Proposed Rule2023-09320
Prudential Management and Operations Standards
Primary source
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Published
May 4, 2023
Issuing agencies
Federal Housing Finance Agency
Abstract
The Federal Housing Finance Agency (FHFA) is proposing to amend its prudential management and operations standards Rule (rule) to clarify that FHFA may establish prudential management and operations standards (Standards) as regulations as well as guidelines. The proposed amendments to the rule would also revise definitions and make other conforming changes. FHFA is not proposing to establish new Standards or to revise Standards already established. However, FHFA is proposing that the rule and some of the existing Standards in the appendix to the rule be made applicable to the Office of Finance of the Federal Home Loan Bank System (OF).
Full Text
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<title>Federal Register, Volume 88 Issue 86 (Thursday, May 4, 2023)</title>
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[Federal Register Volume 88, Number 86 (Thursday, May 4, 2023)]
[Proposed Rules]
[Pages 28433-28440]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-09320]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 88 , No. 86 / Thursday, May 4, 2023 /
Proposed Rules
[[Page 28433]]
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1236
RIN 2590-AB10
Prudential Management and Operations Standards
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing to
amend its prudential management and operations standards Rule (rule) to
clarify that FHFA may establish prudential management and operations
standards (Standards) as regulations as well as guidelines. The
proposed amendments to the rule would also revise definitions and make
other conforming changes. FHFA is not proposing to establish new
Standards or to revise Standards already established. However, FHFA is
proposing that the rule and some of the existing Standards in the
appendix to the rule be made applicable to the Office of Finance of the
Federal Home Loan Bank System (OF).
DATES: Comments must be received by July 3, 2023.
ADDRESSES: You may submit your comments on the proposed rule,
identified by regulatory information number (RIN) 2590-AB10, by any one
of the following methods:
<bullet> Agency Website: <a href="http://www.fhfa.gov/open-for-comment-or-input">www.fhfa.gov/open-for-comment-or-input</a>.
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at <a href="/cdn-cgi/l/email-protection#bceed9dbffd3d1d1d9d2c8cffcdad4dadd92dbd3ca"><span class="__cf_email__" data-cfemail="297b4c4e6a4644444c475d5a694f414f48074e465f">[email protected]</span></a> to ensure timely receipt by FHFA.
Include the following information in the subject line of your
submission: Comments/RIN 2590-AB10.
<bullet> Hand Delivered/Courier: The hand delivery address is:
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB10,
Federal Housing Finance Agency, Fourth Floor, 400 Seventh Street SW,
Washington, DC 20219. Deliver the package at the Seventh Street
entrance Guard Desk, First Floor, on business days between 9 a.m. and 5
p.m.
<bullet> U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Clinton Jones,
General Counsel, Attention: Comments/RIN 2590-AB10, Federal Housing
Finance Agency, Fourth Floor, 400 Seventh Street SW, Washington, DC
20219. Please note that all mail sent to FHFA via U.S. Mail is routed
through a national irradiation facility, a process that may delay
delivery by approximately two weeks. For any time-sensitive
correspondence, please plan accordingly.
FOR FURTHER INFORMATION CONTACT: Clinton Jones, General Counsel, (202)
649-3006, <a href="/cdn-cgi/l/email-protection#71321d181f051e1f5f3b1e1f140231171917105f161e07"><span class="__cf_email__" data-cfemail="0b486762657f6465254164656e784b6d636d6a256c647d">[email protected]</span></a>; or Francisco Medina, Assistant
General Counsel, (202) 649-3076, <a href="/cdn-cgi/l/email-protection#6d2b1f0c030e041e0e024320080904030c2d0b050b0c430a021b"><span class="__cf_email__" data-cfemail="9ed8ecfff0fdf7edfdf1b0d3fbfaf7f0ffdef8f6f8ffb0f9f1e8">[email protected]</span></a>. These are
not toll-free numbers. The mailing address is: Federal Housing Finance
Agency, 400 Seventh Street SW, Washington, DC 20219. For TTY/TRS users
with hearing and speech disabilities, dial 711 and ask to be connected
to any of the contact numbers above.
SUPPLEMENTARY INFORMATION:
I. Comments
FHFA invites comments on all aspects of the proposed rule and will
consider all comments before issuing a final rule. Copies of all
comments will be posted without change and will include any personal
information provided, such as the commenter's name, address, email
address, and telephone number, on the FHFA website at <a href="http://www.fhfa.gov">http://www.fhfa.gov</a>. In addition, copies of all comments received will be
available for examination by the public through the electronic
rulemaking docket for this proposed rule, also located on the FHFA
website.
II. Background
The Federal Housing Enterprises Financial Safety and Soundness Act
(the Safety and Soundness Act) requires the Director of FHFA to
establish Standards that address ten subjects relating to the
management and operation of the regulated entities, authorizes the
Director to establish other Standards in addition to those on the ten
listed subjects, and authorizes the Director to establish Standards by
regulation or guideline.\1\ FHFA currently implements this statutory
requirement, which is codified at 12 U.S.C. 4513b (section 4513b),
through Standards that it has established as guidelines set forth in an
appendix to FHFA's current rule, which is codified at 12 CFR part 1236.
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\1\ 12 U.S.C. 4513b(a).
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Section 4513b requires a regulated entity that fails to meet a
Standard to submit a corrective plan if the Standard is established by
regulation, and permits FHFA to require a corrective plan if a
regulated entity fails to meet a Standard established by guideline.\2\
Section 4513b also establishes procedural requirements for corrective
plans (including FHFA approval), and requires FHFA to establish other
procedural requirements by regulation.\3\
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\2\ Id. 4513b(b)(1)(A).
\3\ Id. 4513b(b)(1)(C).
