer than

nine meetings annually.

Section 985.8(c) adopts provisions of

proposed § 941.6(b)(2) requiring the OF

board of directors to establish policies

regarding COs which shall govern the

frequency and timing of issuance, issue

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations 36297

size, minimum denomination, bond

concessions, underwriter qualifications,

currency of issuance, interest-rate

change or conversion features, call

features, principal indexing features,

selection and retention of outside

counsel, and selection of clearing

organizations. It also requires that the

policies be intended to cause CO

issuance efficiently and at the lowest

all-in funding costs over time,

consistent with: (i) Prudent riskmanagement practices, prudential debt

parameters, short and long-term market

conditions, and the Banks’ role as

government-sponsored enterprises; (ii)

maintaining reliable access to the shortterm and long-term capital markets; and

(iii) positioning the issuance of debt to

take advantage of current and future

capital market opportunities.

Section 985.8(d) adopts without

significant substantive change the

provisions of proposed § 941.6(b), and

requires the OF board of directors to be

responsible for the conduct and

performance of all duties, functions,

operations and activities of the OF and

for its efficient and effective operation.

The final rule authorizes the OF board

of directors to approve a strategic

business plan for the OF and monitor

the progress of its operations under such

plan; and to review, adopt, and monitor

the annual operating budget of the OF.

The final rule requires the OF board of

directors to select, employ and define

the duties of the Managing Director,

who shall be the chief executive officer

of the OF, a member of the Directorate

of the Financing Corporation, pursuant

to section 21(b)(1)(A) of the Act, 12

U.S.C. 1441(b)(1)(A), and a member of

the Directorate of the Resolution

Funding Corporation, pursuant to

section 21B(c)(1)(A) of the Act, 12

U.S.C. 1441b(c)(1)(A). The final rule

provides that the OF will be the Fiscal

Agent of the Banks. Additionally, the

final rule requires the OF board of

directors to review and approve all

contracts of the OF. Pursuant to the final

rule, the OF board of directors will have

the exclusive authority to employ and

contract for the services of an

independent, external auditor for the

Banks’ annual and quarterly combined

financial statements; select, evaluate,

determine the compensation of, and,

where appropriate, replace the internal

auditor, who may be removed only by

vote of the OF board of directors. Under

the final rule, the OF board of directors

will assume any other responsibilities

that may from time to time be delegated

to it by the Finance Board. The final

rule expressly states that no private

rights of action are created and none

may be deemed to be created under part

985.

Also adopted is the provision of

proposed § 941.4(f) that requires the OF

board of directors to establish an audit

committee. The final rule provides that

the OF board of directors shall

constitute and perform the duties of an

audit committee, which to the extent

possible shall operate consistent with

the requirements of § 917.6 and the

requirements pertaining to audit

committee reports set forth in Item 306

of Regulation S-K promulgated by the

SEC.

Proposed § 941.8, which would have

retained a savings clause providing that

all actions taken by the OF as it existed

prior to these amendments will

continue to be valid as regards the

Finance Board and the Bank System, is

deleted, along with the rest of the

provisions of current § 941.12 (which

were proposed to be deleted) as obsolete

and no longer necessary. As discussed

above, the appropriate savings clause

applying to pre-existing contracts has

been included as § 966.10.

The new § 989.2 sets forth audit

requirements. At the present time, the

process for selecting the independent

outside accountant for the Bank System

and independent audit requirements is

governed by Decision Memorandum 95–

DM–09 (Feb. 9, 1995), as modified by

Resolution 96–94 (Dec. 12, 1996). These

require the Banks to have a single

independent outside accountant and

that this independent outside

accountant provide a separate opinion

on the financial statements on each

Bank and on the combined financial

statements for all of the Banks that

appears in the annual financial report

for the Bank System. Although the

selection of the independent outside

accountant was up to the Banks, the

Finance Board, as issuer of the COs

under section 11(c) of the Act, annually

ratified the Banks’ selection.

New § 989.2 codifies most of the

provisions of Decision Memorandum

95–DM–09, with the exception of the

requirement that there be a single

independent outside accountant for

each Bank and the Bank System. It also

removes the Finance Board from any

role in selecting or ratifying the

selection of the independent outside

accountant.

The method of selecting the

independent outside accountant must

change for two reasons. First, the Banks

will be taking over the function of

issuing COs under the authority of

section 11(a) of the Act, with the OF

acting as their agent in issuing and

servicing the debt and in preparing the

Bank System’s combined financial

reports. Section 985.8(d)(7) of the final

rule gives the OF board of directors the

exclusive authority to select the

independent outside accountant for the

combined financial report.

Second, in its recently adopted

governance rule, § 917.7, the Finance

Board gives the audit committee of each

Bank a role in the selection or retention

of the independent outside accountant

for that Bank. Section 989.2 of the final

rule sets the criteria for selecting the

independent outside accountant that

each Bank and the OF must follow.

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, 5 U.S.C. 605(b), the Finance Board

hereby certifies that this final rule will

not have significant economic impact on

a substantial number of small entities.

IV. Paperwork Reduction Act

This final rule does not contain any

collections of information pursuant to

the Paperwork Reduction Act of 1995.

See 33 U.S.C. 3501 et seq. Therefore, the

Finance Board has not submitted any

information to the Office of

Management and Budget for review.

V. Effective Date

Because the final rule provides for

revisions to the leverage limit

previously authorized under Finance

Board Resolution No. 99–33, dated May

28, 1999, which by its terms expires

June 30, 2000, the Finance Board for

good cause finds that the final rule

should become effective on July 1, 2000.

