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Proposed Rule2024-24767

Federal Home Loan Bank System Boards of Directors and Executive Management

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Published

November 4, 2024

Issuing agencies

Federal Housing Finance Agency

Abstract

The Federal Housing Finance Agency (FHFA or the Agency) is proposing to revise regulations addressing boards of directors and overall corporate governance of the Federal Home Loan Banks (Banks) and the Bank System's Office of Finance (OF) to update and clarify regulatory requirements on a variety of topics including: FHFA's annual designation of Bank directorships; Bank director eligibility and professional qualifications; nomination, election, and removal of Bank directors; the conduct of System board and committee meetings; conflicts of interest; and the respective responsibilities of System boards of directors and executive management.

Full Text

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<title>Federal Register, Volume 89 Issue 213 (Monday, November 4, 2024)</title>
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[Federal Register Volume 89, Number 213 (Monday, November 4, 2024)]
[Proposed Rules]
[Pages 87730-87758]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-24767]

[[Page 87729]]

Vol. 89

Monday,

No. 213

November 4, 2024

Part II

Federal Housing Finance Agency

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12 CFR Parts 1239, 1261, 1273

Federal Home Loan Bank System Boards of Directors and Executive
Management; Proposed Rule

Federal Register / Vol. 89, No. 213 / Monday, November 4, 2024 /
Proposed Rules

[[Page 87730]]

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FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1239, 1261, and 1273

RIN 2590-AB24

Federal Home Loan Bank System Boards of Directors and Executive
Management

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
proposing to revise regulations addressing boards of directors and
overall corporate governance of the Federal Home Loan Banks (Banks) and
the Bank System's Office of Finance (OF) to update and clarify
regulatory requirements on a variety of topics including: FHFA's annual
designation of Bank directorships; Bank director eligibility and
professional qualifications; nomination, election, and removal of Bank
directors; the conduct of System board and committee meetings;
conflicts of interest; and the respective responsibilities of System
boards of directors and executive management.

DATES: Written comments must be received on or before February 3, 2025.

ADDRESSES: You may submit your comments on the proposed rule,
identified by regulatory information number (RIN) 2590-AB24, by any one
of the following methods:
<bullet> Agency Website: <a href="https://www.fhfa.gov/regulation/federal-register?comments=open">https://www.fhfa.gov/regulation/federal-register?comments=open</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#a8facdcfebc7c5c5cdc6dcdbe8cec0cec986cfc7de">[email&#160;protected]</a> to ensure timely receipt by FHFA.
Include the following information in the subject line of your
submission: Comments/RIN 2590-AB24.
<bullet> Hand Delivered/Courier: The hand delivery address is:
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB24,
Federal Housing Finance Agency, 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-AB24, Federal Housing
Finance Agency, 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: Lindsay Spadoni, Assistant General
Counsel, Office of General Counsel, (202) 649-3634,
<a href="/cdn-cgi/l/email-protection#397550575d4a5840176a49585d565750797f717f78175e564f">[email&#160;protected]</a>; or Janna Bruce, Senior Financial Analyst,
Division of Bank Regulation, (202) 649-3202, <a href="/cdn-cgi/l/email-protection#f7bd96999996d9b585829492b7b1bfb1b6d9909881">[email&#160;protected]</a>.
These are not toll-free numbers. 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
take all comments into consideration before issuing a final rule.
Comments will be posted to the electronic rulemaking docket on the FHFA
public website at <a href="https://www.fhfa.gov">https://www.fhfa.gov</a>, except as described below.
Commenters should submit only information the commenter wishes to make
available publicly. FHFA may post only a single representative example
of identical or substantially identical comments, and in such cases
will generally identify the number of identical or substantially
identical comments represented by the posted example. FHFA may, in its
discretion, redact or refrain from posting all or any portion of any
comment that contains content that is obscene, vulgar, profane, or
threatens harm. All comments, including those that are redacted or not
posted, will be retained in their original form in FHFA's internal
rulemaking file and considered as required by all applicable laws.
Commenters that would like FHFA to consider any portion of their
comment exempt from disclosure on the basis that it contains trade
secrets, or financial, confidential or proprietary data or information,
should follow the procedures in section IV.D. of FHFA's Policy on
Communications with Outside Parties in Connection with FHFA
Rulemakings, see <a href="https://www.fhfa.gov/sites/default/files/documents/Ex-Parte-Communications-Public-Policy_3-5-19.pdf">https://www.fhfa.gov/sites/default/files/documents/Ex-Parte-Communications-Public-Policy_3-5-19.pdf</a>. FHFA cannot guarantee
that such data or information, or the identity of the commenter, will
remain confidential if disclosure is sought pursuant to an applicable
statute or regulation. See 12 CFR 1202.8 and 1214.2 and the FHFA FOIA
Reference Guide at <a href="https://www.fhfa.gov/about/foia-reference-guide">https://www.fhfa.gov/about/foia-reference-guide</a> for
additional information.

II. Background

A. Statutory Requirements on Bank System Governance

The Bank System consists of eleven district Banks and the OF. The
Banks are wholesale, cooperatively owned financial institutions, the
debt of which is the joint and several obligation of all eleven Banks.
They are organized under authority of the Federal Home Loan Bank Act
(Bank Act) to serve the public interest by enhancing the availability
of residential housing finance and community lending credit through
their member institutions and, to a very limited extent, through
certain eligible nonmembers. In general, only members may obtain
advances (low-cost secured loans) and access other products and
services provided by a Bank.
The Bank Act vests the management of each Bank in its board of
directors.\1\ As required by statute, each Bank's board comprises two
types of directors: (1) member directors, who are drawn from the
officers and directors of member institutions located in the Bank's
district and who are elected to represent members in each respective
state in that district; and (2) independent directors, who are
unaffiliated with any of the Bank's member institutions or borrowing
housing associates,\2\ but who reside in the Bank's district and are
elected on an at-large basis.\3\ The Bank Act specifies that a majority
of seats on each Bank's board of directors must be member
directorships, while not less than 40 percent must be independent
directorships.\4\ Both types of directors serve four-year terms, which
must be staggered so that approximately one-quarter of a Bank's total
directorships are up for election every year.\5\ The Bank Act
establishes the eligibility requirements for both types of Bank
directors, including the professional qualifications required for
independent directors, and sets forth requirements for their nomination
and election.\6\ The statute requires the FHFA Director to annually
designate the size and composition of each Bank's board of directors
for the following calendar

[[Page 87731]]

year, including by establishing the number of member and independent
directorships and allocating member directorships among the states of
the Bank district.\7\
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\1\ See 12 U.S.C. 1427(a)(1).
\2\ FHFA's regulations refer to eligible nonmember borrowers as
``housing associates.'' See 12 CFR part 1264.
\3\ See 12 U.S.C. 1427(a)(4), (b), and (d).
\4\ See 12 U.S.C. 1427(a)(2).
\5\ See 12 U.S.C. 1427(d).
\6\ See 12 U.S.C. 1429, 1430(a)(1), 1430b.
\7\ See 12 U.S.C. 1427(b)(1), (c).
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The Bank Act requires that at least two of a Bank's independent
directors qualify as ``public interest'' independent directors, each of
which must ``have more than 4 years of experience in representing
consumer or community interests on banking services, credit needs,
housing, or financial consumer protections.'' \8\ Each independent
director that is not a public interest independent director (referred
to in this proposed rule as a ``regular independent director'') must
``have demonstrated knowledge of, or experience in, financial
management, auditing and accounting, risk management practices,
derivatives, project development, or organizational management, or such
other knowledge or expertise as the [FHFA] Director may provide by
regulation.'' \9\ By regulation, FHFA has added ``the law'' to that
list of qualifying knowledge and experience.\10\
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\8\ 12 U.S.C. 1427(a)(3)(B)(ii).
\9\ 12 U.S.C. 1427(a)(3)(B)(i).
\10\ See 12 CFR 1261.7(e)(1).
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B. Existing Regulations on Corporate Governance of Banks and OF

Part 1261 of FHFA's regulations, entitled ``Federal Home Loan Bank
Directors,'' implements the statutory provisions and otherwise
establishes requirements and processes relating to the composition and
operations of Bank boards of directors. With respect to the former,
sections in subpart B of the regulation (Sec. Sec. 1261.2 through
1261.15) cover the annual designation of Bank directorships by the FHFA
Director, director eligibility, the nomination and election processes,
reporting and record retention requirements, handling conflicts of
interest, and the filling of vacancies. Sections in subpart C
(Sec. Sec. 1261.20 through 1261.24) address director compensation and
expenses and the conduct of board and committee meetings.\11\
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\11\ Subpart A of the existing regulation, entitled
``Definitions,'' has no content.
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In addition to the corporate governance issues addressed in part
1261, part 1239 of FHFA's regulations, entitled ``Responsibilities of
Boards of Directors, Corporate Practices, and Corporate Governance,''
addresses duties and responsibilities of directors, required board
committees, and programs and policies each Bank must establish and
maintain. Although part 1239 generally applies to all of FHFA's
regulated entities, subpart E of the regulation sets forth requirements
that are specific to the Banks. Part 1273 of FHFA's regulations governs
the Bank System's OF, with governance issues--including composition and
meetings of the OF board of directors--being addressed primarily in
Sec. 1273.8.

III. Overview of the Proposed Rule

The proposed rule would make numerous revisions to part 1261, as
well as more limited revisions to parts 1239 and 1273 to address
various issues related to the corporate governance of the Banks and the
OF. While the greater portion of the proposed changes to existing
regulatory text are intended merely to restate existing requirements
more clearly, many of the proposed revisions are substantive. The
latter are being proposed primarily to ensure that the Banks maintain
strong corporate governance that enables them to effectively fulfill
their public policy mission while maintaining safe and sound
operations. New proposed requirements and authorities would help ensure
the Banks have the leadership and resources to forestall avoidable
difficulties and to address challenges that may arise in the years
ahead. The proposed revisions reflect FHFA's view that corporate
governance of the Banks is strengthened when: the public interest is
adequately represented; Bank boards have the collective knowledge and
expertise to guide the Bank through new and emerging risks and complex
problems; independent directors represent a true independent voice;
each Bank has the tools to ensure that its directors are fit to serve
in a fiduciary role with the Bank; and Bank directors and management
are incentivized to carry out their duties and responsibilities
conscientiously.
As discussed further below, several of the proposed changes
implement action items from FHFA's FHLBank System at 100: Focusing on
the Future Report (FHLBank System at 100 Report or Report), published
in November 2023. The proposed rule would also address issues raised in
comments received in response to FHFA's April 2023 Notice of Regulatory
Review, which was published pursuant to FHFA's Regulatory Review
Plan.\12\ Other substantive changes are intended to increase
transparency by codifying existing guidance or practices or to provide
clarity on issues for which there currently exists no formal guidance,
but on which FHFA has received inquiries. Finally, FHFA is also
proposing many non-substantive revisions to part 1261, which are
intended merely to address existing requirements, processes, and
authorities pertaining to Bank boards and directors more clearly than
does the existing regulation.
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\12\ See 88 FR 22919 (Apr. 14, 2023) (FHFA Notice of Regulatory
Review). The Regulatory Review Plan establishes a process by which,
at least every five years, FHFA issues a notice of the regulatory
review in the Federal Register and requests comments on how its
regulations may be made more effective and less burdensome in
achieving the Agency's regulatory objectives. See 77 FR 10351 (Feb.
22, 2012) (FHFA Regulatory Review Plan).
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The FHLBank System at 100 Report provides a blueprint for
innovative and prudent steps to bolster and improve the Bank System
over the next several years, with the goal of ensuring that the Banks
remain well positioned to meet the needs of their members and the
communities they serve as they approach their 100th anniversary. The
Report was informed by a year-long review of the Bank System involving
significant stakeholder outreach, a historical review of the role of
the Banks, and detailed analysis of both the strengths and areas for
improvement in the System's current structure. As stated in the Report,
FHFA's vision for the future is to have an effectively governed Bank
System that efficiently provides stable and reliable funding to
creditworthy members and delivers innovative products and services to
support the housing and community development needs of the communities
its members serve, all in a safe and sound manner. The Report noted
that each Bank's ``effectiveness in achieving its mission and safety
and soundness goals is influenced by its governance.'' \13\
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\13\ See FHLBank System at 100 Report at 64.
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The Report laid out four regulatory actions to be taken by FHFA to
strengthen Bank boards of directors and enable them to effectively
address emerging risks and to oversee the safety and soundness and
mission achievement of the Banks in today's financial market
environment: (1) clarify required qualifications for public interest
independent directors; (2) expand the list of qualifying experience for
regular independent directors to reflect business developments in
housing finance and new and emerging risks and complex problems; (3)
encourage the Banks to evaluate potential gaps in board knowledge and
pursue opportunities to address these gaps by nominating individuals
with particular skills, backgrounds, and experience; and (4) facilitate
the nomination of individuals with

