[Federal Register Volume 63, Number 21 (Monday, February 2, 1998)]
[Notices]
[Pages 5381-5384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1968]


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FEDERAL HOUSING FINANCE BOARD

[No. 98-01]


Statement of Policy: Disclosures in the Combined Annual and 
Quarterly Financial Reports of the Federal Home Loan Bank System

AGENCY: Federal Housing Finance Board.

ACTION: Proposed policy statement.

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SUMMARY: The Board of Directors of the Federal Housing Finance Board 
(Finance Board) is proposing to adopt a statement of policy entitled 
``Disclosures in the Combined Annual and Quarterly Financial Reports of 
the Federal Home Loan Bank System.'' The policy statement will 
generally require that the combined annual and quarterly financial 
reports of the Federal Home Loan Bank (FHLBank) System be prepared in 
accordance with the disclosure rules applicable to Securities and 
Exchange Commission (SEC) registrants.

DATES: The Finance Board will accept comments through March 19, 1998.


[[Page 5382]]


ADDRESSES: Mail comments to Elaine L. Baker, Executive Secretary, 
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 
20006. Comments will be available for public inspection at this 
address.

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

SUPPLEMENTARY INFORMATION: The FHLBank Act (12 U.S.C. 1431(c)) 
authorizes the Finance Board to issue FHLBank consolidated obligations. 
As issuer of the FHLBank System debt, the Finance Board prepares the 
combined annual and quarterly financial reports that are used as 
principal disclosure documents in conjunction with the offering of this 
debt.
    Until now, the Board of Directors of the Finance Board has 
established no formal policies as to the scope and content of the 
combined annual and quarterly financial reports of the FHLBank System. 
Since the establishment of the Finance Board in 1989, the combined 
annual report has grown in length as the disclosures have become more 
detailed and more comprehensive. Current practices represent an 
evolving consensus reached among Finance Board staff, FHLBank staff, 
the independent outside accountant for the combined financial report, 
and outside bond counsel. As generally accepted accounting principles 
and industry disclosure standards have changed, so have the combined 
annual and quarterly reports keep up with industry disclosure 
standards.
    In most but not all respects, the combined annual and quarterly 
financial reports are similar in scope and content to reports that 
registrants must file with the Securities and Exchange Commission (SEC) 
under the Securities Exchange Act of 1934, 15 U.S.C. 78a et seq., (1934 
Act). The Finance Board staff prepares the combined financial reports 
using financial and other information provided by the FHLBanks and the 
Office of Finance. Office of Finance staff and outside bond counsel 
review these combined reports. The independent outside accountant 
audits the financial statements that appear in the combined annual 
financial report. In addition, the independent outside accountant 
reviews but does not issue an opinion on the combined quarterly 
financial statements.
    The Finance Board's proposed policy statement would require that 
the combined annual and quarterly financial reports of the FHLBank 
System follow existing SEC disclosure rules with certain specific 
exceptions. For three reasons, the Finance Board is proposing the 
adoption of this policy statement concerning financial and other 
disclosures in the combined annual and quarterly financial reports. The 
first reason is that Finance Board, as one of the largest issuers of 
debt securities in the U.S. capital markets, believes it has an 
obligation to provide adequate disclosures that generally agree with 
industry standards.<SUP>1</SUP>  In addition, one of the statutory 
responsibilities of the Finance Board is to ensure that the FHLBanks 
remain able to raise funds in the capital markets (see 12 U.S.C. 
1422a(a)(3)(b)(iii)). By adopting the proposed statement of policy, the 
Finance Board will address a significant policy matter on how the 
FHLBank System disclosure is provided to maintain the ability of the 
FHLBanks to raise funds in the capital markets. The second reason is 
that SEC disclosure rules represent ``best practice,'' and the 
financial and other disclosures provided by the FHLBank System should 
follow this standard.
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    \1\ At September 30, 1997, consolidated obligations outstanding 
were $284.5 billion, and the amount of consolidated obligations 
issued in the first nine months of 1997 was $1.572 trillion.
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    Thirdly, the proposed policy statement will address recent 
Congressional actions that could have subjected the FHLBanks and the 
Finance Board to the registration and reporting requirements of the 
Securities Act of 1993, 15 U.S.C. 77c(a)(2)), (1933 Act), and the 1934 
Act.
    The proposed policy affirms existing practice generally to provide 
disclosure that complies with SEC requirements. The Finance Board 
solicits comments on the scope, adequacy, and usefulness of the 
existing and proposed disclosures and whether the Finance Board should 
provide any additional disclosures.