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The proposed rule addresses FHFA's determination that a regulated
entity has failed to meet a Standard and FHFA's direction to the
regulated entity to submit a corrective plan; the contents of a
corrective plan and filing deadlines; FHFA's review of a corrective
plan and notification to the regulated entity of FHFA's decision on a
plan; and the regulated entity's opportunity to request FHFA to amend
an approved plan and FHFA's review of proposed amendments to the
plan.\4\ The proposed rule also addresses procedural coordination of a
corrective plan with a capital restoration plan submitted pursuant to
12 U.S.C. 4622, a cease-and-desist order entered into pursuant to 12
U.S.C. 4631 or 4632, a formal or informal agreement, or a response to a
report of examination or report of inspection.\5\
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\4\ 12 CFR 1236.4.
\5\ Id. 1236.4(c)(2)(ii).
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Section 4513b specifies the consequences if a regulated entity
fails to submit an acceptable plan within the required time period or
fails to implement a corrective plan that the Director has approved.\6\
In those cases, the Director must order the regulated entity to correct
the deficiency.\7\ Section
[[Page 28434]]
4513b also provides the Director with additional discretionary
authority to take other actions (including imposing limits on asset
growth or requiring increases in capital, as well as taking any other
action the Director believes will better carry out the purposes of
section 4513b) until the regulated entity meets the standard.\8\ The
Director must take at least one of those additional actions for a
regulated entity that has failed to submit or implement a corrective
plan and has experienced ``extraordinary growth'' within the 18 months
before it failed to meet the standard.\9\
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\6\ 12 U.S.C. 4513b(b)(2).
\7\ Id. 4513b(b)(2)(A).
\8\ Id. 4513b(b)(2)(B).
\9\ Id. 4513b(b)(3).
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The proposed rule implements these statutory provisions by setting
forth a process for FHFA to notify the regulated entity of its intent
to issue an order requiring the regulated entity to correct its failure
to submit or implement a corrective plan, which must include FHFA's
proposed action and, if applicable, FHFA's determination of
``extraordinary growth.'' \10\ The proposed rule defines
``extraordinary growth,'' and does so separately for the FHLBanks and
the Enterprises.\11\ The proposed rule provides an opportunity for the
regulated entity to respond to an FHFA notice of intent to issue an
order and sets forth the actions FHFA may take on review of a response
or if no response is received.\12\ The proposed rule also addresses
FHFA's issuance of an order that is immediately final and establishes a
process for a regulated entity to appeal such an order.\13\ Finally,
the proposed rule addresses a request by a regulated entity for
modification or rescission of an order.\14\
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\10\ 12 CFR 1236.5(b); 12 CFR 1236.5(c)(1).
\11\ Id. 1236.2.
\12\ Id. 1236.5(c)(2) and 1236.5(c)(3).
\13\ Id. 1236.5(c)(4).
\14\ Id. 1236.5(d).
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The proposed rule provides that failure to meet a Standard may
constitute an unsafe or unsound practice for purposes of FHFA's
enforcement authority.\15\ Section 4513b provides that its remedial
powers are in addition to any other authority of the Director and thus
expressly preserves FHFA's right to exercise any other supervisory or
enforcement authority available under the Safety and Soundness Act.\16\
The PMOS framework does not limit FHFA's authorities and FHFA will
determine the appropriate supervisory response (including the
appropriate timing or sequence of supervisory action) based on the
facts and circumstances of any failure or violation.
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\15\ 12 CFR 1236.3(d).
\16\ 12 U.S.C. 4513b(c).
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When FHFA proposed the rule and initial Standards in 2011, FHFA did
not propose to apply the rule or the Standards to OF on the grounds
that several of the statutorily required standards (such as the
standards on relating to interest rate, market and credits risks and
investment portfolio growth) would not be relevant to OF and statutory
examples of corrective actions for noncompliance also would not be
applicable.\17\ FHFA nonetheless noted that the Safety and Soundness
Act, which grants FHFA general supervisory and regulatory authority
over OF, would permit FHFA to extend the rule or Standards to OF, or to
establish new Standards specifically applicable to OF.\18\ Likewise,
section 4513b permits FHFA to establish other prudential management and
operational standards as the Director deems appropriate, and permits
FHFA to require a regulated entity to take any other action that the
Director determines will better carry out the purposes of section 4513b
than the statutorily listed actions.\19\ Consequently, it is feasible
to establish appropriate Standards and corrective actions for OF.
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\17\ 76 FR 35791, 35792 (June 20, 2011).
\18\ Id.; see also 12 U.S.C. 4511(b)(2).
\19\ 12 U.S.C. 4513b(a)(11) and (b)(2)(B)(iii).
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III. Overview of Proposed Amendments; Section-by-Section Analysis
A. Overview
FHFA is proposing to amend part 1236 to reflect the scope of FHFA's
statutory authority to establish Standards as regulations as well as
guidelines and to apply the rule and some Standards to OF.
Currently, the rule addresses ``prudential standards as
guidelines,'' \20\ provides that the Standards ``have been adopted as
guidelines,'' \21\ and states that these Standards ``constitute the
prudential and operations standards'' required by section 4513b.\22\ In
turn, the appendix to part 1236 further provides that guidelines set
forth in the appendix ``constitute the prudential and operations
standards established pursuant'' to section 4513b.\23\
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\20\ 12 CFR 1236.3.
\21\ Id. 1236.3(b).
\22\ Id. 1236.3(a).
\23\ 12 CFR part 1236, appendix.
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Taken together, the rule and its appendix imply that the guidelines
in the appendix constitute the entirety of the Standards that FHFA has
established and that any further Standards adopted by FHFA will
similarly be established as guidelines and located in the appendix.
That implication is inconsistent with FHFA's statutory authority and
recent actions. Specifically, FHFA established Standards by regulation
in December 2020 and May 2021.\24\
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\24\ See 12 CFR 1240.1(e)(3) (Enterprise Regulatory Capital
Framework) and 12 CFR 1242.1(b) (Enterprise Resolution Planning).