[[Page 87732]]

technical subject matter expertise.\14\ The proposed rule would address
each of those four action items.
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\14\ See FHLBank System at 100 Report at 67.
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The proposed rule would clarify required qualifications for public
interest independent directors, including by specifying criteria for a
Bank to consider when determining if an individual has ``represented''
consumer or community interests on banking services, credit needs,
housing, or financial consumer protections, as required by statute to
qualify as a public interest independent director. The rule would
codify existing guidance that a person must have advocated for, or
otherwise acted primarily on behalf of or for the direct benefit of,
consumers or the community to meet the representation requirement.
The revised regulation would require each Bank to take affirmative
measures to ensure that its board of directors has the knowledge and
experience needed to adequately oversee the management of the Bank.
Based on input received during the FHLBank System at 100 outreach, the
proposed rule would add artificial intelligence, information technology
and security, climate-related risk, Community Development Financial
Institution (CDFI) business models, and modeling to the list of
qualifying experience for regular independent directors. To ensure
coverage of critical areas, each Bank's board would be required to
conduct an annual assessment of the skills and experience possessed by
its incumbents and those for which the board has a need. ``Skills and
experience'' assessments are authorized, but not required, under the
existing regulation.\15\
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\15\ See 12 CFR 1261.9(a).
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Banks would be required to take active steps to seek independent
directorship nominees--and to encourage member directorship nominees--
who possess needed skills and experience. The revised regulation also
would require the Banks to prioritize knowledge and experience relevant
to the business, programs, and mission of the Bank and gained primarily
through full time paid executive, management, or other senior positions
when considering potential independent directorship nominees. To
provide Banks with more flexibility to address critical needs when
filling board vacancies, the proposed rule would add a provision
expressly permitting Banks to fill a vacant public interest independent
directorship by redesignating a qualifying incumbent regular
independent director as a public interest independent director and vice
versa. The Bank could then find new nominees to fill the resulting
independent directorship vacancy (a practice FHFA currently permits).
At several points during the outreach phase of the FHLBank System
at 100 initiative, stakeholders stressed the importance of independent
voices on a Bank's board. The proposed rule includes provisions
addressing director independence. It would make modest changes to
increase the separation between independent directors and Bank members
by extending ``independence'' requirements (which currently only apply
to seated directors) to independent directorship nominees and
prohibiting former member directors from serving as an independent
director until they have been off the board for at least two years.
In response to a Notice of Regulatory Review comment, the proposed
rule includes a new provision clarifying the definition of ``advances''
for purposes of the prohibition against an independent director serving
as an officer, employee, or director of any ``recipient of advances''
from the Bank. This issue is of particular relevance for independent
directors who lead or work for entities certified as housing
associates.\16\ As proposed, the word ``advances'' would refer to any
loan from a Bank to the recipient, regardless of form or nomenclature,
except for debt securities traded in the public capital markets. This
definition strikes a balance between preventing circumvention of the
independence requirements and allowing Banks to tap into their housing
associates' valuable expertise without having to relinquish, or decline
to make, investments in their debt securities.
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\16\ See 12 CFR part 1264. A Bank may make an advance to an
entity, such as a state housing finance agency, that is certified as
a housing associate, but housing associates cannot become bank
members.
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The proposed rule would codify requirements and authorities
relating to the ``fitness'' of an individual to serve as a director. It
would require that a Bank decline to nominate or seat as a director any
individual it knows to be ``unfit'' to serve and authorize each Bank's
board to adopt bylaws or policies under which it may remove directors
``for cause'' upon a two-thirds vote of the board. As proposed,
``cause'' for removal would include code of ethics or policy
violations, violations of the law, posing a risk of material harm to
the Bank, conduct or a mental condition indicating an inability to
oversee the Bank, and poor performance or lack of participation. The
proposed rule would also require that each Bank's board conduct an
annual assessment of director performance and participation to
determine whether each director is contributing positively to the
board's ability to adequately oversee the operations of the Bank. The
proposed rule would require that director compensation reflect
performance, as determined through the annual assessment, and permit
the board to remove a director where the assessment reveals that a
director's continuous poor performance or lack of participation is
compromising the board's ability to adequately oversee the operations
of the Bank. Additionally, the proposed rule would allow the FHFA
Director to establish and provide notice of an annual amount of
director compensation determined to be reasonable.
As further assurance that all Bank directors are fit to serve, the
proposed rule would codify as a regulatory requirement the Banks'
existing practice of conducting thorough background checks on
independent directorship nominees, as well as individuals under
consideration to fill a vacant directorship. It would also for the
first time expressly require the Banks to conduct background checks for
their member directorship nominees. The revised regulation would
prohibit a Bank from including any individual on the ballot without
having first confirmed, based on the background check, the individual's
fitness to serve in a fiduciary role with the Bank.
With respect to directorship terms and term limits, the proposed
rule would expressly provide that FHFA may continue, as part of the
annual designation of directorships process, to adjust downward the
length of terms from time to time where required to maintain the even
staggering of directorship terms on a Bank's board. The proposed rule
would make clear that such truncated terms do not count as ``full
terms'' for purposes of the statutory term limit provisions, but that
full terms on either side of a truncated term must be counted as
consecutive for those purposes.
In one of only a few revisions to address corporate governance
issues below the board level, the proposed rule would require each Bank
to adopt and implement a conflicts of interest policy covering all Bank
employees. The required policy would establish appropriate limitations,
standards, and procedures on the holding of outside positions and
financial interests by Bank employees and close family members and
associates. Although the treatment of different types of employees
under such a policy may be

[[Page 87733]]

calibrated to the risk presented, each Bank's policy would be required
to prohibit its executive officers and senior management from holding
paid positions with any entity that is, or may be eligible to become, a
member or housing associate of any Bank or with any affiliate of such
entity.
Finally, the proposed rule would revise the regulation's existing
provisions on record retention. Changes would increase the amount of
time a Bank must retain materials pertaining to its directors and the
director nomination and election process from two years to the longer
of seven years or seven years after the director to which the
information pertains leaves the board. This requirement is consistent
with recognized best practices and should not be burdensome to
implement in an electronic environment.
Although the proposed rule would impose new requirements (in
addition to codifying some existing expectations), it would also
implement new, or make permanent previously temporary, flexibilities.
As requested in a Notice of Regulatory Review comment, the proposed
rule would remove the requirement that Bank boards satisfy their six
meeting per year minimum only through in-person meetings. The proposed
revision would codify the substance of a waiver that has been in place
since early in the COVID-19 pandemic by permitting Bank and OF board
and committee meetings to be held by video or teleconferencing, or in a
hybrid format, provided all directors have an opportunity to
communicate, have access to all written documents and presentations,
and all participants are within a state or U.S. Territory that is part
of a Bank district.
To reduce burden in other areas, the proposed rule would also
implement a number of other recommendations received as comments on the
Notice of Regulatory Review. These changes include expanding the range
of arms-length transactions not considered to be a prohibited
``financial interest'' for purposes of the Bank director conflicts-of-
interest requirements, updating and expanding the authorized methods
for withdrawal of OF operating funds, and allowing the OF board of
directors to delegate review and approval of contracts as specified in
applicable governance documents.
In addition to these substantive revisions, the proposed rule would
make non-substantive revisions throughout part 1261 to improve the
readability of the regulatory text and provide greater clarity on the
requirements, processes, and authorities pertaining to Bank directors.
In particular, provisions governing the annual designation of
directorships, director eligibility, the nomination and election
processes, and the filling of vacant directorships would be updated.
These proposed non-substantive revisions include substitution of
clearer phrasing, changes to assure consistent use of terminology,
consolidation of related subject matter, replacement of statutory
cross-references with either substantive text or regulatory cross-
references, reorganization of sections and revision of headings, and
removal of transitional material that is no longer needed.

IV. Section-by-Section Analysis of the Proposed Rule

A. Revisions to 12 CFR Part 1261

1. Definitions--Sec. 1261.2
Section 1261.2 of the existing regulation sets forth definitions
applicable to subpart B of part 1261, which consists of the provisions
governing Bank director eligibility, nominations, and elections.
Existing Sec. 1261.2 includes definitions for ``independent
directorship,'' ``member directorship,'' ``public interest director,''
and ``public interest directorship.'' As described below, the proposed
rule would add to and revise the regulatory terms describing the Bank
directorship types and sub-types. The proposals are intended to provide
clarity, and revisions to existing definitions are not intended to
change the scope of the defined terms.
The existing regulation defines the terms ``independent
directorship'' and ``member directorship'' by means of cross-references
to the relevant provisions of the Bank Act. The proposed rule would
replace these statutory references with cross-references to the
regulatory provisions establishing the eligibility and designation
requirements for those two types of Bank directorships. FHFA believes
it is preferable to define terms with reference to the regulation
itself, as opposed to requiring reference to the statute the regulation
is intended to implement. Because part 1261 addresses both
``directorships'' (the designated seats comprising a Bank's board) and
``directors'' (the individuals filling those seats), those variants
would be defined together for each directorship type.
While both the Bank Act and the existing regulation define ``public
interest directorship'' (referring to an independent directorship to be
filled by an individual meeting the ``representing consumer or
community interests'' qualification requirement), both refer to an
independent directorship to be filled by an individual meeting the
``knowledge and experience'' qualification requirement of the statute
with such undefined terms as ``an independent directorship, other than
a public interest directorship'' and ``an independent director that is
not a public interest director.'' The proposed rule would establish a
joint definition for ``regular independent directorship and regular
independent director'' to refer to those types of independent
directorships and directors, and would define the terms with a cross-
reference to the new provision addressing the qualifications
requirements for such directors under the proposed rule (Sec.
1261.5(c)(1), discussed below).
The existing regulation defines ``public interest directorship'' as
``an independent directorship filled by an individual with more than
four years of experience representing consumer or community interests
in banking services, credit needs, housing or consumer financial
protections.'' The regulation separately defines ``public interest
director'' to mean ``an individual serving in a public interest
directorship.'' The proposed rule would revise the former term to
``public interest independent directorship'' to make clear that it
refers to a sub-type of independent directorship and so the
construction of the term parallels that of its counterpart, ``regular
independent directorship.'' The proposed rule would also combine the
``directorship'' and ``director'' definitions into one paragraph and
define the terms with a cross-reference to the new provision addressing
the qualifications requirements for such directors under the proposed
rule (Sec. 1261.5(c)(2), also discussed below), so that the
definitions parallel those of the other directorship types.
The proposed rule would also add a definition for the term
``nominee,'' referring to an individual formally nominated by a Bank's
members or board of directors, as appropriate, to stand for election
for a Bank directorship. This change is intended to allow a clearer
distinction in the regulatory text between requirements that apply to
persons requesting or being considered for nomination for a
directorship and requirements that apply only to those that have been
duly nominated.
Existing Sec. 1261.2 defines the term ``voting State'' to mean
``the District of Columbia, Puerto Rico, or the State of the United
States in which a member's principal place of business, as determined
in accordance with 12 CFR part 1263, is located as of the record
date,'' and further clarifies that ``[t]he