Disclosure Standards

    Section 3(a)(2) of the 1933 Act exempts the Finance Board and the 
FHLBanks from all SEC registration requirements under the 1933 Act. In 
addition, publicly traded commercial banks and savings associations 
that are not part of holding companies are exempt from SEC registration 
under the 1933 Act, but must register and file reports with their 
primary Federal regulators pursuant to 1934 Act. Further, the Office of 
the Comptroller of the Currency (OCC) has adopted securities offering 
disclosure policies for non-affiliated commercial banks that are almost 
identical to SEC disclosure requirements. The Office of Thrift 
Supervision (OTS) also has securities offering disclosure rules for its 
regulated institutions that mirror SEC disclosure requirements. The 
OCC, OTS, and Federal Deposit Insurance Corporation (FDIC) all require 
their regulated institutions to file reports under the 1934 Act in 
conformance with the forms and requirements promulgated by the SEC 
under the 1934 Act or in accordance with forms and requirements adopted 
by the agencies but modeled after SEC requirements and forms. The SEC 
disclosure rules represent the industry standard, and the bank and 
thrift regulators have largely adopted these standards.
    The proposed policy statement would require as a general matter 
that the combined annual and quarterly financial reports of the FHLBank 
System meet the SEC disclosure standards, with noted exceptions. The 
combined annual financial reports already generally comply with SEC 
disclosure requirements, with several exceptions. These current 
exceptions include biographical information about FHLBank directors, 
executive compensation, capital stock holdings, and related-party 
transactions. In addition, the 1996 combined annual report did not 
provide disclosures about derivatives as comprehensive as that required 
by new SEC derivative disclosure rules adopted in 1997. In following 
the SEC disclosure rules, the combined annual financial report would, 
under the proposed policy statement, include new disclosures on 
compensation, capital stock holdings, related-party transactions, and 
property and premises.
    The SEC rules were broadly written, and thus contain disclosures 
that were not intended for wholesale financial institutions such as the 
FHLBanks. Furthermore, the FHLBanks are cooperatives where officers of 
members serve on the boards of directors of the FHLBanks. As such, 
related-party transactions are to be expected.

Exceptions to Following SEC Rules

    The FHLBank System presents a number of unique institutional 
factors. These include the cooperative nature of the System, the fact 
that the FHLBanks are wholesale financial institutions, and the unusual 
role of the Finance Board as issuing the debt and preparing the 
financial report for combined 12 regulated entities. For these reasons,

[[Page 5383]]

some of the SEC disclosure rules are either inapplicable or 
inappropriate for the FHLBank System.
    The combined annual and quarterly financial reports would, under 
the proposed policy statement, not follow the SEC rule in the following 
areas:
    Derivatives. On February 10, 1997, the SEC published a final rule 
that established new required disclosures for derivative transactions 
and holdings (Item 305, Regulation S-K, 17 CFR 229.305) (SEC rule). The 
SEC rule applies to all filings made with the SEC after June 15, 1997, 
and encompasses all types of derivatives--commodity, currency, equity, 
and financial. The Finance Board believes that the only facet of the 
FHLBanks' operations that meets the threshold test for disclosure in 
the SEC rule is the interest-rate risk associated with financial 
derivatives.
    The rule presents only one issue unique to the FHLBank System. The 
System combined financial report rolls up the financial information of 
12 independent portfolios. Many complex financial organizations fall 
within the scope of the rule, but these complex organizations 
ultimately report to a single board of directors. The FHLBanks report 
to 12 separate boards of directors, and each has differing investment 
strategies, yet each FHLBank is jointly and severally liable for the 
consolidated obligations of the FHLBank system issued by the Finance 
Board.
    Information for the System's quantitative disclosures would come 
from simulation of interest-rate shocks in the asset-liability 
management models of the FHLBanks. The FHLBanks use different modeling 
software and assumptions. Any analysis that would roll up the results 
from 12 separate models should first ensure some uniformity of 
assumptions and methodology to make sure the results will be 
meaningful.
    In light of these complexities, the Finance Board proposes that the 
FHLBanks provide the Finance Board the information required to make the 
required qualitative disclosures about derivatives in the 1997 combined 
financial report, but proposes a one-year delay in providing the 
quantitative disclosures in the combined annual financial report. 
Finance Board staff will work with FHLBanks' staff in developing a 
methodology for arriving at a common set of assumptions for the 
quantitative analysis that would appear in the 1998 combined financial 
report.
    Related-Party Transactions. SEC disclosure rules require the 
disclosure of any transaction greater than $60,000 between a director 
and a related party. Due to the cooperative nature of the System, it is 
expected that the FHLBanks will have business dealings with members 
whose officers also serve as directors of the FHLBank. It would be 
unwieldy to present full disclosures of all credit relationships 
between the FHLBanks and the members their directors represent in the 
combined annual report. The FHLBanks may wish to consider making this 
disclosure in their individual annual reports. However, the Finance 
Board proposes that the combined annual report present an aggregate 
disclosure about the percentage of advances to members whose officers 
serve as directors of an FHLBank. In addition, it proposes that the 
combined annual report disclose the amount of advances to individual 
members if those advances amounted $1 billion or more and indicate 
which of these members had an officer that also served as an FHLBank 
director. The Finance Board specifically solicits comments on whether 
the $1 billion threshold is appropriate or whether the threshold should 
be higher, lower, or a different type of threshold.
    Information about Directors and Officers. The SEC disclosure rules 
require information about all directors and executive officers of the 
registrant. The required information includes name, age, current and 
previous positions with the registrant, terms of office, family 
relationships with the registrant, business experience, and other 
directorships. Presenting biographical information on all FHLBank 
directors and all FHLBank executive officers in the combined annual 
report would be unwieldy. The FHLBanks may wish to consider making this 
disclosure in their individual annual reports. The Finance Board 
proposes that the existing biographical information about members of 
the Board of Directors of the Finance Board and FHLBank presidents be 
expanded to include the age of those persons. In addition, the Finance 
Board proposes to provide similar biographical information about the 
managing director of the Office of Finance and the chairs and vice 
chairs of the FHLBanks.
    Submission of Matters to a Vote of Stockholders. The SEC disclosure 
rule requires registrants to provide certain information about matters 
submitted to stockholders for a vote. The only item that FHLBank 
stockholders vote upon is the annual election of directors. For two 
reasons, the Finance Board has determined to exclude election-of-
director information from the combined annual financial statements. 
First, matters concerning election of directors can be handled more 
expeditiously and efficiently by separate mailings to an FHLBank's 
stockholders as a part of the election process. Second, election of 
directors occurs in the fall, but the annual combined financial report 
is published in late spring, making it impossible to provide timely 
information about the election of directors in the combined annual 
report.
    Exhibits. The exhibits specified in the SEC disclosure rules are 
generally not applicable.
    The text of the proposed policy follows:

