This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

15627 

Vol. 72, No. 62 

Monday, April 2, 2007 

1Should an appointive directorship become 

vacant during the term of the appointment because 

the director no longer meets any of the statutory or 

regulatory requirements for serving on a Bank’s 

board or for any other reason, section 7(f) of the 

Bank Act (12 U.S.C. 1427(f)) authorizes the Finance 

Board to fill the vacancy for the remainder of the 

unexpired term. 

2See 56 FR at 55220. The 1991 amendments 

clarified the prohibition on serving on the board of, 

or ownership in, a member, member subsidiary or 

a non-diversified holding company of a member or 

affiliate of such holding company to make clear that 

the term ‘‘member’’ meant only a member of the 

Bank on whose board an appointive director served 

and not a member of another Bank. See 56 FR at 

55206–207. The 1991 amendments also added a 

definition for the term ‘‘diversified holding 

company’’ that read: 

A holding company whose member subsidiary 

and related activities, as specified in 12 U.S.C. 

1467a(c)(2), represented on either an actual or pro 

forma basis less than fifty (50) percent of both its 

consolidated net worth and its consolidated net 

earnings at the close of its preceding fiscal year. For 

purposes of the foregoing, consolidated net worth 

and consolidated net earnings shall be determined 

in accordance with generally accepted accounting 

principles. 56 FR at 55219. 

FEDERAL HOUSING FINANCE BOARD 

12 CFR Part 915 

[No. 2007–05] 

RIN 3069–AB34 

Financial Interests of Appointive 

Directors 

AGENCY: Federal Housing Finance 

Board. 

ACTION: Proposed rule. 

SUMMARY: The Federal Housing Finance 

Board (Finance Board) is proposing to 

clarify the types of financial interests a 

Federal Home Loan Bank (Bank) 

appointive director may own in a Bank 

member. The proposal would 

incorporate into Finance Board rules its 

long-standing policy that financial 

interests in a Bank member acquired 

though ownership of shares of a 

diversified mutual fund are permissible 

holdings for an appointive director. The 

proposal would extend the rationale for 

permitting mutual fund investments to 

other types of vehicles and accounts 

that share certain of the same key 

features as mutual funds and thus are 

unlikely to pose a risk of conflict of 

interest for an appointive director. The 

proposal also would set forth additional 

criteria to define when owning shares of 

a holding company, or having other 

types of financial interests in a member, 

would be permissible for an appointive 

director. 

DATES: The Finance Board will accept 

written comments on the proposed rule 

on or before May 17, 2007. 

ADDRESSES: Submit comments to the 

Finance Board using any one of the 

following methods: 

E-mail: comments@fhfb.gov. 

Fax: 202–408–2580. 

Mail/Hand Delivery: Federal Housing 

Finance Board, 1625 Eye Street NW., 

Washington DC 20006, Attention: Public 

Comments. 

Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. If 

you submit your comment to the 

Federal eRulemaking Portal, please also 

send it by e-mail to the Finance Board 

at comments@fhfb.gov to ensure timely 

receipt by the agency. Include the 

following information in the subject line 

of your submission: Federal Housing 

Finance Board. Proposed Rule: 

Financial Interests of Appointive 

Directors. RIN Number 3069-AB34. 

Docket Number 2007–05. 

We will post all public comments we 

receive without change, including any 

personal information you provide, such 

as your name and address, on the 

Finance Board Web site at http:// 

www.fhfb.gov/ 

Default.aspx?Page=93&Top=93. 

FOR FURTHER INFORMATION CONTACT: Neil 

R. Crowley, Acting General Counsel, 

crowleyn@fhfb.gov or 202–408–2990; or 

Thomas E. Joseph, Senior AttorneyAdvisor, Office of General Counsel, 

josepht@fhfb.gov or 202–408–2512. You 

can send regular mail to the Federal 

Housing Finance Board, 1625 Eye Street 

NW., Washington, DC 20006. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Section 7(a) of the Federal Home Loan 

Bank Act (Bank Act) (12 U.S.C. 1427(a)), 

provides for management of each Bank 

by a board of directors of at least 14 

persons, with 8 directors elected by the 

members and 6 directors appointed by 

the Finance Board. This provision also 

states that any individual appointed by 

the Finance Board may not, ‘‘during 

such Bank director’s term of office, 

serve as an officer of any Federal Home 

Loan Bank or a director or officer of any 

member of a Bank, or hold shares, or 

any other financial interest in, any 

member of a Bank.’’ 1 The provision 

concerning the qualifications for 

appointive directors was added to the 

Bank Act by section 706 of the Finance 

Institutions Reform, Recovery, and 

Enforcement Act of 1989 (FIRREA) (Pub. 

L. 101–73, 103 Stat. 183 (Aug. 9, 1989)). 

In adopting the FIRREA amendments, 

Congress indicated that it did not intend 

these conflict of interest provisions to 

preclude an appointive director from 

investing in a diversified mutual fund 

that in turn may own shares in a Bank 

member. See H.R. Conf. Rep. 101–209 at 

430 (1989). The Bank Act, however, 

does not further define the terms 

‘‘shares’’ or ‘‘financial interests,’’ nor 

does it otherwise indicate how the 

provision should be applied. As a result, 

the Finance Board has had to interpret 

these terms whenever prospective 

appointive directors have asked whether 

certain of their investments were 

permissible under this provision. The 

Finance Board has provided guidance to 

these individuals in the past on a caseby-case basis, as well as through its 

regulations. 

In January 1990, the Finance Board 

adopted an interim final rule 

implementing the FIRREA appointive 

director and conflict of interest 

provision. See Interim Final Rule: 

Election of Directors; Eligibility 

Requirements, 55 FR 1393 (Jan. 18, 

1990), codified at 12 CFR 932.18 (1991). 