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As amended, the rule would expressly reflect FHFA's statutory
authority to establish Standards as either regulations or guidelines
and to locate Standards established as regulations outside of the
appendix to the rule. If amended as proposed, the rule would make clear
that guidelines or regulations adopted by FHFA that FHFA identifies as
Standards are to be considered Standards for purposes of section 4513b
and part 1236.
As an administrative matter, for convenience and clarity, FHFA
plans to continue establishing Standards that are guidelines through a
Federal Register notice and comment process, and will continue locating
all Standards established as guidelines in the appendix to part 1236.
FHFA is also proposing to amend the rule and the appendix to part
1236 so that the OF would be subject to the rule and identified
Standards. The Standards FHFA proposes to apply to OF are the General
Responsibilities of the Board of Directors and Senior Management, and
Standards 1, 2, 8, and 10. Standard 1 addresses ``Internal Controls and
Information Systems.'' Standard 2 addresses ``Independence and Adequacy
of Internal Audit Systems.'' Standard 8 addresses ``Overall Risk
Management Processes.'' Standard 10 addresses ``Maintenance of Adequate
Records.'' Since adopting the rule in 2012, FHFA has revisited its
decision to exclude OF from the rule and has determined that making OF
subject to the rule and the identified Standards would further the
purposes of section 4513b. Moreover, FHFA could in the future establish
Standards by regulation or guideline that would apply only to OF. FHFA
welcomes any comments on subjecting OF to the rule and the identified
Standards.
Consistent with the foregoing changes, FHFA also proposes to revise
and clarify definitions and make conforming changes to part 1236 and
its appendix. Proposed changes to the rule are discussed by section and
proposed changes to the appendix are discussed by Standard, below.
[[Page 28435]]
B. Section 1236.1--Purpose
This section currently states that part 1236 establishes ``the''
prudential management and operations standards that are required by
section 4513b. That construction was appropriate when part 1236
addressed only the 10 Standards specifically required by statute, and
when all Standards established by FHFA were located within the appendix
to part 1236. FHFA is proposing to remove ``the'' and to revise
``establishes'' to ``addresses'' to reflect the full scope of part
1236, and to add ``and authorized'' following ``required'' to reflect
the discretion expressly conferred on FHFA to establish other
operational and management Standards as the Director determines to be
appropriate. These changes also acknowledge that Standards may be
located either in the appendix (if they are established as guidelines)
or elsewhere in chapter XII of title 12 of the Code of Federal
Regulations (if they are established as regulations).
As appropriate throughout the rule, FHFA is also proposing to
revise the terms ``a regulated entity,'' ``any regulated entity,'' and
``entity'' to ``a regulated entity or the Office of Finance'' to bring
the OF within the scope of the rule.
C. Section 1236.2--Definitions
This section defines terms used in this part. After the rule was
adopted by FHFA in 2012, FHFA adopted part 1201 of the FHFA regulations
(12 CFR part 1201), one section of which sets forth definitions that
apply to all FHFA regulations. FHFA is now proposing to amend Sec.
1236.2 to include a reference to 12 CFR part 1201 as an aid to users of
this part. This amendment is not a substantive change, as definitions
in 12 CFR part 1201 already apply to terms used in this part.
In addition, FHFA is proposing one change to the definition of
``standard'' (which is defined within this part) to remove language
that referred to Sec. 1236.3(b), on FHFA's authority to revise
Standards established as guidelines. Other changes that FHFA is
proposing would cause that reference to become incomplete, as a
different section of the rule would now address revisions to Standards
established as regulations. On review, FHFA has determined that the
reference to Sec. 1236.3(b) is unnecessary; for that reason, instead
of expanding on it, FHFA proposes to delete the reference.
D. Section 1236.3--Prudential Standards as Guidelines or Regulations
FHFA is proposing to revise Sec. 1236.3(a) to remove language that
effectively repeated the definition of ``Standard'' set forth at Sec.
1236.2 and thus is unnecessary, and in its place add a sentence
acknowledging that, as expressly authorized by statute, FHFA may
establish Standards as guidelines or regulations.
Section 1236.3(b) would be amended to clarify that it applies only
to Standards established as guidelines (instead of stating that it
covers all Standards, which would include those established as
regulations). In keeping with FHFA's prior practice, proposed revisions
to Sec. 1236.3(b) would set forth FHFA's commitment to provide public
notice of and seek public comment on Standards that it proposes to
establish as guidelines, or on any material modification to a Standard
established as a guideline. For efficiency, however, FHFA could revoke
a Standard adopted as a guideline at any time by order or notice. FHFA
requests comment on these proposed processes for establishing,
modifying, and revoking Standards established as guidelines.
FHFA proposes to revise Sec. 1236.3(c) to address Standards
established as regulations. Although section 4513b expressly authorizes
FHFA to establish Standards as regulations, FHFA had not done so when
part 1236 was promulgated in 2012. As a result, part 1236 does not
currently address Standards that have been established as regulations
after part 1236 was promulgated.
As proposed to be amended, Sec. 1236.3(c) acknowledges that the
Administrative Procedure Act sets forth the process for establishing
Standards as regulations and amending such Standards. FHFA also
proposes to clarify that Standards established as regulations may be
located in part 1236, may amend existing regulations, or may be
undertaken as entirely new rulemakings that would be located outside of
part 1236. For example, FHFA may decide to locate a Standard
established as a regulation that applies to all of its regulated
entities within part 1236, but may locate a Standard established as a
regulation that applies only to the Enterprises (including any
affiliate of an Enterprise), or only to the Federal Home Loan Banks
(including OF), outside of part 1236. Any Standard established as a
regulation would be identified as a Standard in that regulation.\25\
Proposed Sec. 1236.3(c) would also make clear that Standards
established as regulations are subject to the remedial and enforcement
provisions of part 1236 (because they are Standards) as well as
statutory enforcement provisions (because they are regulations).
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\25\ See, e.g., 12 CFR 1240.1(e)(3).
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FHFA proposes to re-number current Sec. 1236.3(c) as Sec.