Federal Housing Finance Board--Statement of Policy

Disclosures in the Combined Annual and Quarterly Financial Reports of 
the Federal Home Loan Bank System

1. Policy Objective

    The Federal Housing Finance Board (Finance Board) policy on 
Disclosures in the Combined Annual and Quarterly Financial Reports of 
the Federal Home Loan Bank System provides that purchasers of Federal 
Home Loan Bank (FHLBank) System consolidated obligations receive the 
same types of disclosures that Securities and Exchange (SEC) 
registrants must provide. As issuer of the debt for the FHLBank System, 
the Finance Board provides many of the disclosures normally made in 
conjunction with the offering of FHLBank System debt in the combined 
annual and quarterly financial reports of the FHLBank System. The 
Finance Board has the explicit statutory responsibility to ensure that 
the FHLBanks are able to raise funds in the capital markets, and the 
provision of industry-standard disclosures facilitates the issuance of 
this debt.

2. General Policy

    To the extent they are applicable to the FHLBank System, it is the 
policy of the Finance Board that the combined annual and quarterly 
financial reports of the FHLBank System present the disclosures 
required by Regulations S-K and S-X of the SEC (see 17 CFR parts 229 
and 210).

3. Exceptions to the General Policy

    a. Derivatives. Item 305, Regulation S-K, 17 CFR 229.305, requires 
certain registrants to present information about their derivatives 
holdings and activities. The requirement includes a discussion of 
accounting policy for derivatives, a qualitative discussion about 
derivatives by management, and an analysis that presents quantitative 
information about derivatives. The presentation of the required 
quantitative information will

[[Page 5384]]

be deferred until the 1998 combined annual report of the FHLBank 
System.
    b. Related-Party Transactions. Item 404 of Regulation S-K, 17 CFR 
229.404, requires the disclosure of certain relationships and related 
transactions. In light of the cooperative nature of the FHLBank System, 
related-party transactions are to be expected, and a disclosure of all 
related-party transactions that meet the threshold would not be 
meaningful. Instead, the combined annual report will provide 
disclosures on (1) the percent of advances to members an officer of 
which serves and an FHLBank director, (2) a listing of all members that 
hold $1 billion or more of advances, with a further disclosure that 
indicates which of these members has an officer that serves as an 
FHLBank director, and (3) a general disclosure about equitable advances 
pricing.
    c. Biographical Information. The biographical information required 
by Items 401 and 405 of Regulation S-K, 17 CFR 229.401, 229.405, will 
be provided only for the members of the Board of Directors of the 
Finance Board, FHLBank presidents, the managing director of the Office 
of Finance, and FHLBank chairs and vice chairs.
    d. Compensation. The information on compensation required by Item 
402 of Regulation S-K, 17 CFR 229.402, will be provided only for 
members of the Board of Directors of the Finance Board, FHLBank 
presidents, and the managing director of the Office of Finance.
    e. Submission of Matters to a Vote of Stockholders. No information 
will be presented on matters submitted to shareholders for a vote, as 
otherwise required by Item 4 of the SEC's form 10-K, 17 CFR 249.310. 
The only item shareholders vote upon is the annual election directors.
    f. Exhibits. The exhibits required by Item 601 of Regulation S-K, 
17 CFR 229.601, are not applicable and will not be provided.

    By the Board of Directors of the Federal Housing Finance Board.

    Dated: January 21, 1998.
Bruce A. Morrison,
Chairperson.
[FR Doc. 98-1968 Filed 1-30-98; 8:45 am]
BILLING CODE 6725-01-U