[Federal Register Volume 63, Number 142 (Friday, July 24, 1998)]
[Rules and Regulations]
[Pages 39702-39705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19810]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 937

[No. 98-28]


Financial Disclosure by the Federal Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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[[Page 39703]]

SUMMARY: The Federal Housing Finance Board (Finance Board) hereby 
amends its regulations to require that the Federal Home Loan Banks 
(Banks) provide information in such form and within such timeframes as 
the Finance Board may prescribe so that the Finance Board may prepare 
combined Bank System financial disclosure in a complete and timely 
manner; and to require that any financial statements issued by the 
individual Banks be consistent in both form and content with those 
presented in the combined quarterly and annual financial reports issued 
for the Bank System by the Finance Board. This amendment is intended to 
ensure that the Finance Board can issue accurate and timely financial 
disclosure to the capital markets and that all information issued to 
the public concerning the Bank System is consistent and prepared in 
accordance with uniform standards.

EFFECTIVE DATE: August 24, 1998.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Director, 
Financial Analysis and Reporting Division, Office of Policy, 202/408-
2845, or Deborah F. Silberman, General Counsel, Office of General 
Counsel, 202/408-2570, Federal Housing Finance Board, 1777 F Street, 
NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    The Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1421 et seq., 
authorizes the Finance Board to issue consolidated obligations that are 
the joint and several obligations of the Banks in order to provide 
funds for the Banks. 12 U.S.C. 1431(b), (c). The Bank Act further 
authorizes the individual Banks to issue debt securities subject to 
rules and regulations adopted by the Finance Board, 12 U.S.C. 1431(a). 
The Finance Board has never adopted regulations concerning the issuance 
of debt securities by the individual Banks, and the Banks have never 
issued debt securities under this authority.
    Pursuant to section 3(a)(2) of the Securities Act of 1933, 15 
U.S.C. 77c(a)(2), (Securities Act), the debt securities issued by the 
Finance Board to raise funds for the Banks are exempt from the 
registration requirements of the Securities Act. Section 3(a)(2) 
exempts from registration and other requirements of the Securities Act, 
inter alia, securities issued or guaranteed by ``any person controlled 
or supervised by and acting as an instrumentality of the Government of 
the United States pursuant to authority granted by the Congress of the 
United States.'' 15 U.S.C. 77c(a)(2).
    Classes of securities issued by the Finance Board similarly are 
exempt from the registration and reporting requirements of the 
Securities Exchange Act of 1934, (15 U.S.C. 78a et seq.) (Exchange 
Act), pursuant to section 3(a)(42) of the Exchange Act. (15 U.S.C. 
78c(a)(42)). Section 3(a)(42)(B) designates as securities exempt from 
registration and reporting under the Exchange Act, ``government 
securities,'' including ``securities which are issued or guaranteed by 
corporations in which the United States has a direct or indirect 
interest and which are designated by the Secretary of the Treasury for 
exemption as necessary or appropriate in the public interest or for the 
protection of investors.'' Id. Sec. 78c(a)(42)(B).
    The exemptions from registration and reporting under the Securities 
Act and the Exchange Act discussed above are principally grounded in a 
presumption that the securities activities of institutions acting as 
government entities, as designated under the federal securities laws, 
will be conducted in the public interest and for the protection of 
investors. While securities issued by the Finance Board are exempt from 
the registration and reporting requirements of the Securities Act and 
the Exchange Act, the Finance Board believes it is in the public 
interest and in the interests of the Bank System for the disclosure 
documents used in connection with the issuance of its debt to be as 
state-of-the-art as possible. Indeed, one of the duties of the Finance 
Board specified in the Bank Act is that it ensures that the Banks 
remain adequately capitalized and able to raise funds in the capital 
markets. See 12 U.S.C. 1422a(a)(3)(B)(iii).
    However, the Finance Board heretofore had never formally addressed 
the scope and content of the financial reports issued by itself on 
behalf of the Bank System nor by individual Banks to their members. 
Because the Finance Board has supervisory and examination authority 
over the Banks, it is the Finance Board's responsibility to regulate 
the securities activities of those institutions when it finds such 
regulation to be necessary or appropriate for the protection of 
investors and the Bank system.
    On February 2, 1998, the Finance Board published for notice and 
comment a proposed rule to amend its regulations to add a requirement 
that the Banks file with the Finance Board for review and provide to 
their members annual audited financial statements and quarterly 
unaudited financial statements prepared in conformance with the rules 
and other requirements promulgated under the Federal securities laws by 
the Securities and Exchange Commission (SEC). See 63 FR 5315 (Feb. 2, 
1998). The SEC's disclosure requirements prescribe that an issuer of 
securities into the capital markets make full and fair disclosure of 
all information material to an investment decision in connection with 
the offer, sale, and other market transactions in those securities. 
Generally, a securities issuer's compliance with SEC disclosure 
regulations will reduce risk of and liability for potential fraud. The 
proposed rule was designed to ensure that a Bank's members would 
receive timely, accurate, and uniform financial information about their 
respective Banks, and to codify prevailing practice at the Banks. 
Nothing in the proposed rule was intended to subject the Banks to the 
jurisdiction of any other agency, nor to confer any private right of 
action on any member or on any investor in Bank system securities. The 
proposed rule invited comment on the scope of the existing and proposed 
new disclosures and to indicate to the Finance Board any other 
disclosures that would be appropriate.
    Simultaneously with the publication of the proposed rule, the 
Finance Board also published for notice and comment a proposed policy 
statement regarding the preparation of the Bank System combined annual 
and quarterly financial reports by the Finance Board in connection with 
the issuance of consolidated debt securities pursuant to section 11(c) 
of the Bank Act, 12 U.S.C. 1431(c), in accordance with the disclosure 
requirements promulgated by the SEC. See Proposed Policy Statement, 
Finance Board Res. No. 98-01, January 21, 1998, 63 FR 5381 (February 2, 
1998).
    The Finance Board received a total of six comments on the proposed 
policy statement and the proposed rule. Commenters included three 
Banks, one committee of the Banks, one trade association, and one 
accounting firm.

