Federal Register: June 29, 2004 (Volume 69, Number 124)
DOCID: FR Doc 04-14696
FEDERAL HOUSING FINANCE BOARD
Federal Housing Finance Board
CFR Citation: 12 CFR Parts 900 and 998
RIN ID: RIN 3069-AB22
DOCUMENT ID: [No. 2004-07]
NOTICE: RULES
ACTION: Federal home loan bank system:
DOCUMENT ACTION: Final rule.
SUBJECT CATEGORY:
Registration of Federal Home Loan Bank Equity Securities
DATES: Effective Date: The final rule will be effective on July 29, 2004.
DOCUMENT SUMMARY:
The Federal Housing Finance Board (Finance Board) is issuing a
final rule requiring each Federal Home Loan Bank (Bank) to register a
class of its equity securities with the Securities and Exchange
Commission (SEC) under the registration provisions of section 12(g)(1)
of the Securities Exchange Act of 1934 (1934 Act).\1\ Each Bank shall
thereafter be required to comply with the disclosure requirements of
the 1934 Act by preparing and filing with the SEC the annual,
quarterly, and current reports required under that Act, as well as any
other materials required by the SEC, including those related to audited financial statements.
\1\ 15 U.S.C. 78a et seq.
SUMMARY:
Bank business and financial condition disclosure requirements; class of securities registration,
SUPPLEMENTAL INFORMATION
To assist readers, below is an outline of
the discussion contained in this SUPPLEMENTARY INFORMATION: I. Statutory and Regulatory Background
A. The Federal Home Loan Bank (Bank System)
B. Bank Securities
C. Current Bank System Disclosure
1. Bank System Combined Reports
2. Individual Bank Annual and Quarterly Reports
D. Exemptions for Bank Securities From the Registration Provisions of the 1933 Act and 1934 Act
E. Registration Pursuant to the Voluntary Registration Provisions of Section 12(g)(1) of the 1934 Act
F. Proposed Rule
II. Finance Board Findings Supporting Adoption of the Final Rule
A. Legal Authority To Require Registration
1. Authority To Require Enhanced Disclosures
2. Authority To Require Registration With the SEC
B. Reasonable Exercise of Finance Board Authority
1. Benefits of Enhanced Disclosure Generally
2. Benefits of Disclosures That Are Consistent With Industry Standards
3. Benefits of Registration With the SEC Versus Registration With the Finance Board
4. Costs of SEC Registration
a. Compliance Costs
b. Liquidity Costs
c. Funding Costs
5. Resolution of Operational Issues
III. Analysis of Final Rule
IV. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
I. Statutory and Regulatory Background
A. The Federal Home Loan Bank System (Bank System)
The Bank System consists of 12 Banks and the Office of Finance
(OF). The Banks are instrumentalities of the United States organized
under the authority of the Federal Home Loan Bank Act (Bank Act).\2\
The Banks also are ``government sponsored enterprises'' (GSEs), i.e.,
federallychartered but privatelyowned institutions created by
Congress to support the financing of housing and community lending by
their members.\3\ OF is a joint office of the Banks created by the
Federal Home Loan Bank Board, which was the predecessor agency to the
Finance Board. As a ``joint office,'' OF is not a separate legal entity.
\2\ 12 U.S.C. 1421 et seq.
\3\ See 12 U.S.C. 1422a(a)(3)(B)(ii), 1430(i), and 1430(j).
By virtue of their GSE status and the AAA credit rating awarded to Bank System debt, the Banks are able to borrow in the capital markets at favorable rates. The Banks then pass along that funding advantage to their membersand ultimately to consumersby providing advances (secured loans) and other financial services to their members (principally, depository institutions) at rates that the members generally could not obtain elsewhere. In recent years, the Banks have established acquired member asset (AMA) programs under which the Banks acquire certain residential mortgage loans from their members and certain eligible housing associates (such as state housing finance agencies). The AMA programs represent a means of advancing the Banks' housing finance mission, pursuant to criteria established in Finance Board regulations.\4\
\4\ See 12 CFR part 955.
The Banks are cooperatives, meaning that only their members may own
the capital stock and share in the profits of the Banks and only their
members and certain eligible housing associates may borrow from or use
the other products and services provided by the Banks.\5\ An
institution that is eligible may become a member of a Bank if it
satisfies certain statutory and regulatory criteria and purchases a specified amount of the Bank's capital stock.\6\
\5\ See 12 U.S.C. 1426, 1430(a), and 1430b.
\6\ See 12 U.S.C. 1424 and 1426; 12 CFR part 925.
The Bank System operates under the supervision of the Finance
Board, an independent agency created in 1989 within the executive
branch of the U.S. government.\7\ The primary duty of the Finance Board
is to ensure that the Banks operate in a financially safe and sound
manner. Consistent with that duty, the Finance Board is required to
supervise the Banks, ensure that they carry out their housing finance
mission, and ensure that they remain adequately capitalized and able to raise funds in the capital markets.\8\
\7\ See Financial Institutions Reform, Recovery, and Enforcement
Act of 1989, Pub. L. 10173, Title VII, sec. 702(a), 103 Stat. 413 (codified at 12 U.S.C. 1422a and 1422b).
\8\ See 12 U.S.C. 1422a(a)(3)(A) and (B).
[[Page 38800]]
B. Bank Securities
Each Bank individually issues equity securities to its members.\9\ A member is required to purchase and hold stock of its district Bank as a condition both of membership in the Bank and of doing business with the Bank. Members also may acquire stock, often referred to as ``excess stock,'' in excess of the levels required to maintain membership or to support its business with its Bank.
\9\ See 12 U.S.C. 1426a(4)(A).
Until the enactment of the GrammLeachBliley Act in 1999,\10\ the
Bank Act authorized the Banks to issue only one class of stock to their
members.\11\ This stock was redeemable in cash at par value six months
after a member filed a notice to withdraw from the Bank.\12\ The GLB
Act altered the capital structure of the Banks. Under the GLB Act's
amendments to the Bank Act, a Bank may issue one or both of two classes
of stock. Class A stock is redeemable at par value six months after a
member files a notice with the Bank to redeem the stock, and Class B
stock is redeemable at par value five years after a member files a
redemption notice.\13\ A Bank also may repurchase, at par value, any
excess stock acquired by a member. All stock purchases and redemptions
are subject to certain limits relating to the Bank's capital adequacy.\14\
\10\ Pub. L. 106102, 133 Stat. 1338 (Nov. 12, 1999) (GLB Act). \11\ See 12 U.S.C. 1426 (1994).
\12\ Id.
\13\ See 12 U.S.C. 1426(a)(4)(A).
\14\ See 12 U.S.C. 1426(e)(1) (2004); 12 U.S.C. 1426 (1994); 12 CFR 931.7(b).