1236.3(d), and to amend it to clarify that if there is a direct
conflict between a Standard adopted as a guideline and an FHFA
regulation, the regulation will control. This clarification retains the
sense of current Sec. 1236.3(c) (which recognizes the primacy of an
FHFA regulation over other agency guidance), but it was not necessary
when, for purposes of part 1236, all Standards were guidelines. FHFA's
authority to determine that failure to meet a Standard is an unsafe or
unsound practice, currently addressed in Sec. 1236.3(d), would be
relocated to Sec. 1236.4(a) (addressed below).
E. Section 1236.4--Failure To Meet a Standard; Corrective Plans
Consistent with other proposed changes to part 1236, FHFA is
proposing to expand the scope of Sec. 1236.4, which addresses the
failure to meet a Standard and submission of corrective plans, to cover
Standards established as regulations. Other changes are proposed to
clarify the application of Sec. 1236.4.
As already noted, FHFA proposes to relocate its authority to
determine that failure to meet a Standard is an unsafe or unsound
practice, currently addressed in Sec. 1236.3(d), to Sec. 1236.4(a).
FHFA believes this authority is more appropriately located in Sec.
1236.4, with other regulatory provisions addressing failure to meet a
Standard.
Section 1236.4(b), which addresses the submission of corrective
plans, currently implies that FHFA has discretion in all cases to
decide whether to require a corrective plan from a regulated entity
that fails to meet a Standard. That implication was correct when part
1236 was originally adopted because part 1236 established Standards as
guidelines only, and section 4513b provides that FHFA may require a
corrective plan if a regulated entity fails to meet a Standard
established as a guideline.\26\ However, section 4513b provides that
FHFA must require a corrective plan if a regulated entity fails to meet
a Standard established as a regulation.\27\ Consistent with those
statutory provisions, and reflecting extension of the rule to OF, FHFA
is now proposing to clarify in Sec. 1236.4(b) that FHFA may require a
corrective plan if a regulated entity or OF fails to meet a Standard
established as a guideline, but must require a corrective plan if a
[[Page 28436]]
regulated entity or OF fails to meet a Standard established as a
regulation.
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\26\ 12 U.S.C. 4513b(b)(1)(A)(ii).
\27\ Id. 4513b(b)(1)(A)(i).
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As a procedural matter, Sec. 1236.4(b) provides that FHFA will
inform a regulated entity or the OF that it is required to submit a
corrective plan by written notice, which will also set forth FHFA's
determination that the regulated entity or OF has failed a particular
Standard or Standards. FHFA may otherwise inform a regulated entity or
the OF that it has failed to meet a Standard, but Sec. 1236.4(b) and
(c) establish procedural requirements that govern corrective plans. For
example, FHFA may provide a regulated entity a report of examination
that includes a determination that the regulated entity failed to meet
a particular Standard. That determination, without more, is not
``written notice'' for purposes of Sec. 1236.4(b) and (c), because it
does not include the statement that FHFA is requiring the regulated
entity to submit a corrective plan. FHFA intends it to be explicitly
clear when ``written notice'' for purposes of Sec. 1236.4(b) has been
provided (e.g., it is likely such a notice will cite to Sec.
1236.4(b)), to avoid confusion about the applicability of regulatory
deadlines in Sec. 1236.4(c) while permitting fulsome dialogue and
communication between FHFA examiners and management of a regulated
entity or OF.
Within Sec. 1236.4(c), FHFA is proposing to relocate the
requirement that plans be in writing from Sec. 1236.4(c)(2)(i) to
Sec. 1236.4(c)(1). FHFA is also proposing to amend Sec.
1236.4(c)(2)(ii), on submitting a corrective plan with another
submission such as a capital restoration plan, to clarify that the
relevant deadline may be one established by FHFA in accordance with
Sec. 1236.4(c)(2) and to expand the sorts of required plans or
submissions of which a corrective plan may be a part, as deemed
appropriate by FHFA. This last change is intended to reduce burden on a
regulated entity or OF, if it is feasible and appropriate to combine a
corrective plan under this proposed rule with another type of required
plan or submission.
Finally, FHFA is also proposing conforming amendments to Sec.
1236.4(d) and (e) to bring OF within the scope of those provisions.
F. Section 1236.5--Failure To Submit a Corrective Plan; Noncompliance
Section 1236.5 addresses FHFA authority to require a corrective
order if a regulated entity fails to submit an acceptable corrective
plan or fails in any material respect to implement an approved
corrective plan and processes related to such an order. FHFA is
proposing to revise the term ``regulated entity'' in the first clause
of Sec. 1236.5(a) to ``regulated entity or Office of Finance''.
Similarly, FHFA is proposing to revise the term ``regulated entity'' to
``regulated entity or Office of Finance'' in Sec. 1236.5(a)(6).
However, given that the corrective measures set out in Sec.
1236.5(a)(1) through (5) and Sec. 1236.5(b) are not applicable to the
OF, FHFA is not proposing to revise the term ``regulated entity'' in
those provisions. FHFA is also proposing conforming amendments to Sec.
1236.5(c), (d), and (e) to extend the application of those paragraphs
to OF.
G. Appendix to Part 1236
FHFA is proposing to revise the introductory text of the appendix
to be consistent with proposed amendments to the rule. Currently that
introductory text states the provisions in the appendix ``constitute
the prudential management and operations standards established pursuant
to 12 U.S.C. 4513b'' and thus implies that FHFA has established all
Standards as guidelines located in the appendix, even though FHFA has
also established Standards as regulations located in different parts of
title 12, chapter XII, of the Code of Federal Regulations. Although
FHFA intends to continue locating Standards established as guidelines
in the appendix, FHFA may locate any additional Standards established
as regulations outside of part 1236.
FHFA is also proposing to add a sentence after the introductory
text of the appendix stating that the General Responsibilities of the
Board of Directors and Standards 1, 2, 8, and 10 in the appendix apply
to OF as appropriate. In addition, FHFA is proposing to revise the
General Responsibilities of the Board of Directors and Standards 1, 2,
8, and 10 in the appendix so that these Standards would apply to OF as
appropriate. In particular, FHFA is proposing to revise the term
``regulated entity'' in those Standards to ``regulated entity and
Office of Finance'' or some variation thereof.
