14 November 2008
[Federal Register: November 14, 2008 (Volume 73, Number 221)]
[Proposed Rules]
[Page 67424-67427]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14no08-35]
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1231
RIN 2590-AA08
Golden Parachute and Indemnification Payments
AGENCY: Federal Housing Finance Agency.
ACTION: Proposed amendment.
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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing to
amend the interim final Golden Parachute Payments regulation published
in the Federal Register on September 16, 2008 (73 FR 53356), and as
corrected on September 19, 2008 (73 FR 54309), and on September 23,
2008 (73 FR 54673). This proposed amendment addresses prohibited and
permissible indemnification payments with regard to any administrative
proceeding brought by the FHFA against an entity-affiliated party of
the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, and the Federal Home Loan Banks in light of the
statutory requirements set forth in 12 U.S.C. 4514(e), as amended by
the Housing and Economic Recovery Act of 2008.
DATES: Written comments on the proposed amendment to the Interim Final
Regulation must be received on or before December 29, 2008. For
additional information, see SUPPLEMENTARY INFORMATION.
ADDRESSES: You may submit your comments on the proposed amendment,
identified by regulatory information number ``RIN 2590-AA08,'' by any
of the following methods:
U.S. Mail, United Parcel Post, Federal Express, or Other
Mail Service: The mailing address for comments is: Alfred M. Pollard,
General Counsel, and Christopher Curtis, General Counsel; Attention:
Comments/RIN 2590-AA08, Federal Housing Finance Agency, Fourth Floor,
1700 G Street, NW., Washington, DC 20552.
Hand Delivered/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, and Christopher Curtis, General
Counsel; Attention: Comments/RIN 2590-AA08, Federal Housing Finance
Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The
package should be logged at the Guard Desk, First Floor, on business
days between 9 a.m. and 5 p.m.
E-mail: Comments to Alfred M. Pollard, General Counsel,
and Christopher Curtis, General Counsel, may be sent by e-mail at
[[Page 67425]]
RegComments@FHFA.gov. Please include ``RIN 2590-AA08'' in the subject
line of the message.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
FOR FURTHER INFORMATION CONTACT: Alfred M. Pollard, General Counsel,
telephone (202) 414-3788; or Christopher Curtis, General Counsel,
telephone (202) 408-2802 (not toll-free numbers), Federal Housing
Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552.
The telephone number for the Telecommunications Device for the Deaf is
(800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Comments
The FHFA invites comments on all aspects of the proposed amendment
and will take all comments into consideration before issuing the final
regulation. The FHFA requests that comments submitted in hard copy also
be accompanied by the electronic version in Microsoft[supreg] Word or
in portable document format (PDF) on 3.5'' disk or CD-ROM.
Copies of all comments will be posted on the internet Web site at
http://www.FHFA.gov. In addition, copies of all comments received will
be available for examination by the public on business days between the
hours of 10 a.m. and 3 p.m., at the Federal Housing Finance Agency,
Fourth Floor, 1700 G Street, NW., Washington, DC 20552. To make an
appointment to inspect comments, please call the Office of General
Counsel at (202) 414-3751.
II. Background
The Housing and Economic Recovery Act of 2008 (HERA), Public Law
110-289, 122 Stat. 2654, amended the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.)
(Act) to establish FHFA as an independent agency of the Federal
Government.\1\ FHFA was established to oversee the prudential
operations of the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation (collectively, the Enterprises), and the
Federal Home Loan Banks (Banks) (collectively, the regulated entities),
and to ensure that they operate in a safe and sound manner including
being capitalized adequately; foster liquid, efficient, competitive and
resilient national housing finance markets; comply with the Act and
rules, regulation, guidelines and orders issued under the Act, and the
respective authorizing statutes of the regulated entities; and carry
out their missions through activities authorized and consistent with
the Act and their authorizing statutes; and, that the activities and
operations of the regulated entities are consistent with the public
interest.
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\1\ See Division A, titled the ``Federal Housing Finance
Regulatory Reform Act of 2008,'' Title I, Section 1101 of HERA.
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III. Proposed Amendment to Interim Final Regulation
The FHFA published the Interim Final Regulation on Golden Parachute
and Indemnification Payments in the Federal Register on September 16,
2008 (73 FR 53356). Subsequently, it published corrections rescinding
that portion of the regulation that addressed indemnification payments
on September 19, 2008 (73 FR 54309), and on September 23, 2008 (73 FR
54673).
Section 1114 of HERA amended 12 U.S.C. 4518 to provide additional
authorities to FHFA in addressing certain compensation and benefits,
including ``golden parachute'' and ``indemnification payments'' as
those terms are defined therein. The proposed amendment would describe
prohibited and permissible indemnification payments that a regulated
entity may make to an entity-affiliated party in connection with
administrative proceedings or civil actions instituted by FHFA. The
provisions of the proposed amendment addressing indemnification
payments are substantially similar to the regulation that limits
indemnification by insured depository institutions to institution-
affiliated parties.