The GLB Act also required each Bank to adopt a capital plan in
which the Bank must set forth, among other items, the attributes
associated with each class (or subclass) of stock that the Bank intends
to issue, including each class of stock's par value, dividend rights
and preferences, and liquidation rights.\15\ Until a Bank implements
its capital plan, its capital structure, including its authority with
regard to issuance of stock, is governed by the Bank Act requirements
that were in effect immediately prior to the passage of the GLB Act.\16\
\15\ See 12 U.S.C. 1426(c); 12 CFR 933.2.
\16\ See 12 U.S.C. 1426(a)(6). All of the Banks have had their
capital plans approved by the Finance Board, and eight Banks have
implemented their capital plans as of the date of the adoption of this final rule.
The Banks also issue debt securities, known as consolidated
obligations (COs), to investors throughout the United States and the
rest of the world, pursuant to section 11(a) of the Bank Act, subject
to certain conditions.\17\ Among the conditions are that the COs may
only be issued through OF as agent for the Banks jointly, and that the
Banks shall be jointly and severally liable on all COs issued by OF on
the Banks' behalf.\18\ While the Banks may issue debt jointly through
OF, a Bank is not allowed to issue debt individually in its own name.
As of March 31, 2004, the Bank System had $603.0 billion of CO bonds
(with a maturity of one year or more) and $161.9 billion of CO discount notes (with a maturity of less than one year) outstanding.
\17\ Section 11 of the Bank Act provides three options for
raising funds in the capital markets for the Banks. Section 11(a)
authorizes the individual Banks to issue debt securities, subject to
rules and regulations, terms and conditions prescribed by the
Finance Board. 12 U.S.C. 1431(a). Section 11(b) authorizes the
Finance Board to issue consolidated debentures, within stated
limitations, and upon such terms and conditions as the Finance Board
may prescribe, which shall be the joint and several obligations of
all of the Banks. See 12 U.S.C. 1431(b). Section 11(c) authorizes
the Finance Board to issue secured consolidated bonds, upon such
terms and conditions as the Finance Board may prescribe, which shall
be the joint and several obligations of the Banks. See 12 U.S.C. 1431(c).
Under section 15 of the Bank Act, obligations of the Banks
issued with the approval of the Finance Board must state that they
are not the obligations of, and are not guaranteed by, the United
States. See 12 U.S.C. 1435. The Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 provides that none of the
housing GSE obligations or securities is backed by the full faith
and credit of the United States. See Pub. L. 102550, Tit. XIII,
sec. 1304, 106 Stat. 3944 (Oct. 28, 1992) (codified at 12 U.S.C.
4503). Notwithstanding these statements, the capital markets often
view debt issued by or on behalf of the Banks as having an implied
government guarantee based on the GSE status of the Banks, the joint
and several liability of the Banks on the COs, and the existence of
section 11(i) of the Bank Act (12 U.S.C. 1431(i)), which provides
that the Secretary of the Treasury is authorized, in his discretion,
to purchase up to $4 billion of obligations of the Banks issued
under section 11. The Secretary's purchase or sale of such
obligations would be treated as ``publicdebt transactions of the United States.''
\18\ See 12 CFR 966.2(b), 966.9, 985.3(a), and 985.6(a). Prior
to 2001, the Finance Board issued COs pursuant to section 11(c) of
the Bank Act through OF. The functions currently performed by OF as
agent for the Banks with regard to the CO issuance are largely
identical to the functions it performed on behalf of the Finance
Board when the Finance Board issued the COs. While the Finance Board
has retained the authority to issue debt on behalf of the Banks
pursuant to section 11(c) of the Bank Act, it currently does not do so. See 12 CFR 966.2(a).
C. Current Bank System Disclosure
1. Bank System Combined Reports
The Finance Board's regulations currently require OF to prepare and distribute combined annual and quarterly financial reports for the Bank System (Bank System Combined Reports).\19\ The disclosure in the Bank System Combined Reports must be generally consistent in scope, form, and content with the requirements of SEC Regulations SX and SK,\20\ subject to exceptions that the Finance Board has approved for certain nonfinancial statement information.\21\
The Bank System Combined Reports also contain discussions of
certain nonfinancial information on an aggregate Bank System level,
such as a description of Bank System businesses, and a financial
discussion and analysis. Information about each Bank is required to be
presented in the Bank System Combined Reports as a segment of the Bank
System as if Statement of Financial Accounting Standards No. 131,
titled ``Disclosures about Segments of an Enterprise and Related
Information'' (FASB 131), applied to the Bank System Combined Reports.\22\
\19\ See 12 CFR 985.6(b).
\20\ SEC Regulation SK specifies disclosure rules for non
financial items to be included in registration statements, annual
reports, and proxy statements. See 17 CFR part 229. Major items
include a description of a registrant's business, management's
discussion and analysis, and disagreements with accountants. SEC
Regulation SX, and the SEC's financial reporting releases, set
forth the accounting principles that must be utilized in preparing
financial statements for inclusion in SEC filings. See 17 CFR part 210.
\21\ See 12 CFR part 985 Appendix A.
\22\ See 12 CFR 985.6(b)(2).
To facilitate OF's preparation of the annual and quarterly Bank
System Combined Reports, the Finance Board's regulations require each
Bank to provide to OF, in such form and within such timeframes as the
Finance Board or OF shall specify, all financial and other information
and assistance OF shall request for that purpose.\23\ The financial
statements of the Banks must be audited in accordance with generally
accepted auditing standards (GAAS) and Federal government auditing standards.\24\
\23\ See 12 CFR 989.3.
\24\ See 12 CFR 989.2. OF also distributes various offering
documents to investors in connection with issuances of Bank System
COs. These OF discloure documents are modeled on the disclosure
documents that are prepared by issuers of investment grade debt. 2. Individual Bank Annual and Quarterly Reports
Each Bank currently prepares and distributes to its members an
annual report containing audited financial statements, a section
containing some level of management discussion and analysis, and
discussions of other aspects of Bank operations. Each Bank also
distributes unaudited quarterly or semiannual summary financial
reports to its members, with most of the reports being brief. The
Finance Board's regulations require that any financial statements
contained in an annual or quarterly financial report issued by an [[Page 38801]]
individual Bank be consistent in both form and content with the
financial statements presented in the Bank System Combined Reports
prepared by OF.\25\ Except for this requirement, there is no other
Finance Board regulatory requirement that individual Bank annual or
quarterly reports be in scope, form, or content generally consistent with the requirements of SEC Regulations SK and SX.
\25\ See 12 CFR 989.4.
While the financial statements in the Banks' annual and quarterly
reports are generally consistent with SEC Regulation SX, the level of
discussions in these reports of nonfinancial statement information
varies from Bank to Bank and is not in all cases generally consistent
with 1934 Act disclosure standards.\26\ Thus, the major effect of
requiring the Banks to register a class of securities with the SEC and
subject themselves to an SECadministered 1934 Act periodic disclosure
regime would be greater disclosure by the Banks at the individual Bank
level of nonfinancial statement information, with the attendant benefits discussed below in section II.B.