The Finance Board later modified this 

rule somewhat based on the comments 

it received on the interim final rule. See 

Final Rule: Eligibility and Financial 

Disclosure Requirements for Directors of 

the Federal Home Loan Banks, 56 FR 

55205 (Oct. 25, 1991). The rule, as 

amended in October 1991, provided 

among other things, that no appointive 

director may during his or her term of 

office have a financial interest in any 

member (or a subsidiary or nondiversified holding company thereof, or 

affiliate of such holding company) of the 

Bank on whose board the director 

served.2 It also specifically defined a 

financial interest to include the 

ownership or control, either directly or 

indirectly, of any shares of common or 


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15628 Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules 

3 56 FR at 55219, 55220. The definition of 

‘‘financial interest’’ applied if the interest was held 

by an appointive director or director candidate or 

by his or her immediate family member and related 

interests, or the related interest of the immediate 

family member. 56 FR at 55219. 

4See Final Rule: Election of Federal Home Loan 

Bank Directors, 63 FR 65683 (Nov. 30, 1998). These 

rules are now found in part 915 of the Finance 

Board’s regulations (12 CFR part 915). 

5See Interim Final Rule: Federal Home Loan 

Bank Appointive Directors, 72 FR 3028 (Jan. 24, 

2007) (adopting new § 915.10). The Finance Board 

also solicited comments on this interim final rule. 

The Finance Board considered the comments 

received and adopted a final rule to address the 

selection process at the same meeting in which it 

approved this proposed rule for publication in the 

Federal Register. 

preferred capital stock, any other equity 

security, any debt security or obligation 

(except deposit or savings accounts) 

including subordinated debt, but 

allowed an appointive director to hold 

such interests if they arose solely 

through ownership of shares or other 

investment units of one or more 

diversified mutual funds (as defined in 

section 5(a) and (b)(1) of the Investment 

Company Act of 1940, as amended).3

The rule also prohibited an appointive 

director from having other financial 

relationships, including loans or other 

extensions of credit, with a member of 

the Bank on whose board the director 

served, or with the member’s subsidiary, 

or its non-diversified holding company 

(or an affiliate of such holding 

company), which were not transacted in 

the ordinary course of business and on 

normal commercial terms, as discussed 

in the rule itself. 56 FR at 55220. 

In 1998, the Finance Board 

substantially revised its rules governing 

elective and appointive directors.4

Among other things, the 1998 

amendments required the Banks to 

adopt conflict of interest policies that 

applied to both elective and appointive 

directors. The rule specifically required 

the conflict of interest policy to prohibit 

an appointive director from serving as 

an officer of any Bank or as an officer 

or director of any member or from 

owning any equity or debt security 

issued by a member or from having any 

other financial interest in a member. See 

63 FR at 65690. 

The 1998 revisions also deleted the 

detailed provisions addressing 

appointive director qualifications and 

prohibited financial interests in favor of 

more general references to the Bank Act 

and somewhat more general definitions 

of terms such as ‘‘financial interests.’’

The new definition of ‘‘financial 

interests’’ specifically excluded deposit 

or savings accounts maintained with a 

member and loans and other extensions 

of credit from a member so long as they 

were obtained in the normal course of 

business on terms generally available to 

the public. See 63 FR at 65691. Among 

the provisions that were dropped in 

1998, however, was the one that 

specifically had allowed an appointive 

director to hold shares or other financial 

interests in a member if they arose 

solely through ownership of one or 

more diversified mutual funds. 

Notwithstanding that change, the 

Finance Board has continued to 

interpret section 7(a) as it had done 

previously, and has allowed appointive 

directors to have indirect financial 

interests in a member if held through 

ownership of shares of a diversified 

mutual fund. 

The conflict of interest rules for 

appointive directors remain 

substantively the same as adopted in 

1998, and currently are found at 12 CFR 

§ 915.11. The Finance Board recently 

adopted an interim final rule to address 

procedures for how appointive directors 

are selected.5 Under the new 

procedures, the boards of directors of 

each Bank have to submit to the Finance 

Board a list of individuals who could 

serve in appointive directorships. Along 

with the list, the Banks must submit 

information regarding each individual’s 

eligibility and qualifications to serve as 

a Bank director. 

II. Analysis of the Proposed Rule 

A. Reasons for the Proposed Changes 

The recent changes in the selection 

process for appointive directors have 

prompted questions to the Finance 

Board about whether specific 

investments held by potential 

candidates would be barred by section 

7(a), and thus would have to be sold if 

the person were to accept an 

appointment to the board of a Bank. 

These questions have brought to light 

the extent to which developments in the 

financial services marketplace in recent 

years have created different types of 

investment accounts and investment 

vehicles that either did not exist when 

FIRREA was enacted or were not as 

widely held as they are today, and for 

which the Finance Board has not 

previously provided formal guidance. 

The Finance Board believes that the 

lack of a rule providing clear guidance 

as to what investments are encompassed 

by the terms ‘‘shares’’ and ‘‘financial 

interests’’ could cause some potential 

appointive director candidates to 

decline to consider an appointive 

directorship for fear that they would be 

required to divest certain investments in 

order to accept the position. Any such 

divestiture could prove financially 

costly and disruptive to their personal 

financial planning strategies. At the 

same time, the Finance Board 

recognizes that as the Banks have 

become involved in more complex 

financial activities, it is important that 

some of a Bank’s individual appointive 

directors have more sophisticated skills 

and a deeper understanding of financial 

markets to provide strong oversight. 