See 5 U.S.C. 553(d)(3).

List of Subjects

12 CFR Part 900

Administrative practice and

procedure.

12 CFR Part 905

Organization and functions

(Government agencies).

12 CFR Part 965

Federal home loan banks, Finance.

12 CFR Part 966

Federal home loan banks, Securities.

12 CFR 969

Federal home loan banks, Finance.

12 CFR Part 985

Federal home loan banks, Securities.

36298 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations

12 CFR Part 989

Accounting, Federal home loan banks,

Financial disclosure.

For the reasons stated in the

preamble, the Finance Board hereby

amends 12 CFR parts 900, 905, 965, 966,

969, 985, and 989 as follows:

PART 900—DEFINITIONS

1. The authority citation for part 900

continues to read as follows:

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

2. Amend § 900.1 to revise the

definition of ‘‘Consolidated obligations’’

to read as follows:

§ 900.1 Definitions applying to all

regulations.

* * * * *

Consolidated obligation or CO means

any bond, debenture, or note authorized

under part 966 of this chapter to be

issued jointly by the Banks pursuant to

section 11(a) of the Act, as amended (12

U.S.C. 1431(a)), or any bond or note

issued by the Finance Board on behalf

of all Banks pursuant to section 11(c) of

the Act (12 U.S.C. 1431(c)), on which

the Banks are jointly and severally

liable.

* * * * *

PART 905—DESCRIPTION OF

ORGANIZATION AND FUNCTIONS

3. The authority citation for part 905

continues to read as follows:

Authority: 5 U.S.C. 552; 12 U.S.C. 1422b(a)

and 1423.

Subpart C [Removed and Reserved]

4. Remove and reserve subpart C.

5. Add part 965 to read as follows:

PART 965—SOURCE OF FUNDS

Sec.

965.1 Definitions.

965.2 Authorized liabilities.

965.3 Liquidity reserves for deposits.

Authority: 12 U.S.C. 1422a, 1422b, and

1431.

§ 965.1 Definitions.

As used in this part:

Deposits in banks or trust companies

means:

(1) A deposit in another Bank;

(2) A demand account in a Federal

Reserve Bank;

(3) A deposit in, or a sale of Federal

funds to:

(i) An insured depository institution,

as defined in section 2(12)(A) of the Act

(12 U.S.C. 1422(12)(A)), that is

designated by a Bank’s board of

directors;

(ii) A trust company that is a member

of the Federal Reserve System or

insured by the Federal Deposit

Insurance Corporation, and is

designated by a Bank’s board of

directors; or

(iii) A U.S. branch or agency of a

foreign bank, as defined in the

International Banking Act of 1978, as

amended (12 U.S.C. 3101 et seq.), that

is subject to the supervision of the

Board of Governors of the Federal

Reserve System, and is designated by a

Bank’s board of directors.

Repurchase agreement means an

agreement in which a Bank sells

securities and simultaneously agrees to

repurchase those securities or similar

securities at an agreed upon price, with

or without a stated time for repurchase.

§ 965.2 Authorized liabilities.

As a source of funds for business

operations, each Bank is authorized to

incur liabilities by:

(a) Accepting proceeds from the

issuance of consolidated obligations

issued in accordance with part 966 of

this chapter;

(b) Accepting time or demand

deposits from members, other Banks or

instrumentalities of the United States,

and cash accounts from members or

associates pursuant to § § 969.2,

950.24(b)(2)(i)(B), 950.24(d) or

961.4(a)(1), or other institutions for

which the Bank is providing

correspondent services pursuant to

section 11(e) of the Act (12 U.S.C.

1431(e));

(c) Purchasing Federal funds; and

(d) Entering into repurchase

agreements.

§ 965.3 Liquidity reserves for deposits.

Each Bank shall at all times have at

least an amount equal to the current

deposits received from its members

invested in:

(a) Obligations of the United States;

(b) Deposits in banks or trust

companies; or

(c) Advances with a maturity of not to

exceed five years that are made to

members in conformity with part 950 of

this chapter.

6. Revise part 966 to read as follows:

PART 966—CONSOLIDATED

OBLIGATIONS

Sec.

966.1 Definitions.

966.2 Issuance of consolidated obligations.

966.3 Leverage limit and credit rating

requirements.

966.4 Form of consolidated obligations.

966.5 Transactions in consolidated

obligations.

966.6 Lost, stolen, destroyed, mutilated or

defaced consolidated obligations.

966.7 Administrative provision.

966.8 Conditions for issuance of

consolidated obligations.

966.9 Joint and several liability.

966.10 Savings clause.

Authority: 12 U.S.C. 1422a, 1422b, and

1431.

§ 966.1 Definitions.

For purposes of this part:

Financial Management Policy (FMP)

has the meaning set forth in § 956.1 of

this chapter.

NRSRO means a credit rating

organization regarded as a Nationally

Recognized Statistical Rating

Organization by the Securities and

Exchange Commission.

§ 966.2 Issuance of consolidated

obligations.

(a) Consolidated obligations issued by

the Finance Board. The Finance Board

may issue consolidated obligations

under section 11(c) of the Act (12 U.S.C.

1431(c)), including the determination of

the dates of issue, maturities, rates of

interest, terms and conditions thereof,

and the manner in which such

consolidated obligations shall be issued.

The Finance Board in its discretion from

time to time may delegate this by

resolution of the Board of Directors of

the Finance Board, or may terminate

such delegation.