\26\ See section II.B.2, below, for additional discussion of the
differences between current Bank disclosures required under Federal securities laws.
D. Exemptions for Bank Securities From the Registration Provisions of the 1933 Act and 1934 Act
The Securities Act of 1933 (the 1933 Act) \27\ regulates public offerings of securities and prohibits offers and sales of securities that are not registered with the SEC, subject to certain exemptions for enumerated kinds of securities and transactions. The 1934 Act regulates trading in certain securities that are already issued and outstanding and prescribes a robust disclosure regimen for registered entities. \27\ 15 U.S.C. 77a et seq.
Since enactment of the Bank Act in 1932, the Banks have never registered their debt or equity securities under either the 1933 Act or the 1934 Act. Neither the 1933 Act nor the 1934 Act, however, exempts the Banks from registration by name or otherwise provides special status or unique exemptions for the Banks, although there are generally available exemptions from registration under those Acts for which the Banks may be eligible.
Under section 3(a)(2) of the 1933 Act, securities issued ``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'' are exempt from the registration
requirements of that Act.\28\ Because the Banks are instrumentalities
of the Federal government, both the equity and debt securities of the
Banks are exempt from the registration requirements of the 1933 Act under this provision.\29\
\28\ See 15 U.S.C. 77c(a)(2).
\29\ See 12 U.S.C. 1431(e)(1). See also Fahey v. O'Melveny &
Myers, 200 F. 2d 420 (9th Cir. 1952), cert. denied, 345 U.S. 952
(1953); Merrill Lynch, Pierce, Fenner & Smith, SEC No Action Letter, 1986 SEC NoAct. LEXIS 2877 (Nov. 5, 1986).
Under the 1934 Act, the term ``exempted securities'' is defined to
include, among other things, ``government securities.'' \30\ The term
``government securities'' is, in turn, defined to include ``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.'' \31\ The
debt securities of the Banks have been exempted from the registration
requirements of the 1934 Act as a result of action taken by the
Secretary of the Treasury in 1937 pursuant to these provisions. In
Release 341168, dated April 28, 1937, the SEC announced that the
Secretary of the Treasury had designated for exemption those debt
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.\32\ The designation specified that the
``exemption may be revoked, modified or amended at any time with
respect to securities not issued prior to such time.'' Outstanding Bank
COs have been issued under the authority of sections 11(a) and 11(c) of
the Bank Act, respectively, and therefore are included within the scope
of the Secretary of the Treasury's 1937 designation. By contrast, the
Secretary of the Treasury has never designated the equity securities
issued by the Banks as being exempted under this provision. \30\ See 15 U.S.C. 78c(a)(12)(A).
\31\ See 15 U.S.C. 78c(a)(42)(B) (emphasis added).
\32\ SEC Exchange Act Release 1168 (April 28, 1937) (1937 WL 3510).
E. Registration Pursuant to the Voluntary Registration Provisions of Section 12(g)(1) of the 1934 Act
Notwithstanding any exemptions for issuers or securities under the
1933 and 1934 Acts, section 12(g)(1) of the 1934 Act provides a
mechanism by which equity securities not otherwise required to be
registered may nevertheless be registered under provisions of the 1934
Act. Section 12(g)(1) provides, among other things, that an issuer may
register any class of equity securities not required to be registered
by filing a registration statement pursuant to the provisions of
section 12(g).\33\ Registration pursuant to section 12(g)(1) subjects
registrants to the periodic disclosure requirements put in place under
the 1934 Act, as interpreted and administered by the SEC. For the
reasons discussed in part II below, the Finance Board has determined,
consistent with the proposed rule, to require each Bank to register a
class of its equity securities pursuant to the voluntary registration provisions of section 12(g)(1).
\33\ See 15 U.S.C. 78l(g)(1).
F. Proposed Rule
In July 2002, the Undersecretary for Domestic Finance of the United
States Department of the Treasury called on all GSEs to follow the lead
of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the
Federal National Mortgage Association (Fannie Mae) and begin working
with the SEC to achieve a 1934 Act securities disclosure regime
administered by the SEC.\34\ Shortly thereafter, Finance Board staff
held a number of meetings with Bank System representatives
(collectively, the Bank Disclosure Task Force) to discuss SEC
registration and related disclosure requirements. The Finance Board
subsequently relayed the Banks' principal concerns on registration
issues to SEC staff. On December 2, 2002, the Finance Board held a
public hearing to consider enhanced Bank disclosure generally and
possible Bank registration under the 1934 Act in particular.\35\
Finance Board staff also had numerous discussions with SEC staff on
registration issues. In addition, SEC staff met with several Banks to
resolve certain accounting and disclosure issues raised by 1934 Act registration.
\34\ Fannie Mae subsequently registered its common stock with
the SEC under the voluntary registration provisions of section 12(g)
of the 1934 Act. Freddie Mac has agreed to register, but has not done so.
\35\ Testimony and comments submitted at that hearing may be
located at http://www.fhfb.gov/pressroom/PR02_testimony4.htm.
After gathering information and analyses through these various
forums, on September 17, 2003, the Finance Board published for comment
a proposed rule that would have required each Bank to agree to register
a class of its securities with the SEC under section 12(g) of the 1934
Act within 120 days of the adoption of the rule as a final rule.\36\
Registration, and the resulting periodic disclosure requirements under [[Page 38802]]
the 1934 Act, would result in the Banks disclosing at the individual
Bank level more comprehensive information than currently is provided in
individual Bank quarterly and annual reports. The major effect of this
new disclosure requirement would be greater disclosure of nonfinancial
statement information by the Banks at the individual Bank level. \36\ See 68 FR 54396 (Sept. 17, 2003).
The proposed rule also would have required the Banks to provide to the Finance Board on a concurrent basis copies of all disclosure documents filed with the SEC. The proposal expressly provided that it would not limit or restrict the Finance Board's ability to carry out its responsibilities under the Bank Act, including its responsibility to ensure that the Banks operate in a financially safe and sound manner and are able to raise funds in the capital markets.
The Finance Board cited in the SUPPLEMENTARY INFORMATION section of the proposed rule three bases for adoption of the rule.\37\ First, comprehensive, fully transparent securities disclosure by each Bank under an SECadministered disclosure regime may help maintain the long term confidence of the investment community and the national rating agencies, thereby better securing the Bank System's ability to access the capital markets. The SEC establishes the bestpractices standard for disclosure, has the resources and expertise to ensure that individual Bank disclosure documents meet this standard, and enhances the credibility of registrants' financial statements through its review of those disclosures.
\37\ See 68 FR 54398.