Such persons can bring business and 

leadership skills to the boards that will 

complement the skills and expertise 

brought by the elective directors and the 

community interest directors. In some 

cases, persons who possess those 

analytical skills and related business 

experience may also be sophisticated 

investors in their own right and have 

investments that go beyond traditional 

stock, bond, and mutual fund holdings. 

The possibility that persons who can 

bring needed skills and experience to 

the board of a Bank might be 

discouraged from serving as appointive 

directors due to uncertainty about how 

the conflict of interest limitations may 

apply to their investments has caused 

the Finance Board to consider whether 

it should amend its regulations. The 

Finance Board hopes that in updating 

these provisions, a new rule will better 

reflect the range of investments or 

investment vehicles (beyond traditional 

investments) through which an 

appointive director may obtain some 

interest in a member but which, because 

of the director’s lack of control over the 

investment or the minimal value of the 

interest obtained, would not present 

concerns that should disqualify such 

individual from serving as an 

appointive director. Thus, the Finance 

Board is proposing this rule in an 

attempt to balance the need to assure 

that appointive directors do not have 

actual or apparent conflicts that would 

undermine their ability to represent the 

public interest against the need to 

attract a sufficient pool of candidates 

with sophisticated skills in areas such 

as housing and finance to build boards 

of directors capable of overseeing the 

Banks as they evolve and undertake new 

activities. 

The proposal is based primarily on 

the Finance Board’s experience to date 

in administering section 7(a) and the 

questions raised about potential 

conflicts as a result of interests in 

various investment vehicles and 

strategies. The Finance Board recognizes 

that it has had only limited experience 

in dealing with the types of investment 

products that are available in today’s 

financial marketplace, particularly those 

that are available to high net worth 

individuals. In order to craft a final rule 

that will strike an appropriate balance 

between allowing investments that 


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Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules 15629 

6As already noted, § 915.10 sets forth the new 

process for the selection of appointive directors. 

7For purposes of applying the prohibitions on 

financial interests in a member and on serving as 

an officer or director of a member, the Finance 

Board interprets the term ‘‘member’’ broadly to 

include the member institutions itself, as well as 

any subsidiary, holding company and affiliate. See 

Federal Home Loan Bank Appointive Director 

Application Form, Statutory Eligibility 

Requirements § 4, Conflict of Interests (reproduced 

at 72 FR at 3033). The Finance Board currently 

intends to continue to interpret the term ‘‘member’’

in this broad manner. 

8See 12 U.S.C. 1427(a) and 12 CFR § 915.11(a)(2). 

As discussed in the next section, the Finance Board 

also is proposing conforming changes to 

§ 915.11(a)(2) of its rules. 

share key characteristics associated with 

mutual fund shares, which were 

permitted by Congress, and barring 

investments that are more like direct 

ownership interests in member stock, 

the Finance Board will benefit greatly 

from the perspectives of persons more 

familiar with the universe of investment 

products currently available. 

Accordingly, the Finance Board 

welcomes all comments on how to 

further refine the proposal to assure that 

the rule will not unintentionally allow 

individuals to hold investments that 

may create conflicts with their duties as 

appointive directors but still remain 

flexible enough not to create 

unnecessary barriers to finding 

candidates with the skills and 

experience to be strong Bank directors. 

B. Proposed Rule Changes 

General. The Finance Board is 

proposing to add a new paragraph (f) to 

§ 915.10 of its rules to address the issues 

described above.6 The proposed 

provision first would set out the general 

prohibition against an appointive 

director owning any debt or equity 

securities issued by, or otherwise having 

any financial interest in, a member of 

the Bank on whose board the director 

serves. The provision also would restate 

the statutory requirements that an 

appointive director may not serve as an 

officer of any Bank or as an officer or 

director of any member of the Bank on 

whose board the director serves.7 This 

proposed language closely follows the 

wording of section 7(a) of the Bank Act 

and the requirements of current 

§ 915.11(a)(2) of the Finance Board’s 

rules.8 The proposal goes on to describe 

certain types of investments or 

contractual relationships that would not 

be deemed to constitute shares or 

financial interests in a member for 

purposes of determining whether an 

appointive director may hold such 

interests while serving on the board of 

a Bank. 

The Finance Board emphasizes that 

because it is not proposing to amend the 

broad definition of ‘‘financial interests’’

now contained in § 915.11(f)(2), the 

proposed rule would not change the 

extent to, or the manner in which an 

individual Bank’s disclosure and 

recusal policies must address the types 

of investments or activities identified in 

proposed § 915.10(f), even if the 

investments themselves would no 

longer be deemed to disqualify an 

individual from serving as an 

appointive director. See 12 CFR 

§§ 915.11(b) and (f)(2). The Finance 

Board views continued application of 

the rules related to the Bank’s recusal 

and disclosures policies to the types of 

investments identified in proposed 

§ 915.10(f) as an additional safeguard to 

assure that these investments would not 

create a conflict of interest. The Finance 

Board, however, requests comments on 

whether this approach is appropriate or 

if some modification to §§ 915.11(b) and 

(f)(2) may be warranted. The Finance 

Board also requests comment on 

whether it should require appointive 

directors to disclose their financial 

holdings to the Banks as part of their 

application so the Banks can verify that 

the investments—including the vehicles 

and accounts described below—do not 

create a conflict that would be barred by 

section 7(a). 