[[Page 87734]]

voting State of a member with a principal place of business located in
the U.S. Virgin Islands as of the record date is Puerto Rico, and the
voting State of a member with a principal place of business located in
American Samoa, Guam, or the Commonwealth of the Northern Mariana
Islands as of the record date is Hawaii.'' The proposed rule would
amend this definition to eliminate the unnecessary references to the
District of Columbia and Puerto Rico in the first clause. Section
1201.1 of FHFA's regulations, which defines terms that are used
frequently throughout the regulations, already defines the term
``State'' to include the District of Columbia and Puerto Rico (as well
as American Samoa, the Commonwealth of the Northern Mariana Islands,
Guam, and the United States Virgin Islands), so there is no reason to
specify their inclusion in the definition of ``voting State.''
Where appropriate, the proposed rule would also revise numerous
references to a ``State'' in existing part 1261 to refer to a ``voting
State.'' This is especially important with respect to provisions on the
allocation of member directorships and member directorship nominations
and voting, as the latter term includes the concept that members in
U.S. Virgin Islands nominate, vote for, and are represented by member
directors for Puerto Rico, while members in American Samoa, Guam, or
the Northern Mariana Islands nominate, vote for, and are represented by
member directors for Hawaii.
2. General Provisions--Sec. 1261.3
Section 1261.3 of the existing regulation sets forth ``General
provisions'' addressing board size and composition, length of term of
directorships, annual elections, location of members for purposes of
voting to fill member directorships, and the calculation of dates for
purposes of determining compliance with deadlines required under the
regulation. The proposed rule would remove the material on board size
and composition in existing Sec. 1261.3(a), the substance of which
would be consolidated with related material on the designation of
directorships in revised Sec. 1261.4. The remaining paragraphs of
Sec. 1261.3 would be redesignated as appropriate and revised to remove
or replace statutory references and streamline language for greater
clarity and consistency. No change in substantive meaning is intended.
3. Annual Designation of Directorships--Sec. 1261.4
Section 1261.4 of the existing regulation addresses the annual
``designation of directorships'' process which results in the issuance
of an order by the FHFA Director designating the size and composition
of each Bank's board of directors for the following calendar year. The
proposed rule would make various revisions to this section to
consolidate provisions relating to the designation of directorships and
to provide clarity regarding the methods through which FHFA determines
the appropriate size and composition for each Bank's board and the
requirements and procedures associated with the process. The proposed
rule would also change the heading of Sec. 1261.4 to ``Annual
designation of directorships'' to reflect that the process is annual
and that the Director designates not only member directorships, but
also independent directorships for each Bank. The proposed revisions
are not intended to change any current procedure or requirement.
The proposed rule would redesignate existing Sec. 1261.4(a) as
Sec. 1261.4(b) and would add a new paragraph (a) providing that the
Director will annually issue a written order designating for each
Bank's board of directors for the following calendar year: (1) the
total number of member directorships and their allocation among the
voting States of the Bank's district; (2) the total number of
independent directorships; and (3) the directorships for which an
election will be held for terms beginning on January 1 of the following
year, and the length of those terms.\17\ The designation of
directorships has been carried out by means of a Director's order since
the inception of FHFA and the new regulatory text would make this
explicit and would more accurately describe the content of the
designations order than existing Sec. 1261.3(a). Consistent with
current practice, the proposed rule would provide that the Director
will issue the designation of directorships order by June 1 of each
year.
---------------------------------------------------------------------------

\17\ Bank directorship terms, for both member and independent
directors, are generally four years but, as discussed below, FHFA
may on rare occasions truncate the term length for a Bank
directorship to maintain the equal staggering of terms.
---------------------------------------------------------------------------

Redesignated Sec. 1261.4(b), requiring each Bank to submit a
capital stock report to provide data for the allocation of member
directorships and the determination of the number of votes each member
may cast in the election, would remain substantively unchanged. For
clarity, however, the sentence providing that ``[i]f a Bank has issued
more than one class of stock, it shall report the total shares of stock
of all classes required to be held by members'' would be revised to
refer to ``the total shares of each class of stock required to be held
by the members.''
Paragraphs (b) and (c) of existing Sec. 1261.4--entitled
``Designation of member directorships'' and ``Allocation of
directorships,'' respectively--would be replaced by a new Sec.
1261.4(c), which is intended to describe the process through which FHFA
sets the total number of member directorships for each Bank and
allocates them among the respective States of the Bank district.
Proposed paragraph (c)(1) would describe the first part of the
statutorily required process, whereby member directorships are
allocated among the States of each district based on the relative
amount of Bank stock the members in each respective state were required
to hold as of December 31 of the preceding year. As described in the
proposed regulatory text, FHFA begins by choosing for each Bank a
``base'' number of member directorships to allocate among the states of
the district. For practical reasons, the base number is typically
eight,\18\ but may differ where there is a legal or policy reason for
selecting a different number. For example, where the number of states
comprising a Bank district exceeds eight, FHFA must begin with a higher
base number for that Bank because the Bank Act requires that each state
have a minimum of one member directorship. In other cases, for example
where application of the statutory ``grandfather provision'' (discussed
below) would otherwise result in an excessively large board size, FHFA
may start with a base number lower than eight.\19\
---------------------------------------------------------------------------

\18\ Among other things, a base number of eight seats has been
shown to result in most cases in a board that is not excessively
large, but is large enough so that the board's composition meets all
statutory requirements.
\19\ The Bank Act provides that each Bank is to have a board of
13 directors, ``or such other number as the Director determines
appropriate.'' See 12 U.S.C. 1427(a)(1).
---------------------------------------------------------------------------

Proposed Sec. 1261.4(c)(1)(i) provides that FHFA will then use the
``method of equal proportions'' to allocate those member directorships
among the voting States of the Bank district, based on the ratio of the
number of shares of Bank stock required to be held by the members in
each State to the number of shares required to be held by all members
of the Bank. As required by statute,\20\ proposed Sec.
1261.4(c)(1)(ii) makes clear that each State must be allocated at least
one, but no more than

[[Page 87735]]

six, member directorships. As does the existing regulation, proposed
Sec. 1261.4(c)(1)(iii) provides that, for those Banks that have issued
more than one class of stock, member directorships will be allocated
based on the combined number of shares required to be held by members.
Proposed Sec. 1261.4(c)(1)(iv) would make clear that the required
stock amounts on which the allocations are based shall be the amounts
as of the record date (December 31 of the preceding calendar year, as
defined in Sec. 1261.2) shown in the capital stock report required to
be submitted by the Banks under redesignated Sec. 1261.4(b).
---------------------------------------------------------------------------

\20\ See 12 U.S.C. 1427(c).
---------------------------------------------------------------------------

In practice, when allocating member directorships for a Bank, FHFA
first allocates one member directorship to each State in the Bank
district to fulfill the minimum statutory requirement. Any remaining
seats are then allocated using the ``method of equal proportions,''
which is the method that has been used to apportion seats in the United
States House of Representatives since 1941.\21\ The use of the method
of equal proportions is intended to result in the stock-based
allocation of member directorships having the closest possible
correlation with the relative amounts of stock required to be held by
Bank members in each respective state of the district.
---------------------------------------------------------------------------

\21\ The method of equal proportions has been the required
method for the stock-based allocation of Bank member directorship
seats since 1998. See 63 FR 65683, 65685, 65688 (Nov. 30, 1998)
(final rule); 63 FR 26532, 26533 (May 13, 1998) (proposed rule).
---------------------------------------------------------------------------

Under the method of equal proportions, after each state has been
allocated one seat, a priority value is calculated for each potential
subsequent seat a state could be allocated--out to the maximum of six
member directorships that may be allocated to each State--based on the
following formula:
[GRAPHIC] [TIFF OMITTED] TP04NO24.000

<bullet> V represents a priority value.
<bullet> P represents the total shares of Bank stock required to be
held by members in a particular State.
<bullet> n represents the number of member directorships the state
would have if it gained a seat.
The remaining seats are then allocated sequentially among the
states of the district based on those priority values.
For example, if FHFA were to allocate eight member directorships
among the states of a Bank district including three states having
required member stock holdings of 20 million, 12.5 million, and 5
million shares, respectively, the priority values for potential seats
#2 through #6 for each state would be as follows:

----------------------------------------------------------------------------------------------------------------
Seat # > 2nd Seat 3rd Seat 4th Seat 5th Seat 6th Seat
----------------------------------------------------------------------------------------------------------------
Multiplier > 0.7071068 0.4082483 0.2886751 0.2236068 0.1825742
----------------------------------------------------------------------------------------------------------------
State A (20,000,000 sh)........................ 14,142,136 8,164,966 5,773,503 4,472,136 3,651,484
State B (12,500,000 sh)........................ 8,838,835 5,103,104 3,608,439 2,795,085 2,282,177
State C (5,000,000 sh)......................... 3,535,534 2,041,241 1,443,376 1,118,034 912,871
----------------------------------------------------------------------------------------------------------------

This would result in a priority order for the allocation of seats
#2 through #6 for each state as follows:

------------------------------------------------------------------------
Seat # > 2nd 3rd 4th 5th 6th
------------------------------------------------------------------------
State A......................... 1 3 4 6 7
State B......................... 2 5 8 10 11
State C......................... 9 12 13 14 15
------------------------------------------------------------------------

Assuming a base number of eight total member directorships are to
be allocated, there would be five remaining seats after each state has
been allocated one seat. Based on the priority order reflected in the
table above, State A would be allocated the first of the remaining
seats, State B the second, State A the third and fourth, and State B
the fifth, resulting in an overall allocation of four seats to State A,
three seats to State B, and one seat to State C.
The Bank Act generally requires that FHFA allocate member
directorships based on the ratio of required stock holdings. However,
the statute also requires that, whenever the number of member
directorships representing the members located in any State would not
be at least equal to the total number representing that State on
December 31, 1960, FHFA ``shall add to the board of directors'' such
additional seats as are necessary to bring the total number being
allocated to that State up to the 1960 total (the ``grandfather
provision'').\22\ The minimum number of member directorships that must
be allocated to each State to meet the requirements of the grandfather
provision is specified in a table set forth in existing Sec. 1261.15,
which would not be revised as part of this rulemaking.
---------------------------------------------------------------------------

\22\ 12 U.S.C. 1427(c). By its express terms, the statutory
grandfather provision does not apply to the directorships of any
Bank resulting from the merger of two or more Banks--currently only
the Federal Home Loan Bank of Des Moines.
---------------------------------------------------------------------------

Existing Sec. 1261.4(c) implements the grandfather provision
through a bare cross-reference to the statute. In contrast, proposed
Sec. 1261.4(c)(2) would expressly provide that, where the stock-based
allocation has resulted in a state being allocated fewer member
directorships than shown for that State in Sec. 1261.15, FHFA will
allocate it as many additional member directorships as are necessary to
increase the total number of member directorships for that State to the
number shown on the table in that section. Only those states that have
been ``grandfathered'' at more than one member directorship appear on
the table in Sec. 1261.15. Proposed Sec. 1261.4(c)(2) would deem the
minimum number of member directorships required to fulfill the
``grandfather provision'' to be one for those States not appearing on
the table. In the example above, if all three States had been
represented by three member directorships in 1960, FHFA would need to
allocate two additional seats to State C, beyond the one earned in the
stock-based allocations, increasing the total number of member
directorships for the Bank to 10.

