30584 Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 /Rules and Regulations

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 932

[No. 98–24]

RIN 3069–AA76

Compensation and Conflicts-ofInterest Rules for Federal Home Loan

Bank Employees

AGENCY: Federal Housing Finance

Board.

ACTION: Final rule.

SUMMARY: The Federal Housing Finance

Board (Finance Board) is issuing a final

rule amending its regulation on

compensation of Federal Home Loan

Bank (Bank) employees (Compensation

regulation) and its regulation governing

conflicts of interest of Bank employees

(Conflicts regulation). The final rule

makes two specific changes to the

existing Compensation regulation to

address issues that have arisen since the

regulation was last revised in January of

1997. First, the final rule eliminates the

existing limits on the base salaries and

incentive payment opportunities of a

Bank’s employees other than the

President, and establishes an overall

limit on cash compensation for such

employees equal to 125 percent of the

base salary cap established by the

Finance Board for the Bank’s President.

Second, the final rule eliminates

unnecessary regulatory requirements

regarding the payment of bonuses to

Bank employees. The final rule amends

the Conflicts regulation by adding an

exception for non-exempt hourly Bank

employees.

DATES: The final rule is effective on June

5, 1998.

FOR FURTHER INFORMATION CONTACT:

Ellen Hancock, Associate Director,

Compliance Assistance Division, Office

of Policy, (202) 408–2906; or David Guy,

Associate General Counsel, (202) 408–

2536, Federal Housing Finance Board,

1777 F Street, N.W., Washington, D.C.

20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

A. Base Salaries and Incentive

Payments for Bank Employees

Section 12(a) of the Federal Home

Loan Bank Act (Bank Act) provides that

each Bank may fix the compensation of

Bank employees, subject to the approval

of the Finance Board. See 12 U.S.C.

1432(a). From 1992 to 1996, the Finance

Board approved the compensation of

Bank Presidents pursuant to § 932.41(a)

of its regulations and the Bank

Presidents’ Compensation Plan

(Compensation Plan) established by the

Finance Board. See 12 CFR 932.41(a)

(January 1, 1996 revision) (amended 61

FR 2 (Jan. 4, 1997)); Bd. Res. No. 91–565

(as amended). Under the Compensation

Plan, the boards of directors of the

individual Banks were authorized to set

the base salaries of the Bank Presidents,

subject to Finance Board approval,

within ranges established by the

Finance Board. Under the

Compensation Plan, the Banks also were

authorized to make incentive payments

to their Presidents in amounts up to a

maximum percentage of base salary, as

determined by the Finance Board. The

Finance Board’s Compensation

regulation did not contain specific

standards governing the base salaries or

incentive payments for Bank employees

other than the Presidents. On January 2,

1997, after providing the public with

opportunity for notice and comment,

the Finance Board published a new

Compensation regulation, which, among

other things, superseded the

Compensation Plan and provided new

standards governing the base salaries

and incentive payments for Bank

Presidents and other Bank employees.

See 61 FR 2 (Jan. 4, 1997). The 1997

revisions to the Compensation

regulation eliminated the use of Finance

Board-established salary ranges and

now permit each Bank to set its

President’s base salary, subject to a cap

to be published annually by the Finance

Board. See 12 CFR 932.41(b)(1)(i). The

1997 revisions also established a dollar

limit on a Bank President’s total cash

compensation payable in salary and

incentive payments of 125 percent of

the amount of the base salary cap

established by the Finance Board for

that Bank. Thus, a Bank President’s

maximum incentive payment allowable

under the Compensation regulation is

the difference between the President’s

annual base salary approved by the

Bank and 125 percent of the annual base

salary cap for the Bank. See id.

§ 932.41(c)(2)(i).

In establishing a base salary cap and

the 125 percent limit on total cash

compensation for Bank Presidents, the

Finance Board explicitly intended to

permit the Banks to choose incentive

compensation levels for their Presidents

higher than 25 percent of the Presidents’

base salaries. Specifically, under the

Compensation regulation, the further a

Bank set its President’s base salary

below the cap, the higher the President’s

potential incentive payment

opportunity. The Finance Board

believes that incentive compensation is

an important and useful management

tool, and it made the regulatory change

described above in response to

comments from the Banks and others

that the industry trend in setting

compensation for chief executives and

other employees of financial institutions

was to allocate increasingly higher

percentages of total cash compensation

to incentive compensation rather than

base salary.