Investment Vehicles. Both the 

legislative history of FIRREA and the 

Finance Board’s prior regulations 

expressly permitted an appointive 

director to own shares of a diversified 

mutual fund that in turn owned debt or 

equity securities issued by a member of 

the Bank on whose board the director 

served. The legislative history offers 

scant insight into the intent of Congress 

in adding this provision, but the use of 

the term ‘‘diversified mutual fund’’

appears to reflect a view that an 

appointive director can own indirectly 

securities he or she cannot own directly 

under certain circumstances. Thus, in 

the case of mutual funds, indirect 

ownership of member securities would 

be permissible, provided the securities 

are owned by a legally distinct entity 

(the fund), and the investment decisions 

are made by that entity (or by an 

investment adviser acting on its behalf), 

and the appointive director lacks any 

control over the purchase or sale of the 

securities owned by the entity. The 

proposed rule is intended to include 

within the universe of permissible 

investments other types of investment 

vehicles and accounts that share those 

key concepts, and thus should pose no 

greater risk of conflict than would exist 

in the case of ownership of shares 

through a mutual fund. 

Accordingly, proposed § 915.11(f)(1) 

would allow an appointive director to 

own shares or other interests in certain 

investment vehicles, which in turn may 

own equity or debt securities issued by 

a member of the director’s Bank, 

without violating section 7(a) of the 

Bank Act. In order for such an 

investment to be permissible, the 

investment vehicle must be a legally 

separate entity and the appointive 

director must not control the investment 

vehicle or play any role in the selection 

of the entity’s underlying investments. 

By providing that the investment 

vehicle must be organized as a ‘‘legally 

recognized entity,’’ the proposal would 

require that the vehicle be a corporation, 

limited partnership, trust, or similar 

entity that is recognized as having its 

own corporate existence under state law 

and is legally separate and distinct from 

the individual appointive director. As 

drafted, the provision would include 

registered investment companies 

(mutual funds) as well as limited 

partnership interests and other passive 

interests in distinct entities, even if 

those investment vehicles were not 

required to register under the 

Investment Company Act. 

The proposal would require that an 

appointive director not control the 

investment entity or be involved in 

decisions involving investments or 

trading strategies, which is intended to 

assure that the director could not direct 

the entity to purchase or sell member 

securities or otherwise manipulate 

trading based on knowledge acquired as 

a result of the individual’s duties on the 

Bank’s board. Because a general partner 

typically is deemed under state law to 

have the ability to control or otherwise 

act on behalf of either a general or 

limited partnership, a general 

partnership interest would not be 

permissible under this proposal. 

Investment Accounts. Since the 

Congress adopted the limitation on 

appointive directors’ financial interests 

in 1989, the financial investment 

marketplace has evolved considerably. 

It has come to the attention of the 

Finance Board that among the 

investment alternatives used with much 

greater frequency by the investing 

public are arrangements that, while 

structured differently than mutual 

funds, are functionally similar, 

especially with respect to the client’s 

lack of control over the investment 

decisions for the portfolio. Such 

investments may have somewhat 

differing structures and may have 

different names depending on the 

company offering the investment. One 

such investment alternative has been 

described as a ‘‘managed account’’ or a 

‘‘separately managed account.’’ Persons 

using these accounts may direct the 


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9While the prohibition on an appointive director 

serving as an officer or director of a holding 

company or an affiliate or a subsidiary of a member 

investment adviser to allocate the 

portfolio among certain classes of assets, 

such as growth stocks, value stocks, 

bonds, or foreign equities, but do not 

direct the purchase or sale of securities 

within those asset classes. A key 

distinction between a mutual fund and 

a managed account is that in the former 

case the investor owns shares of the 

fund, which in turn owns the portfolio 

securities in its own name, whereas in 

the latter case the investor will own the 

portfolio securities in his or her own 

name. A key similarity between the two 

is that in both cases the investor plays 

no role in the purchase or sale of the 

portfolio securities, as a typical 

requirement of the managed account is 

that the investor must confer full 

investment discretion on the investment 

adviser that manages the portfolio. 

Proposed § 915.10(f)(2) is intended to 

allow appointive directors to hold 

securities of a member through such an 

account, based principally on the 

requirement that the director would 

have no control over the acquisition of 

securities for the account. Thus, the 

proposal would deem any debt or equity 

securities issued by a member that an 

appointive director owns through 

accounts where the director has no 

investment discretion not to constitute 

shares or financial interests in a 

member. To qualify for the exclusion 

under the proposed provision, however, 

the account would have to be managed 

by an investment adviser registered with 

the Securities and Exchange 

Commission under the Investment 

Advisers Act, the appointive director 

would have to pay a fee to the adviser 

for the advisory services that are 

provided as an integral component of 

the account, and the director would 

have to give the adviser complete 

discretion to buy or sell all securities in 

the account. The Finance Board believes 

that where an appointive director has 

turned over all investment decisions 

regarding the portfolio to a professional 

adviser and is not otherwise involved in 

the investment decisions concerning the 

account to have no greater interest in 

the member securities, in a practical 

sense, than does a director who owns 

such securities indirectly through a 

mutual fund. To further assure that the 

director could not indirectly influence 

the purchase or sale of securities within 

the portfolio, the proposal provides that 

the director could not be affiliated with 

the investment adviser and could not 

otherwise have control over the choice 

of securities acquired for the account. 

Given these proposed safeguards 

(coupled with the continued application 

of current disclosure and recusal 

policies), the Finance Board views 

accounts covered by this proposed 

provision as not presenting risks of a 

conflict of interest greater than those 

posed by investments in mutual funds 

or similar investments. 

In applying this provision, an 

investor’s right to identify broad 

financial goals or broad investment 

strategies or asset classes (e.g., 

aggressive growth, value investing, etc.) 

would not constitute sufficient 

investment discretion to violate section 

7(a), so long as the strategies would not 

allow a director to direct the purchase 

of individual securities. The Finance 

Board understands that persons 

investing through such accounts 

sometimes are able to direct an 

investment adviser not to purchase 

securities issued by a particular 

company, such as where the investor is 

an officer or director of a publicly 

traded company and instructs the 

adviser not to purchase any securities 

issued by that company. In such 

circumstances, the Finance Board 

would not be inclined to view that 

limited right to identify specific 

companies whose securities should be 

excluded from the account as violating 

the statute or the proposed rule. If the 

type of account held by an appointive 

director gives the director the ability to 

identify securities to sell on an ad hoc 

basis or based on current market 

conditions, however, such an 

arrangement would confer significant 

investment discretion in the client, and 

thus would not fall within the proposed 

exclusion established by this provision. 