Second, Bank accounting and financial statement reporting issues have become significantly more complex in recent years due to new Financial Accounting Standards Board (FASB) statements on reporting requirements, necessitating more comprehensive and detailed disclosures by individual Banks. As noted in the proposal, the SEC staff has the extensive accounting expertise required to review this Bank disclosure.
Third, Fannie Mae has voluntarily registered its common stock with the SEC under section 12(g) of the 1934 Act, and Freddie Mac has agreed to do so upon completion of its restatement of its financial statements. The proposal recognized that there may be merit in having the core securities disclosures of all of the housing GSEs overseen by the same disclosure regulator.
The proposed rule provided for a 120day comment period, which closed on January 15, 2004. The Finance Board received 24 comment letters on the proposed rule. Commenters included: 11 Banks; one Bank member; five financial institution trade associations (with one commenter submitting two separate comments); two housing trade associations; one nonprofit social services organization; one nonprofit community development organization; one Congressional Representative (forwarding the abovementioned letters from one of the housing trade associations, the social services organization and the community development organization); and one law student.
In general, the commenters supported more comprehensive securities disclosure by the individual Banks, provided such enhanced disclosure takes into account the unique structure of the Banks. Commenters expressed differing views on whether such enhanced disclosures should be overseen by the SEC or the Finance Board, and on the appropriate process for achieving an SECadministered disclosure regime. Some commenters argued that the Finance Board lacks the legal authority to require SEC registration. Commenters stated that the record lacked factual or empirical evidence supporting the bases for adopting the rule and an analysis of the potential costs and benefits of the rule. The comments, and the Finance Board's responses thereto, are discussed further in part II of this SUPPLEMENTARY INFORMATION section. II. Finance Board Findings Supporting Adoption of the Final Rule
The Finance Board has carefully reviewed the issues raised by the commenters. The Finance Board's review encompassed analysis of: the Finance Board's legal authority to adopt the rule; the individual Banks'' current securities disclosure as compared to the enhanced disclosure requirements, and what exceptions to 1934 Act disclosure requirements might be appropriate due to the unique structure of the Banks; the effect of enhanced disclosure on market discipline, access to the capital markets, and the safe and sound operations of the Banks; and the potential costs and benefits of enhanced disclosure under an SECadministered, versus a Finance Boardadministered, disclosure regime. In conducting this review, the Finance Board considered the comments received on the proposed rule, as well as Finance Board staff analyses and other documents included in the administrative record.
Based on this review, the Finance Board has determined to adopt the proposed rule as a final rule, in substantially similar form and subject to a date by which all Banks must become SEC registrants. The Finance Board's findings supporting the adoption of the final rule are discussed below.
A. Legal Authority To Require Registration
Several commenters stated that the Finance Board lacks the legal
authority under the Bank Act to require each Bank to register a class
of its securities with the SEC under the voluntary registration
provisions of section 12(g) of the 1934 Act.\38\ The Finance Board's
authority to adopt the rule at issue involves two distinct questions:
First, whether the Finance Board may require the Banks to provide
enhanced disclosures in furtherance of its mission as the Banks' safety
and soundness regulator; and second, if the authority exists as a
general matter, whether the Finance Board has the authority to require that the registration be with the SEC.
\38\ One commenter requested that the Finance Board seek an
advisory opinion from the U.S. Department of Justice's Office of
Legal Counsel (OLC) on this issue. The Board of Directors of the
Finance Board considered this issue and determined, at its February
11, 2004 meeting, not to seek such an advisory opinion from the OLC.
A review by Finance Board staff of numerous OLC opinions requested
by or covering federal financial institution regulatory agencies
from 1984 to date did not reveal any instances in which such an
agency requested an opinion on whether the agency's enabling statute
allowed it to take an action relating to its primary statutory mission.
1. Authority To Require Enhanced Disclosures
As a general proposition, any action taken by a federal regulatory
agency must be within the scope of the authority conferred on it by
Congress.\39\ With respect to the Bank System, Congress has vested
supervisory authority with the Finance Board, which is charged with
ensuring both the safety and soundness of the Banks and the achievement of their housing
[[Page 38803]]
finance mission.\40\ The Finance Board has plenary authority over the
Banks, which is derived from numerous provisions of the Bank Act.\41\
\39\ An agency has the power to issue binding legislative rules
only to the extent that Congress has delegated such authority to the
agency. See R. Pierce, Administrative Law Treatise, 4th Ed., Sec.
6.4 (Pierce), citing United States v. Storer Broadcasting Co., 351
U.S. 192 (1956); National Broadcasting Co. v. United States, 319
U.S. 190 (1943); National Petroleum Refiners Ass'n v. FTC, 482 F.2d
672 (D.C. Cir. 1973), cert. denied, 415 U.S. 951 (1974). As long as
the Finance Board's rule is addressed to, and reasonably adapted to,
the enforcement of the Bank Act, it will have the ``force and effect
of law if it be not in conflict with express statutory provision.''
See Pierce, Sec. 6.4 citing Maryland Casualty Co. v. United States,
251 U.S. 342, 349 (1920). Generally, Congress has authorized federal
agencies to issue binding rules through the use of the notice and
comment procedure set forth in section 553 of the Administrative
Procedure Act (APA), 5 U.S.C. 551 et seq. See generally Pierce, Sec. 6.4, at 341.
\40\ See U.S.C. 1422a(a)(3).
\41\ See 12 U.S.C. 1422b(a)(1) (rulemaking) and 1422a(a)(3)
(statutory duties). Other provisions of the Bank Act that confer
supervisory authority on the Finance Board include: Section
2B(a)(2), which authorizes the Finance Board to suspend or remove
any officer, director, employee or agent of any Bank or joint office
for cause, 12 U.S.C. 1422b(a)(2); section 2B(a)(5), which confers
administrative enforcement powers that are substantially the same as
those possessed by other federal financial institution regulators,
12 U.S.C. 1422b(a)(5); and section 20, which authorizes the Finance
Board to examine the Banks and to require reports of condition of
all Banks, and which confers on the Finance Board examiners the same
powers, duties, privileges, and obligations as federal bank
examiners have under the Federal Reserve Act and the National Bank Act, 12 U.S.C. 1440.
Congress has given the Finance Board broad rulemaking authority to carry out its oversight responsibilities. Specifically, section 2B(a)(1) of the Bank Act authorizes the Finance Board ``[t]o supervise the Federal Home Loan Banks and to promulgate and enforce such regulations and orders as are necessary from time to time to carry out the provisions of [the Bank Act].'' \42\ The language of that provision includes no limitations on the authority of the Finance Board to regulate the Banks or on its authority to adopt regulations, other than that the regulation be necessary to carry out the provisions of the Bank Act. The statute leaves to the Finance Board the discretion to determine what regulations or orders are ``necessary'' to carry out the provisions of the Bank Act.
\42\ See 12 U.S.C. 1422b(a)(1).