V. Differences Between Banks and Enterprises
Section 1313(f) of the Safety and Soundness Act (12 U.S.C.
4513(f)), as amended by section 1201 of the Housing and Economic
Recovery Act of 2008, 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 this proposed rule, the Director considered the differences
between the Banks (including OF) and the Enterprises as they relate to
the above factors, and determined that the rule is appropriate.
VI. Paperwork Reduction Act
The proposed rule would not contain any information collection
requirement that would require the approval of the Office of Management
and Budget (OMB) under the Paperwork Reduction Act (44 U.S.C. 3501 et
seq.). Therefore, FHFA has not submitted any information to OMB for
review.
VII. 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). FHFA has considered the impact of this
proposed rule under the Regulatory Flexibility Act. The General Counsel
of FHFA certifies that this proposed rule, if adopted as a final rule,
is not likely to have a significant economic impact on a substantial
number of small entities because the regulation applies only to the
regulated entities and the Office of Finance, which are not small
entities for purposes of the Regulatory Flexibility Act.
List of Subjects in 12 CFR Part 1236
Administrative practice and procedure, Federal home loan banks,
Government-sponsored enterprises, Office of Finance, Prudential
Management and Operations Standards, Reporting and recordkeeping
requirements.
Accordingly, for the reasons stated in the Preamble, FHFA proposes
to amend part 1236 of chapter XII of title 12 of the Code of Federal
Regulations as follows:
PART 1236--PRUDENTIAL MANAGEMENT AND OPERATIONS STANDARDS
0
1. The authority citation for part 1236 continues to read as follows:
[[Page 28437]]
Authority: 12 U.S.C. 4511, 4513(a) and (f), 4513b, and 4526.
0
2. Revise Sec. 1236.1 to read as follows:
Sec. 1236.1 Purpose.
This part addresses prudential management and operations standards
that are required and authorized by 12 U.S.C. 4513b, including
establishment of Standards by Federal Housing Finance Agency (FHFA) and
the processes by which FHFA can notify a regulated entity or the Office
of Finance of its failure to operate in accordance with a Standard and
can direct the regulated entity or the Office of Finance to take
corrective action. This part further specifies the possible
consequences if any regulated entity or the Office of Finance fails to
operate in accordance with an applicable Standard or otherwise fails to
comply with this part.
0
3. Revise Sec. 1236.2 introductory text, remove the definition of
``Standards'', and add the definition of ``Standard(s)'' to read as
follows:
Sec. 1236.2 Definitions.
Unless otherwise indicated, terms used in this part have the
meanings that they have in part 1201 of this chapter, in the Safety and
Soundness Act, 12 U.S.C. 4501 et seq., or in the Bank Act, 12 U.S.C.
1421 et seq.
* * * * *
Standard(s) means any one (or more) of the prudential management
and operations standards established by the Director pursuant to 12
U.S.C. 4513b(a). Standard includes the introductory statement of
general responsibilities of boards of directors and senior management
of the regulated entities set forth in the appendix to this part.
0
4. Revise Sec. 1236.3 to read as follows:
Sec. 1236.3 Prudential standards as regulations or guidelines.
(a) Form. As expressly authorized by 12 U.S.C. 4513b(a), FHFA may
establish Standards as regulations or guidelines.
(b) Standards established as guidelines. Each Standard that has
been established as a guideline is located in the appendix to this
part. FHFA will provide public notice of, and seek public comment on,
any Standard it plans to establish as a guideline, or on any material
modification to any Standard established as a guideline. FHFA may
revoke any Standard established as a guideline at any time by order or
notice. Standards established as guidelines are subject to the remedial
provisions of Sec. Sec. 1236.4 and 1236.5.
(c) Standards established as regulations. When establishing a
Standard as a regulation or amending such a Standard, FHFA shall follow
applicable rulemaking procedures of the Administrative Procedure Act,
12 U.S.C. 553. Standards established as regulations may be set forth as
subparts or provisions of this part; or as other parts or subparts, or
as provisions of such other parts or subparts, of this chapter XII of
title 12. When not set forth as a subpart of this part, the regulation
or any provision thereof that is a Standard shall be identified as a
Standard in the body of the regulation. Standards established as
regulations are subject to this part, including the remedial provisions
of Sec. Sec. 1236.4 and 1236.5, and to the enforcement provisions of
12 U.S.C. chapter 46, subchapter III.
(d) Conflicts. In the case of a direct conflict between a Standard
established as a guideline and any FHFA regulation, when it is not
possible to comply with both that Standard and the FHFA regulation, the
FHFA regulation shall control.
0
5. Revise Sec. 1236.4 to read as follows:
Sec. 1236.4 Failure to meet a Standard; corrective plans.
(a) Determination. FHFA may determine, based upon an examination,
inspection, or any other information, that a regulated entity or the
Office of Finance has failed to meet one or more of the Standards.
Failure to meet any Standard may constitute an unsafe and unsound
practice for purposes of the enforcement provisions of 12 U.S.C.
chapter 46, subchapter III.
(b) Submission of corrective plan. When a regulated entity or the
Office of Finance is required to submit a corrective plan, FHFA shall
inform the regulated entity or the Office of Finance of that
requirement by written notice, which shall also set forth FHFA's
determination that the regulated entity or the Office of Finance has
failed a particular Standard or Standards. FHFA shall require a
regulated entity or the Office of Finance to submit a corrective plan
if FHFA determines that the regulated entity or the Office of Finance
has failed to meet a Standard established as a regulation. FHFA may
require a regulated entity or the Office of Finance to submit a
corrective plan for failure to meet a Standard established as a
guideline.
(c) Corrective plans--(1) Contents of plan. A corrective plan shall
be in writing and shall describe the actions the regulated entity or
the Office of Finance will take to correct its failure(s) as determined
by FHFA, and the time within which each action will be taken.