Holding Companies. Section 7(a) of 

the Bank Act speaks in terms of shares 

or other financial interests in ‘‘any 

member’’ of the Bank, but does not refer 

expressly to treatment of securities 

issued by a holding company for a 

member. In the current financial 

services sector, many depository 

institutions are owned by one or more 

holding companies and thus do not 

issue their own equity securities to the 

public. Although the statute does not 

address this matter, the Finance Board 

previously had regulations that 

effectively exempted securities issued 

by certain holding companies from the 

reach of section 7(a). Under that 

regulation, which was in effect from 

1991 to 1998, securities issued by a 

diversified holding company were 

permissible investments for an 

appointive director. A bank holding 

company or a savings and loan holding 

company was deemed to be 

‘‘diversified’’ for these purposes if less 

than 50 percent of its net worth and net 

earnings, on a consolidated basis, were 

attributable to the depository 

institutions that it controlled. See n.2. 

The Finance Board is proposing to 

adopt a similar test for determining 

whether an appointive director may 

own securities issued by a holding 

company that controls one or more 

members of the Bank on whose board 

the director serves. 

Accordingly, proposed § 915.10(f)(3) 

would deem debt or equity securities 

issued by a holding company that 

controls one or more members to not 

constitute ‘‘shares’’ or ‘‘financial 

interests’’ in a member, provided that 

the assets of all members of the Bank 

that are controlled by the holding 

company constitute less than 25 percent 

of the total assets of the holding 

company, on a consolidated basis. The 

Finance Board believes that where the 

assets of the institutions that are 

members of the Bank on whose board 

the director sits constitute less than 25 

percent of the total assets of a holding 

company, the debt or equity instruments 

issued by the holding company 

represent interests that are 

predominately something other than an 

interest in a member. 

The Finance Board believes the 

proposed standard limiting members’

assets to less than 25 percent of the 

consolidated assets would be more 

restrictive than the standard applied 

under the former the definition of 

‘‘diversified holding company’’ (i.e., 50 

percent of consolidated net worth and 

net earnings). The Finance Board also 

believes the proposed standard would 

be easier to apply and would be less 

subject to fluctuations over time (so that 

companies would be less likely to shift 

status under the exclusion from year-toyear). Nonetheless, the Finance Board 

specifically seeks comments on how 

best to measure the relative sizes of the 

holding company and its member 

subsidiaries (i.e., a percentage of assets 

or a percentage of capital or earnings) 

and whether some threshold other than 

25 percent would be appropriate. 

Moreover, while proposed 

§ 915.10(f)(3) would deem interests in 

certain holding companies not to 

constitute shares or financial interests in 

a member, the proposed provision does 

not deal with other relationships with a 

holding company. Given the current 

practice, however, the Finance Board 

would not permit an appointive director 

to serve as an officer or director of any 

holding company that controls a 

member, even if the member constitutes 

less than 25 percent of the assets of the 

holding company.9 It would appear to 


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Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules 15631 

is not set out in the current rules, it has been agency 

policy to interpret the term ‘‘member’’ for purposes 

of applying the conflict of interest rules broadly to 

refer to the member itself, any subsidiary or affiliate 

of the member or any holding company of the 

member. See n.7. As previously noted, this 

interpretation currently is embodied in the 

explanation addressing conflict of interest provided 

in the application form for appointive directors, but 

the Finance Board specifically is requesting 

comment as to whether this interpretation should 

be clearly incorporated into the text of its rules. 

10As already noted, when determining if a 

contractual relationship with a member exists, the 

Finance Board would interpret the term ‘‘member’’

broadly to include a member itself, any subsidiary 

or affiliate of a member, and any holding company 

of a member. See n.7 and n.9. 

be incompatible with the independence 

expected of an appointive director and 

the public interests the director is 

expected to serve to allow that person 

simultaneously to serve as an officer or 

director of any holding company that 

controlled any member of the Bank. As 

an appointive director, the individual 

would owe fiduciary duties to the Bank 

and the Finance Board does not believe 

that an appointive director also should 

owe fiduciary duties to a member or its 

holding company. These competing 

duties could make it difficult for the 

appointive director to competently serve 

in either capacity. The Finance Board is 

requesting comment on whether it 

should apply the same standard for 

determining if a holding company’s 

securities are permissible investments 

for an appointive director to other types 

of relationships, such as service as a 

director or officer of such company or 

contractual relationships with, or 

receipt of income from, such company. 

Loans and Deposits. Proposed 

§ 915.10(f)(4) would provide that loans 

from, or deposits in, a member would 

not constitute a financial interest in the 

member if the transaction occurs in the 

normal course of business and on terms 

that are no more favorable than those 

available under like circumstances to 

members of the public. This provision 

does not represent a change in current 

Finance Board practices. Loans and 

deposits meeting the proposed criteria 

already are excluded from the definition 

of financial interest contained in 

§ 915.11(f)(2) and holding such loans 

and deposits does not currently 

disqualify a candidate from 

consideration for an appointive 

directorship. See 12 CFR § 915.11(f)(2); 

see also Federal Home Loan Bank 

Appointive Director Application Form, 

Statutory Eligibility Requirements § 4, 

Conflict of Interest. Such items also had 

been permitted under the prior 

regulations. See, e.g., 56 FR at 55220 

(adopting §§ 931.30 and 932.18 of the 

Finance Board’s rules). 