While the Compensation regulation

now permits the Banks to make this

kind of adjustment in the way they

compensate their Presidents, most of the

Banks have not taken advantage of this

flexibility. Most of the Banks have set

their Presidents’ base salaries at or near

the cap established by the Finance

Board. Consequently, the Presidents

receive the bulk of their cash

compensation in base salary. Eight of

the Banks have established incentive

payment opportunities for their

Presidents ranging from 25 to 27.8

percent of base salary. Under the

Compensation regulation, the maximum

incentive payment opportunity for a

Bank employee other than the President

is linked to the incentive payment

opportunity of the President. Section

932.41(c)(3)(ii) of the Compensation

regulation provides that the total

incentive payment opportunity,

expressed as a percentage of base salary,

for an employee other than the Bank

President shall not exceed the total

incentive payment opportunity,

expressed as a percentage of base salary,

allowable for the Bank President. See id.

§ 932.41(c)(3)(ii). In addition,

§ 932.41(b)(2) of the Compensation

regulation provides that no employee’s

base salary may exceed the base salary

of the Bank President.

The purpose of linking the maximum

incentive payment opportunities of the

Bank Presidents and other Bank

employees was to ensure a measure of

consistency between the President and

other employees regarding the

allocation of compensation between

base salary and incentive pay.

Specifically, in providing the Banks

with flexibility to allocate compensation

between base salary and incentive pay,

the Finance Board wished to prevent a

Bank from paying a large percentage of

total cash compensation to employees

other than the President in the

contingent form of incentive pay, while

paying the President mostly in the form

of guaranteed base salary.

Because most of the Banks have set

the base salaries of their Presidents at or

near the caps published by the Finance

Board, and thereby limited the

Presidents’ maximum incentive

payment opportunities to the minimum

percentage of base salary available

under the regulation, these Banks are
Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 /Rules and Regulations 30585

unable to provide increased incentive

payment opportunities to their other

employees, due to the limitation in

§ 932.41(c)(3)(ii) of the Compensation

regulation. As further discussed below,

several of the Banks have voiced

concerns that this is impairing their

ability to hire and retain key personnel

below the level of President. As

discussed above, these Banks have the

option to address this situation by

reducing their Presidents’ base salaries

and increasing their Presidents’

incentive payment opportunities, which

would allow the Banks to increase

incentive payment opportunities for

their other employees. However, the

Banks have not viewed reducing their

Presidents’ base salaries as a viable

alternative, and the Finance Board does

not wish to make this the Banks’ sole

option. Therefore, the Finance Board is

eliminating the link between the

maximum base salaries and incentive

payment opportunities of the Bank

Presidents and other Bank employees,

and establishing instead an overall

dollar limit on cash compensation for a

Bank’s employees other than the

President equal to 125 percent of the

base salary cap established by the

Finance Board for the Bank President.

B. Payment of Bonuses

Section 932.41(f) of the Compensation

regulation provides that a Bank shall not

pay any employee or other person a

bonus. See id. § 932.41(f). A bonus is

defined in the Compensation regulation

as ‘‘a payment to an employee, other

than base salary and benefits, that is not

based on performance.’’ Id. § 932.41(a).

As further discussed below, the Finance

Board is eliminating the provisions of

the Compensation regulation governing

bonuses because they have proved

confusing and duplicative with the

provisions of the regulation governing

incentive payments for Bank employees.

See id. §§ 932.41(a), (c)(3)(iii).

C. Conflicts of Interest

Section 12(a) of the Bank Act provides

that each Bank may select and employ

such officers, employees, attorneys, and

agents as shall be necessary for the

transaction of its business, subject to the

approval of the Finance Board. See 12

U.S.C. 1432(a). The Finance Board’s

Conflicts regulation, set forth at 12 CFR

932.40(d), provides that a Bank

employee shall not also be employed by,

or otherwise act in any capacity for, a

member or an institution eligible to

make application to become a member.

