Federal Register: September 17, 2003 (Volume 68, Number 180)
DOCID: FR Doc 03-23761
FEDERAL HOUSING FINANCE BOARD
Federal Housing Finance Board
CFR Citation: 12 CFR Parts 900 and 998
RIN ID: RIN 3069-AB22
DOCUMENT ID: [No. 2003-19]
NOTICE: PROPOSED RULES
ACTION: Federal home loan bank system:
DOCUMENT ACTION: Proposed regulation.
SUBJECT CATEGORY:
Registration by Each Federal Home Loan Bank of a Class of Its Securities Under the Securities Exchange Act of 1934
DATES: Written comments on the proposed regulation must be received by January 15, 2004.
DOCUMENT SUMMARY:
The Federal Housing Finance Board (Finance Board) is proposing to adopt a regulation requiring each Federal Home Loan Bank (Bank) to prepare and make public certain disclosures relating to its business and financial condition. Each Bank will satisfy these disclosure requirements by voluntarily registering a class of its securities with the Securities and Exchange Commission (SEC) under the provisions of section 12(g) of the Securities Exchange Act of 1934. By voluntarily registering a class of its securities, each Bank will subject itself to the 1934 Act's periodic disclosure regime, as interpreted and administered by the SEC.
SUMMARY:
Bank business and financial condition disclosure requirements; class of securities registration,
SUPPLEMENTAL INFORMATION
I. Comments
The Finance Board invites comments on all aspects of the proposed
regulation, including legal and policy considerations, and assessments of the
[[Page 54397]]
proposed regulation's impact on access to capital markets, cost of
funds, and other costs to the Bank System. The Finance Board will take
all comments into consideration before issuing a final regulation. For
copies of public comments, contact Karen Rogers, Executive Secretary,
by email at rogersk@fhfb.gov, by facsimile at 202/4082530, or by telephone at 202/4082910.
II. Statutory and Regulatory Background
A. The Banks
The 12 Banks are privately owned ``governmentsponsored
enterprises'' (GSEs) organized under the authority of the Federal Home
Loan Bank Act (Bank Act) \1\ to support the financing of housing and
community lending by their members.\2\ The Bank Act requires the Banks
to adopt a cooperative structure. Eligible financial institutions
(principally, depository institutions) may become members of a Bank if
they satisfy certain statutory and regulatory criteria and purchase a
specified amount of a Bank's capital stock.\3\ Only Bank members may
own Bank capital stock and share in Bank profits. Only Bank members,
and certain eligible housing associates (such as State housing finance
agencies), may borrow from or use other Bank products and services.\4\ \1\ 12 U.S.C. 1421 et seq.
\2\ 12 U.S.C. 1422a(a)(3)(B)(ii), 1430(i), (j).
\3\ 12 U.S.C. 1424, 1426.
\4\ 12 U.S.C. 1426, 1430, 1430b.
B. The Finance Board
The Banks' regulator is the Finance Board, an independent agency in
the executive branch of the U.S. government. The Finance Board's
primary duty is to ensure that the Banks operate in a financially safe
and sound manner. To the extent consistent with that duty, the Finance
Board also must supervise the Banks, ensure that the Banks carry out
their housing finance mission, and ensure that the Banks remain
adequately capitalized and able to raise funds in the capital markets.\5\
\5\ 12 U.S.C. 1422a(a)(3)(A), (B).
C. GrammLeachBliley Act
The GrammLeachBliley Act \6\ (GLB Act) required the Banks to
adopt new riskbased capital structures. On January 30, 2001, the
Finance Board published a final regulation implementing new capital
structure requirements for the Banks.\7\ As of July 18, 2002, the
Finance Board had approved a new capital plan for each of the Banks. To
date, six Banks have implemented their capital plans and are operating
under new capital structures. Until a Bank implements its capital plan,
its capital structure is governed by the Finance Board's preGLB Act regulations.
\6\ Pub. L. 106102 (1999).
\7\ 66 FR 8262 (January 30, 2001).