The Finance Board's authority to promulgate regulations is
sufficiently broad to authorize any regulation duly promulgated by the
Finance Board that has the purpose or effect of advancing the safety or
soundness of the Banks or any other of the statutory duties of the
Finance Board (as well as implementing any specific provision of the
Bank Act).\43\ As applied to the instant rulemaking, the intent of the
Finance Board in adopting a final rule requiring the Banks to provide
enhanced disclosures is to advance or promote both the safe and sound
operation of the Banks and their continued access to the capital
markets through enhanced disclosures. Accordingly, it is within the authority of the Board to require enhanced disclosures.
\43\ See, e.g., Fidelity Federal Savings and Loan Association v. De La Cuesta, 458 U.S. 141, 159162 (1982) (upholding rule
addressing lending practices of savings associations as within scope
of delegation from Congress and in furtherance of the purposes of
the statute); Texas Savings & Community Bankers Association, et al.
v. Federal Housing Finance Board, No. 9850758 (5th Cir. 2000)
(upholding Finance Board approval of a Bank mortgage loan purchase
program); and WFS Financial Inc. v. Dean, 79 F. Supp. 1024, 1026
(W.D. Wis. (1999)) (upholding rule addressing operating subsidiaries
as within delegation of authority from Congress and consistent with advancing purposes of the statute).
As courts have recognized, an agency need not show that a particular action is, by itself, crucial to the ability of the agency to fulfill its duties.\44\ If the action is ``reasonably useful'' or ``proper'' within the context of the agency's overall responsibilities, then it may be adopted pursuant to the authority to issue regulations that are ``necessary'' to implement other statutory provisions. \44\ See, e.g., Shinn v. Encore Mortgage Services, Inc., 96 F. Supp. 2d 419, 424 (D.N.J. 2000) (upholding Office of Thrift Supervision (OTS) rule regulating alternative mortgage transactions as an appropriate exercise of its authority to ``prescribe such regulations and issue such orders as the Director may determine to be necessary for carrying out this chapter and all other laws within the Director's jurisdiction.''); Home Mortgage Bank v. Ryan, 986 F.2d 372, 377 (10th Cir. 1993) (upholding OTS merger regulation as a ``permissible exercise of OTS's regulatory responsibility over statechartered savings associations''); Federal Labor Relations Authority v. United States Department of the Navy, 96 F.2d 747, 752 (3rd Cir. 1992) (upholding the Fair Labor Relations Authority determination that disclosure of home addresses was ``necessary'' for collective bargaining, and stating that ``Congress delegated this sort of specific determination to the FLRA in the Labor Statute.''). As stated by the United States Supreme Court, ``An agency `must be given ample latitude to adapt [its] rules and polices to the demands of changing circumstances.' '' Rust v. Sullivan, 500 U.S. 173, 186187 (1991).
2. Authority To Require Registration With the SEC
The Finance Board has analyzed whether Congress has curtailed the agency's authority to require enhanced disclosures. The precise issue before the Finance Board is whether Congress has expressed its intent regarding the registration of Bank securities with the SEC. For the reasons outlined below, we believe that the answer to that question is no.
The Bank Act is a comprehensive statute that addresses virtually
all aspects of the Bank System. Among other things, the Bank Act
provides for the incorporation of the Banks, their corporate structure,
their capital structure, their powers and duties, their membership
base, their lending and investment powers, their borrowing authority,
their tax status, and the circumstances under which they may be
liquidated. In a similar fashion, the Bank Act provides for the
creation of the Finance Board, confers on it both general and specific
supervisory responsibilities and powers, and generally gives it
``cradle to grave'' supervisory authority over the Banks.\45\ Nowhere,
however, does the Bank Act speak expressly to the issue of Bank
securities disclosure, either by establishing a unique disclosure
regime for the Banks or by constraining the authority of the Finance
Board to do so. Moreover, the Bank Act does not affirmatively exempt
the Banks from the registration requirements of the 1934 Act, as do the
chartering statutes for the other two housing GSEs, Fannie Mae and Freddie Mac.\46\
\45\ See 12 U.S.C. 1422a (creation), 1422b (general powers),
1426 (capital standards), 1427 (designation of directorships/
appointment of directors), 1431 (approval/oversight of borrowing),
1440 (examinations), and 1446 (authority to liquidate/reorganize).
\46\ Congress has expressly provided that all securities issued
by Fannie Mae and Freddie Mac shall be treated as exempt securities
under federal securities laws to the same extent as securities that
are the direct obligations of the United States. See 12 U.S.C.
1723(c) (Fannie Mae's securities) and 12 U.S.C. 1455(g) (Freddie Mac's securities).
In considering whether Congress has addressed the question of the appropriate disclosure regime for the Banks, we also have reviewed provisions of the 1933 Act and the 1934 Act. As discussed in section I.D, above, Bank securities are not currently registered under either the 1933 Act or the 1934 Act. The reasons why Bank securities have not been registered under those Acts vary. For example, under the 1933 Act, Bank debt and equity securities are exempted from the registration provisions as securities issued by a ``government instrumentality.'' Under the 1934 Act, Bank debt and equity securities are not generally exempted (although they may qualify under a more limited exemption or otherwise not be subject to the 1934 Act registration requirements). The Secretary of the Treasury has designated Bank debt securities as exempt from registration, but has not so exempted Bank equity securities.
This lack of uniformity in how Bank securities are treated suggests
that Congress had no intention to establish a particular disclosure
regime for the Banks under the federal securities laws. Although there
are certain exemptions from registration that may be available to the
Banks under various provisions of both the 1933 Act and the 1934 Act,
none of those exemptions is targeted specifically toward the Banks.
Rather, they are generally available to any issuer or type of security
that meets the particular requirements for each exemption. As
previously noted, Congress has not enacted an express exemption for
Bank securities, as it has done in the Charter Acts of Fannie Mae and
Freddie Mac, nor has it conferred 1934 Act jurisdiction over the Banks
on the Finance Board, as it has done with respect to the regulators of federally
[[Page 38804]]
insured depository institutions.\47\ Based on the absence of any Bank
specific provisions in these laws, and the inconsistent treatment
generally afforded to Bank securities, we believe that there is no
evidence that Congress intended to establish a particular disclosure
regime for the Banks pursuant to the provisions of the federal securities laws or the Bank Act.
\47\ See section 12(i) of the 1934 Act, codified at 15 U.S.C.
78l(i). Under section 12(i), certain federally insured depository
institutions that are subject to the 1934 Act registration
requirements must make their 1934 Act disclosure filings with the
federal banking regulator that supervises their operations. Section
12(i) requires the banking agency to adopt substantially similar
disclosure regulations as those adopted by the SEC, unless it finds
that implementation of a regulation is not necessary or appropriate
in the public interest or for the protection of investors. The
agency must publish a detailed explanation of the reasons for its
departure from the 1934 Act rules in the Federal Register. The
number of depository institutions making 1934 Act filings with their
banking regulators is rather small. For example, 17 state member
banks (out of 949 such banks) made such filings with the Federal
Reserve (as of December 31, 2002), and 15 savings associations (out of 928 such associations) make such filings with the OTS.