[[Page 87736]]

Proposed Sec. 1261.4(d) would state that, after the total number
of member directorships and their allocation have been determined for
each Bank, FHFA will set the number of independent directorships at a
number within the statutorily prescribed range of at least 40 percent,
but less than 50 percent, of total directorships. In the example above,
with 10 member directorships, FHFA could choose to designate seven,
eight, or nine independent directorships (with independent directors
representing 41 percent, 44 percent, or 47 percent of boards comprising
17, 18, or 19 directors). That decision is based on a variety of
general and Bank-specific considerations, including the number of
independent directorships designated for the current year.
Under the designation of directorships process, year-to-year
changes in the relative level of required stock holdings for the
members in the various States of a Bank district may result in the
redesignation of one or more member directorships from one state to
another. In some cases, the interaction of changes in the relative
level of required stockholdings with the requirements of the
grandfather provision may result in the addition of a new member
directorship to a Bank's board. This could also lead to the addition of
a new independent directorship if needed to maintain the required ratio
of independent directorships to total directorships. In other
instances, FHFA may simply choose to add a new independent directorship
for policy reasons or at the request of a Bank's board.
Proposed Sec. 1261.4(e) would address these redesignations and
additions. Proposed paragraph (e)(1) (like existing Sec. 1261.4(e))
would make clear that the member directorship representing the state
that is losing a seat terminates as of December 31 of the year the
designation of directorships order is issued and a new directorship is
created as of January 1 of the following year to represent the state
that is gaining a seat. The Bank would need to hold an election to fill
the newly added member directorship during the year the designation of
directorships order is issued, with the duly elected director to begin
serving on the following January 1. The individual occupying the member
directorship being terminated would cease to be a director after
December 31 of the current year.
As does the existing regulation, proposed paragraph (e)(1) would
further provide that the length of the initial term of the newly added
member directorship shall be adjusted to equal the remaining term of
the directorship being terminated, to ensure that the terms of the
Bank's directorships remain staggered with approximately one quarter of
the terms expiring each year, as required by statute.\23\ Similarly,
proposed paragraph (e)(2) would provide that the Director may truncate
the initial term of any new directorship added to a Bank's board if
needed to maintain the even staggering of terms. As under the existing
regulation, such truncated terms would not be counted in determining
term limits for Bank directors (this is discussed further below).
---------------------------------------------------------------------------

\23\ See 12 U.S.C. 1427(d).
---------------------------------------------------------------------------

Finally, proposed Sec. 1261.4(f) would provide that the board of
directors of each Bank shall determine the number of public interest
independent directorships to be included among its designated
independent directorships for the following year, a requirement that
appears in Sec. 1261.3(a) of the existing regulation. Under the
proposed provision, a Bank would now also be expressly permitted to
change the number of public interest independent directorships during
the year (a practice which FHFA has permitted). As required by statute,
a Bank would at all times need to have at least two such directorships.
4. Director Eligibility--Sec. 1261.5
The proposed rule would make numerous revisions to Sec. 1261.5 of
the existing regulation, which governs director eligibility, including
qualifications for independent directors and term limits. These
revisions are intended to consolidate provisions relating to director
eligibility, strengthen eligibility requirements to encourage strong
corporate governance, fill in gaps in the coverage of the existing
regulation, and provide greater overall clarity than the existing
regulation.
The proposed rule would make clarifying revisions to Sec.
1261.5(a), which implements the statutory eligibility requirements for
member directors, with no intended change to the substance. The heading
to the provision would be revised to make clear (as does the existing
text) that the eligibility requirements apply not just to sitting
directors, but to nominees as well. Proposed paragraph (a)(1) would
provide that each member director, and each nominee for a member
directorship must be: (i) a citizen of the United States; and (ii) an
officer or director of a member institution that is located in the
voting State of the Bank district to which the directorship being
occupied, sought, or filled has been allocated under proposed Sec.
1261.4(c). As required by statute, paragraph (a)(1)(ii) would make
clear that the member institution with which any member director or
member directorship nominee is associated must meet all minimum capital
requirements established by its appropriate Federal banking agency or
appropriate State regulator. As does existing Sec. 1261.5(a),
paragraph (a)(2) would provide that the institution with which the
director is associated must have been a member as of the ``record
date'' (that is, December 31 of the year preceding the election) or, in
the case of a director chosen by a Bank's board of directors to fill a
vacancy, as of the time the board acts.
Existing Sec. 1261.5(b) provides that each member director, and
each nominee to a member directorship, must be an officer or director
of a member located in the State to which the Director has allocated
the directorship. Because its substance would be incorporated into
proposed Sec. 1261.5(a), the proposed rule would delete this
provision.
Existing Sec. 1261.5(c), entitled ``Eligibility requirements for
independent directors,'' provides that each independent director and
each nominee to an independent directorship shall be: (1) a citizen of
the United States; and (2) a bona fide resident of the district in
which the Bank is located. The Bank Act actually sets forth a total of
four requirements each independent director must meet to be eligible to
serve. In addition to the two covered by existing Sec. 1261.5(c), an
independent director may not serve as an officer of any Bank or as a
director, officer, or employee of any member of a Bank, or of any
recipient of advances from a Bank \24\ and must possess certain
professional qualifications, which differ depending on whether the
individual is filling a public interest independent directorship or a
regular independent directorship.\25\ While the latter two requirements
are covered in separate provisions of the existing regulation
(Sec. Sec. 1261.10 and 1261.7, respectively), they are not identified
as ``eligibility requirements'' in Sec. 1261.5(c).
---------------------------------------------------------------------------

\24\ 12 U.S.C. 1427(a)(3)(B)(iii).
\25\ 12 U.S.C. 1427(a)(3)(B)(i), (ii).
---------------------------------------------------------------------------

The proposed rule would redesignate Sec. 1261.5(c) as Sec.
1261.5(b) and would expand the list of eligibility requirements set
forth therein to include the independence and qualifications
requirements. This proposed revision is intended to provide clarity by
itemizing in one provision all of the requirements an individual must
meet to be eligible for nomination and service as an independent
director. In the case of the

[[Page 87737]]

independence and qualifications requirements, proposed Sec. 1261.5(b)
would cross-reference other provisions of the revised regulation
(Sec. Sec. 1261.10 and 1261.5(c), respectively) providing more detail
on how a Bank must determine whether an individual meets those
requirements. Under proposed Sec. 1261.5(b), all four requirements
would apply to both sitting independent directors and to independent
directorship nominees. While the citizenship, residency, and
qualifications requirements apply to nominees as well as sitting
directors under the existing regulation, the independence requirement
currently applies only to seated directors. The extension of this
requirement to nominees is discussed below in the analysis of proposed
Sec. 1261.10.
The proposed rule would add a new paragraph (c) to Sec. 1261.5 to
address the required professional qualifications for both regular and
public interest independent directors. Under the existing regulation,
both sets of required qualifications are fully or partially stated in
multiple provisions, which FHFA believes is a potential source of
confusion.\26\ Under the proposed rule, the required qualifications for
regular and public interest independent directors would be described
once--in proposed Sec. 1261.5(c)--which would, in turn, simply be
cross-referenced where relevant in other provisions of the revised
regulation. As explain below, the proposed rule would also make
substantive revisions to the regulatory text describing the
qualifications.
---------------------------------------------------------------------------

\26\ See 12 CFR 1261.5(c)(2), 1261.7(d)(1)(i) and (e)(2) (public
interest independent director qualifications); 12 CFR
1261.7(d)(1)(ii) and (e)(1), 1261.8(a)(1)(iii) (regular independent
director qualifications).
---------------------------------------------------------------------------

The existing regulation, at Sec. 1261.7(e), provides that each
independent director that is not a public interest independent director
(i.e., a ``regular independent director'' under the proposed rule) must
``have experience in, or knowledge of, one or more of the following
areas: auditing and accounting, derivatives, financial management,
organizational management, project development, risk management
practices, and the law.'' \27\ To that list of qualifying knowledge and
experience, which would now appear in proposed Sec. 1261.5(c)(1), the
proposed rule would add artificial intelligence, information technology
and security, climate-related risk, CDFI business models, and modeling.
---------------------------------------------------------------------------

\27\ See 12 CFR 1261.7(e).
---------------------------------------------------------------------------

These additions were developed both from input on critical areas of
expertise that should be covered by a Bank's board of directors sought
and received during the FHLBank System at 100 initiative and from
understanding of the Banks' corporate governance needs developed
through FHFA's general supervisory efforts. Their inclusion is intended
to encourage each Bank's board to take active steps to ensure it has
sufficient knowledge and expertise regarding recent business
developments in housing finance and new and emerging risks and complex
problems that could affect Bank operations. To allow FHFA and the Banks
to respond more rapidly to evolving conditions and risks going forward,
the list of qualifying knowledge or expertise for regular independent
directors in proposed Sec. 1261.5(c)(1) would also include ``such
other areas as the Director shall determine,'' thus allowing FHFA to
add other areas to the list, as appropriate, without going through the
rulemaking process. Such additions would be conveyed through guidance.
FHFA requests comment on whether these areas of qualifying
experience are appropriate and whether other specific areas should be
included.
Proposed Sec. 1261.5(c)(2) would implement the statutory
requirement that each public interest independent director qualify by
having ``more than four years of experience representing consumer or
community interests in banking services, credit needs, housing, or
consumer financial protection.'' The application of this requirement
has been a frequent subject of inquiry and discussion between FHFA and
Bank boards of directors and staff, potential directors, and trade
groups since it was adopted as part of the Housing and Economic
Recovery Act of 2008 (HERA).\28\ In early 2022, FHFA issued a revised
version of the Bank Independent Director Application Form (FHFA Form
#129), the instructions for which provide guidance on how to determine
whether an applicant for a public interest independent directorship
meets the statutory qualifications.\29\ The guidance provided on the
Form is consistent with advice given by FHFA in individual cases over
the years. In addition to restating the statutory requirement, proposed
Sec. 1261.5(c)(2) would include the substance of this material to
provide clarity on the implementation of the statutory standard in the
regulation itself.
---------------------------------------------------------------------------

\28\ Under existing Sec. Sec. 1261.7(f) and 1261.14(b), FHFA
has an opportunity to review the completed Independent Director
Application Forms and other supporting materials for each Bank's
proposed independent directorship nominees and to provide comments
to the Bank where warranted. For public interest independent
directorship nominees, FHFA's review includes evaluation of whether
the individual's professional experience meets the statutory
standard.
\29\ FHFA released an updated version of the Form with some
additional minor revisions in 2023.
---------------------------------------------------------------------------

The new provision would stipulate that, for purposes of determining
compliance with the public interest qualification requirements,
``representing'' means advocating for, or otherwise acting primarily on
behalf of or for the direct benefit of, consumers or the community in
one of the four enumerated areas. Those who have not advocated for or
acted on behalf of or for the direct benefit of consumers and the
community in any material capacity cannot reasonably be viewed as
representatives of those constituencies. Industry-side interests are
more than adequately represented among the Banks' member and regular
independent directors. Among other things, FHFA believes that
experience related to fair housing, fair lending, consumer protection,
affordable housing, community development, and diversity and inclusion
that otherwise meets the requirements of the statute and regulation
would be qualifying experience for public interest independent
directors.
Proposed Sec. 1261.5(c)(2) would also provide that qualifying
experience in one of the four enumerated areas may have been acquired
in professional, public service, or significant volunteer positions, so
long as the work done was substantial in terms of time commitment and
responsibility and that the experience was accrued from activities
personally undertaken by the director or nominee, as opposed to being
attributed based solely on the activities of organizations with which
the person was associated.
Prior to 2008, the Bank Act required the appointment of at least
two ``community interest'' directors at each Bank ``chosen from
organizations with more than a 2-year history of representing consumer
or community interests on banking services, credit needs, housing, or
financial consumer protections.'' In 2008, HERA substituted the current
language focusing on the personal experience of the individual in
representing community or consumer interests, as opposed to the mission
of the organization with which they were affiliated. The additional
clarifying regulatory text is intended to ensure that nominees meet the
statutory requirement of personal experience and have the kind of
knowledge, experience, and perspective necessary to oversee a Bank and
guide it in the safe and sound fulfillment of its public policy
mission. Experience gained through full-time paid employment is almost
always qualifying. FHFA has generally viewed experience with
nonprofits, community

[[Page 87738]]

organizations, state and local housing finance agencies, and non-member
CDFIs, or service as an elected, appointed, or career government
official, to be qualifying. Ultimately, determinations as to
qualification to serve as a public interest independent director must
be made on a case-by-case basis, given the numerous ways in which a
person could conceivably meet the statutory standard.
Both regular and public interest independent directors need to have
the capacity to challenge Bank management on important issues,
including the sufficiency and effectiveness of its mission programs.
While Bank boards can benefit from a wide variety of viewpoints, FHFA
has observed that the most effective directors possess knowledge and
experience that are relevant to the business, programs, and mission of
the Bank and that provide a basis for understanding the actual and
potential impact of the Bank's activities on its members and on
communities within the Bank's district. FHFA also believes that service
in full-time executive, management, or other senior paid professional
positions generally provides the most valuable experience for a Bank
director. Proposed Sec. 1261.5(c)(3) would require that Banks' boards
prioritize those characteristics when soliciting and choosing Bank
independent directorship nominees.
With respect to length of board service, the Bank Act limits Bank
directors to ``three consecutive full terms'' and requires former
directors who have termed out to sit out for a minimum of two years
before seeking to serve again as a Bank director.\30\ Section 1261.5(d)
of the existing regulation, entitled ``Restrictions,'' implements the
statutory term limit provisions by setting forth principles for
determining whether a director has been elected to and served three
consecutive full terms. In general, under the existing regulation,
four-year terms to which a director has been elected and has served any
part count as full terms, while terms that have been truncated to
maintain board staggering and terms served out by a vacancy electee do
not. Much of the material in existing Sec. 1261.5(d) is intended to
address issues arising from the transition from the pre-HERA regime,
under which directors served three-year terms and independent directors
were appointed by the Bank System regulator, to the current regime,
under which directors serve four-year terms and independent directors
are nominated by Bank boards and elected by Bank members.
---------------------------------------------------------------------------