In proposing the amendment, FHFA recognizes that prior to the
enactment of HERA, the regulated entities may have entered into
indemnification agreements that provide for indemnification beyond that
which is proposed to be permissible under 12 U.S.C. 4518(e) and the
proposed amendment. The FHFA intends that the proposed amendment would
apply to agreements entered into by a regulated entity with an entity-
affiliated party on or after the date the regulation is effective.
The FHFA is also of the view that the enactment of section 1114 of
HERA makes clear that Congress has authorized FHFA to limit or prohibit
a regulated entity from indemnifying an entity-affiliated party for any
civil money penalty, notwithstanding the language of 12 U.S.C. 4636(g).
Nevertheless, FHFA is of the view that it would be in the best
interests of the regulated entities to permit indemnification of first
and second tier civil money penalties where the administrative
proceeding or civil action relates to conduct occurring while the
regulated entity was in conservatorship. FHFA specifically requests
comments on this point.
Section 1313(f) of the Act, as amended by section 1201 of HERA,
requires the Director, when promulgating regulations relating to the
Banks, to consider the differences between the Banks and the
Enterprises with respect to the Banks' cooperative ownership structure;
mission of providing liquidity to members; affordable housing and
community development mission; capital structure; and joint and several
liability. The Director may also consider any other differences that
are deemed appropriate. In preparing the proposed amendment, the
Director considered the differences between the Banks and the
Enterprises as they relate to the above factors. The Director requests
comments from the public about whether differences related to these
factors should result in a revision of the proposed amendment as it
relates to the Banks.
Regulatory Impact
Paperwork Reduction Act
The proposed amendment does not contain any information collection
requirement that requires the approval of OMB under the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.).
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. Such an analysis need not be
undertaken if the agency has certified that the regulation will not
have a significant economic impact on a substantial number of small
entities. 5 U.S.C. 605(b). The FHFA has considered the impact of the
proposed amendment under the Regulatory Flexibility Act. The FHFA
certifies that the proposed amendment is not likely to have a
significant economic impact on a substantial number of small business
entities because the regulation is applicable only to the regulated
entities, which are not small entities for the purposes of the
Regulatory Flexibility Act.
List of Subjects in 12 CFR Part 1231
Golden Parachutes, Government-sponsored enterprises,
Indemnification.
[[Page 67426]]
Accordingly, for the reasons stated in the preamble, under the
authority of 12 U.S.C. 4518(e) and 4526, the Federal Housing Finance
Agency proposes to amend part 1231 of subchapter B of title 12 CFR
Chapter XII by making the following amendments:
Subchapter B--Entity Regulations
PART 1231--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS
1. The authority citation for part 1231 is revised to read as
follows:
Authority: 12 U.S.C. 4518(e); 12 U.S.C. 4526.
2. Section 1231.1 is revised to read as follows:
Sec. 1231.1 Purpose and scope.
The purpose of this part is to implement section 1318(e) of the Act
(12 U.S.C. 4518(e)) by setting forth the standards that the Director
will take into consideration in determining whether to limit or
prohibit golden parachute payments and by setting forth prohibited and
permissible indemnification payments that regulated entities may make
to entity-affiliated parties.
3. Section 1231.2 is amended by:
a. Removing the paragraph designations before each definition.
b. Removing the reserved paragraphs (l) through (n).
b. Placing the definition for FHFA in alphabetical order.
c. Adding the definitions for ``Liability or legal expenses,''
``Payment'' and ``Prohibited indemnification payment'' in alphabetical
order.
The additions read as follows:
Sec. 1231.2 Definitions.
* * * * *
Liability or legal expense means--
(1) Any legal or other professional expense incurred in connection
with any claim, proceeding, or action;
(2) The amount of, and the cost incurred in connection with, any
settlement of any claim, proceeding, or action; and
(3) The amount of, and any cost incurred in connection with, any
judgment or penalty imposed with respect to any claim, proceeding, or
action.
* * * * *
Payment, as set forth in the definition of the term ``prohibited
indemnification payment,'' includes--
(1) Any direct or indirect transfer of any funds or any asset; and
(2) Any segregation of any funds or assets for the purpose of
making, or pursuant to an agreement to make, any payment after the date
on which such funds or assets are segregated, without regard to whether
the obligation to make such payment is contingent on--
(i) The determination, after such date, of the liability for the
payment of such amount; or
(ii) The liquidation, after such date, of the amount of such
payment.
Prohibited indemnification payment. (1) The term prohibited
indemnification payment means any payment (or any agreement to make any
payment) by any regulated entity for the benefit of any person who is
or was an entity-affiliated party, to pay or reimburse such person for
any civil money penalty or judgment resulting from any administrative
or civil action instituted by FHFA, or for any other liability or legal
expense with regard to any administrative proceeding or civil action
instituted by FHFA that results in a final order or settlement pursuant
to which such person:
(i) Is assessed a civil money penalty;
(ii) Is removed from office or prohibited from participating in the
conduct of the affairs of the regulated entity; or
(iii) Is required to cease and desist from or take any affirmative
action described in section 1371 of the Act (12 U.S.C. 4631) with
respect to the regulated entity.
(2) Exceptions.