In the view of one commenter, the proposal constituted an
impermissible delegation of authority by one agency of its
responsibilities to another. That commenter cited several cases as
supporting the proposition that a federal agency may not delegate
statutory decisionmaking authority to an outside entity without express authority from Congress.\48\
\48\ The primary cases cited by the commenter include United
States Telecom Ass'n (USTA) v. FCC, 2004 WL 374262 (D.C. Cir. March
2, 2004); and National Park Service (NPS) v. Stanton, 54 F. Supp. 2d 7 (D.D.C. 1999).
We do not believe that these cases are controlling in the current
rulemaking. In each of the cases cited, the courts were faced with
specific delegations of authority by Congress to an agency, which the
agency then subdelegated to a third party. In short, the agency at
issue was relying on a third party to fulfill the agency's
responsibilities. In USTA v. FCC, for instance, the court rejected the
FCC's attempt to delegate to state utility commissions its
responsibility to make determinations related to requiring
telecommunication carriers to open up their infrastructure to
competition. Similarly, in NPS v. Stanton, the court rejected the NPS's
attempt to delegate to an outside entity its responsibilities for
managing a national scenic river. The common element in the cited cases
is that the agency had delegated to an outside party decisionmaking authority that a statute had required it to perform.\49\
\49\ Other cases cited by the commenter also are not persuasive
or applicable to this rulemaking. The other cases deal with
situations in which: (i) An agency attempted to exercise authority
which Congress clearly had not granted it (ETSI Pipeline Project v.
Missouri, 484 U.S. 495 (1988)); (ii) a party (unsuccessfully)
challenged the constitutionality of the delegation by Congress of
decisionmaking authority to an agency as lacking sufficient
standards (Touby v. United States, 500 U.S. 160 (1991)); or (iii)
the delegation was in violation of the clear terms of the statute in
question (Shook v. DC Financial Responsibility and Management Assistance Authority, 132 F.3d 775 (DC Cir. 1998)).
In contrast to the central facts of those cases, the Finance Board, in requiring the Banks to register a class of securities under the 1934 Act, is not delegating to the SEC any of the statutory responsibilities assigned to the Finance Board by section 2A(a)(3) of the Bank Act. The Finance Board remains the sole entity responsible for ensuring that the Banks operate in a financially safe and sound manner and that they remain adequately capitalized and able to raise funds in the capital markets. Instead, the Finance Board, having determined that enhanced disclosure would further its duty to ensure the safety and soundness of the Banksa point with which the commenters agreehas determined further that registration with the SEC under the 1934 Act would be the most appropriate means to fulfill the Finance Board's statutory duties.
By adopting the regulation, the Finance Board is not abdicating its role as Bank supervisor or giving up any enforcement power but instead is requiring the Banks to subject themselves to a disclosure review by a specialized outside entity. Rather than delegating decisionmaking authority, the Finance Board is using authority granted under the Bank Act to direct the Banks to avail themselves of an established securities registration regime so that the Finance Board may do its job better. Such action does not violate any explicit prohibition in the Bank Act or the 1934 Act, nor is it contrary to any express intent of Congress.
The ability of the Finance Board to fulfill its responsibilities as
the Banks' safety and soundness regulator will be enhanced by improved
disclosures that are on a par with disclosures in other businesses,
including the other housing GSEs.\50\ The discipline imposed by debt
and equity investors on the operations of financial institutions has
come to be viewed as an important complement to minimum capital
requirements and the supervisory review process in ensuring the safe
and sound operation of a financial institution. Adequate and consistent
disclosure is an important element in achieving market discipline,
since it is through such disclosure that market participants gain
access to information on the risks faced by the institution in
question. Critical to that process is the ability to compare
information across similar institutions at a point in time and over time.
\50\ This point is discussed in greater detail in Section II.B of this SUPPLEMENTARY INFORMATION.
As is well recognized, public disclosure is not a replacement for
regulatory oversight but is an important complement to the regulatory
and supervisory oversight process in ensuring the safe and sound
operation of a financial institution.\51\ In this respect, the
registration rule is analogous to existing requirements that Banks and
OF annually submit to accounting audits by an independent external
auditor.\52\ The rule also is analogous to the Finance Board regulation
that conditions the acceptability of certain investments on ratings
received from a nationally recognized statistical rating organization (NRSRO).\53\
\51\ See, e.g., Basel Committee on Banking Supervision,
Consultative Document: The New Basel Capital Accord Part 4 (April 2003) (Basel II).
\52\ See 12 CFR 989.2.
\53\ 12 CFR 955.3(a) and 956.3.
In several of the cases cited by the commenter, the entity receiving delegated powers had no independent authority to act. Here, the SEC's authority to accept the Banks as registrants and to oversee disclosure comes from the 1934 Act itself, not from any power delegated to it by the Finance Board.\54\ Given the SEC's wellestablished authority to regulate securities disclosure, it is reasonable for the Finance Board to rely on the SEC's expertise in this area, absent a specific expression that Congress did not intend such an outcome. \54\ In fact, the SEC registration rule appears to be closer to the use of an outside entity that the D.C. Circuit distinguished as not covered by the nondelegation doctrine in one of the cases cited by the commenter. USTA v. FCC, 2004 WL 374262. The USTA court distinguished the delegation at issue before it with the facts of U.S. v. Matherson, 367 F. Supp. 779 (E.D.N.Y. 1973), in which the court upheld the regulations by an official of the Department of the Interior requiring an applicant for a permit to drive in a national seashore park to first obtain a permit from one of the neighboring municipalities. The Matherson Court found that the Superintendent's regulation ``is in no way an abdication of the Superintendent's power to administer the National Seashore. Rather, the instant section merely exemplifies an effort by the Superintendent to facilitate an orderly prevention of erosion on the land.''
Congress specifically provided that issuers that are not required
to register under the 1934 Act could avail themselves of the benefits
of SEC disclosure by ``voluntarily'' registering their stock, and authorized the SEC to accept such registration.\55\ One
[[Page 38805]]
commenter criticized the Finance Board's proposal on the ground that
there was nothing voluntary about the proposal and, therefore, the
provisions in the 1934 Act governing voluntary registrations are
inapplicable. The Finance Board agrees that its rule makes registration
of securities with the SEC mandatory. However, it does so as a
requirement stemming from the Bank Act. References in the proposal to
voluntary registration with the SEC simply underscore that those not
otherwise required by the federal securities laws may register with the
SEC. Thus, there is no inconsistency to say that registration is
mandatory under the banking laws while done so in accordance with the
procedures available to those who are not otherwise subject to 1934 Act registration requirements.
\55\ See 15 U.S.C. 78l(g).