See 12 CFR 932.40(d).

Several of the Banks maintain item

processing operations in which they

employ non-exempt hourly employees

who also have full- or part-time

positions with financial institutions that

are, or are eligible to make application

to become, members of the Bank. The

Finance Board has determined that

based upon the nature of the work

performed by these Bank employees, it

is unlikely that any conflict of interest

between the Bank and a Bank member

or an institution eligible to make

application to become a member would

be created as a result of concurrent

employment by a Bank and such

institution. Consequently, the Conflicts

regulation, as currently stated,

unnecessarily impedes a Bank’s ability

to hire qualified employees for its item

processing operations. See Bd. Res. 98–

06 (Feb. 18, 1998). On this basis, the

Finance Board has waived the Conflicts

regulation, as applied to the non-exempt

hourly employees working in the item

processing operations of the Topeka,

Pittsburgh and Indianapolis Banks. See

id.

The Finance Board believes that the

rationale for waiving application of the

Conflicts regulation to non-exempt

hourly employees working in a Bank’s

item processing operations applies with

equal force for all non-exempt hourly

Bank employees. Therefore, the final

rule adds a specific exception to the

Conflicts regulation for all non-exempt

hourly employees of the Banks, so that

such employees may be employed

concurrently by a Bank and a member

or an institution eligible to make

application to become a member.

II. Analysis of the Final Rule

A. Base Salary and Incentive Payments

for Employees Other than the Bank

President

As discussed above, several of the

Banks have raised concerns that the

limit on incentive payment

opportunities for employees other than

the President set forth in

§ 932.41(c)(3)(ii) of the Compensation

regulation constrains the Banks’ ability

to attract and retain experienced and

highly qualified personnel in key areas

of Bank operations, such as auditing,

asset/liability management,

investments, risk analysis, and

accounting. In addition, this poses an

immediate problem for the Banks in

attracting and retaining qualified

personnel to assist in Year 2000

information systems conversion

processes.

While there is no concern that the

Banks’ ability to attract key personnel

has had any negative impact on the

safety and soundness of their operations

to date, the Finance Board believes that

there is a credible risk that, in the

future, the Banks may be placed in a

non-competitive position relative to

other employers of financial and

banking professionals. The Finance

Board wishes to prevent a situation in

which the Banks’ ability to compete for

the highest quality personnel is unduly

limited.

For these reasons, the Finance Board

is making the following changes to the

provisions of the Compensation

regulation governing base salary and

incentive payments of Bank employees

other than the Presidents. First, the final

rule eliminates the limitation in

§ 932.41(c)(3)(ii) on incentive payment

opportunities for Bank employees other

than the President. Consequently, such

employees may have incentive payment

opportunities in excess of that of a

Bank’s President. However, incentive

payments for employees other than the

President will continue to be subject to

the requirement in § 932.41(c)(3)(i) of

the Compensation regulation that such

payments be reasonable and comparable

with incentive payments made to

employees of the other Banks and other

similar businesses (including financial

institutions) with similar duties and

responsibilities. See id. § 932.41(c)(3)(i).

Second, in order to give the Banks

maximum flexibility in allocating total

cash compensation for employees other

than the President between base salary

and incentive pay, the final rule

eliminates the requirement in

§ 932.41(b)(2) of the Compensation

regulation that no Bank employee may

have a base salary higher than that of

the President. See id. § 932.41(b)(2).

Third, the final rule establishes an

overall limit on total cash compensation

for a Bank’s employees other than the

President equal to 125 percent of the

base salary cap established by the

Finance Board for the Bank’s President.

This limit is the same as under the

existing Compensation regulation;

however under the existing regulation,

it is embodied in two separate limits on

base salary and incentive payments for

Bank employees other than the

President, which, as discussed above,

are eliminated by this final rule.

The Finance Board is hopeful that the

Banks will use this new flexibility in

structuring cash compensation for

employees other than the President to

enhance their strategic plans for mission

achievement, which are under

consideration at the Banks. The Finance

Board will look at the degree to which

the Banks have tied incentive

compensation for employees other than

the President to mission-related goals,

similar to the those that form the basis

the Bank Presidents’ incentive

payments, in deciding whether further
30586 Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 /Rules and Regulations

regulatory action in this area is

warranted.