(2) Filing deadline--(i) In general. A regulated entity or the
Office of Finance must file a corrective plan with FHFA within thirty
(30) calendar days of being notified by FHFA of the requirement to file
a corrective plan, unless FHFA notifies the regulated entity or the
Office of Finance in writing that the plan must be filed within a
different time period.
(ii) Other plans or submissions. If a regulated entity must file a
capital restoration plan submitted pursuant to 12 U.S.C. 4622, it may
submit the corrective plan required under this section as part of the
capital restoration plan, subject to the deadline established in
accordance with paragraph (c)(2)(i) of this section. If a regulated
entity or the Office of Finance is operating under a cease-and-desist
order entered into pursuant to 12 U.S.C. 4631 or 4632, or a formal or
informal agreement, or must file a response to a report of examination
or report of inspection, it may, with the permission of FHFA, submit
the corrective plan required under this section as part of its
compliance with that order, agreement, or response, subject to the
deadline established in accordance with paragraph (c)(2)(i) of this
section, but the corrective plan would not become a part of the order,
agreement, or response. FHFA may also permit a regulated entity or the
Office of Finance to submit a corrective plan required under this
section as part of another type of required plan or submission by a
regulated entity or the Office of Finance, as deemed appropriate by
FHFA.
(d) Amendment of corrective plan. A regulated entity or the Office
of Finance that is operating in accordance with an approved corrective
plan may submit a written request to FHFA to amend the plan as
necessary to reflect any changes in circumstance. Until such time that
FHFA approves a proposed amendment, the regulated entity or the Office
of Finance must continue to operate in accordance with the terms of the
corrective plan as previously approved.
(e) Review of corrective plans and amendments. Within thirty (30)
calendar days of receiving a corrective plan or proposed amendment to a
plan, FHFA will notify the regulated entity or the Office of Finance in
writing of its decision on the plan, will direct the regulated entity
to submit additional information, or will notify the regulated entity
in writing of any extended deadline for review that FHFA has
established.
0
6. Amend Sec. 1236.5 by revising the introductory text to paragraph
(a), paragraph (a)(6), the introductory text to paragraph (c)(1),
paragraphs (c)(1)(i), (c)(2) through (4), paragraph (d), and the
[[Page 28438]]
introductory text to paragraph (e) to read as follows:
Sec. 1236.5 Failure to submit a corrective plan; noncompliance.
(a) Remedies. If a regulated entity or the Office of Finance fails
to submit an acceptable corrective plan under Sec. 1236.4(b), or fails
in any material respect to implement or otherwise comply with an
approved corrective plan, FHFA shall order the regulated entity or the
Office of Finance to correct that deficiency, and may:
* * * * *
(6) Require the regulated entity or the Office of Finance to take
any other action that the Director determines will better carry out the
purposes of the statute by bringing the regulated entity or the Office
of Finance into conformance with the Standards.
* * * * *
(c) * * *
(1) Notice. Except as provided in paragraph (c)(4) of this section,
FHFA will notify a regulated entity or the Office of Finance in writing
of FHFA's intent to issue an order requiring the regulated entity or
the Office of Finance to correct its failure to submit or its failure
in any material respect to implement or otherwise comply with an
approved corrective plan. Any such notice will include:
(i) A statement that the regulated entity or the Office of Finance
has failed to submit a corrective plan under Sec. 1236.4, or has not
implemented or otherwise has not complied in any material respect with
an approved plan;
* * * * *
(2) Response to notice. A regulated entity or the Office of Finance
may file a written response to a notice of intent to issue an order,
which must be delivered to FHFA within fourteen (14) calendar days of
the date of the notice, unless FHFA determines that a different time
period is appropriate in light of the safety and soundness of the
regulated entity or the Office of Finance or other relevant
circumstances. The response should include:
(i) An explanation of why the regulated entity or the Office of
Finance believes that the action proposed by FHFA is not an appropriate
exercise of discretion;
(ii) Any recommended modification of the proposed order; and
(iii) Any other relevant information, mitigating circumstances,
documentation or other evidence in support of the position of the
regulated entity or the Office of Finance regarding the proposed order.
(3) Failure to file response. The failure of a regulated entity or
the Office of Finance to file a written response within the specified
time period will constitute a waiver of the opportunity to respond and
will constitute consent to issuance of the order.
(4) Immediate issuance of final order. FHFA may issue an order
requiring a regulated entity or the Office of Finance immediately to
take actions to correct a Standards deficiency or to take or refrain
from taking other actions pursuant to paragraph (a) of this section.
Within fourteen (14) calendar days of the issuance of an order under
this paragraph, or other time period specified by FHFA, a regulated
entity or the Office of Finance may submit a written appeal of the
order to FHFA. FHFA will respond in writing to a timely filed appeal
within sixty (60) days after receiving the appeal. During this period,
the order will remain in effect unless FHFA stays the effectiveness of
the order.
(d) Request for modification or rescission of order. A regulated
entity or the Office of Finance subject to an order under this part may
submit a written request to FHFA for an amendment to the order to
reflect a change in circumstance. Unless otherwise ordered by FHFA, the
order shall continue in place while such a request is pending before
FHFA.
(e) Agency review and determination. FHFA will respond in writing
within thirty (30) days after receiving a response or amendment
request, unless FHFA notifies the regulated entity or the Office of
Finance in writing that it will respond within a different time period.
After considering the response or amendment request from a regulated
entity or the Office of Finance, FHFA may:
* * * * *
0
7. Amend the appendix to part 1236 by:
0
a. Revising the introductory text to the appendix;
0
b. Revising the introductory text and paragraphs 1. through 8. and 10.
under the undesignated heading ``General Responsibilities of the Board
of Directors and Senior Management'';
0
c. In Standard 1, revising paragraphs 1., 4., 5. through 14., and 16.;
0
d. In Standard 2, revising paragraphs 1., 3., 5. through 7., and 11.;
0
e. In Standard 8, revising paragraphs 1. through 3. and 7. through 12.;
and
0
f. Revising Standard 10.