The issue of whether voluntary registration under the 1934 Act is
available for disclosures that are mandated by some other law is a
question of interpretation of the securities law. In that regard, the
Finance Board is persuaded by the views of the SEC. In testimony
delivered before the Committee on Banking, Housing, and Urban Affairs
of the United States Senate on February 10, 2004, by Alan L. Beller,
Director of the Division of Corporation Finance of the SEC (the Beller Testimony), Mr. Beller stated:
Since at least 1992, the Commission has expressed the view that,
because the GSEs, most prominently Fannie Mae and Freddie Mac, but
also including the Federal Home Loan Banks, sell securities to the
public and have public investors, and do not have the ``full faith
and credit'' government backing of government securities, their
disclosures should comply with the disclosure requirements of the
federal securities laws. * * * [T]he manner by which mandatory
compliance is achievedincluding through voluntary registration with the Commissionmay be less significant.\56\
\56\ Beller Testimony at 1 (emphasis added). The Beller
Testimony may be located at http://www.sec.gov/news/testimony/ts021004alb.htm. SEC staff recently confirmed to the Finance Board
that the statements made in that testimony ``continue to be accurate
and to reflect the views of the [SEC] staff.'' Letter from Alan
Beller to Alicia R. Castaneda, Chairman, Federal Housing Finance Board, June 1, 2004, at 1.
Thus, the SEC interprets the 1934 Act in a way that permits filings under the provisions governing voluntary registration, notwithstanding that the registration is required by some other law or regulation. B. Reasonable Exercise of Finance Board Authority
Based on its review and analysis of the record, the Finance Board has determined that there is a reasonable basis to conclude that requiring enhanced Bank securities disclosure under an SECadministered periodic disclosure regime under the 1934 Act will assist the Finance Board in carrying out its primary duty to ensure that the Banks operate in a financially safe and sound manner and that they have access to capital markets.
1. Benefits of Enhanced Disclosure Generally
The benefits of enhanced disclosure have been well documented. A leading study in this area, conducted by staff at the Federal Reserve Board (FRB Study), documents how enhanced disclosure of a commercial bank's business risks and financial information can supplement the existing oversight regime for such banks.\57\ The FRB Study notes that banking regulators have increasingly accepted the fact that market discipline can serve as one element of an effective program of bank supervision, and discusses in detail how the concepts of financial disclosure, market discipline, and bank supervision are interrelated. \57\ Staff Study 173, Improving Public Disclosure in Banking, Federal Reserve Study Group on Disclosure (March 2000).
Briefly stated, the stakeholders of a banking institution, by deciding what return they are willing to accept on their investments in a bank's securities, can effectively determine the availability and cost of the bank's funding and thereby influence the bank's business decisions. This ability to ``discipline'' a bank's risktaking through market forces is accepted by banking regulators as contributing to the stability of the banking system. The ability of the stakeholders to exert such influence on a bank, however, depends in large part on whether they can accurately assess its financial condition, risks, and earnings prospects, which, in turn, depends on the quality and extent of the institution's financial disclosures. The FRB Study notes that this recognition of the value of market discipline as a supplement to the regulatory regime has prompted banking regulators to focus on methods of improving the transparency of commercial banks' financial condition through enhanced disclosure. It also has led the other housing GSEs to take steps voluntarily to promote market discipline.
Basel II also underscores the importance of enhanced disclosure.
Basel II will establish new international standards on bank capital
adequacy, and is intended to improve the existing regulatory capital
framework for commercial banking organizations. The Accord is based on
three separate ``pillars'' of supervision. The first pillar consists of
the minimum regulatory capital requirements for each banking
organization, which will be much the same as the existing Basel capital
requirements. The second pillar relates to supervisory review of
banking institutions by their regulators, which in part entails an
assessment of capital adequacy in light of the overall risks to the
bank. The third pillar is market discipline, which the Basel Committee
expects will complement both the minimum capital requirements of Pillar
1 and the supervisory review process of Pillar 2 and thereby promote
safety and soundness in banks and the financial system. The Basel
Committee has explained that ``the rationale for Pillar 3 is
sufficiently strong to warrant the introduction of disclosure
requirements for banks using the New Accord,'' and that it intends ``to
encourage market discipline by developing a set of disclosure
requirements which will allow market participants to assess key pieces
of information on the scope of application, capital, risk exposures,
risk assessment processes, and hence the capital adequacy of the institution.'' \58\
\58\ Basel II, ] 757 and ] 758.
2. Benefits of Disclosures That Are Consistent With Industry Standards
Both the FRB Study and Basel II demonstrate that market discipline has become an accepted element of effective bank supervision, particularly with regard to the adequacy of a banking institution's capital. Full and consistent disclosure is an important element in achieving market discipline because it is only through such disclosure that market participants can obtain, and assess, information on the risks faced by individual financial institutions. Moreover, a common and consistent framework for such disclosure will enhance the ability of market participants to compare information across similar institutions and over time. The Office of Federal Housing Enterprise Oversight (OFHEO) made similar observations about the importance of public disclosure to safety and soundness oversight when it recently adopted disclosure requirements for Fannie Mae and Freddie Mac.\59\ \59\ See 68 FR 16715 (April 7, 2003) (adopting 12 CFR part 1730) (``As users of and participants in the financial markets, the success of the Enterprises [i.e., Fannie Mae and Freddie Mac] in meeting their public policy missions and in maintaining their safe and sound operations is inextricably tied to full and robust disclosure. * * * Full and adequate disclosure of information by the Enterprises regarding their financial conditions and risks is an important part of the OFHEO's supervisory program. Full disclosure enhances market discipline.''). 68 FR at 16715, 16716 (footnotes omitted).
[[Page 38806]]
At present, the annual or quarterly financial statements prepared
by a Bank are required to be consistent, in both form and content, with
the combined financial statements prepared by OF for the entire Bank
System.\60\ The practices among the Banks, however, vary from Bank to
Bank as to the level of detail that is provided by the annual and
quarterly financial reports of the individual Banks. In conjunction
with this rulemaking process, Finance Board staff has reviewed past
quarterly and annual Bank disclosure documents of several Banks. As a
result of that comparison, staff has concluded that the current
individual Bank disclosures fall short, in certain respects, of the requirements for 1934 Actcompliant financial disclosures.
\60\ See 12 CFR 989.4. OF prepares the combined annual and
quarterly financial statements for all twelve of the Banks, the
scope, form, and content of which must be consistent with the requirements of SEC Regulations SK and SX.
Areas where some of the Banks' current disclosures in annual
reports were found by Finance Board staff to fall short of SEC administered 1934 Act standards include:
The final rule adopted by the Finance Board will lead to the elimination of these deficiencies, resulting in an increase in both the quality and quantity of individual Bank disclosures.