\30\ 12 U.S.C. 1427(d). (The Bank Act provides that ``[i]f any
person . . . has been elected to each of three consecutive full
terms as a director of a [Bank] and has served for all or part of
each of said terms, such person shall not be eligible for election
to a directorship of such [Bank] for a term which begins earlier
than two years after the expiration of the last expiring of said
three terms'').
---------------------------------------------------------------------------

Proposed Sec. 1261.5(d) (which would be re-titled ``Term limits'')
would continue to address director term limits using the principles
reflected in the existing regulation. The proposed rule, however, would
remove from the regulatory text the post-HERA transition material,
which is no longer needed because all directors who were serving at the
time of the statutory change have now termed out, and otherwise
streamline the language and structure of the provision. Consistent with
other revisions, the proposed rule would replace cross-references to
the Bank Act with either an express substantive statement or a cross-
reference to a substantive regulatory provision. As proposed, Sec.
1261.5(d) would continue to provide that truncated terms do not count
as full terms, but would make clear that two full terms on either side
of a truncated term count as consecutive full terms; that is, while a
truncated term may not count in the term limit calculation, it cannot
re-set the term limit calculation back to zero.
Existing Sec. 1261.5(e) explains that a director shall become
ineligible to remain in office if, during their incumbency, the
directorship to which they have been elected is eliminated. The
proposed rule would add to this provision a cross-reference to the
section of the proposed rule (Sec. 1261.4, governing the designation
of directorships) under which a seat could be eliminated. As under the
existing regulation, proposed Sec. 1261.5(e) would continue to provide
that the incumbent director shall become ineligible after the close of
business on December 31 of the year in which the directorship is
eliminated.
Section 1261.6 of the existing regulation, governing the
determination of members votes, would not be changed by the proposed
rule.
5. Nominations for Member and Independent Directorships--Sec. 1261.7
Section 1261.7 of the existing regulation governs nominations for
member and independent directorships, including election announcements,
the submission and acceptance of member directorship nominations,
independent directorship qualifications and nominations, and
eligibility verification. The proposed rule would make numerous textual
and structural revisions to Sec. 1261.7, most of which are non-
substantive and intended only to provide clarity.
Existing Sec. 1261.7(a) requires that ``[w]ithin a reasonable time
in advance of an election,'' a Bank provide notice to each member in
its district of the commencement of the election process to include:
(1) the number of member directorships designated for each voting State
and the total number of independent directorships; (2) the name of, and
pertinent information about, each incumbent Bank director; (3) a brief
statement of the skills and experience the Bank believes are most
likely to add strength to its board; (4) an attachment identifying
every member, its voting state, and the number of votes it is eligible
to cast; and (5) a certificate to be used by member institutions to
make any desired nominations.
The proposed rule would make three substantive revisions to the
list of information to be included in or with the election
announcement, each of which FHFA believes is consistent with the
current practice of most Banks. First, the proposed rule would require
that the statement regarding the number of member and independent
directorships include the number of independent directorships
designated by the Bank as public interest independent directorships for
the following calendar year. Second, the proposed rule would require
that the election notice identify the member directorships, regular
independent directorships, and public interest independent
directorships, respectively, for which the Bank will be holding an
election in the current year. Finally, while the existing regulation
makes inclusion of a brief statement of sought-after skills and
experience contingent on the Bank having carried out the assessment of
board skills and experience permitted under existing Sec. 1261.9, the
proposed rule would make the inclusion of the statement mandatory
because, as discussed below, the annual assessment would also be made
mandatory. In addition to these substantive revisions, the proposed
rule would also move a misplaced heading and renumber the paragraphs to
accommodate the additional material.
The proposed rule would combine into proposed Sec. 1261.7(b)
material that appears in existing paragraphs (b) and (c) governing
member directorship nominations by members and the acceptance of such
nominations by a Bank's board. The one substantive change would be the
removal in two places of the requirement that election and nomination
records be retained for at least two years after the date of the
election. These provisions would be replaced by a new Sec. 1261.7(f),
requiring

[[Page 87739]]

each Bank to retain all information received under proposed Sec.
1261.7 for at least seven years after the date of the election in
question and, in the case of any information about a specific director,
for at least seven years after that director leaves the board
(discussed below). The remaining changes consist of non-substantive
paragraph redesignations, revised headings, and minor textual changes
to provide clarity.
In the existing regulation, Sec. 1261.7(d) and (e) address
independent director nominations and independent director required
qualifications, respectively. The proposed rule would remove Sec.
1261.7(e) in its entirety because, under the revised regulation, the
required qualifications for regular and public interest independent
directors would be stated in only one provision--proposed Sec.
1261.5(c). Further duplicative statements regarding the required
qualifications would also be removed from existing Sec. 1261.7(d),
which would be redesignated as Sec. 1261.7(c). The proposed rule would
also remove from the redesignated provision language indicating that an
interested individual may not submit, and a Bank may not consider, an
Independent Director Application Form that does not demonstrate that
the applicant is both eligible and qualified to serve; these
restrictions are not consistent with the intended use of the completed
Form as a means through which eligibility may be determined. Instead,
the proposed rule would include in proposed Sec. 1261.7(d)(3),
discussed below, a new express provision prohibiting a Bank's board
from nominating any individual for an independent directorship or
accepting the nomination of any individual for a member directorship if
it has not concluded based on the appropriate completed Form and
supplementary materials that the individual is eligible to serve.
The proposed rule would also remove the language in existing Sec.
1261.7(d)(3) requiring that each Bank determine and announce to its
members the number of public interest independent directorships to be
included among its authorized independent directorships for the
following year, because this requirement would be covered by proposed
Sec. 1261.4(f). The proposed rule would also remove language requiring
each Bank to retain all completed Independent Director Application
Forms for at least two years after the date of the election because, as
mentioned, the record retention requirements for all records related to
the nomination and election of directors would now be governed by
proposed Sec. 1261.7(f). The remaining changes to the existing
provisions on the nomination of independent directors would be non-
substantive textual and organizational revisions (including the
division of different topical material into paragraphs) for better
readability.
Existing Sec. 1261.7(f) addresses the steps each Bank must take to
verify the eligibility of its member and independent director nominees.
It requires each Bank to use the information provided on the Member
Director Eligibility Certification Form or the Independent Director
Application Form, as applicable, to verify that each nominee meets the
relevant eligibility requirements and, for independent directorship
nominees, possesses the required qualifications. The provision further
requires that, before announcing any independent director nominee, the
Bank deliver to FHFA for review a copy of the proposed nominee's
executed Independent Director Application Form. Although the existing
regulation does not generally require FHFA approval of Bank independent
directorship nominees, existing Sec. 1261.7(f) requires a Bank's board
to consider any comments on a proposed nominee provided by FHFA within
two weeks of FHFA's receipt of the Application Form for that
individual.\31\
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\31\ In 2022, in conjunction with FHFA's issuance of the revised
Bank Independent Director Application and Certification Forms,
FHFA's Division of Bank Regulation issued a Supervisory Letter on
the proper submission of Independent Director Application Forms and
pertinent supplementary material to FHFA for review. This guidance
would remain in effect under the proposed rule.
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The proposed rule would redesignate Sec. 1261.7(f) as Sec.
1261.7(d) and, for clarity, would break the existing text into topical
paragraphs and revise references to the member and independent director
eligibility requirements to add cross-references to the applicable
substantive provisions of the revised regulation (proposed Sec.
1261.5(a) and (b) respectively). The proposed rule would also add a new
paragraph (d)(3) expressly prohibiting a Bank's board from nominating
any individual for an independent directorship or including on the
ballot any individual nominated for a member directorship except where
it has concluded that the individual meets the applicable eligibility
requirements and is not term limited. Although this concept is implicit
in the existing regulation, FHFA believes it is preferable for the
regulation to set forth a clear statement to this effect.
The proposed rule would add a new Sec. 1261.7(e), which would
prohibit a Bank's board from nominating any person for an independent
directorship or including on the election ballot any individual
nominated for a member directorship without having first conducted a
thorough background check and concluding that the individual is fit to
serve in a fiduciary role with the Bank. The proposed rule would
require each Bank to include a discussion of the results of the
background check for each independent directorship nominee when
submitting its Independent Director Application Forms to FHFA,
including any potentially concerning information that was revealed and
how the Bank's concerns were allayed. In recent years, the Banks have
typically conducted background checks on independent directorship
nominees and addressed the results of those checks in their submissions
to FHFA; the proposed rule would codify this practice. The rule would
also require each Bank to conduct a background check on nominees for a
member directorship, as the risks background checks are designed to
mitigate are no less of a concern for member directors than they are
for independent directors.
Although the Bank Act clearly vests in a Bank's members the
authority to nominate and elect their own representatives on a Bank's
board, the continued safe and sound operation of every Bank depends
upon the reservation of some mechanism for identifying and addressing
potential risks to the institution that could be posed by its own
directors. Bank directors not only have a unique opportunity to
influence a Bank's course of action, they also are privy to the most
sensitive inside information, including confidential supervisory
information (CSI), about the operations, finances, and personnel of the
Bank. It is critical that a Bank's board retain the ability to police
itself and prevent individuals whose history of criminality,
malfeasance, poor judgment, or other concerning behavior indicates they
are not fit to fulfill a fiduciary role with the Bank from being or
remaining seated as directors. Conducting a background investigation in
support of a director's nomination, whether for a member or independent
directorship, is a common-sense way to prevent problems before they
start.
In July 2020, FHFA's Division of Bank Regulation issued a
Supervisory Letter discussing the importance of conducting a thorough
background check on any individual a Bank's board intends to nominate
for an independent directorship. The guidance given in the letter
remains applicable to background checks to be carried out under
proposed Sec. 1261.7(e).

[[Page 87740]]