The revisions read as follows:
Appendix to Part 1236--Prudential Management and Operations Standards
The following provisions constitute the prudential management
and operations standards established as guidelines pursuant to 12
U.S.C. 4513b(a). The General Responsibilities of the Board of
Directors and Standards 1, 2, 8, and 10 apply to the Office of
Finance as appropriate.
General Responsibilities of the Board of Directors and Senior
Management
The following provisions address the general responsibilities of
the boards of directors and senior management of the regulated
entities as they relate to the matters addressed by each of the
Standards, and the general responsibilities of the board of
directors and senior management of the Office of Finance to the
extent a particular Standard is applicable to the Office of Finance.
The descriptions are not a comprehensive listing of the
responsibilities of either the boards or senior management, each of
whom have additional duties and responsibilities to those described
in these Standards.
Responsibilities of the Board of Directors
With respect to the subject matter addressed by each applicable
Standard, the board of directors of each regulated entity and of the
Office of Finance is responsible for adopting business strategies
and policies that are appropriate for the particular subject matter.
The board should review all such strategies and policies
periodically. It should review and approve all major strategies and
policies at least annually and make any revisions that are necessary
to ensure that such strategies and policies remain consistent with
the overall business plan of the entity or the Office of Finance.
2. The board of directors is responsible for overseeing
management of the regulated entity or the Office of Finance, which
includes ensuring that management includes personnel who are
appropriately trained and competent to oversee the operation of the
regulated entity and the Office of Finance as it relates to the
functions and requirements addressed by each applicable Standard,
and that management implements the policies set forth by the board.
3. The board of directors is responsible for remaining informed
about the operations and condition of the regulated entity or the
Office of Finance, including operating consistently with the
applicable Standards, and senior management's implementation of the
strategies and policies established by the board of directors.
4. The board of directors must remain sufficiently informed
about the nature and level of the regulated overall risk exposures
of the entity or the Office of Finance, including, as applicable,
market, credit, operational, and counterparty risk, so that it can
understand the possible short- and long-term effects of those
exposures on the financial health of the regulated entity, including
the possible short- and long-term consequences, as applicable, to
earnings, liquidity, and economic value. The board of directors
should: establish the risk tolerances of the regulated entity or the
Office of Finance and provide management with clear guidance
regarding the level of acceptable risks; review the entire risk
management framework of the regulated entity or the Office of
Finance, including policies and
[[Page 28439]]
entity-wide risk limits at least annually; oversee the adequacy of
the actions taken by senior management to identify, measure, manage,
and control the risk exposures of the regulated entity or the Office
of Finance; and ensure that management takes appropriate corrective
measures whenever risk limit violations or breaches occur.
Responsibilities of Senior Management
5. With respect to the subject matter addressed by each
applicable Standard, senior management is responsible for developing
the policies, procedures and practices that are necessary to
implement the business strategies and policies adopted by the board
of directors. Senior management should ensure that such items are
clearly written, sufficiently detailed, and are followed by all
personnel. Senior management also should ensure that the regulated
entity or the Office of Finance has personnel who are appropriately
trained and competent to carry out their respective functions and
that all delegated responsibilities are performed.
6. Senior management should ensure that the regulated entity or
the Office of Finance has adequate resources, systems, and controls
available to execute effectively the business strategies, policies,
and procedures of the entity or the Office of Finance, including
operating consistently with each of the applicable Standards.
7. Senior management should provide the board of directors with
periodic reports relating to the condition and performance of the
regulated entity or the Office of Finance, including the subject
matter addressed by each of the applicable Standards, that are
sufficiently detailed to allow the board of directors to remain
fully informed about the business of the regulated entity or the
Office of Finance.
8. Senior management should regularly review and discuss with
the board of directors information regarding the risk exposures of
the regulated entity or the Office of Finance that is sufficient in
detail and timeliness to permit the board of directors to understand
and assess the performance of management in identifying and managing
the various risks to which the regulated entity or the Office of
Finance is exposed.
Responsibilities of the Board of Directors and Senior Management
* * * * *
10. The board of directors and senior management should ensure
that the overall risk profile of the regulated entity or the Office
of Finance is aligned with its mission objectives.
Standard 1--Internal Controls and Information Systems
Responsibilities of the Board of Directors
1. Regarding internal controls and information systems, the
board of directors of each regulated entity and the Office of
Finance should adopt appropriate policies, ensure personnel are
appropriately trained and competent, approve and periodically review
overall business strategies, approve the organizational structure,
and assess the adequacy of senior management's oversight of this
function.
* * * * *
Framework
4. Each regulated entity and the Office of Finance should have
an adequate and effective system of internal controls, which should
include a board approved organizational structure that clearly
assigns responsibilities, authority, and reporting relationships,
and establishes an appropriate segregation of duties that ensures
that personnel are not assigned conflicting responsibilities.
5. Each regulated entity and the Office of Finance should
establish appropriate internal control policies and should monitor
the adequacy and effectiveness of its internal controls and
information systems on an ongoing basis through a formal self-
assessment process.
6. Each regulated entity and the Office of Finance should have
an organizational culture that emphasizes and demonstrates to
personnel at all levels the importance of internal controls.
7. Each regulated entity and the Office of Finance should
address promptly any violations, findings, weaknesses, deficiencies,
and other issues in need of remediation relating to the internal
control systems.
Risk Recognition and Assessment
8. Each regulated entity and the Office of Finance should have
an effective risk assessment process that ensures that management
recognizes and continually assesses all material risks, including
credit risk, market risk, interest rate risk, liquidity risk, and
operational risk.
Control Activities and Segregation of Duties
9. Each regulated entity and the Office of Finance should have
an effective internal control system that defines control activities
at every business level.