(b) Consolidated obligations issued by

the Banks. (1) Pursuant to the Banks’

housing finance mission set forth in

section 2A(a)(3)(B)(ii) of the Act (12

U.S.C. 1422a(a)(3)(B)(ii)), pursuant to

the Finance Board’s duty to ensure that

the Banks carry out that mission and

remain adequately capitalized and able

to raise funds in the capital markets

under section 2A(a)(3)(B)(ii) and (iii) of

the Act (12 U.S.C. 1422a(a)(3)(B)(ii) and

(iii)), and subject to the provisions of

this part and such rules, regulations,

terms and conditions as the Finance

Board may prescribe, the Banks are

authorized to issue joint debt under

section 11(a) of the Act (12 U.S.C.

1431(a)), which shall be called

consolidated obligations and on which

the Banks shall be jointly and severally

liable under § 966.9 of this part.

(2) Consolidated obligations shall be

issued only through the Office of

Finance, as agent of the Banks pursuant

to this part and part 985.

(3) The authorization contained

herein shall be deemed to constitute

satisfaction of the requirement for

Finance Board approval of the ‘‘terms

and conditions’’ of the consolidated

obligations pursuant to section 11(a) of

the Act (12 U.S.C. 1431(a)).

(c) Negative pledge requirement. Each

Bank shall at all times maintain assets

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations 36299

described in paragraphs (c)(1) through

(c)(6) of this section free from any lien

or pledge, in an amount at least equal

to a pro rata share of the total amount

of currently outstanding consolidated

obligations jointly issued by the Banks

pursuant to section 11(a) of the Act (12

U.S.C. 1431(a)) and by the Finance

Board pursuant to section 11(c) of the

Act (12 U.S.C. 1431(c)) and equal to

such Bank’s participation in all such

COs outstanding, provided that any

assets that are subject to a lien or pledge

for the benefit of the holders of any

issue of consolidated obligations shall

be treated as if they were assets free

from any lien or pledge for purposes of

compliance with this paragraph (c).

Eligible assets are:

(1) Cash;

(2) Obligations of or fully guaranteed

by the United States;

(3) Secured advances;

(4) Mortgages as to which one or more

Banks have any guaranty or insurance,

or commitment therefor, by the United

States or any agency thereof;

(5) Investments described in section

16(a) of the Act (12 U.S.C. 1436(a)); and

(6) Other securities that have been

assigned a rating or assessment by an

NRSRO that is equivalent to or higher

than the rating or assessment assigned

by that NRSRO to consolidated

obligations outstanding.

§ 966.3 Leverage limit and credit rating

requirements.

(a) Bank leverage. (1) Except as

provided in paragraph (a)(2) of this

section, the total assets of any Bank

shall not exceed 21 times the total of

paid-in capital stock, retained earnings,

and reserves (excluding loss reserves

and liquidity reserves for deposits

pursuant to 12 U.S.C. 1431(g)) of that

Bank.

(2) The aggregate amount of assets of

any Bank may be up to 25 times the

total paid-in capital stock, retained

earnings, and reserves of that Bank,

provided that non-mortgage assets, after

deducting the amount of deposits and

capital, do not exceed 11 percent of

such total assets. For the purposes of

this section, the amount of nonmortgage assets equals total assets after

deduction of core mission activity assets

and assets described in sections II.B.8

through II.B.11 of the FMP.

(b) Credit ratings. (1) The Banks,

collectively, shall obtain from an

NRSRO and, at all times, maintain a

current credit rating on the Banks’

consolidated obligations.

(2) Each Bank shall operate in such a

manner and take any actions necessary,

including without limitation reducing

Bank leverage, to ensure that the Banks’

consolidated obligations receive and

continue to receive the highest credit

rating from any NRSRO by which the

consolidated obligations have then been

rated.

(c) Individual Bank credit rating. Each

Bank shall operate in such a manner

and take any actions necessary to ensure

that the Bank has and maintains an

individual issuer credit rating of at least

the second highest credit rating from

any NRSRO providing a rating, where

such rating is a meaningful measure of

the individual Bank’s financial strength

and stability, and is updated at least

annually by an NRSRO, or more

frequently as required by the Finance

Board, to reflect any material changes in

the condition of the Bank.

(d) Transition provision. Each Bank

shall obtain the credit rating from an

NRSRO required under paragraph (c) of

this section by July 1, 2001.

§ 966.4 Form of consolidated obligations.

(a) All consolidated obligations shall

be issued in pari passu.

(b) Consolidated obligations with

maturities of one year or less may be

designated consolidated notes.

§ 966.5 Transactions in consolidated

obligations.

The general regulations of the

Department of the Treasury now or

hereafter in force governing transactions

in United States securities, except 31

CFR part 357 regarding book-entry

procedure, are hereby incorporated into

this part 966, so far as applicable and as

necessarily modified to relate to

consolidated obligations, as the

regulations of the Finance Board for

similar transactions on consolidated

obligations. The book-entry procedure

for consolidated obligations is contained

in part 987 of this subchapter.

§ 966.6 Lost, stolen, destroyed, mutilated

or defaced consolidated obligations.

United States statutes and regulations

of the Department of the Treasury now

or hereafter in force governing relief on

account of the loss, theft, destruction,

mutilation or defacement of United

States securities, so far as applicable

and as necessarily modified to relate to

consolidated obligations, are hereby

adopted as the regulations of the

Finance Board for the issuance of

substitute consolidated obligations or

the payment of lost, stolen, destroyed,

mutilated or defaced consolidated

obligations.

§ 966.7 Administrative provision.