Without a background investigation, a Bank could not reasonably
determine whether a potential nominee meets its own standards,
including codes of conduct, codes of ethics, conflicts of interest
policies, and anti-fraud policies. A background check also gives a Bank
an opportunity to verify that eligibility requirements have been met
and that the employment and educational history shown on nominee's
Application Forms is accurate. On occasion, a background check may
reveal information that calls into question the validity of the
responses on the Application Form, or the fitness of the nominee to
serve in a fiduciary role with a large financial institution like the
Bank. Examples that may give rise to concerns about the latter include
a criminal record, past bankruptcy, or failure to pay taxes. A Bank
should evaluate the circumstances surrounding each issue of concern and
take appropriate steps to determine whether the risk can be
satisfactorily mitigated or whether the board should decline to the
nominate an individual for an independent directorship or post a
member-nominated individual on the ballot for a member directorship. In
either case, the board should thoroughly document its decision-making
process.
Finally, the proposed rule would add a new Sec. 1261.7(f), which
would require each Bank to retain all information received under
proposed Sec. 1261.7 for at least seven years after the date of the
election in question and, in the case of any information about a
specific director, for at least seven years after that director leaves
the board. Each Bank would be required to maintain those records
pursuant to a duly adopted policy. As mentioned above, existing Sec.
1261.7 includes a number of separate provisions requiring that a Bank
retain various documents for at least two years after an election.\32\
FHFA believes that all material documentation regarding a Bank's
nomination and election process should be subject to the same retention
requirements and that two years is not a sufficient length of time to
retain those types of important records. Seven years is a conservative
retention period that is frequently required by law or corporate
policy,\33\ and one that is an appropriate minimum for Bank nomination
and election records and not burdensome for a Bank to fulfill given the
ease with which electronic records are stored.\34\
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\32\ See 12 CFR 1261.7(b)(3), (c), (d)(2) (nominating
certificates, executed Membership Director Certification Forms, and
Independent Directorship Application Forms, respectively).
\33\ See, e.g., 17 CFR 210.2-06 (Securities and Exchange
Commission rule requiring records of an audit or review of an
issuer's financial statements to be retained for seven years).
\34\ FHFA's regulations at 12 CFR part 1235 establish general
minimum requirements for record retention for the Agency's regulated
entities, including the Banks and the OF. The standards established
require that the regulated entities maintain adequate records in
accordance with consistent accounting policies and practices that
enable the Director to evaluate the financial condition of each
regulated entity and the OF and such other operational and
management standards as the Director determines to be appropriate.
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Where information involves an individual that was elected to the
board, proposed Sec. 1261.7(f) would require the information to be
retained for the duration of that director's service and then for at
least seven years after that director leaves the board. Issues
regarding sitting Bank directors arise from time to time that call for
reference to information or materials submitted years earlier as part
of the nomination process and these materials should remain accessible
until well after the directors to which they pertain have left the
board.
6. Election Process--Sec. 1261.8
Section 1261.8 of the existing regulation governs the various
aspects of the Bank director election process. The proposed rule would
make several substantive revisions to this section, including revisions
regarding the required contents of a Bank's director election ballot,
the authority of a Bank's board to decline to seat a director-elect for
cause, and the length of time ballots need to be retained.
Existing Sec. 1261.8(b) provides that if a Bank has conducted an
annual assessment of the skills and experience possessed by the board
permitted by Sec. 1261.9 and has included the results of the
assessment as part of the election notice, it may include with each
ballot a statement of the results of that assessment or any subsequent
assessment. As discussed below, the proposed rule would revise Sec.
1261.9 to make the now optional assessment mandatory for each Bank. The
proposed rule would also require that the results of that assessment be
included as part of the election notice required under Sec. 1261.7(a).
Consistent with those changes, the proposed rule would delete
existing Sec. 1261.8(b) and revise Sec. 1261.8(a) to require that a
Bank include on the ballot a statement of the results of the
assessment, including an explanation for any differences between the
statement on the ballot and that appearing on the earlier election
notice. Revised Sec. 1261.8(a) would also require that each Bank
include on its election ballot a brief description of the skills and
experience of each nominee for a member directorship. This is permitted
but not required under the existing regulation, which does require that
that qualifying areas of expertise for independent directorship
nominees be noted on the ballot (a requirement that would be retained
under the proposed rule). To accommodate these substantive revisions,
the provisions within Sec. 1261.8(a) would be redesignated as
paragraphs (a)(1) through (6).
Given the ever changing business and societal landscape within
which the Banks operate, it is prudent to look beyond the four to six
regular independent directors they are likely to have on their
respective boards and find ways to promote the nomination and election
to member directorships of individuals that have the experience to
cover some of the critical areas of board expertise. For example, if
the Chief Technology Officer (CTO) of a Bank member were to be elected
as a member director, that individual would likely be able to provide
the board with necessary expertise in information technology and
security and possibly in other critical areas enumerated in proposed
Sec. 1261.5(c).
Even if the nomination and election of member directors is largely
within the control of Bank members in the respective voting States of
the district, the required statement of needed skills and expertise on
the election notice and ballot and the required inclusion on the ballot
of a statement on the knowledge and skills possessed by individual
member directorship nominees would encourage Bank members to take into
account the expertise needed to allow the board to most effectively
supervise the operations of the Bank. The coverage of vital areas of
expertise through member directors, where possible, would allow the
Bank to seek independent directors to cover some of the areas of
expertise that senior officers and directors of Bank member
institutions would be less likely to have.
Existing Sec. 1261.8(f)(4) provides that a ``[b]ank shall not
declare elected a nominee that it has reason to know is ineligible to
serve, nor shall it seat a director-elect that it has reason to know is
ineligible to serve.'' This provision, which would be redesignated as
Sec. 1261.8(e)(4), would be revised also to prohibit a Bank's board
from declaring elected a nominee or seating any director-elect it has
reason to know is ``unfit'' to serve. As discussed above with respect
to the background check required under Sec. 1261.7(e), a Bank's board
must retain the ability to address the directorship status of
individuals

[[Page 87741]]

who may pose a material risk to the Bank to fulfill its fiduciary duty
to protect the Bank's interests. Proposed Sec. 1261.8(e)(4) would
authorize and require a Bank to prevent the seating of a director if it
obtains information indicating the individual poses a material and
unacceptable risk to the Bank that was not available to it at the time
it conducted the required background check.
Because Sec. 1261.8(b) would be eliminated, the proposed rule
would redesignate existing paragraphs (c) though (h) as paragraphs (b)
through (g). It would also make multiple non-substantive changes
throughout the section by adding cross-references to appropriate
provisions of the revised regulation, removing redundant statements of
the required qualifications for independent directors, and making other
minor changes to nomenclature and phrasing.
7. Actions Affecting Director Elections--Sec. 1261.9
Existing Sec. 1261.9 addresses actions affecting director
elections. Paragraph (a) authorizes each Bank to ``conduct an annual
assessment of the skills and experience possessed by its board of
directors as a whole and [to] determine whether the capabilities of the
board would be enhanced through the addition of individuals with
particular skills and experience.'' The proposed rule would make this
annual assessment mandatory and require that the results of the
assessment be reflected in the election announcement under proposed
Sec. 1261.7(a) and the election ballot under proposed Sec. 1261.8(a),
as discussed above. It would also require that the assessment be
undertaken ``pursuant to policies adopted by the board.''
To effectively oversee a Bank's operations, its board should be
balanced and includes a diversity of experience and perspectives across
member and independent directors. Periodic assessment of the knowledge
and skills possessed by sitting board directors and identification of
areas that require better coverage is critical to ensuring that a
Bank's board of directors is able to effectively oversee and guide the
operations of the Bank.
FHFA requests comment on whether requiring that such an assessment
be completed on a less frequent cadence than annually would compromise
a Bank's ability to plan effectively.
Aside from this, to plan effectively, Bank boards of directors
should develop and maintain a director's service timeline to track all
directors' terms from beginning to end; develop and annually review and
update a director position description for member directors, regular
independent directors, and public interest independent directors; and
focus recruiting on addressing gaps in knowledge and skills identified
by the assessment. Insufficient board succession planning can lead to a
lack of experience and expertise needed to effectively oversee a Bank's
operations. For example, if several long-tenured directors were to
vacate a Bank's board simultaneously, the board may face a critical
loss of institutional knowledge. Without appropriate succession
planning, a Bank's board may find itself lacking knowledge, skills, and
abilities that are critical to providing effective strategic direction
and oversight.
The remaining revisions to Sec. 1261.9(a) would be non-substantive
clarifying revisions to change the heading from the cryptic ``Banks''
to the more descriptive ``Annual assessment of skills and experience,''
add cross-references to appropriate provisions of the revised
regulation, remove redundant statements of the required qualifications
for independent directors, and make other minor changes to nomenclature
and phrasing. Existing Sec. 1261.9(b) and (c) would remain unchanged.
8. Independent Director Independence--Sec. 1261.10
Section 1261.10 is currently entitled ``Independent director
conflict of interests.'' Because the focus of the section is to
elaborate on the ``independence'' requirements for independent
directors, the proposed rule would revise the heading of Sec. 1261.10
to read ``Independent director independence.'' Conflicts-of-interest
policies for all Bank directors are covered separately from
independence requirements, in Sec. 1261.11.
Existing Sec. 1261.10(a) prohibits any independent director from
serving as an officer, employee, or director of any member of the Bank,
or of any recipient of advances from the Bank, or as an officer of any
Bank, during that director's term of service on the Bank's board. The
proposed rule would redesignate paragraph (a) as paragraph (a)(1) and
revise the provision to prohibit an independent director from serving
not only as an officer, but also as any kind employee, of another Bank.
Permitting even a non-executive employee of one Bank to serve on the
board of another Bank could not only compromise the independence of the
board on which the individual sits, but could also give rise to
internal control concerns for the Bank employing the individual.
The proposed rule would further revise newly-redesignated Sec.
1261.10(a)(1) to prohibit not just the seating, but also the nomination
of individuals with any of the impermissible connections. Under the
existing regulation, FHFA has permitted Banks to nominate individuals
with a prohibited connection for an independent directorship, provided
the nominee agrees to relinquish the impermissible position prior to
being seated on the board. Extending the independence requirement to
the nomination phase creates greater separation between a director's
term of service and pursuit of possible conflicting interests and helps
ensure that anyone wishing to serve as an independent director is
committed to being a true outside voice.\35\
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\35\ Notwithstanding FHFA's approach to this issue since the
post-HERA requirements were implemented, the extension of the
independence requirements to independent directorship nominees is
consistent with section 7(b)(2)(B) of the Bank Act, which provides
that ``[n]ominees shall meet all applicable requirements prescribed
in this section.'' See 12 U.S.C. 1427(b)(2)(B).
---------------------------------------------------------------------------

The proposed rule would also create a new paragraph (a)(2), which
would define the term ``advances'' for purposes of applying the
prohibition against the seating or nomination of any officer, employee,
or director of any ``recipient of advances'' from the Bank. As
proposed, the term would include any loan from a Bank to the recipient,
regardless of form or nomenclature, except for debt securities traded
in the public capital markets. This definition is intended to prevent
Banks and housing associates such as state housing finance agencies
(SHFAs) from skirting the independence requirements by creating bespoke
lending terms for the housing associate by which an independent
director or nominee is employed in an arrangement called something
other than an ``advance.'' At the same time, the definition would allow
Banks to support their housing associates through the purchase of debt
securities on the open market on the same terms and conditions as are
applicable to other market participants even where an employee of the
housing associate is serving as an independent director. Providing
clarity regarding the meaning of the word ``advances'' in this context
was suggested in the Bank System's joint letter in response to FHFA's
Spring 2023 Notice of Regulatory Review. FHFA requests comment on
whether the proposed definition adequately addresses the relevant legal
and policy concerns or whether a different definition would be more
appropriate.

[[Page 87742]]

The proposed rule would make no revisions to existing Sec.
1261.10(b).
Existing Sec. 1261.10(c) provides that, for purposes of
determining compliance with the independence requirements, a Bank shall
attribute to the independent director any officer position, employee
position, or directorship of the director's spouse. The proposed rule
would further strengthen independence requirements by extending the
attribution requirement to all ``immediate family members'' of the
director or nominee. Existing Sec. 1261.11(f) defines ``immediate
family member'' to include a ``parent, sibling, spouse, child, or
dependent, or any relative sharing the same residence as the director''
for purposes of the director conflicts-of-interest requirements; under
the proposed rule, the same definition would apply for purposes of the
independence provisions. The proposed change recognizes that director
independence can be compromised through the activities and financial
interests of close family members other than a spouse, seeks to prevent
circumvention of the spirit of the independence requirement, and aligns
the standards for the independence requirement with those of the
conflicts-of-interest requirements.
In line with the extension of the independence requirements to
nominees under proposed Sec. 1261.10(a), the rule would also add a new
paragraph (d) to Sec. 1261.10 to require any former member director to
wait at least two years after leaving a member directorship before
returning to the board as an independent director (assuming all
eligibility requirements are met for the position). The two-year
requirement parallels the two-year requirement set forth in the
statutory provision at 18 U.S.C. 207 that is the primary source of
post-employment restrictions applicable to officers and employees of
the executive branch of the Federal Government and the two year period
during which former Bank directors who have termed out are prohibited
from serving.\36\ These types of transitions have happened on occasion
and FHFA has typically permitted a member director to transition to an
independent directorship upon relinquishing the impermissible position,
without any ``cooling off'' period. By requiring a two-year sit out
period FHFA intends to create greater separation between the seating of
an independent director and the individual's employment with a member.
The Agency requests comments on whether a different length of time
would more effectively ensure board independence.
---------------------------------------------------------------------------

\36\ See 12 U.S.C. 1427(d).
---------------------------------------------------------------------------