D. Bank System Securities
Consolidated Obligations. The Bank Act authorizes the individual
Banks to issue debt securities, subject to Finance Board regulation.\8\
While the Finance Board has not adopted regulations permitting the
issuance of debt securities by individual Banks and no Bank has ever
individually issued debt securities, the Finance Board has adopted
regulations authorizing the Office of Finance (OF), a joint office of
the Banks, as agent for the Banks, to offer, issue and service
consolidated obligations on which the Banks are jointly and severally
liable.\9\ The Banks, together with the OF, comprise the Bank System.
The Banks' GSE status enables the OF to issue consolidated obligations
at favorable rates. The Banks pass along their funding advantage to
their membersand ultimately to consumersby providing advances
(secured loans) and other financial services to their members at lower
rates than the members generally could obtain elsewhere. At June 30,
2003, the Bank System had $507 billion of consolidated obligation bonds
(maturity of one year or more) and $134 billion of consolidated
obligation discount notes (maturity of less than one year) outstanding. \8\ 12 U.S.C. 1431(a).
\9\ 12 CFR 985.3(a). Prior to 2001, the OF performed the same
functions for the Finance Board, which had issued consolidated
obligations on behalf of the Banks pursuant to Section 11(c) of the Bank Act. The Finance Board no longer issues consolidated
obligations on behalf of the Banks under Section 11(c).
Equity Securities. Banks that have implemented new capital plans
may issue Class A stock or Class B stock (and each class may have
subclasses). Shares of both Class A stock and Class B stock are issued
at a par value of $100 per share. Shares of Class A stock are
redeemable in cash on sixmonths written notice to a Bank. Shares of
Class B stock are redeemable in cash on fiveyears written notice to a
Bank. The redemption price for shares of both Class A stock and Class B
stock is $100 per share.\10\ Banks that have not implemented new
capital plans issue only one class of capital stock redeemable by the
Bank on sixmonths notice. This capital stock is also purchased by the
member and redeemed by the Bank at a par value of $100 per share. Each
Bank may also repurchase outstanding shares of any type of Bank capital
stock at a price of $100 per share in certain circumstances. \10\ 12 CFR 931.1.
E. 1933 Act and 1934 Act Exemptions Applicable to Bank Securities
1933 Act Exemption for Bank Equity and Debt Securities. Equity
securities issued by individual Banks to their members and debt
securities issued by the OF as agent for the Banks to public investors
are exempt from the registration requirements of the Securities Act of
1933 (1933 Act) \11\ because the Banks are persons ``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.'' \12\
\11\ 15 U.S.C. 77a et seq.
\12\ 15 U.S.C. 77c(a)(2).
1934 Act Exemption for Bank Debt Securities. Debt securities issued
by the OF as agent for the Banks are exempt from the registration
requirements of the Securities Exchange Act of 1934 (1934 Act).\13\
Sections 3(a)(12)(A) and 3(a)(42)(B) of the 1934 Act designate as
exempt securities, ``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.'' \14\ In
Release 341168 dated April 28, 1937, the SEC announced the Secretary
of the Treasury's designation for exemption of those securities issued
by the Federal Home Loan Bank Board (the predecessor agency to the
Finance Board) or by the Banks under the authority of Section 11 of the
Bank Act. The consolidated obligations issued by the OF as agent for
the Banks are issued under the authority of Section 11(a) of the Bank Act.
\13\ 15 U.S.C. 78a et seq.
\14\ 15 U.S.C. 78c(a)(42)(B).
Bank Equity Securities under the 1934 Act. The Secretary of the Treasury has not designated Bank equity securities for exemption under the 1934 Act.
Basis for 1933 Act and 1934 Act Exemptions. The Banks' 1933 Act and
1934 Act exemptions rest on a presumption, and the Finance Board's
supervisory and examination authority over the Banks includes a
responsibility to ensure, that the securities activities of government
instrumentalities are conducted in the public interest and for the
protection of investors. This obligation was reinforced when [[Page 54398]]
Congress assigned to the Finance Board the statutory duty ``to ensure
that the Federal Home Loan Banks remain adequately capitalized and able to raise funds in the capital markets.'' \15\
\15\ 12 U.S.C. 1422a(a)(3)(B)(iii).