The Secretary of the Treasury or the

Acting Secretary of the Treasury is

hereby authorized and empowered, as

the agent of the Finance Board and the

Banks, to administer §§ 966.5 and 966.6,

and to delegate such authority at their

discretion to other officers, employees,

and agents of the Department of the

Treasury. Any such regulations may be

waived on behalf of the Finance Board

and the Banks by the Secretary of the

Treasury, the Acting Secretary of the

Treasury, or by an officer of the

Department of the Treasury authorized

to waive similar regulations with

respect to United States securities, but

only in any particular case in which a

similar regulation with respect to

United States securities would be

waived. The terms ‘‘securities’’ and

‘‘bonds’’ as used in this section shall,

unless the context otherwise requires,

include and apply to coupons and

interim certificates.

§ 966.8 Conditions for issuance of

consolidated obligations.

(a) The OF board of directors shall

authorize the offering for current and

forward settlement (up to 12 months) or

the reopening of COs, as necessary, and

authorize the maturities, rates of

interest, terms and conditions thereof,

subject to the provisions of 31 U.S.C.

9108.

(b) COs may be offered for sale only

to the extent that Banks are committed

to take the proceeds.

(c) COs shall not be directly placed

with any Bank.

§ 966.9 Joint and several liability.

(a) In general. (1) Each and every

Bank, individually and collectively, has

an obligation to make full and timely

payment of all principal and interest on

consolidated obligations when due.

(2) Each and every Bank, individually

and collectively, shall ensure that the

timely payment of principal and interest

on all consolidated obligations is given

priority over, and is paid in full in

advance of, any payment to or

redemption of shares from any

shareholder.

(3) The provisions of this part shall

not limit, restrict or otherwise diminish,

in any manner, the joint and several

liability of all of the Banks on all of the

consolidated obligations issued by the

Finance Board pursuant to section 11(c)

of the Act (12 U.S.C. 1431(c)) and by the

Banks pursuant to section 11(a) of the

Act (12 U.S.C. 1431(a)).

(b) Certification and reporting. (1)

Before the end of each calendar quarter,

and before declaring or paying any

dividend for that quarter, the President

of each Bank shall certify in writing to

the Finance Board that, based on known

current facts and financial information,

the Bank will remain in compliance

with the liquidity requirements set forth

36300 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations

in section 11(g) of the Act (12 U.S.C.

1431(g)), and the Finance Board’s FMP

or any regulations (as the same may be

amended, modified or replaced), and

will remain capable of making full and

timely payment of all of its current

obligations, including direct obligations,

coming due during the next quarter.

(2) A Bank shall immediately provide

written notice to the Finance Board if at

any time the Bank:

(i) Is unable to provide the

certification required by paragraph

(b)(1) of this section;

(ii) Projects at any time that it will fail

to comply with statutory or regulatory

liquidity requirements, or will be unable

to timely and fully meet all of its current

obligations, including direct obligations,

due during the quarter;

(iii) Actually fails to comply with

statutory or regulatory liquidity

requirements or to timely and fully meet

all of its current obligations, including

direct obligations, due during the

quarter; or

(iv) Negotiates to enter or enters into

an agreement with one or more other

Banks to obtain financial assistance to

meet its current obligations, including

direct obligations, due during the

quarter; the notice of which shall be

accompanied by a copy of the

agreement, which shall be subject to the

approval of the Finance Board.

(c) Consolidated obligation payment

plans. (1) A Bank promptly shall file a

consolidated obligation payment plan

for Finance Board approval:

(i) If the Bank becomes a noncomplying Bank as a result of failing to

provide the certification required in

paragraph (b)(1) of this section;

(ii) If the Bank becomes a noncomplying Bank as a result of being

required to provide the notice required

pursuant to paragraph (b)(2) of this

section, except in the event that a failure

to make a principal or interest payment

on a consolidated obligation when due

was caused solely by a temporary

interruption in the Bank’s debt servicing

operations resulting from an external

event such as a natural disaster or a

power failure; or

(iii) If the Finance Board determines

that the Bank will cease to be in

compliance with the statutory or

regulatory liquidity requirements, or

will lack the capacity to timely and fully

meet all of its current obligations,

including direct obligations, due during

the quarter.

(2) A consolidated obligation payment

plan shall specify the measures the noncomplying Bank will undertake to make

full and timely payments of all of its

current obligations, including direct

obligations, due during the applicable

quarter.

(3) A non-complying Bank may

continue to incur and pay normal

operating expenses incurred in the

regular course of business (including

salaries, benefits, or costs of office

space, equipment and related expenses),

but shall not incur or pay any

extraordinary expenses, or declare, or

pay dividends, or redeem any capital

stock, until such time as the Finance

Board has approved the Bank’s

consolidated obligation payment plan or

inter-Bank assistance agreement, or

ordered another remedy, and all of the

non-complying Bank’s direct obligations

have been paid.

(d) Finance Board payment orders;

Obligation to reimburse. (1) The Finance

Board, in its discretion and

notwithstanding any other provision in

this section, may at any time order any

Bank to make any principal or interest

payment due on any consolidated

obligation.

(2) To the extent that a Bank makes

any payment on any consolidated

obligation on behalf of another Bank,

the paying Bank shall be entitled to

reimbursement from the non-complying

Bank, which shall have a corresponding

obligation to reimburse the Bank

providing assistance, to the extent of

such payment and other associated costs

(including interest to be determined by

the Finance Board).

(e) Adjustment of equities. (1) Any

non-complying Bank shall apply its

assets to fulfill its direct obligations.