10. The control activities of each regulated entity and the
Office of Finance should include:
a. Board of directors and senior management reviews of progress
toward goals and objectives;
b. Appropriate activity controls for each business unit;
c. Physical controls to protect property and other assets and
limit access to property and systems;
d. Procedures for monitoring compliance with exposure limits and
follow-up on non-compliance;
e. A system of approvals and authorizations for transactions
over certain limits; and
f. A system for verification and reconciliation of transactions.
Information and Communication
11. Each regulated entity and the Office of Finance should have
information systems that provide relevant, accurate and timely
information and data.
12. Each regulated entity and the Office of Finance should have
secure information systems that are supported by adequate
contingency arrangements.
13. Each regulated entity and the Office of Finance should have
effective channels of communication to ensure that all personnel
understand and adhere to policies and procedures affecting their
duties and responsibilities.
Monitoring Activities and Correcting Deficiencies
14. Each regulated entity and the Office of Finance should
monitor the overall effectiveness of its internal controls and key
risks on an ongoing basis and ensure that business units and
internal and external audit conduct periodic evaluations.
* * * * *
Applicable Laws, Regulations, and Policies
16. Each regulated entity and the Office of Finance should
comply with all applicable laws, regulations, and supervisory
guidance (e.g., advisory bulletins) governing internal controls and
information systems.
Standard 2--Independence and Adequacy of Internal Audit Systems
Audit Committee
1. The board of directors of each regulated entity and the
Office of Finance should have an audit committee that exercises
proper oversight and adopts appropriate policies and procedures
designed to ensure the independence of the internal audit function.
The audit committee should ensure that the internal audit department
includes personnel who are appropriately trained and competent to
oversee the internal audit function.
* * * * *
3. The audit committee of the board of directors is responsible
for monitoring and evaluating the effectiveness of the internal
audit function of each regulated entity and the Office of Finance.
* * * * *
Internal Audit Function
5. Each regulated entity and the Office of Finance should have
an internal audit function that provides for adequate testing of the
system of internal controls.
6. Each regulated entity and the Office of Finance should have
an independent and objective internal audit department that reports
directly to the audit committee of the board of directors.
7. The internal audit department of each regulated entity and
the Office of Finance should be adequately staffed with properly
trained and competent personnel.
* * * * *
Applicable Laws, Regulations, and Policies
11. Each regulated entity and the Office of Finance should
comply with applicable laws, regulations, and supervisory guidance
(e.g., advisory bulletins) governing the independence and adequacy
of internal audit systems.
* * * * *
Standard 8--Overall Risk Management Processes
Responsibilities of the Board of Directors
1. Regarding overall risk management processes, the board of
directors is
[[Page 28440]]
responsible for overseeing the process, ensuring senior management
are appropriately trained and competent, ensuring processes are in
place to identify, manage, monitor and control risk exposures (this
function may be delegated to a board appointed committee), approving
all major risk limits, and ensuring incentive compensation measures
for senior management capture a full range of risks to the regulated
entity or the Office of Finance.
Responsibilities of the Board and Senior Management
2. Regarding overall risk management processes, the board of
directors and senior management should establish and sustain a
culture that promotes effective risk management. This culture
includes timely, accurate and informative risk reports, alignment of
the overall risk profile of the regulated entity or the Office of
Finance with its mission objectives, and the annual review of
comprehensive self-assessments of material risks.
Independent Risk Management Function
3. A regulated entity or the Office of Finance should have an
independent risk management function, or unit, with responsibility
for risk measurement and risk monitoring, including monitoring and
enforcement of risk limits.
* * * * *
Risk Measurement, Monitoring, and Control
7. Each regulated entity and the Office of Finance should
measure, monitor, and control its overall risk exposures, reviewing,
as applicable, market, credit, liquidity, and operational risk
exposures on both a business unit (or business segment) and
enterprise-wide basis.
8. Each regulated entity and the Office of Finance should have
the risk management systems to generate, at an appropriate
frequency, the information needed to manage risk. As applicable,
such systems should include systems for market, credit, operational,
and liquidity risk analysis, asset and liability management,
regulatory reporting, and performance measurement.
9. Each regulated entity and the Office of Finance should have a
comprehensive set of risk limits and monitoring procedures to ensure
that risk exposures remain within established risk limits, and a
mechanism for reporting violations and breaches of risk limits to
senior management and the board of directors.
10. Each regulated entity and the Office of Finance should
ensure that it has sufficient controls around risk measurement
models to ensure the completeness, accuracy, and timeliness of risk
information.
11. Each regulated entity and the Office of Finance should have
adequate and well-tested disaster recovery and business resumption
plans for all major systems and have remote facilitates to limit the
impact of disruptive events.
Applicable Laws, Regulations, and Policies
12. As applicable, each regulated entity and the Office of
Finance should comply with all applicable laws, regulations, and
supervisory guidance (e.g., advisory bulletins) governing the
management of risk.
* * * * *
Standard 10--Maintenance of Adequate Records
1. Each regulated entity and the Office of Finance should
maintain financial records in compliance with Generally Accepted
Accounting Principles (GAAP), FHFA guidelines, and applicable laws
and regulations.
2. Each regulated entity and the Office of Finance should ensure
that assets are safeguarded and financial and operational
information is timely and reliable.
3. Each regulated entity and the Office of Finance should have a
records retention program consistent with laws and corporate
policies, including accounting policies, as well as personnel that
are appropriately trained and competent to oversee and implement the
records management plan.
4. Each regulated entity and the Office of Finance, with
oversight from its board of directors, should conduct a review and
approval of the records retention program and records retention
schedule for all types of records at least once every two years.
5. Each regulated entity and the Office of Finance should ensure
that reporting errors are detected and corrected in a timely manner.
6. Each regulated entity and the Office of Finance should comply
with all applicable laws, regulations, and supervisory guidance
(e.g., advisory bulletins) governing the maintenance of adequate
records.
Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2023-09320 Filed 5-3-23; 8:45 am]
BILLING CODE 8070-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.