In addition to facilitating the Finance Board's efforts to ensure the safety and soundness of the Banks through increased market discipline, disclosures by the Banks that are consistent with industry standards will help the Finance Board in its efforts to ensure that the Banks remain able to raise funds in the capital markets. When issuing COs in the debt markets, the Banks compete primarily against the other two housing GSEs, Fannie Mae and Freddie Mac. As noted previously, both Fannie Mae and Freddie Mac have agreed to register their stock with the SEC under the 1934 Act. Fannie Mae has already done so, and Freddie Mac has stated that it will do so after it resolves certain accounting matters. Thus, unless the Finance Board requires the Banks to enhance their disclosures, once Freddie Mac has registered with the SEC, the Banks will be the only housing GSEs that are competing for funds in the capital markets with financial disclosures that are not subject to SEC scrutiny under the 1934 Act.
This may have negative effects in several ways. First, member
interest in holding Bank stock may be diminished. Members of a Bank
must hold a certain level of Bank stock, with the amount of stock that
must be purchased determined by the capital plan of each Bank.\61\
However, many Banks permit members to buy and hold ``excess'' stock,
which is stock beyond what is required to remain a member of, or to do
business with, the Bank. Members may be more reluctant to purchase or
hold Bank ``excess'' stock if they conclude that they lack adequate information about the Bank issuer.
\61\ In the case of the four Banks that have not implemented
their new capital plans, the amount of stock that members must hold
is determined by the Bank Act rules that applied before they were amended by the GLB Act.
Second, since Bank membership is now voluntary,\62\ the
attractiveness of holding Bank stock may be adversely affected by a
member's inability to obtain information that permits it to evaluate
fully its investment. The change to allvoluntary membership increases
the importance of disclosure in maintaining member confidence and thereby in maintaining adequate Bank capitalization.
\62\ Both before and after its amendment by the GLB Act, section
6 of the Bank Act required members to buy and hold stock to
capitalize the Bank. See 12 U.S.C. 1426. Prior to the GLB Act
amendments, section 6 set uniform stock purchase requirements
applicable to members of each Bank. The GLB Act changed the Bank Act
by requiring each Bank to adopt stock purchase requirements for its
members in its capital plan. In addition, the GLB Act made
membership in the Bank System voluntary for all members when it
removed provisions from section 5(f) of the Home Owners' Loan Act
that required a federal savings association to become a member of
and maintain membership in the Bank district in which it maintained its principal place of business. GLB Act sec. 603.
Moreover, a perception, right or wrong, by the capital markets that
nonSEC reviewed disclosures about the Bank System are less complete
than are the disclosures of Fannie Mae and Freddie Mac also may
adversely affect the ability of the Bank System to compete with the
other housing GSEs for funding. As described more fully in section
I.C.1, above, OF currently prepares combined disclosures based on
information provided to it by the 12 Banks. The quality of the
disclosures made by OF depends, therefore, on the quality of the information it receives from each of the Banks.\63\
\63\ OF would not be required under the final rule to register a
class of securities with the SEC and, therefore, would not be
subject to SEC oversight. OF is a joint office of the 12 Banks, and
was established to facilitate the issuing and servicing of the COs
of the Banks. OF, like the Banks, is regulated by the Finance Board.
As recognized by the SEC, because of the structure of the Bank
System, there is no issuer tied to the Bank System Combined Reports
and, therefore, no issuer to register with the SEC. See Beller
Testimony, at 7. However, Finance Board regulations require that the
Reports prepared by OF be consistent with SEC Regulations SK and
Regulation SX in scope, form, and content generally. See 12 CFR
985.6(b)(1). These Reports are to be filed with, and reviewed by,
the Finance Board. The SEC has requested the opportunity to review
the Reports and provide the Finance Board with whatever comments the
SEC may have, and the Finance Board intends to provide the SEC with this opportunity.
Whether the prospective disparity between the quality of the
disclosures provided by Fannie Mae and Freddie Mac and the Banks,
respectively, is apt to affect significantly the ability of the Banks
to raise funds in the capital markets is difficult to quantify,
especially before the fact. By requiring the Banks to publish financial
disclosures that are equivalent to those provided by their principal
competitors, the Finance Board is eliminating the possibility that the
Banks' access to the capital markets will be disadvantaged because of
any perceived differences in the quality of their financial disclosures.
3. Benefits of Registration With the SEC Versus Registration With the Finance Board
Many of the commenters raised questions about the appropriateness of requiring registration by the Banks with
[[Page 38807]]
the SEC. These commenters noted that the Finance Board has a much
better understanding of the Banks' business than does the SEC and would
be better able to tailor disclosure requirements in a manner that will
yield the most appropriate disclosures from the Banks. Commenters
proposed that the Finance Board establish a disclosure regime modeled
on section 12(i) of the 1934 Act, which requires various depository
institutions to file their 1934 Act disclosure documents with their
respective primary Federal banking regulatory agencies.\64\ The
commenters suggested that, because the SEC's emphasis is on investor
protection while the Finance Board's emphasis is on the Banks' safety
and soundness, registration with the SEC risks subjecting the Banks to
conflicting regulatory directives. These commenters cited a
disagreement in 1998 between the SEC and bank regulators over the
appropriate treatment of a financial institution's loan loss reserves as an example of the problems that may arise.
\64\ As previously noted, section 12(i) explicitly assigns to
the respective Federal banking regulatory agencies responsibility
and authority to perform this function. The Finance Board and the Banks are not listed in section 12(i).
After carefully considering the benefits and disadvantages of requiring disclosures to be filed with the SEC as opposed to the Finance Board, the Finance Board has determined that registration with the SEC is appropriate, for the reasons set forth below.
a. The SEC is the nation's functional disclosure regulator. As a matter of national policy, Congress has designated the SEC as the securities disclosure authority. Since its creation in 1934, the SEC has been at the forefront of investor protection and is generally recognized as significantly contributing to the integrity of the United States securities markets. The rules and regulations that form the SEC's disclosure system are widely recognized as establishing the best practices for disclosure, both domestically and internationally.
SEC staff is the nation's expert in the interpretation of disclosure and accounting rules. This is especially important in light of the changes in recent years in Bank activities, and the resulting increase in the complexity and sophistication of the Banks' accounting and financial statements. Furthermore, new FASB statements on reporting requirements, which will result in more comprehensive and d
FOR FURTHER INFORMATION CONTACT
Joseph A. McKenzie, Deputy Chief
Economist, Office of Supervision, 2024082845, mckenziej@fhfb.gov; Neil R. Crowley, Deputy General Counsel, 2024082990,
crowleyn@fhfb.gov; John Harry Jorgenson, Of Counsel, 2024082560,
jorgensonh@fhfb.gov; John P. Foley, Senior AttorneyAdvisor, Office of
General Counsel, 2024082932, foleyj@fhfb.gov, Federal Housing Finance
Board, 1777 F Street, NW., Washington, DC 20006.