(2) If a Bank is required to meet, or

otherwise meets, the direct obligations

of another Bank due to a temporary

interruption in the latter Bank’s debt

servicing operations (e.g., in the event of

a natural disaster or power failure), the

assisting Bank shall have the same right

to reimbursement set forth in paragraph

(d)(2) of this section.

(3) If the Finance Board determines

that the assets of a non-complying Bank

are insufficient to satisfy all of its direct

obligations as set forth in paragraph

(e)(1) of this section, then the Finance

Board may allocate the outstanding

liability among the remaining Banks on

a pro rata basis in proportion to each

Bank’s participation in all consolidated

obligations outstanding as of the end of

the most recent month for which the

Finance Board has data, or otherwise as

the Finance Board may prescribe.

(f) Reservation of authority. Nothing

in this section shall affect the Finance

Board’s authority to adjust equities

between the Banks in a manner different

than the manner described in paragraph

(e) of this section, or to take

enforcement or other action against any

Bank pursuant to the Finance Board’s

authority under the Act or otherwise to

supervise the Banks and ensure that

they are operated in a safe and sound

manner.

(g) No rights created. (1) Nothing in

this part shall create or be deemed to

create any rights in any third party.

(2) Payments made by a Bank toward

the direct obligations of another Bank

are made for the sole purpose of

discharging the joint and several

liability of the Banks on consolidated

obligations.

(3) Compliance, or the failure to

comply, with any provision in this

section shall not be deemed a default

under the terms and conditions of the

consolidated obligations.

§ 966.10 Savings clause.

Any agreements or other instruments

entered into in connection with the

issuance of COs prior to the

amendments made to this part shall

continue in effect with respect to all

COs issued under the authority of

section 11 of the Act and pursuant to

this part. References to consolidated

obligations in such agreements and

instruments shall be deemed to refer to

all joint and several obligations of the

Banks.

PART 969—DEPOSITS

7. The authority citation for part 969

continues to read as follows:

Authority: 12 U.S.C. 1422b(a)(1) and 1431.

§ 969.3 [Removed]

8. Remove § 969.3.

9. Revise part 985 to read as follows:

PART 985—THE OFFICE OF FINANCE

Sec.

985.1 Definitions.

985.2 Authority of the OF.

985.3 Functions of the OF.

985.4 Finance Board oversight.

985.5 Funding of the OF.

985.6 Debt management duties of the OF.

985.7 Structure of the OF board of directors.

985.8 General duties of the OF board of

directors.

Appendix A to Part 985—Exceptions to the

General Disclosure Standards

§ 985.1 Definitions.

For purposes of this part:

Bank System means the Banks and the

Office of Finance.

Chair means the Chairperson of the

board of directors of the Office of

Finance.

Managing Director means the

managing director of the Office of

Finance.

OF means the Office of Finance, a

joint office of the Banks pursuant to

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations 36301

section 2B of the Act (12 U.S.C.

1422b(b)(2)).

§ 985.2 Authority of the OF.

(a) General. The OF shall enjoy such

incidental powers under section 12(a) of

the Act (12 U.S.C. 1432(a)), as are

necessary, convenient and proper to

accomplish the efficient execution of its

duties and functions pursuant to this

part, including the authority to contract

with a Bank or Banks for the use of Bank

facilities or personnel in order to

perform its functions or duties.

(b) Agent. The OF in the performance

of its duties, shall have the power to act

on behalf of:

(1) The Banks in issuing consolidated

obligations pursuant to section 11(a) of

the Act (12 U.S.C. 1431(a));

(2) By delegation of the Finance Board

under § 966.2 of this chapter in issuing

consolidated obligations pursuant to

section 11(c) of the Act (12 U.S.C.

1431(c)); and

(3) The Banks in paying principal and

interest due on the consolidated

obligations, or other obligations of the

Banks.

(c) Assessments. The OF shall have

authority to assess the Banks for the

funding of its operations in accordance

with § 985.5.

§ 985.3 Functions of the OF.

(a) Joint debt issuance. Subject to

parts 965 and 966 of this chapter, and

this part, the OF as agent shall offer,

issue and service (including making

timely payments on principal and

interest due) consolidated obligations

on which the Banks are jointly and

severally liable on behalf of the Finance

Board pursuant to section 11(c) of the

Act (12 U.S.C. 1431(c), or the Banks

pursuant to section 11(a) of the Act (12

U.S.C. 1431(a)).

(b) Preparation of combined financial

reports. The OF shall prepare and issue

the combined annual and quarterly

financial reports for the Bank System in

accordance with the requirements of

§ 985.6(b) and Appendix A of this part.

(c) Fiscal agent. The OF shall function

as the Fiscal Agent of the Banks.

(d) Financing Corporation and

Resolution Funding Corporation. The

OF shall perform such duties and

responsibilities for the Financing

Corporation (FICO) as may be required

under part 995 of this chapter, or for the

Resolution Funding Corporation

(REFCorp) as may be required under

part 996 of this chapter or authorized by

the Finance Board pursuant to section

21B(c)(6)(B) of the Act (12 U.S.C.

1441b(c)(6)(B)).

§ 985.4 Finance Board oversight.

(a) Oversight and enforcement

actions. The Finance Board shall have

the same regulatory oversight authority

and enforcement powers over the OF,

the OF board of directors, the directors,

officers, employees, agents, attorneys,

accountants or other OF staff, as it has

over a Bank and its respective directors,

officers, employees, attorneys,

accountants, agents or other staff.