The final rule adds a new

§ 932.41(c)(3)(iv) to the Compensation

regulation, requiring all Bank incentive

compensation plans in effect on May 1,

1998, to be submitted to the Finance

Board no later than June 1, 1998. This

section further provides that any

subsequent amendments to such plans

shall not become effective until

submitted to the Finance Board. The

effect of this provision is to make the

effectiveness of any changes a Bank may

adopt to its incentive programs for

employees other than the President

contingent upon the submission of such

changes to the Finance Board, but does

not contemplate any action to approve

or disapprove the submissions. Of

course, these policies and their

implementation are subject to

compliance review as part of the regular

examination process.

B. Payment of Bonuses

The Compensation regulation, as

revised in 1997, carried forward an

existing regulatory provision prohibiting

the payment of bonuses to Bank

employees. See id. § 932.41(f). The 1997

revisions also for the first time adopted

a regulatory definition of ‘‘bonus’’ as ‘‘a

payment to an employee, other than

base salary and benefits, that is not

based on performance.’’ Id. § 932.41(a).

The Banks have questioned whether

the new definition of ‘‘bonus’’ prevents

an employee from receiving incentive

payments based on the achievement of

Bank-wide performance targets. For

many years, several Banks have

maintained incentive programs for

employees under which incentive

payments are based, in part, on the

extent to which the Bank achieves

certain corporate performance targets.

Several Banks have requested

confirmation that such programs remain

permissible in light of the new

definition of ‘‘bonus.’’

The 1997 revisions were not intended

to preclude the Banks from maintaining

existing or establishing new employee

incentive programs linked to Bank

performance. Under § 932.41(c)(3)(iii) of

the Compensation regulation, the Banks

may make incentive payments to

employees other than the Bank

President based on the extent to which

an employee meets objective

performance targets related to criteria

established by the Bank’s board of

directors. See id. § 932.41(c)(3)(iii). The

Compensation regulation defines

‘‘incentive payment’’ as ‘‘a direct or

indirect transfer of funds by a Bank to

a Bank employee, in addition to base

salary, based on the employee’s on-thejob-performance.’’ Id. § 932.41(a).

The Finance Board believes that the

achievement of Bank-wide performance

targets may be the basis for employee

incentive payments as long as there is

a reasonable nexus between the job

performance of the employee and the

achievement of the performance target.

The extent to which a Bank achieves its

corporate performance targets may be

considered a reflection of the on-the-job

performance of each of the Bank’s

employees. The regulatory changes

discussed above regarding incentive

payments for employees other than the

Presidents provide the Banks with the

opportunity to integrate Bank-wide

goals related to mission achievement

into the incentive payment plans of

employees whose jobs may not be

directly related to the mission of the

Bank, but whose support is crucial to

the Bank’s overall performance, such as

the Chief Financial Officer.

The definition of ‘‘bonus’’ was added

in 1997 to carve out non-performance

related incentive payments from the

category of permissible incentive

payments. However, the Finance Board

believes, and it is the Finance Board’s

intention, that the definition of

‘‘incentive payment’’ in § 932.41(a),

coupled with § 932.41(e)(1), which

prohibits a Bank from making any

payment to a Bank employee except as

provided in the Compensation

regulation, see id. § 932.41(e)(1),

preclude a Bank from making nonperformance related incentive payments

to Bank employees. Therefore, removal

of the prohibition in § 932.41(f) on the

payment of bonuses and the definition

of ‘‘bonus’’ would clarify the provisions

of the Compensation regulation

governing employee incentive payments

without substantively changing the

prohibition on non-performance related

incentive payments. Based on the

foregoing, and in light of the confusion

caused by the provisions on employee

bonuses, the Finance Board is

eliminating § 932.41(f) and the

definition of ‘‘bonus’’ in § 932.41(a).

C. Conflicts of Interest

For the reasons discussed in the

Statutory and Regulatory Background

section, the final rule adds a specific

exception to the Conflicts regulation for

all non-exempt hourly employees of the

Banks.