II. Analysis of the Final Rule

A. In General.

    A number of the commenters expressed concern about the increased 
legal, accounting, and administrative costs and other burdens adoption 
of the proposed regulation would impose on the Banks, and about the 
unintended adverse consequences that would result from incorporating 
the SEC's disclosure requirements into the regulation. In particular, 
the commenters urged that future rule changes by the SEC, and SEC 
interpretations, bulletins, opinions, no-action letters, and analysis 
about its regulations should be explicitly excluded from incorporation 
into the

[[Page 39704]]

Finance Board's regulation and policy statement. The commenters 
suggested that, instead of adopting the proposed regulation, the 
Finance Board should either delay adoption of the regulation until 
further analysis of the effects of the regulation could be made, or 
adopt its own disclosure requirements specifically tailored to the 
business of the Banks.
    The Finance Board believes that uniformity, completeness, and 
accuracy of financial disclosure in the capital markets is a critically 
important issue and is, therefore, unwilling to delay the adoption of a 
final rule regarding financial disclosure requirements for the Banks. 
However, the Finance Board does not wish to impose unnecessary burdens 
on the Banks, or to require duplicative disclosure. Therefore, the 
final rule has been revised in a number of ways to address these 
concerns and other considerations.

B. Definitions--Section 937.1.

    The proposed rule sets forth certain definitions to be used in the 
part. The definitions of ``Bank,'' and ``Finance Board'' are adopted as 
proposed without change. The definitions of ``Member,'' ``SEC,'' ``Form 
10-K,'' ``Form 10-Q,'' and ``Regulation S-X'' have been deleted from 
the final rule, for the reasons discussed below.