Contractual Relationships. There have 

been instances in the past in which 

individuals have asked if certain 

contractual relationships with a 

member, such as those associated with 

serving as legal counsel or as auditor, 

would constitute a financial interest in 

the member that is prohibited by section 

7(a).10 The answers to such questions 

are largely dependent on the facts of 

each case, and typically have been 

addressed by staff on a case-by-case 

basis. Although it is not practicable to 

create a regulation that would address 

all such circumstances, the Finance 

Board believes that the regulations 

could be revised to establish a type of 

safe harbor for contractual relationships 

that do not contribute a significant 

amount to the person’s income. 

Accordingly, proposed § 915.11(f)(5) 

would establish a presumption that an 

appointive director’s contractual 

relationships with members of the Bank 

would not constitute a financial interest 

in a member if the money paid to the 

person under such contracts in any 

calendar year constitutes less than 10 

percent of the appointive director’s 

adjusted gross income for that year. 

The Finance Board would intend the 

director to calculate his or her adjusted 

gross income for the purposes of this 

proposed test in the same manner as 

would be done for federal tax purposes. 

The Finance Board would also expect 

the director to aggregate all amounts 

earned (or to be earned) under contracts 

with all members of the Bank on whose 

board the director serves in determining 

the amount due the director for 

purposes of applying the proposed test. 

Given the attribution provision in 

proposed § 915.11(f)(6), if an appointive 

director’s spouse has contractual 

relationships with Bank members, the 

amounts due under those contracts also 

would be combined with those of the 

director (and the adjusted gross income 

would represent that of both the director 

and the spouse) to determine if the 

contracts exceed the 10 percent 

threshold. If only the director’s spouse 

had a contract with Bank members, the 

adjusted gross income used in applying 

the test would be that of the spouse 

only. 

The proposed rule also would require 

an appointive director to disclose all 

contractual relationships with members 

of the Bank on whose board the director 

serves (or will serve) whether or not the 

amounts due exceed 10 percent of the 

director’s adjusted gross income, as well 

as those of a spouse. Where the amounts 

due under such contracts would be 10 

percent or more of the director’s 

adjusted gross income, the proposed 

rule would require the Finance Board to 

determine on a case-by-case basis 

whether the contractual relationships 

represent a financial interest that would 

disqualify an individual from serving as 

an appointive director. In making the 

determination, the Finance Board would 

consider, among other things, if the 

contractual relationships may result in 

the appointive director not fairly 

representing the public interest when 

considering matters that come before the 

board or otherwise causing the director 

to be partial toward or biased against 

any member or otherwise partial in his 

or her judgment. In weighing this 

matter, the Finance Board would 

consider whether the contractual 

relationships may create an appearance 

of partiality in deciding if the 

contractual relationship may disqualify 

a person from holding an appointive 

directorship. 

Attribution. Proposed § 915.10(f)(6) 

would establish that debt or equity 

securities owned by a spouse or minor 

child of an appointive director are 

attributed to the appointive director for 

purposes of complying with proposed 

§ 915.10(f). This proposed provision 

also would make clear that any 

contractual relationships between a 

member and the spouse of a director 

would be attributed to the appointive 

director. How the calculation would be 

performed to determine whether such 

contracts exceeded the proposed 

threshold in § 915.10(f)(5) has already 

been discussed above. The Finance 

Board has not included minor children 

in the proposed attribution provision 

with regard to contracts because it 

would not expect that minor children 

would, or could legally, enter into such 

agreements. The Finance Board believes 

that the financial interests of a spouse 

or minor child of a director would be so 

closely aligned with the interests of the 

director that these proposed attribution 

provisions are fair and are generally 

consistent with how attribution 

provisions dealing with conflict of 

interests and similar matters are 

generally structured. 

C. Other Conforming Amendments 

The Finance Board also is proposing 

amendments to § 915.11(a)(2) to 

conform this provision to the changes 

proposed in new § 915.10(f). As now 

written, § 915.11(a)(2), given the broad 

definition of financial interest in 

§ 915.11, could be read to require the 

Banks to adopt policies for appointive 

directors that would be more restrictive 

with regard to allowable investments 

than the changes proposed in 

§ 915.10(f). Because the Bank Act 

provides the Finance Board the sole 

discretion to select appointive directors, 


rmajette on PROD1PC67 with PROPOSALS
15632 Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules 

11Pub. L. No. 106–102, 133 Stat. 1338 (Nov. 12, 

1999). 

the Finance Board would not intend the 

Banks to apply more restrictive criteria 

in determining when an appointive 

director may hold certain investments 

than that set forth in the Finance Board 

rules and policies. Thus, proposed 

§ 915.11(a)(2) would state that a Bank’s 

conflict of interest policy must require 

appointive directors to comply with 

§ 915.10(f). 

The Finance Board also is proposing 

to delete §§ 915.16 and 915.17, which 

applied only to election cycles that 

occurred between 1999 and 2001 and 

primarily were needed to implement 

changes made by the Gramm-LeachBliley Act 11 to the Bank Act’s election 

and director provisions. Thus, the 

regulatory provisions in §§ 915.16 and 

915.17 no longer serve any purpose and 

are not applicable to current or future 

election cycles. Similarly, the Finance 

Board is proposing to delete Appendix 

A to part 915, which includes matrices 

that were created in conjunction with 

earlier elections and appointments and 

related to the directorships of the Banks. 

Over the past few years, as part of its 

annual designation of elective 

directorships, the Finance Board has 

created updated versions of these 

matrices to reflect the revised board 

structure for each Bank for that year, 

and expects to continue to create new 

matrices as part of each annual 

designation exercise. Because the 

matrices in Appendix A relate to prior 

years and have been superseded by 

more current versions, it no longer is 

necessary to include them in the 

regulations. 