F. Current Bank System Securities Disclosure
Bank System Combined Reports. Subject to certain specifically enumerated exceptions, Finance Board regulations currently require the OF to prepare combined annual and quarterly financial reports for the Bank System (Bank System Combined Reports) in scope, form and content generally consistent with the requirements of SEC Regulation SK and Regulation SX.\16\ Under these Finance Board regulations, the OF prepares an annual and three quarterly Bank System Combined Reports. The annual report portion of the Bank System Combined Reports contains: (i) Audited balance sheets for the prior two years and income statements for the prior three years; (ii) a discussion and analysis of the Bank System's financial condition and results of operations; and (iii) supplemental information describing the Bank System's business and senior Bank System management. The quarterly report portions of the Bank System Combined Reports contain unaudited interim financial statements with accompanying discussion and analysis of the Bank System's financial condition and results of operations.
\16\ 12 CFR 985.6(b)(1).
Bank Annual and Quarterly Reports. Finance Board regulations also require that any financial statements contained in an annual or quarterly financial report issued by an individual Bank be consistent in both form and content with the financial statements presented in the Bank System Combined Reports.\17\ Except for this obligation, there is no Finance Board regulatory requirement that individual Bank annual or quarterly reports be in scope, form and content generally consistent with the requirements of SEC Regulation SK and Regulation SX. Each Bank currently prepares and distributes to its members an annual report containing audited financial statements and a management discussion and analysis section. Each Bank also distributes brief quarterly or semi annual summary financial reports to its members.
\17\ 12 CFR 989.4.
Additional OF 1933 Act Disclosure Documents. The OF distributes
various offering documents to investors in connection with issuances of
Bank System consolidated obligations. These OF disclosure documents are
modeled on the disclosure documents that are prepared by issuers of
investment grade debt who issue debt securities under cover of a Form S3 shelf registration statement.
G. Reassessment of the Securities Disclosure of the Individual Banks Bank System's Need to Remain Adequately Capitalized
Comprehensive, fully transparent securities disclosure is necessary if the Banks are to maintain the longterm confidence of the investment community and the national rating agencies. The rules and regulations that form the 1934 Act's periodic disclosure system establish the best practices standard for disclosure by U.S. corporations. The SEC has the resources and the expertise to ensure that individual Bank disclosure documents meet this standard. Congress established the SEC in 1934 to enforce the newly enacted federal securities laws, to promote stability in the financial markets and to protect investors. For the last 69 years, the SEC has been in the forefront of investor protection and has significantly contributed to the integrity of the United States securities markets.
Because of the SEC's expertise and resources and the credibility that SEC review brings to a registrant's financial statements, the Finance Board has concluded that the Bank System's ability to access the capital markets may be better secured if each of the 12 Banks voluntarily registers a class of its securities with the SEC under Section 12(g) of the 1934 Act, thereby subjecting the Banks to the SEC's periodic disclosure system, as interpreted and administered by the SEC.
The Finance Board's proposal that each Bank should be required to voluntarily register a class of its securities under Section 12(g) of the 1934 Act also rests on the fact that Bank accounting and financial statement reporting issues have become significantly more complex in recent years because of new Financial Accounting Standards Board (FASB) statements. In particular, Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, has given rise to interpretative complexities. These more complex FASB financial statement reporting requirements necessitate more comprehensive and detailed disclosure by individual Banks. The SEC staff has the extensive accounting expertise required to review this Bank disclosure.
Finally, the Finance Board recognizes that Fannie Mae has voluntarily registered its common stock with the SEC under Section 12(g) of the 1934 Act and that Freddie Mac has agreed to do so upon the completion of its restatement of its financial statements. There may be merit in having the core securities disclosures of all of the housing GSEs overseen by the same disclosure regulator.