(b) Examinations. Pursuant to section

20 of the Act (12 U.S.C. 1440), the

Finance Board shall examine the OF, all

funds and accounts that may be

established pursuant to this part 985,

and the operations and activities of the

OF, as provided for in the Act or any

regulations promulgated pursuant

thereto.

§ 985.5 Funding of the OF.

(a) Generally. The Banks are

responsible for jointly funding all of the

expenses of the Office of Finance,

including the costs of indemnifying the

members of the OF board of directors,

the Managing Director and other officers

and employees of the OF, as provided

for in this part.

(b) Funding policies. (1) At the

direction of, and pursuant to policies

and procedures adopted by, the OF

board of directors, the Banks shall

periodically reimburse the OF in order

to maintain sufficient operating funds

under the budget approved by the OF

board of directors. The OF operating

funds shall be:

(i) Available for expenses of the Office

of Finance and the OF board of

directors, according to their approved

budgets; and

(ii) Subject to withdrawal by check,

wire transfer or draft signed by the

Managing Director or other person

designated by the OF board of directors.

(2) Each Bank’s respective pro rata

share of the reimbursement described in

paragraph (b)(1) of this section shall be

based on the ratio of the total paid-in

value of its capital stock relative to the

total paid-in value of all capital stock in

the Bank System.

(c) Alternative formula for

assessment. With the prior approval of

the Finance Board, the OF board of

directors may implement an alternative

formula for determining each Bank’s

respective share of the OF expenses or,

by contract with a Bank or Banks, may

choose to be reimbursed through a fee

structure in lieu of or in addition to

assessment, for services provided to the

Bank or Banks.

(d) Prompt reimbursement. Each Bank

from time to time shall promptly

forward funds to the OF in an amount

representing its share of the

reimbursement described in paragraph

(b) of this section when directed to do

so by the Managing Director pursuant to

procedures of the OF board of directors.

(e) Indemnification expenses. All

expenses incident to indemnification of

the members of the OF board of

directors, the Managing Director, and

other officers and employees of the OF

shall be treated as an expense of the OF

to be reimbursed by the Banks under the

provisions of this part.

(f) Operating funds shall be

segregated. (1) Any funds received by

the OF from the Banks pursuant to this

section for OF operating expenses

promptly shall be deposited into one or

more accounts and shall not be

commingled with any proceeds from the

sale of consolidated obligations in any

manner.

(2) Neither the proceeds from the sale

of consolidated obligations under part

966, nor any operating expense

reimbursements received by the OF

from assessments on the Banks under

this section shall be construed to be

Government Funds or appropriated

monies or subject to apportionment for

the purposes of chapter 15 of title 31 of

the United States Code, or any other

authority, in accordance with section

2B(b)(1) of the Act (12 U.S.C.

1422b(b)(1)).

§ 985.6 Debt management duties of the

OF.

(a) Issuance and servicing of COs. The

OF shall issue and service (including

making timely payments on principal

and interest due, subject to §§ 966.8 and

966.9 of this chapter) consolidated

obligations pursuant to and in

accordance with the policies and

procedures established by the OF board

of directors under this part.

(b) Combined financial reports

requirements. The OF shall prepare and

distribute the combined annual and

quarterly financial reports for the Bank

System in accordance with the

following requirements:

(1) The scope, form and content of the

disclosure generally shall be consistent

with the requirements of the Securities

and Exchange Commission’s

Regulations S–K and S–X (17 CFR parts

229 and 210).

(2) Information about each Bank shall

be presented as a segment of the Bank

System as if Statement of Financial

Accounting Standards No. 131, titled

‘‘Disclosures about Segments of an

Enterprise and Related Information’’

(FASB 131) applied to the combined

annual and quarterly financial reports of

the Bank System.

(3) The standards set forth in

paragraphs (b)(1) and (2) of this section

36302 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations

are subject to the exceptions set forth in

the Appendix to this part.

(4) The combined Bank System

annual report shall be filed with the

Finance Board and distributed to each

Bank and Bank member within 90 days

after the end of the fiscal year. The

combined Bank System quarterly

reports shall be filed with the Finance

Board and distributed to each Bank and

Bank member within 45 days after the

end of the first three fiscal quarters of

each year.

(5) The Finance Board in its sole

discretion shall determine whether or

not a combined Bank System annual or

quarterly financial report complies with

the standards of this part.

(6) The OF board of directors shall

comply promptly with any directive of

the Finance Board regarding the

preparation, filing, amendment or

distribution of the combined Bank

System annual or quarterly financial

reports.

(7) Nothing in this section shall create

or be deemed to create any rights in any

third party.

(c) Capital markets data. The OF

board of directors shall provide capital

markets information concerning debt to

the Banks.

(d) NRSROs. The OF board of

directors shall manage relationships

with Nationally Recognized Statistical

Rating Organizations in connection with

their rating of consolidated obligations.

(e) Research. The OF shall conduct

research reasonably related to the

issuance or servicing of consolidated

obligations.

(f) Monitor Banks’ credit exposure.

The OF shall timely monitor each

Bank’s and the Bank System’s

unsecured credit exposure to individual

counterparties.

§ 985.7 Structure of the OF board of

directors.

(a) Membership. The OF board of

directors shall consist of three part-time

members appointed by the Finance

Board as follows:

(1) Two Bank Presidents; and

(2) A citizen of the United States with

a demonstrated expertise in financial

markets. Such appointee may not be an

officer, director or employee of a Bank

or Bank System member, hold shares, or

any other financial interest in, any

member of a Bank, or be affiliated with

any consolidated obligation selling or

dealer group member under contract

with the OF.