9. Conflicts of Interest Policy for Bank Directors--Sec. 1261.11
In Sec. 1261.11, the proposed rule would revise the section
heading to read ``Conflicts of interest'' instead of ``Conflict of
interests'' and would make related conforming changes throughout the
section. The only other changes to Sec. 1261.11 would be to revise the
definition of ``financial interest'' in paragraph (f) and to list
definitions in alphabetical order.
Existing Sec. 1261.11(b) requires a Bank director to disclose any
``financial interests,'' as well as those of any immediate family
member or business associate, in any matter to be considered by the
Bank's board of directors and in any other proposed or actual business
matter involving the Bank and any other person or entity and to refrain
from considering or voting on any issue in which the director, any
immediate family member, or any business associate has any financial
interest. For purposes of those requirements, existing Sec. 1261.11(f)
defines ``financial interest'' to mean ``a direct or indirect financial
interest in any activity, transaction, property, or relationship that
involves receiving or providing something of monetary value, and
includes, but is not limited to any right, contractual or otherwise, to
the payment of money, whether contingent or fixed.'' The provision
further states that the term ``does not include a deposit or savings
account maintained with a member, nor does it include a loan or
extension of credit obtained from a member in the normal course of
business on terms that are available generally to the public.''
In its letter in response to FHFA's Spring 2023 Notice of
Regulatory Review, the Bank System commented that the list of
exclusions in the definition of ``financial interest'' found in
existing Sec. 1261.11 is too narrow in scope and should be broadened
to reflect other financial services products obtained under similar
circumstances. In response to the comment, FHFA is proposing to revise
the exclusion from the definition of ``financial interest'' in Sec.
1261.11(f) to refer to ``a deposit or savings account, loan or
extension of credit, or other accounts and products obtained in the
normal course of business on non-preferential terms generally available
to the public from a member institution or from a non-member
counterparty to the Bank on whose board the director sits.''
In the same letter, the Bank System recommended that FHFA harmonize
the standard for what constitutes a conflict under FHFA's Affordable
Housing Program (AHP) regulation \37\ with the standard for Bank
directors under Sec. 1261.11--specifically, that the definitions of
``financial interest'' and ``immediate family member'' be made
identical for both regulations. Existing Sec. 1261.11 defines
``immediate family member'' as a parent, sibling, spouse, child, or
dependent, or any relative sharing the same residence as the director.
That definition would remain unchanged under the proposed rule and
would also be used, along with the revised definition of ``financial
interest,'' in the new provision on Bank employee conflicts under
proposed 12 CFR 1239.31 (discussed below). FHFA anticipates that the
Bank System's request regarding the AHP regulation will be addressed in
a subsequent rulemaking.
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\37\ The AHP regulation prohibits Bank directors, employees, and
advisory council members from participating in decisions regarding
AHP projects in which they or a family member have a financial
interest and requires each Bank to adopt a conflicts-of-interest
policy for its AHP. See 12 CFR 1291.16. For purposes of these
requirements, the regulation defines ``family member'' as ``any
individual related to a person by blood, marriage, or adoption,''
see 12 CFR 1291.1, but does not define ``financial interest.''
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The proposed rule would not make any other revisions to Sec.
1261.11.
10. Reporting Requirements for Bank Directors--Sec. 1261.12
The proposed rule would make only one change to Sec. 1261.12,
which establishes reporting requirements for Bank directors. Existing
Sec. 1261.12(b) provides that at any time a director believes or has
reason to believe that they no longer meet the eligibility requirements
set forth in the Bank Act or the regulation, the director shall
promptly notify the Bank and FHFA in writing. The proposed rule would
eliminate the requirement that a director submit the notification to
FHFA, requiring only that it be submitted to the Bank. The last
sentence of Sec. 1261.12(b) requires a Bank to promptly notify FHFA in
writing any time it believes or has reason to believe that any director
no longer meets the eligibility requirements, and this has typically
been the method through which FHFA has been informed of director
ineligibility. Director eligibility is an issue for a Bank to monitor
and address in the first instance and there is no reason for an
individual director to contact FHFA directly about eligibility issues.

[[Page 87743]]

11. Ineligibility and Removal of Bank Directors--Sec. 1261.13
Existing Sec. 1261.13 addresses the ineligibility of Bank
directors. It provides that upon a determination by FHFA or a Bank that
any director of the Bank no longer satisfies the statutory or
regulatory eligibility requirements, or has failed to comply with the
reporting requirements, the directorship shall immediately become
vacant. The proposed rule would retain this provision without revision,
other than to redesignate it as paragraph (a), with the heading
``Ineligibility.''
The proposed rule would also create a new paragraph (b) to
establish the authority of a Bank's board to remove directors for good
cause, which may be based upon: (i) a material violation of the Bank's
code of ethics or other applicable Bank policy; (ii) a material
violation of the Bank Act, FHFA regulations or other criminal or civil
law; (iii) a determination by the board that continuation in office of
such director would be materially harmful to the Bank; (iv) conduct, or
a mental or physical condition, that raises substantial questions
concerning the director's ability to fulfill their duties and
obligations; or (v) a determination under proposed Sec. 1261.22(b)(3)
(discussed below, requiring that the board assess director performance
annually) that the director's continuous poor performance or lack of
participation is compromising the board's ability to adequately oversee
the operations of the Bank. Under the proposed rule, a Bank would also
be required to promptly notify FHFA in writing of any pending or final
removal actions taken pursuant to this authority.
As stated above with respect to the required background check for
directorship nominees, the safe and sound operation of every Bank
depends, in part, upon the existence of some mechanism for identifying
and addressing potential risks to a Bank that could be posed by its own
directors. It is important that a Bank's board have clear authority to
address risks posed by sitting directors, as well as potential risks
posed by those seeking to become directors. FHFA believes that the
prescribed list of ``good cause'' bases for removal, as well as the
requirements that two-thirds of disinterested Bank directors vote to
remove and that a Bank carry out any actions pursuant to policies
adopted by the Bank's board should minimize the chance that any removal
authority would be abused or applied in anything other than an
objective fashion in the best interests of the Bank.
Some Banks already have a policy providing for the good cause
removal of directors, which FHFA believes is appropriate. FHFA believes
it is important to make clear that each Bank's board retains this
limited authority and requests comment on whether it would be
appropriate to require each Bank to adopt policies on good cause
removal. The Agency also requests comment on whether any factors should
be added or eliminated from the list of ``good cause'' bases for
removal and on whether the revised regulation should require separate
votes by member and independent directors or something other than a
two-thirds vote for removal.
12. Vacant Bank Directorships--Sec. 1261.14
Section 1261.14 of the existing regulation establishes the
requirements and procedures for the filling of vacant Bank
directorships by the Bank's board of directors. The proposed rule would
make numerous clarifying edits to this section.
Existing Sec. 1261.14(a), entitled ``Filling of unexpired terms,''
requires that, when a directorship vacancy occurs, the Bank's board
elect an individual to complete the unexpired term of office of the
vacant directorship. The election is determined by a majority vote of
the remaining Bank directors sitting as a board, regardless of whether
the remaining Bank directors constitute a quorum.\38\ The regulation
permits a Bank's board to fill an anticipated vacancy prior to its
occurrence, but it may do so no sooner than the regularly scheduled
board meeting immediately prior to the effective date of the
vacancy.\39\ To fill a particular vacancy, a Bank's board may elect
only an individual who satisfies all the statutory and regulatory
eligibility requirements ``that applied to his or her predecessor''
and, for independent directorships, also satisfies any of the
independent director qualifications. If a Bank does not have at least
two sitting public interest independent directors, its board must
designate the vacant directorship as a public interest independent
directorship and elect an eligible and qualified individual to fill
it.\40\
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\38\ 12 CFR 1261.14(a)(1).
\39\ 12 CFR 1261.14(a)(2).
\40\ 12 CFR 1261.14(a)(3).
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While retaining the same basic approach, the proposed rule would
restate the standards for determining who is eligible to fill a
particular vacancy and expressly allow Banks some flexibility in
filling vacant independent directorships. The proposed rule would also
reconfigure existing paragraph (a)(1) into the introductory paragraph
to Sec. 1261.14(a) and redesignate the succeeding paragraphs
accordingly.
With respect to determining who is an eligible successor to a
director that has left the board, the existing regulation provides that
the board ``shall elect only an individual who satisfies all the
eligibility requirements in the Bank Act and in this subpart that
applied to his or her predecessor and, for independent directorships,
also satisfies any of the qualifications in the Bank Act or this
subpart.'' The proposed rule would delete this language and state,
simply, in Sec. 1261.14(a)(2) that a Bank's board must: (i) fill a
vacant member directorship only with an individual who meets the member
director eligibility requirements set forth in proposed Sec. 1261.5(a)
(including by being an officer or director of a member located in the
voting state to which the vacant member directorship is allocated); and
(ii) fill a vacant independent directorship only with an individual who
meets the eligibility requirements for independent directors set forth
in proposed Sec. 1261.5(b).
By statute, a Bank's board must at all times have at least two
seats designated as public interest independent directorships. If one
of those seats becomes vacant, it should be filled as expeditiously as
possible. Proposed Sec. 1261.14(a)(3) would provide more express
flexibility in filling a vacant public interest independent
directorship than the existing regulation by permitting a Bank's board
either to: (i) elect an individual who is qualified under Sec.
1261.5(c)(2) to serve as a public interest independent director to fill
the vacancy; or (ii) elect to redesignate as a public interest
independent director a sitting regular independent director who is
qualified under Sec. 1261.5(c)(2) to serve as a public interest
independent director. In the latter case, the board would elect another
individual who is qualified under Sec. 1261.5(c)(1) to serve as a
regular independent director to fill the resulting vacant regular
independent directorship. The proposed change would also make it
possible for the board of directors to redesignate a public interest
independent director as a regular independent director. This may occur,
for example, if the Bank already has more than two sitting public
interest independent directors on its board. Although FHFA views such
scenarios as permissible under the existing language and has permitted
Banks to fill vacant public interest and regular independent
directorships in that way, the proposed revisions would

[[Page 87744]]

make it clear that the Banks have this flexibility.
Proposed Sec. 1261.14(a)(4) would make clear that a Bank's board
of directors must consult with the Bank's Advisory Council before
considering any individual to fill a vacant independent directorship,
just as is required under existing Sec. 1261.7(d)(2) (proposed Sec.
1261.7(c)(3)) when a board is considering independent directorship
nominations during the regular election cycle.
Existing Sec. 1261.14(b), entitled ``Verifying eligibility,''
requires that prior to any election to fill a board vacancy, the Bank
obtain an executed Application or Certification Form (as appropriate)
from each individual being considered to fill the vacancy and use the
Forms to verify each individual's eligibility and qualifications. The
existing provision also requires that the Bank deliver to FHFA for its
review a copy of the Application Form of each individual being
considered by the board.
The proposed rule would make several clarifications to Sec.
1261.14(b), as well as breaking the revised material into four
paragraphs for better readability. Proposed Sec. 1261.14(b)(1) would
continue to require that a Bank obtain the appropriate executed
Application or Certification Form from each individual being considered
to fill a vacancy and would clarify that this requirement applies even
when a Bank's board is contemplating the redesignation of a sitting
regular independent director as a public interest independent director
or vice versa.
Proposed Sec. 1261.14(b)(2) would require that a Bank conduct a
background check on any individual being considered to fill a vacant
directorship in the same manner as required for nominees in the regular
election cycle under proposed Sec. 1261.7(e).
Proposed Sec. 1261.14(b)(3) would continue to require that a
Bank's board deliver to FHFA for review the executed Independent
Director Application Form for each individual being considered by the
board to fill a vacant independent directorship and would clarify that
(as is the case for its review of Independent Director Application
Forms during the regular election cycle) FHFA has two weeks within
which to provide comments to the Bank. The proposed provision would
also require a Bank to provide a summary of the background check.
Finally, proposed Sec. 1261.14(b)(4) would require a Bank to
retain all information obtained under Sec. 1261.14(b) for at least
seven years after the date of the election in question and, in the case
of any information about a specific director, for at least seven years
after that director leaves the board. This parallels the retention
requirements that would apply to materials received during the regular
nomination and election cycles under Sec. Sec. 1261.7(f) and
1261.8(e)(5).
Existing Sec. 1261.14(c), governing notification, would remain
unchanged under the proposed rule.
In the remainder of subpart B of part 1261, the proposed rule would
make no changes to existing Sec. 1261.15 (setting forth the table for
``grandfathered'' member directorships) and would remove Sec. 1261.16,
which contains no regulatory text and is designated as reserved.
13. (Directors' Compensation) General--Sec. 1261.21
In subpart C of the existing regulation, Sec. 1261.21 addresses
Bank and OF director compensation.\41\ Existing Sec. 1261.21(a)
authorizes each Bank and OF to pay its directors reasonable
compensation and necessary expenses. This authority is subject to
further provisions of subpart C requiring each Bank and the OF to
compensate its directors pursuant to an annually adopted and FHFA-
reviewed written compensation policy \42\ and authorizing the Director
to disapprove compensation or expenses determined not to be
reasonable.\43\ Existing Sec. 1261.21(b) requires that each Bank and
OF report to the Director annually about the compensation it
anticipates paying out in the following year and director compensation,
expenses, and meeting attendance for the immediately preceding calendar
year. FHFA is proposing changes to both paragraphs (a) and (b) of
existing Sec. 1261.21, as described below.
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\41\ Section 1261.21 applies to OF independent directors by
operation of 12 CFR 1273.7(f)(2). Bank presidents serve as ex
officio directors of the OF but are not compensated for such
service. 12 CFR 1273.7(f)(1).
\42\ See 12 CFR 1261.22(a) and (d).
\43\ See 12 CFR 1261.23.
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Proposed amendment to paragraph (a), ``Standard.'' By statute, the
Banks and OF are authorized to pay their directors reasonable
compensation for the time required of them and necessary expenses they
incurred in performing their duties, provided the Bank System regulator
approves such compensation.\44\ As did predecessor Bank System
regulators, FHFA interprets its statutory obligation to approve
reasonable director compensation as conferring authority to establish a
maximum amount or level of reasonable compensation and to provide prior
notice of that amount to each Bank and the OF. FHFA now proposes to
state that authority in the regulation.
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\44\ See 12 U.S.C. 1427(i)(1). FHFA has applied section 7(i) to
OF pursuant to the Director's authorities under 12 U.S.C.
4511(b)(2).
---------------------------------------------------------------------------