III. Paperwork Reduction Act 

The appointive director application 

form is part of the information 

collection entitled ‘‘Federal Home Loan 

Bank Directors.’’ Under the Paperwork 

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

et seq.), the Office of Management and 

Budget (OMB) has assigned control 

number 3069–0002, which is due to 

expire on November 30, 2007. The 

Finance Board and the Banks use the 

information contained in the 

application form to determine whether 

prospective appointive Bank directors 

satisfy the statutory and regulatory 

eligibility requirements and are well 

qualified to serve as a Bank director. 

Only individuals meeting these 

requirements may serve as Bank 

directors. See 12 U.S.C. 1427. The 

proposed rule, if adopted as a final rule, 

would not make substantive or material 

modifications to the ‘‘Federal Home 

Loan Bank Directors’’ information 

collection. Consequently, the Finance 

Board has not submitted any 

information to OMB for review. 

IV. Regulatory Flexibility Act 

The proposed rule would apply only 

to the Banks and to individuals who 

may be willing to serve as Bank 

appointive directors. Neither the Banks 

nor individuals come within the 

meaning of ‘‘small entities’’ as defined 

in the Regulatory Flexibility Act (RFA). 

See 5 U.S.C. 601(6). Thus, in accordance 

with section 605(b) of the RFA, 5 U.S.C. 

605(b), the Finance Board hereby 

certifies that the proposed rule, if 

promulgated as a final rule, will not 

have a significant economic impact on 

a substantial number of small entities. 

Lists of Subjects in 12 CFR Part 915 

Conflict of interests, Elections, 

Federal home loan banks, Reporting and 

recordkeeping requirements. 

For the reasons stated in the 

preamble, the Finance Board is 

proposing to amend 12 CFR Part 915 as 

follows: 

PART 915—BANK DIRECTOR 

ELIGIBILITY, APPOINTMENT, AND 

ELECTIONS 

1. The authority citation for part 915 

continues to read as follows: 

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

1426, 1427, and 1432. 

2. Amend § 915.10 by adding a new 

paragraph (f) to read as follows: 

§ 915.10 Selection of appointive directors. 

* * * * * 

(f) Financial interests. Except as 

otherwise provided in this section, an 

appointive director may not own any 

debt or equity securities issued by, or 

have any other financial interest in, a 

member of the Bank on whose board the 

director serves. An appointive director 

also may not serve as an officer or 

director of any member of the Bank on 

whose board the director serves or serve 

as an officer of any Bank. 

(1) Investment vehicles. An 

appointive director’s investment in a 

legally recognized entity that owns debt 

or equity securities issued by a member 

shall not be deemed to constitute the 

shares or other financial interests in a 

member, provided that the appointive 

director does not control the entity and 

plays no role in the purchase or sale of 

the securities owned by the entity. 

(2) Investment accounts. Debt or 

equity securities owned by an 

appointive director through an account 

managed by an investment adviser 

registered under the Investment 

Advisers Act of 1940 (15 U.S.C. 80b–1 

et seq.), for which the director pays a fee 

for advisory services and with respect to 

which the director has given the 

investment adviser complete discretion 

to buy and sell all securities in the 

account, shall not be deemed to 

constitute the shares or other financial 

interests in a member, provided that the 

appointive director is not affiliated with 

the investment adviser and has no 

control over the selection of securities 

acquired for the account. 

(3) Holding companies. Debt or equity 

securities issued by a holding company 

that controls one or more members of 

the Bank on whose board an appointive 

director serves shall not be deemed to 

constitute the shares or other financial 

interest in a member, provided that the 

assets of all such members constitute 

less than 25 percent of the assets of the 

holding company, on a consolidated 

basis. 

(4) Loans and deposits. Loans 

obtained from a member and money 

placed on deposit with a member shall 

not be deemed to constitute a financial 

interest in a member, provided that the 

transactions occur in the normal course 

of business of the member and are on 

terms that are no more favorable than 

those that would be available under like 

circumstances to members of the public. 

(5) Contractual relationships. Any 

contractual relationship between an 

appointive director and one or more 

members of the Bank on whose board an 

appointive director serves, under which 

the director has a contractual right to 

the payment of money, shall be 

presumed not to constitute a financial 

interest in a member if the amount due 

to the director under such contracts in 

any calendar year is less than 10 percent 

of the director’s adjusted gross income 

for that calendar year. An appointive 

director with any such contractual 

relationships, or any contractual 

relationship involving amounts greater 

than the above threshold, shall disclose 

the relationship to the board of directors 

of the Bank and to the Finance Board. 

The Finance Board shall determine, on 

a case by case basis, whether any 

contractual relationships greater than 

the above threshold constitutes a 

financial interest in a member. 

(6) Attribution. Any debt or equity 

securities owned by the spouse or minor 

children of an appointive director shall 

be attributed to the director for purposes 

of complying with this section, as shall 

be any contractual relationships 

between a member and the spouse of an 

appointive director. 

3. Amend § 915.11 by revising 

paragraph (a) to read as follows: 


rmajette on PROD1PC67 with PROPOSALS
Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules 15633 

§ 915.11 Conflict of interests policy for 

Bank directors. 

(a) Adoption of conflict of interest 

policy. Each Bank shall adopt a written 

conflict of interest policy that shall 

apply to all Bank directors. At a 

minimum, the conflict of interest policy 

of each Bank shall: 

(1) Require the directors to administer 

the affairs of the Bank fairly and 

impartially and without discrimination 

in favor of or against any member or 

nonmember borrower; 

(2) Require appointive directors to 

comply with § 915.10(f) of this part; 

(3) Prohibit the use of a director’s 

official position for personal gain; 

(4) Require directors to disclose actual 

or apparent conflict of interests and 

establish procedures for addressing such 

conflicts; 

(5) Provide internal controls to ensure 

that reports are filed and that conflicts 

are disclosed and resolved in 

accordance with this section; and 

(6) Establish procedures to monitor 

compliance with the conflict of interests 

policy. 