III. Procedural Requirements

The Finance Board has determined

that the rule shall be effective upon

publication in the Federal Register, for

the reasons discussed below.

The Administrative Procedure Act

(APA) does not require adherence to

notice-and-comment procedures when

an agency ‘‘for good cause finds * * *

that notice and public procedure

thereon are impracticable, unnecessary,

or contrary to the public interest.’’ 5

U.S.C. 553(b)(3)(B). In addition, the 30-

day delay in the effective date of a rule

ordinarily required by section 553 of the

APA will not apply where the rule

relieves a restriction or upon a showing

of good cause by the agency adopting

the rule. See id. § 553(d)(3).

The Finance Board finds good cause

to forgo notice-and-comment procedures

as unnecessary in connection with

lifting the limitations on allocating the

base salary and incentive payment

components of the total cash

compensation for Bank employees other

than the President because this

regulatory action imposes no new

requirements on the Banks or their

employees. Furthermore, engaging in

notice-and-comment procedures would

be contrary to the public interest,

because it would prolong existing

conditions under which the Banks may

be at a competitive disadvantage in

attracting and retaining highly

experienced and qualified personnel,

due to the existing limits on incentive

payments for such employees. The

longer these conditions persist, the

greater the potential risk that there will

be a negative impact on the operations

of the Banks. Furthermore, the Finance

Board believes that the Banks should be

free to take immediate action to adjust

their compensation programs in order to

attract and retain personnel involved in

preparing their information systems for

2000. Therefore, the Finance Board

finds good cause to forgo a delayed

effective date for this change. In

addition, the 30-day delay of effective

date is not mandated under the APA,

because this change relieves a

restriction on the Banks’ authority to set

employee compensation.

Elimination of the provisions of the

Compensation regulation governing

employee bonuses will not have a

substantive effect on the Banks, because

they are duplicative of existing

provisions governing the Banks’

employee incentive payments.

Therefore, the Finance Board has

determined that notice-and-comment

procedures and a delay in the rule’s

effective date are unnecessary with

regard to this change.

As discussed above, the Finance

Board has determined that, based upon

the nature of the work performed by

non-exempt hourly Bank employees, it

is unlikely that any conflict of interest

between the Bank and a Bank member
Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 /Rules and Regulations 30587

or an institution eligible to make

application to become a member would

be created as a result of concurrent

employment by a Bank and such

institution. Furthermore, the Finance

Board previously has permitted such

dual employment through the granting

of waivers for three Banks.

Consequently, the Finance Board has

determined that notice-and-comment

procedures are unnecessary in

connection with amendment to the

Conflicts regulation set forth above. The

30-day delay of effective date is not

mandated under the APA for this

change, because it relieves a restriction

on the Banks’ authority to select and

employ personnel.

IV. Regulatory Flexibility Act

The Finance Board is adopting these

regulatory amendments in the form of

an final rule. Therefore, the provisions

of the Regulatory Flexibility Act do not

apply. See 5 U.S.C. 601(2), 603(a).

List of Subjects in 12 CFR Part 932

Conflict of interests, Federal home

loan banks.

Accordingly, the Federal Housing

Finance Board hereby amends title 12,

chapter IX, subchapter B, part 932 of the

Code of Federal Regulations as follows:

SUBCHAPTER B—FEDERAL HOME LOAN

BANK SYSTEM

PART 932—ORGANIZATION OF THE

BANKS

1. The authority citation for part 932

continues to read as follows:

Authority: 12 U.S.C. 1422a, 1422b, 1426,

1427, 1432; 42 U.S.C. 8101 et seq.

2. Amend § 932.40 by revising

paragraph (d) to read as follows:

§ 932.40 Selection.

* * * * *

(d) Conflicts of interest. A Bank

employee shall not also be employed by,

or otherwise act in any capacity for, a

member or an institution eligible to

make application to become a member.

The restriction on employment set forth

in the preceding sentence shall not

apply to non-exempt hourly employees

of a Bank.