(b) Terms. (1) Except as provided in

paragraph (b)(2) of this section, the

members of the OF board of directors

shall serve for three-year terms (which

shall be staggered), and shall be subject

to removal or suspension for cause by

the Finance Board.

(2) The Finance Board shall fill any

vacancy occurring on the OF board of

directors. An appointment to fill a

vacancy shall be only for the remainder

of the term during which the vacancy

occurred.

(3) Any member of the OF board of

directors is authorized to continue to

serve on the OF board of directors after

the expiration of the member’s term

until a successor has been appointed by

the Finance Board.

(c) Chair. (1) The private citizen

member of the OF board of directors

shall serve as the Chair, and the Vice

Chair shall be selected by a majority

vote of the members of the OF board of

directors.

(2) The Chair shall preside over the

meetings of the OF board of directors. In

the absence of the Chair, the Vice Chair

shall preside.

(3) The Chair shall be responsible for

ensuring that the directives and

resolutions of the OF board of directors

are drafted and maintained and for

keeping the minutes of all meetings.

(d) Compensation. (1) The Bank

President members shall not receive any

additional compensation or

reimbursement as a result of their

service on the OF board of directors.

(2) Each Bank shall be entitled to be

reimbursed by from the Office of

Finance for its expenditure of travel and

per diem expenses associated with its

Bank President’s attendance at an OF

board of directors meeting as a director

member thereof.

(3) The Office of Finance shall pay

compensation and expenses to the

private citizen member of the OF board

of directors in accordance with the

requirements for payment of

compensation and expenses to Bank

chairs as set forth in part 918 of this

chapter.

(e) Indemnification. (1) The OF board

of directors shall indemnify its

members, the Managing Director, and

other officers and employees of the OF

under such terms and conditions as

shall be determined by the OF board of

directors, provided that such terms and

conditions are consistent with the terms

and conditions of indemnification of

directors, officers and employees of the

Bank System generally.

(2) The OF board of directors shall

adopt indemnification procedures,

which shall be supplemented by a

contract of insurance.

(f) Delegation. The OF board of

directors may delegate any of its

authority or duties to any employee of

the OF in order to enable the OF to carry

out its functions.

§ 985.8 General duties of the OF board of

directors.

(a) General. (1) Conduct of business.

Each director shall have the duties

prescribed in § 917.2(b) of this chapter,

as appropriate.

(2) Bylaws. The OF board of directors

shall adopt bylaws in accordance with

the provisions of § 917.10 of this

chapter.

(b) Meetings and quorum. The OF

board of directors shall conduct its

business by majority vote of its members

at meetings convened in accordance

with its bylaws, and shall hold no fewer

than nine meetings annually. Due notice

shall be given to the Finance Board by

the Chair prior to each meeting. A

quorum, for purposes of meetings of the

OF board of directors, shall be not less

than two members.

(c) Duties regarding COs. The OF

board of directors shall establish

policies regarding COs that shall:

(1) Govern the frequency and timing

of issuance, issue size, minimum

denomination, CO concessions,

underwriter qualifications, currency of

issuance, interest-rate change or

conversion features, call features,

principal indexing features, selection

and retention of outside counsel,

selection of clearing organizations, and

the selection and compensation of

underwriters for consolidated

obligations, which shall be in

accordance with the requirements and

limitations set forth in paragraph (c)(4)

of this section;

(2) Prohibit the issuance of COs

intended to be privately placed with or

sold without the participation of an

underwriter to retail investors, or issued

with a concession structure designed to

facilitate the placement of the COs in

retail accounts, unless the OF has given

notice to the board of directors of each

Bank describing a policy permitting

such issuances, soliciting comments

from each Bank’s board of directors, and

considering the comments received

before adopting a policy permitting such

issuance activities;

(3) Require all broker-dealers or

underwriters under contract to the OF to

have and maintain adequate suitability

sales practices and policies, which shall

be acceptable to, and subject to review

by, the Office of Finance;

(4) Require that COs shall be issued

efficiently and at the lowest all-in

funding costs over time, consistent with:

(i) Prudent risk-management

practices, prudential debt parameters,

short and long-term market conditions,

and the Banks’ role as governmentsponsored enterprises;

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations 36303

(ii) Maintaining reliable access to the

short-term and long-term capital

markets; and

(iii) Positioning the issuance of debt

to take advantage of current and future

capital market opportunities.

(d) Other duties. The OF board of

directors shall:

(1) Set policies for management and

operation of the OF;

(2) Approve a strategic business plan

for the OF in accordance with the

provisions of § 917.5 of this chapter, as

appropriate;

(3) Review, adopt and monitor annual

operating and capital budgets of the OF

in accordance with the provisions of

§ 917.8 of this chapter, as appropriate;

(4) Constitute and perform the duties

of an audit committee, which to the

extent possible shall operate consistent

with:

(i) The requirements of § 917.6 of this

chapter, and

(ii) The requirements pertaining to

audit committee reports set forth in Item

306 of Regulation S–K promulgated by

the Securities and Exchange

Commission.

(5) Select, employ, determine the

compensation for, and assign the duties

and functions of a Managing Director of

the OF who shall:

(i) Be the chief executive officer for

the OF and shall direct the

implementation of the OF board of

directors’ policies;

(ii) Serve as a member of the

Directorate of the Financing

Corporation, pursuant to section

21(b)(1)(A) of the Act (12 U.S.C.

1441(b)(1)(A)); and

(iii) Serve as a member of the

Directorate of the Resolution Funding

Corporation, pursuant to section

21B(c)(1)(A) of the Act (12 U.S.C.