* * * * * 

§ 915.16 [Removed] 

4. Remove § 915.16. 

§ 915.17 [Removed] 

5. Remove § 915.17. 

Appendix A to Part 915—[Removed] 

6. Remove Appendix A to part 915. 

Dated: March 27, 2007. 

By the Board of Directors of the Federal 

Housing Finance Board. 

Ronald A. Rosenfeld, 

Chairman. 

[FR Doc. E7–5973 Filed 3–30–07; 8:45 am] 

BILLING CODE 6725–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2007–27348; Directorate 

Identifier 2007–CE–015–AD] 

RIN 2120–AA64 

Airworthiness Directives; Diamond 

Aircraft Industries GmbH Model DA 40 

Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), Department of 

Transportation (DOT). 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: We propose to adopt a new 

airworthiness directive (AD) for the 

products listed above. This proposed 

AD results from mandatory continuing 

airworthiness information (MCAI) 

originated by an aviation authority of 

another country to identify and correct 

an unsafe condition on an aviation 

product. The MCAI describes the unsafe 

condition as: 

Abnormal manufacturing variations of the 

universal joints in combination with 

mechanical wear can lead to a joint failure 

and subsequent disconnection between 

selector and the fuel valve. This result in a 

loss of capability to select the fuel tank for 

supply. This condition might remain 

unrecognised by the pilot and can result in 

fuel starvation during flight and/or 

unavailability of emergency fuel shutoff. 

The proposed AD would require actions 

that are intended to address the unsafe 

condition described in the MCAI. 

DATES: We must receive comments on 

this proposed AD by May 2, 2007. 

ADDRESSES: You may send comments by 

any of the following methods: 

• DOT Docket Web site: Go to 

http://dms.dot.gov and follow the 

instructions for sending your comments 

electronically. 

• Fax: (202) 493–2251. 

• Mail: Docket Management Facility, 

U.S. Department of Transportation, 400 

Seventh Street, SW., Nassif Building, 

Room PL–401, Washington, DC 20590–

0001. 

• Hand Delivery: Room PL–401 on 

the plaza level of the Nassif Building, 

400 Seventh Street, SW., Washington, 

DC, between 9 a.m. and 5 p.m., Monday 

through Friday, except Federal holidays. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Examining the AD Docket 

You may examine the AD docket on 

the Internet at http://dms.dot.gov; or in 

person at the Docket Management 

Facility between 9 a.m. and 5 p.m., 

Monday through Friday, except Federal 

holidays. The AD docket contains this 

proposed AD, the regulatory evaluation, 

any comments received, and other 

information. The street address for the 

Docket Office (telephone (800) 647–

5227) is in the ADDRESSES section. 

Comments will be available in the AD 

docket shortly after receipt. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Sarjapur Nagarajan, Aerospace Engineer, 

FAA, Small Airplane Directorate, 901 

Locust, Room 301, Kansas City, 

Missouri 64106; telephone: (816) 329–

4145; fax: (816) 329–4090. 

SUPPLEMENTARY INFORMATION: 

Streamlined Issuance of AD 

The FAA is implementing a new 

process for streamlining the issuance of 

ADs related to MCAI. This streamlined 

process will allow us to adopt MCAI 

safety requirements in a more efficient 

manner and will reduce safety risks to 

the public. This process continues to 

follow all FAA AD issuance processes to 

meet legal, economic, Administrative 

Procedure Act, and Federal Register 

requirements. We also continue to meet 

our technical decision-making 

responsibilities to identify and correct 

unsafe conditions on U.S.-certificated 

products. 

This proposed AD references the 

MCAI and related service information 

that we considered in forming the 

engineering basis to correct the unsafe 

condition. The proposed AD contains 

text copied from the MCAI and for this 

reason might not follow our plain 

language principles. 

Comments Invited 

We invite you to send any written 

relevant data, views, or arguments about 

this proposed AD. Send your comments 

to an address listed under the 

ADDRESSES section. Include ‘‘Docket No. 

FAA–2007–27348; Directorate Identifier 

2007–CE–015–AD’’ at the beginning of 

your comments. We specifically invite 

comments on the overall regulatory, 

economic, environmental, and energy 

aspects of this proposed AD. We will 

consider all comments received by the 

closing date and may amend this 

proposed AD because of those 

comments. 

We will post all comments we 

receive, without change, to http:// 

dms.dot.gov, including any personal 

information you provide. We will also 

post a report summarizing each 

substantive verbal contact we receive 

about this proposed AD. 

Discussion 

The European Aviation Safety Agency 

(EASA), which is the Technical Agent 

for the Member States of the European 

Community, has issued AD No. 2006–

0067, dated March 24, 2006 (referred to 

after this as ‘‘the MCAI’’), to correct an 

unsafe condition for the specified 

products. The MCAI states: 

Abnormal manufacturing variations of the 

universal joints in combination with 

mechanical wear can lead to a joint failure 

and subsequent disconnection between 

selector and the fuel valve. This result in a 

loss of capability to select the fuel tank for 

supply. This condition might remain 

unrecognised by the pilot and can result in 

fuel starvation during flight and/or 

unavailability of emergency fuel shutoff. 

Revision History: 

This inspection was initially addressed by 

Austrian AD A–2004–003. The design of the 

fuel selector/fuel valve universal joint has 

than been changed by design change M–M 


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