(i) The term prohibited indemnification payment shall not include
any reasonable payment by a regulated entity that is used to purchase
any commercial insurance policy or fidelity bond, provided that such
insurance policy or fidelity bond shall not be used to pay or reimburse
an entity-affiliated party for the cost of any judgment or civil money
penalty assessed against such person in an administrative proceeding or
civil action commenced by FHFA, but may pay any legal or professional
expenses incurred in connection with such proceeding or action or the
amount of any restitution to the regulated entity or receiver.
(ii) The term prohibited indemnification payment shall not include
any reasonable payment by a regulated entity that represents partial
indemnification for legal or professional expenses specifically
attributable to particular charges for which there has been a formal
and final adjudication or finding in connection with a settlement that
the entity-affiliated party has not violated certain laws or
regulations or has not engaged in certain unsafe or unsound practices
or breaches of fiduciary duty, unless the administrative proceeding or
civil action has resulted in a final prohibition order against the
entity-affiliated party.
(iii) The term prohibited indemnification payment shall not include
a payment by a regulated entity for a civil money penalty under section
1376(b)(1) and (2) of the Act (12 U.S.C. 4636(b)(1) and (2)) where the
regulated entity has been placed in conservatorship.
4. Section 1231.4 is added to read as follows:
Sec. 1231.4 Indemnification payments.
(a) Scope. (1) This section applies only after an administrative
proceeding or civil action has been instituted by FHFA through issuance
of a notice of charges under regulations issued by the Director.
(2) The provisions of this section shall remain in full force and
effect with respect to a regulated entity that is in conservatorship.
(b) Prohibited indemnification payments. No regulated entity shall
make or agree to make any prohibited indemnification payment, except as
provided in this part.
(c) Permissible indemnification payments. (1) A regulated entity
may make or agree to make reasonable indemnification payments to an
entity-affiliated party with respect to an administrative proceeding or
civil action initiated by the FHFA, including payment for a civil money
penalty pursuant to Sec. 1231.2(l)(2)(iii), if:
(i) The board of directors of the regulated entity, in good faith,
determines in writing after due investigation and consideration that
the entity-affiliated party acted in good faith and in a manner he or
she believed to be in the best interests of the regulated entity;
(ii) The board of directors of the regulated entity, in good faith,
determines in writing after due investigation and consideration that
such payments will not materially adversely affect the safety and
soundness of the regulated entity;
(iii) The indemnification payments do not constitute prohibited
indemnification payments as that term is defined in Sec. 1231.2(l);
and
(iv) The entity-affiliated party agrees in writing to reimburse the
regulated entity, to the extent not covered by payments from insurance
or bonds purchased pursuant to Sec. 1231.2(l)(2), for that portion of
any advanced indemnification payments that subsequently become
prohibited indemnification payments, as defined in Sec. 1231.2(l).
(2) An entity-affiliated party requesting indemnification payments
[[Page 67427]]
shall not participate in any way in the board's discussion and approval
of such payments; provided, however, that such entity-affiliated party
may present his or her request to the board of directors and respond to
any inquiries from the board of directors concerning his or her
involvement in the circumstances giving rise to the administrative
proceeding or civil action.
(3) In the event that a majority of the members of the board of
directors are named as respondents in an administrative proceeding or
civil action and request indemnification, the remaining members of the
board may authorize independent legal counsel to review the
indemnification request and provide the remaining members of the board
with a written opinion of counsel as to whether the conditions
delineated in paragraph (c)(1) of this section have been met. If
independent legal counsel opines that said conditions have been met,
the remaining members of the board of directors may rely on such
opinion in authorizing the requested indemnification.
(4) In the event that all of the members of the board of directors
are named as respondents in an administrative proceeding or civil
action and request indemnification, the board shall authorize
independent legal counsel to review the indemnification request and
provide the board with a written opinion of counsel as to whether the
conditions delineated in paragraph (c)(1) of this section have been
met. If independent legal counsel opines that said conditions have been
met, the board of directors may rely on such opinion in authorizing the
requested indemnification.
5. Section 1231.6 is added to read as follows:
Sec. 1231.6 Applicability in the event of receivership.
The provisions of this part, or any consent or approval granted
under the provisions of this part by the FHFA, shall not in any way
bind any receiver of a regulated entity in receivership. Any consent or
approval granted under the provisions of this part by the FHFA shall
not in any way obligate the FHFA or receiver to pay any claim or
obligation pursuant to any golden parachute, severance,
indemnification, or other agreement. Claims for employee welfare
benefits or other benefits which are contingent, even if otherwise
vested, when a receiver is appointed for any regulated entity,
including any contingency for termination of employment, are not
provable claims or actual, direct compensatory damage claims against
such receiver. Nothing in this part may be construed to permit the
payment of salary or any liability or legal expense of an entity-
affiliated party contrary to section 1318(e)(3) of the Act (12 U.S.C.
4518(e)(3)).
Dated: November 5, 2008.
James B. Lockhart III,
Director, Federal Housing Finance Agency.
[FR Doc. E8-26831 Filed 11-13-08; 8:45 am]
BILLING CODE 8070-01-P
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