C. Annual and Quarterly Financial Statement Requirements.

    Section 937.2 of the proposed rule would have imposed a requirement 
that the Banks file with the Finance Board for review, and distribute 
to their shareholders, annual and quarterly financial statements as 
provided further in the regulation. Sections 937.3 and 937.4 of the 
proposed rule set forth the specific SEC regulatory requirements with 
which the Banks would have had to comply in preparing their annual and 
quarterly financial statements. These sections also set forth the 
timeframes in which the reports had to be prepared.
    As discussed in the notice of proposed rulemaking, see 63 FR 5315, 
5317, all of the Banks currently provide annual financial statements to 
their shareholders, but not all of the Banks currently issue quarterly 
financial statements. The Finance Board wished to assure that all 
members of the Banks were receiving timely financial information about 
the Banks, and proposed to use this regulation as the vehicle for that 
disclosure.
    Since the proposed policy statement and regulation were published, 
and in connection with this project, the Finance Board has been 
reevaluating how it provides disclosure about individual Banks in the 
combined Bank System annual and quarterly reports. The combined Bank 
System annual report already contains combining schedules for the 
statement of condition, the statement of income, statements of capital, 
and statements of cash flows. These combining schedules include a 
column of information supplied by and about each of the Banks, a column 
of combining adjustments that eliminate all material interbank 
transactions, and a column of information for the combined Bank System. 
While the Finance Board has not provided this information in its 
combined Bank System quarterly financial reports, it is planning to do 
so in future quarterly reports.
    Because the Finance Board already includes significant financial 
information about each Bank in the Bank System combined annual report, 
because it plans to provide similarly significant financial information 
about each Bank in the Bank System combined quarterly reports, and 
because the Finance Board intends to distribute the combined annual and 
quarterly reports to members of the Bank System expeditiously after 
their publication, the Finance Board no longer believes it is necessary 
to require the Banks to file for review and distribute to members 
individually prepared annual and quarterly financial statements. 
Therefore, all of the requirements of proposed sections 937.2, 937.3, 
and 937.4 have been deleted from the final rule.
    Instead, the final rule requires in section 937.2 only that the 
Banks provide to the Finance Board, in such form and within such 
timeframes as the Finance Board shall specify, all such financial and 
other information as the Finance Board shall need to prepare the 
combined Bank System annual and quarterly reports.
    There is no longer any requirement in the final rule that the Banks 
prepare or issue individual Bank annual or quarterly financial reports. 
However, section 937.3 of the final rule provides that if the Banks 
choose to issue individual annual or quarterly financial reports, any 
financial statements contained in those reports must be consistent in 
both form and content with the financial statements presented in the 
combined Bank System annual or quarterly financial reports. This is to 
assure that all financial statements relating to the Banks in the 
public domain will be consistent and accurate.
    The requirements of section 937.3 will not preclude a Bank from 
including abbreviated balance sheets or other abbreviated financial 
statement information in marketing materials, so long as those 
materials provide clear disclosure of how and where the reader may 
obtain a complete set of the financial statements of the Bank or the 
Bank System.

III. Regulatory Flexibility Act

    The final rule applies only to the Banks, which are not ``small 
entities'' as defined in the Regulatory Flexibility Act (RFA). See 5 
U.S.C. 601(6). Therefore, in accordance with section 605(b) of the RFA, 
see id. 605(b), the Finance Board hereby certifies that the final rule 
will not have a significant economic impact on a substantial number of 
small entities.

IV. Paperwork Reduction Act

    The final rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501 et 
seq. Consequently, the Finance Board has not submitted any information 
to the Office of Management and Budget for review.

List of Subjects in 12 CFR Part 937

    Federal home loan banks, Reporting and recordkeeping requirements.

    Accordingly, the Federal Housing Finance Board hereby amends title 
12, chpate IX, of the Code of Federal Regulations, to add a new part 
937, as follows:

PART 937--FINANCIAL STATEMENTS OF THE BANKS

Sec.
937.1  Definitions.
937.2  Requirement to provide financial and other information to the 
Finance Board.
937.3  Requirement for voluntary bank disclosure.

    Authority: 12 U.S.C. 1422a, 1422b, 1426, 1431, and 1440.


Sec. 937.1  Definitions.

    As used in this part:
    Bank means a Federal Home Loan Bank established under the authority 
of the Federal Home Loan Bank Act, as amended (12 U.S.C. 1421 et seq.).
    Finance Board means the agency established as the Federal Housing 
Finance Board.


Sec. 937.2  Requirement to provide financial and other information to 
the Finance Board.

    In order to facilitate the preparation by the Finance Board of 
combined Bank System annual and quarterly reports, each Bank shall 
provide to the Finance

[[Page 39705]]

Board in such form and within such timeframes as the Finance Board 
shall specify, all financial and other information the Finance Board 
shall request for that purpose.


Sec. 937.3  Requirement for voluntary bank disclosure.

    Any financial statements contained in an annual or quarterly 
financial report issued by an individual Bank must be consistent in 
both form and content with the financial statements presented in the 
combined Bank System annual or quarterly financial reports prepared and 
issued by the Finance Board.

    Dated: June 24, 1998.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR Doc. 98-19810 Filed 7-23-98; 8:45 am]
BILLING CODE 6725-01-P