1441b(c)(1)(A)).

(6) Review and approve all contracts

of the OF;

(7) Have the exclusive authority to

employ and contract for the services of

an independent, external auditor for the

Banks’ annual and quarterly combined

financial statements;

(8) Select, evaluate, determine the

compensation of, and, where

appropriate, replace the internal

auditor, who may be removed only by

vote of the OF board of directors; and

(9) Assume any other responsibilities

that may from time to time be delegated

to it by the Finance Board.

(e) No rights created. Nothing in this

part shall create or be deemed to create

any rights in any third party.

Appendix A to Part 985—Exceptions to the

General Disclosure Standards

A. Related-party transactions. Item 404 of

Regulation S–K, 17 CFR 229.404, requires the

disclosure of certain relationships and

related party transactions. In light of the

cooperative nature of the Bank System,

related-party transactions are to be expected,

and a disclosure of all related-party

transactions that meet the threshold would

not be meaningful. Instead, the combined

annual report will disclose the percent of

advances to members an officer of which

serves as a Bank director, and list the top ten

holders of advances in the Bank System and

the top five holders of advances by Bank,

with a further disclosure indicating which of

these members had an officer that served as

a Bank director.

B. Biographical information. The

biographical information required by Items

401 and 405 of Regulation S–K, 17 CFR

229.401 and 405, will be provided only for

the members of the Board of Directors of the

Finance Board, Bank presidents, chairs and

vice chairs, and the directors and Managing

Director of the OF.

C. Compensation. The information on

compensation required by Item 402 of

Regulation S–K, 17 CFR 229.402, will be

provided only for Bank presidents and the

Managing Director of the OF. Since stock in

each Bank trades at par, the Office of Finance

will not include the performance graph

specified in Item 402(1) of Regulation S–K,

17 CFR 229.402(1).

D. Submission of matters to a vote of

stockholders. No information will be

presented on matters submitted to

shareholders for a vote, as otherwise required

by Item 4 of the SEC’s form 10–K, 17 CFR

249.310. The only item shareholders vote

upon is the annual election of directors.

E. Exhibits. The exhibits required by Item

601 of Regulation S-K, 17 CFR 229.601, are

not applicable and will not be provided.

F. Per share information. The statement of

financial information required by Items 301

and 302 of Rule S–K, 17 CFR 229.301 and

302, is inapplicable because the shares of the

Banks are subscription capital that trades at

par, and the shares expand or contract with

changes in member assets or advance levels.

G. Beneficial ownership. Item 403 of Rule

S–K, 17 CFR 229.403, requires the disclosure

of security ownership of certain beneficial

owners and management. The combined

financial report will provide a listing of the

ten largest holders of capital stock in the

Bank System and a listing of the five largest

holders of capital stock by Bank. This listing

will also indicate which members had an

officer that served as a director of a Bank.

PART 989—FINANCIAL STATEMENTS

OF THE BANKS

10. The authority citation for part 989

continues to read as follows:

Authority: 12 U.S.C. 1422a, 1422b, 1431

and 1440.

11. Add § 989.1 to read as follows:

§ 989.1 Definitions.

For purposes of this part:

Audit means an examination of the

financial statements by an independent

accountant in accordance with

Generally Accepted Accounting

Principles for the purpose of expressing

an opinion thereon.

Audit report means a document in

which an independent accountant

indicates the scope of the audit made

and sets forth an opinion regarding the

financial statement taken as a whole, or

an assertion to the effect that an overall

opinion cannot be expressed. When an

overall opinion cannot be expressed, the

reasons therefor shall be stated.

§§ 989.2 and 989.3 [Redesignated]

12. Redesignate §§ 989.2 and 989.3 as

§§ 989.3 and 989.4, respectively.

13. Add § 989.2 to read as follows:

§ 989.2 Audit requirements.

(a) Each Bank, the OF and the

Financing Corporation shall obtain

annually an independent, external audit

of and an audit report on its individual

financial statement.

(b) The OF board of directors shall

obtain an audit and an audit report on

the combined annual financial

statements for the Bank System.

(c) All audits must be conducted in

accordance with generally accepted

auditing standards and in accordance

with the most current government

auditing standards issued by the Office

of the Comptroller General of the United

States.

(d) An independent, external auditor

must meet at least twice each year with

the audit committee of each Bank, the

OF board of directors, and the Financing

Corporation Directorate.

(e) Finance Board examiners shall

have unrestricted access to all auditors’

work papers and to the auditors to

address substantive accounting issues

that may arise during the course of any

audit.

14. Revise newly designated § 989.3 to

read as follows:

§ 989.3 Requirement to provide financial

and other information to the Finance Board

and the Office of Finance.

In order to facilitate the preparation

by the Office of Finance of combined

Bank System annual and quarterly

reports, each Bank shall provide to the

Office of Finance in such form and

within such timeframes as the Finance

Board or the Office of Finance shall

specify, all financial and other

information and assistance the Office of

Finance shall request for that purpose.

Nothing in this section shall contravene

or be deemed to circumscribe in any

manner the authority of the Finance

Board to obtain any information from

any Bank related to the preparation or

review of any financial report.

36304 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Rules and Regulations

§ 989.4 [Amended]

15. Amend newly designated § 989.4

by removing the words ‘‘Finance Board’’

wherever they appear and adding in

their place the words ‘‘Office of

Finance.’’

Dated: June 2, 2000.

By the Board of Directors of the Federal

Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 00–14366 Filed 6–6–00; 8:45 am]

BILLING CODE 6725–01–P