Finance Board Will Continue to Oversee the Bank System Combined Reports in Consultation with the SEC. The OF is a joint office of the 12 Banks and is not a separate legal entity. Thus, the OF would not fit into a 1934 Act registration regime that is premised on registrants being separate legal entities with distinct managements. Moreover, the Bank System Combined Reports combine rather than consolidate financial information from each of the 12 Banks. If each of the 12 Banks subjects itself to the SEC's integrated disclosure regime, this will make available to the OF and the Finance Board 1934 Act periodic disclosure documents prepared by each Bank that have been reviewed by SEC staff. With this foundation, the Finance Board believes that its extensive knowledge of the Bank System and the Bank System Combined Reports make the Finance Board the appropriate regulator to continue to supervise the Bank System Combined Report's disclosure. In carrying out this responsibility, the Finance Board will consult with the SEC. III. Analysis of Proposed Regulation
A. Section 900.3 Definitions
The proposed regulation would amend Sec. 900.3\18\ to include the
following three additional definitions of terms related to securities
disclosure that are used in the proposed regulation: ``GLB Act,'' ``SEC,'' and ``1934 Act.''
\18\ 12 CFR 900.3.
B. Section 998.1 General
1. Section 998.1(a) Purpose
This section describes the purpose of part 998, which is to require
each Bank to prepare and submit the financial and other disclosures
required by the Finance Board by voluntarily registering a class of its
securities with the SEC under Section 12(g) of the 1934 Act. The
voluntary registration of a class of the securities of each Bank will
bring each Bank under the 1934 Act periodic disclosure regime, as interpreted and administered by the SEC.
[[Page 54399]]
2. Section 998.1(b) No Limitation on Safety and Soundness Authority and Access to Capital Market Responsibilities
This section would state that the proposed regulation would not limit or restrict the Finance Board's ability carry out its responsibilities under the Bank Act including its responsibility to act under its safety and soundness authority to regulate the Banks, including conducting examinations, requiring reports and disclosures, and enforcing compliance with applicable laws, rules and regulations. This section would not alter the Finance Board's responsibility to ensure the Bank System's continued access to the capital markets. C. Section 998.2 Bank Periodic Disclosures
1. Section 998.2(a) Periodic Disclosures
This section would require each Bank to prepare and make public
disclosures relating to its financial condition, results of operations,
trends or uncertainties affecting its business, and its management's
assessment of its business and financial condition that includes supporting financial information and certifications.
2. Section 998.2(b) Satisfaction of Bank Periodic Disclosure Requirement
This section would require each Bank to satisfy the disclosure requirements of proposed Sec. 998.2(a) by subjecting itself to the 1934 Act's periodic disclosure regime and preparing an annual report, quarterly reports, current reports and such other materials as may be required under the SEC's rules and regulations, including SEC and SEC staff interpretations and rules governing audited financial statements. 3. Section 998.2(c) Voluntary Registration of a Class of the Securities of Each of the Banks with the SEC
This section would establish a mechanism for each Bank to subject itself to the SEC's 1934 Act period disclosure regime. That mechanism would be the voluntary registration of a class of the securities of each Bank with the SEC under Section 12(g) of the 1934 Act. Each Bank would have to agree to voluntarily register a class of its securities with the SEC under Section 12(g) of the 1934 Act within 120 days of the adoption of this proposed regulation as a final regulation. 4. Section 998.2(e) Submission of Disclosures to Finance Board
This section would require each Bank to provide to the Finance Board on a concurrent basis copies of all disclosure documents filed with the SEC.
IV. Regulatory Flexibility Act
The proposed regulation, if adopted as a final regulation, will
apply only to the Banks, which do not come within the meaning of
``small entities,'' as defined in the Regulatory Flexibility Act
(RFA).\19\ Therefore, in accordance with section 605(b) of the RFA,\20\
the Finance Board hereby certifies that the proposed regulation, if
promulgated as a final regulation, will not have a significant economic impact on a substantial number of small entities.
\19\ 5 U.S.C. 601(6).
\20\ 5 U.S.C. 605(b).
V. Paperwork Reduction Act
The proposed regulation does not contain any collections of
information pursuant to the Paperwork Reduction Act of 1995.\21\
Consequently, the Finance Board has not submitted any information to the Office of Management and Budget for review.