3. Amend § 932.41 by removing the

definition of ‘‘Bonus’’ from paragraph

(a), removing paragraph (f) and

redesignating paragraph (g) as paragraph

(f), revising paragraphs (b)(2) and

(c)(3)(ii), and adding a new paragraph

(c)(3)(iv) to read as follows:

§ 932.41 Compensation.

* * * * *

(b) * * *

(2) Other Bank employees. Each Bank

shall establish base salaries for

employees other than the President that

are reasonable and comparable with the

base salaries of employees of the other

Banks and other similar businesses

(including financial institutions) with

similar duties and responsibilities.

* * * * *

(c) * * *

(3) * * *

(ii) The sum of annual base salary and

all incentive payments received in a

single calendar year by an employee

other than the Bank President shall not

exceed 125 percent of the annual base

salary cap for the Bank President, as

published by the Finance Board.

* * * * *

(iv) All Bank incentive compensation

plans in effect on May 1, 1998, shall be

submitted to the Finance Board no later

than June 1, 1998. Any subsequent

amendments to such plans shall not

become effective until submitted to the

Finance Board.

* * * * *

By the Board of Directors of the Federal

Housing Finance Board.

Dated: May 13, 1998.

Bruce A. Morrison,

Chairman.

[FR Doc. 98–14970 Filed 6–4–98; 8:45 am]

BILLING CODE 6725–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 98–CE–15–AD; Amendment 39–

10567; AD 98–12–11]

RIN 2120–AA64

Airworthiness Directives; British

Aerospace Jetstream Model 3101

Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule.

SUMMARY: This amendment adopts a

new airworthiness directive (AD) that

applies to certain British Aerospace

Jetstream Model 3101 airplanes. This

AD requires modifying the emergency

hydraulic hand-pump by increasing the

length of the access aperture. This AD

is the result of mandatory continuing

airworthiness information (MCAI)

issued by the airworthiness authority for

the United Kingdom. The actions

specified by this AD are intended to

prevent difficulty accessing the

emergency hydraulic hand-pump

because of the current design, which, in

the event of a hydraulic system failure,

could result in the inability to operate

the flaps and landing gear.

DATES: Effective July 24, 1998.

The incorporation by reference of

certain publications listed in the

regulations is approved by the Director

of the Federal Register as of July 24,

1998.

ADDRESSES: Service information that

applies to this AD may be obtained from

British Aerospace Regional Aircraft,

Prestwick International Airport,

Ayrshire, KA9 2RW, Scotland;

telephone: (01292) 479888; facsimile:

(01292) 479703. This information may

also be examined at the Federal

Aviation Administration (FAA), Central

Region, Office of the Regional Counsel,

Attention: Rules Docket No. 98–CE–15–

AD, Room 1558, 601 E. 12th Street,

Kansas City, Missouri 64106; or at the

Office of the Federal Register, 800 North

Capitol Street, NW, suite 700,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Mr.

S.M. Nagarajan, Aerospace Engineer,

Small Airplane Directorate, Aircraft

Certification Service, 1201 Walnut, suite

900, Kansas City, Missouri 64106;

telephone: (816) 426-6934; facsimile:

(816) 426–2169.

SUPPLEMENTARY INFORMATION:

Events Leading to the Issuance of This

AD

A proposal to amend part 39 of the

Federal Aviation Regulations (14 CFR

part 39) to include an AD that would

apply to certain British Aerospace

Jetstream Model 3101 airplanes was

published in the Federal Register as a

notice of proposed rulemaking (NPRM)

on March 19, 1998 (63 FR 13378). The

NPRM proposed to require modifying

the emergency hydraulic hand-pump by

increasing the length of the access

aperture. Accomplishment of the

proposed action as specified in the

NPRM would be in accordance with

British Aerospace Jetstream Service

Bulletin 29–JM 7360, Revision No. 1,

dated January 3, 1991.

The NPRM was the result of

mandatory continuing airworthiness

information (MCAI) issued by the

airworthiness authority for the United

Kingdom.

Interested persons have been afforded

an opportunity to participate in the

making of this amendment. No

comments were received on the

proposed rule or the FAA’s

determination of the cost to the public.

The FAA’s Determination

After careful review of all available

information related to the subject