\21\ 44 U.S.C. 3501 et seq.
List of Subjects in 12 CFR Parts 900 and 998
Federal home loan banks, Reporting and recordkeeping requirements, and Securities disclosure.
Accordingly, the Finance Board hereby proposes to amend title 12, chapter IX, of the Code of Federal Regulations, as follows: PART 900GENERAL DEFINITIONS APPLYING TO ALL FINANCE BOARD
REGULATIONS
1. The authority citation for part 900 continues to read as follows:
Authority: 12 U.S.C. 1422b(a).
2. Amend Sec. 900.3 by adding the following three definitions in alphabetical order:
Sec. 900.3 Terms relating to other entities and concepts used throughout 12 CFR chapter IX.
* * * * *
GLB Act means the GrammLeachBliley Act (Pub. L. 106102 (1999)). * * * * *
SEC means the U.S. Securities and Exchange Commission. * * * * *
1934 Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
* * * * *
3. Add Subchapter M (part 998) to title 12, chapter IX, to read as follows:
Subchapter MBank System Securities Disclosure
PART 998VOLUNTARY REGISTRATION OF A CLASS OF SECURITIES OF EACH BANK UNDER SECTION 12(g) OF THE 1934 ACT
Sec.
998.1 General.
998.2 Bank periodic disclosures.
Authority: 12 U.S.C. 1422b(a), 1422a(a)(3)(A),
1422a(a)(3)(B)(iii).
Sec. 998.1 General.
(a) Purpose. The purpose of this part is to require each Bank to
prepare and publicly distribute certain financial and other
disclosures. The required disclosures are those that would be provided
by 1934 Act registrants subject to the 1934 Act's periodic disclosure regime, as interpreted and administered by the SEC.
(b) No limitation on safety and soundness authority or access to
capital markets responsibility. This part does not limit or restrict
the Finance Board's ability carry out its responsibilities under the
Act including its responsibility to act under its safety and soundness
authority to regulate the Banks, including conducting examinations,
requiring reports and disclosures, and enforcing compliance with
applicable laws, rules and regulations. This part shall not alter the
Finance Board's responsibility to ensure the Bank System's continued access to the capital markets.
Sec. 998.2 Bank periodic disclosures.
(a) Periodic disclosures. Each Bank shall prepare and make public
disclosures relating to its financial condition, results of operations,
trends or uncertainties affecting its business, and its management's
assessment of its business and financial condition that includes supporting financial information and certifications.
(b) Satisfaction of Bank periodic disclosure requirement. Each Bank
shall satisfy the disclosure requirements of paragraph (a) of this
section by subjecting itself to the 1934 Act's periodic disclosure
regime and preparing an annual report, quarterly reports, current
reports and such other materials as may be required under the SEC's
rules and regulations, including SEC and SEC staff interpretations and rules governing audited financial statements.
(c) Requirement to voluntarily register a class of securities. Each
Bank shall subject itself to the 1934 Act's periodic disclosure regime
by agreeing to voluntarily register a class of its securities with the SEC under Section
[[Page 54400]]
12(g) of the 1934 Act (15 U.S.C. 78l(g)) within 120 days of the adoption of this regulation.
(d) Submission of disclosures to Finance Board. Unless otherwise
required by the Finance Board, each Bank shall provide to the Finance
Board on a concurrent basis copies of all disclosure documents filed with the SEC.
Dated: September 11, 2003.
By the Board of Directors of the Federal Housing Finance Board. John T. Korsmo,
Chairman.
[FR Doc. 0323761 Filed 91603; 8:45 am]
BILLING CODE 672501P
FOR FURTHER INFORMATION CONTACT
Arnold Intrater, General Counsel, 202/ 4082536, intratera@fhfb.gov, or John P. Foley, Senior Attorney Advisor, Office of General Counsel, 202/4082932, foleyj@fhfb.gov, or Joseph A. McKenzie, Deputy Chief Economist, Office of Supervision, 202/ 4082845, mckenziej@fhfb.gov, Federal Housing Finance Board, 1777 F Street, NW., Washington, DC 20006.