Current section 7(i)(1) of the Bank Act is identical to the
provision regarding director compensation originally enacted as section
7(h) of the Bank Act in 1932, providing that ``[e]ach bank may pay its
directors reasonable compensation for the time required of them, and
their necessary expenses, in the performance of their duties, in
accordance with the resolutions adopted by such directors, subject to
the approval of the board.'' \45\ Although the current statutory
provision does not expressly identify FHFA as the approving authority,
review of the Bank Act demonstrates that ``board,'' as used in the
approval proviso, must be read to refer to FHFA.
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\45\ Compare 12 U.S.C. 1427(i)(1) with Public Law 72-304, sec.
7(h), 47 Stat. 725, 730 (July 22, 1932).
---------------------------------------------------------------------------

When originally enacted in 1932, the Bank Act defined ``board'' as
the Federal Home Loan Bank Board (FHLBB), the original regulator of the
Bank System.\46\ Thus, through use of the word ``board,'' section 7(h)
as originally enacted unambiguously provided the FHLBB authority to
approve Bank director compensation. When section 7 of the original Bank
Act is read as a whole, it is apparent that Congress used the term
``board'' standing alone to mean the Bank System regulator, and used
``board of directors'' or a clear derivative of that term (e.g., a
``board of eleven directors,'' or ``such board'') when referring to a
Bank's board of directors.\47\ Moreover, that approach is evident
throughout the Bank Act as originally enacted \48\ and across
amendments over time.\49\
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\46\ Public Law 72-304, sec. 2(1), 47 Stat. 725.
\47\ Public Law 72-304, sec. 7(a) and (b), 47 Stat. 730.
\48\ See generally, Public Law 72-304, secs. 12, 17, 18, and 20,
47 Stat. 735-38.
\49\ Amendments from 1935 also used ``Board'' in uppercase to
refer to the FHLBB. Among other changes, amendments to section 7 in
1935 provided for the election of ``[t]wo of such [Bank] directors''
by Bank members without regard to classes, under ``rules and
regulations to be prescribed by the Board.'' Public Law 74-76, sec.
3(b), 49 Stat. 293, 294 (May 28, 1935) (emphasis added). As later
examples, see Public Law 84-345, sec. 109(a)(2), 69 Stat. 635, 640
(Aug. 11, 1955), and Public Law 86-349, sec. 1 and 2, 73 Stat. 625
(Sept. 22, 1959). The 1935 amendments also added a new paragraph
(d), such that original paragraph (h) on Bank director compensation
was re-lettered paragraph (i), as it is today.
---------------------------------------------------------------------------

Original section 7(h) was redesignated as section 7(i) in 1935.\50\
When Congress amended sections 7(a) through (h) in 1961 to revise
provisions governing the

[[Page 87745]]

election and appointment of Bank directors it added a clause stating
that ``Federal Home Loan Bank Board'' would be ``hereinafter in this
section referred to as the Board'' to paragraph (a).\51\ Section 7(i)
on director compensation and section 7(j) on administration of the
affairs of each Bank by its board of directors were not addressed in
the 1961 amendments, and section 2(1) of the Bank Act, defining
``board'' as the FHLBB, also was not amended or repealed. As a result,
after the 1961 amendments, section 7 used both ``Board'' and ``board''
standing alone, and each term was identified or defined as--and
understood to refer to--the Bank System regulator.
---------------------------------------------------------------------------

\50\ Public Law 74-76, sec. 3(b), 49 Stat. 294.
\51\ Public Law 87-211, 75 Stat. 486 (Sept. 8, 1961).
---------------------------------------------------------------------------

Reading ``board'' otherwise--as referring to a Bank's board of
directors--leads to an implausible outcome. For example, the Bank's
board of directors would then be statutorily required to act twice on
the matter of directors' compensation--once by resolution and once by
``approval''--or one of the two actions (resolution or approval) is
unnecessary, because it would be redundant.\52\ Moreover, such a
reading also requires assuming that in 1961 Congress intended to
withdraw authority from the Bank System regulator and confer it on each
Bank's board of directors through a new practice, used in only one
place in the Bank Act, of referring to the Bank's board of directors as
``board,'' standing alone in lowercase and as distinguished from
``Board,'' meaning the Bank System regulator, standing alone in
uppercase. The correct reading of section 7 after the 1961 amendments
is that either ``board'' or ``Board,'' when standing alone in section
7, meant the ``Federal Home Loan Bank Board.'' This conclusion is also
supported by the Bank System regulator's contemporaneous understanding,
as evidenced by the fact that following the 1961 amendments, the FHLBB
did not revise its Bank director compensation regulation adopted in
1958, which stated that Bank directors' fees were subject to the
approval of the FHLBB.\53\
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\52\ ``Every clause and word of a statute should, if possible,
be given effect.'' United States v. Menasche, 348 U.S. 528, 538-539
(1955) (internal citations omitted). ``The presence of statutory
language cannot be regarded as mere surplusage; it means
something.'' Potter v. U.S., 155 U.S. 438, 446 (1894).
\53\ See 23 FR 9878, 9885 (Dec. 23, 1958). Presumably Congress
was aware of this interpretation in 1961, when it chose not to amend
paragraph (i). The FHLBB did not amend its Bank directors'
compensation regulation again until 1978, when it codified its
policy, first established in 1974, of imposing supervisory limits on
Bank director compensation. See 43 FR 46835 (Oct. 11, 1978).
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In 1989, the Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) established the Federal Housing Finance Board
(Finance Board) to replace the FHLBB as the Bank System regulator and
revised the Bank Act to replace all uses of ``board'' except in section
7 with ``Board,'' which FIRREA defined as the Finance Board.\54\
Because this change in terms did not cover section 7 (plausibly to
avoid changing ``board'' in the term ``board of directors'' to
``Board''), in sections 7(a) through (h) ``Board'' continued to connote
the Bank System regulator while section 7(i) continued to use the
lowercase ``board.'' There is no evidence that FIRREA's failure to
change the word ``board'' in section 7(i) as part of the conforming
amendments to reflect the name of the new System regulator, however,
was intended to change the long-held understanding that the word refers
to the Bank System regulator. In contrast, FHLBB regulations in effect
immediately prior to FIRREA's enactment and later regulations of the
Finance Board demonstrate that those agencies understood ``board'' in
the approval proviso to refer to the System regulator.\55\
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\54\ Public Law 101-73, secs. 401(a)(2), 702(a), and 703, 103
Stat. 354, 413, and 415 (Aug. 9, 1989); see also Public Law 101-73,
sec. 701(a)(1) and (b), 103 Stat. 411, 412.
\55\ See 12 CFR 522.60 (1989), as originally adopted in 1978, 43
FR 46837. This regulatory provision was not thereafter amended by
the FHLBB but was transferred without change by the Finance Board
after FIRREA's enactment, see 54 FR 36757, 36758 (Sept. 5, 1989).
See also 61 FR 43151, 43153 (Aug. 21, 1996) (wherein the Finance
Board determined that a dollar cap on Bank director compensation was
appropriate considering ``the agency's statutory responsibility to
`approve' Bank directors' compensation, see 12 U.S.C. 1427(i), the
Bank Act's requirement that such compensation be `reasonable,' see
id., and the preference for providing a clear regulatory
standard.'').
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Most recently, section 7(i) of the Bank Act was amended by HERA in
2008, when section 7(i)(2), which was added by the Gramm-Leach-Bliley
Act (GLBA) in 1999 and imposed statutory limits on Bank director
compensation, was repealed.\56\ The 2008 amendment thus returned
section 7(i)(1) to the same language as section 7(i) before GLBA was
enacted, providing that director compensation was subject to the
approval of the ``board''--in lowercase but standing alone. Because
HERA also made FHFA the Bank System regulator, replacing the Finance
Board, HERA included a number of general amendments changing references
to the ``Board'' or the ``Finance Board'' to the ``Director'' of
FHFA.\57\ Likely because ``board'' in the section 7(i)(1) approval
proviso was not capitalized, it was not identified as a reference in
need of updating. Once again however, the fact that the proviso was not
changed indicates that Congress did not intend to change its meaning.
And, as has been consistently demonstrated from the enactment of the
Bank Act in 1932 through its many amendments and in the regulations of
successive System regulators, the proviso means that the Bank System
regulator--now FHFA--has authority to approve Bank director
compensation.\58\
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\56\ Public Law 110-289, sec. 1202(7), 122 Stat. 2783 (July 30,
2008); see also Public Law 106-102, sec. 606(b), 113 Stat. 1450,
1453 (Nov. 12, 1999). Even after GLBA's imposition of statutory
limits the Bank System regulator continued to assert approval
authority by regulation, see 12 CFR 932.17(f) (2000) (``Payments
made to directors in compliance with the limits on annual directors'
compensation and the standards set forth in this section are deemed
to be approved by the Finance Board for purposes of section 7(i) of
the [Bank] Act, as amended.'').
\57\ Public Law 110-289, sec. 1204, 122 Stat. 2785.
\58\ Consistent statutory interpretation by the administrative
regulator ``is of persuasive force,'' U.S. v. Madigan, 300 U.S. 500,
505 (1937); see also Skidmore v. Swift & Co., 323 U.S. 134, 140
(1944).
---------------------------------------------------------------------------

The legislative and regulatory history that substantiates FHFA's
authority to approve Bank director compensation also affirms its
authority to establish limits on ``reasonable'' compensation. As early
as 1974, the Bank System regulator limited Bank director compensation
by policy, exercising statutory authority identical to that in existing
section 7(i)(1).\59\ Thereafter, the Bank System regulator's authority
to determine a level of ``reasonable'' Bank director compensation was
codified in regulation, first in 1978 and again in 1989, 1996, 1999,
2000, 2002, and 2010.\60\
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\59\ See 61 FR 17603 (Apr. 22, 1996).
\60\ See 43 FR 46837 (Oct. 11, 1978), 54 FR 36757 (Sept. 5,
1989), 61 FR 43151 (Aug. 21, 1996), 64 FR 71278 (Dec. 21, 1999), 65
FR 8260 (Feb. 18, 2000), 67 FR 12846 (Mar. 20, 2002), and 75 FR
17040 (Apr. 5, 2010).
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In common with earlier Bank System regulators, FHFA views its
express statutory authority to approve Bank director compensation on
the basis that it is reasonable as conferring authority to establish
and provide to the Banks and OF an amount of director compensation that
FHFA has determined would be reasonable. After administering the
existing regulation for almost 15 years, FHFA believes it could be
useful to provide the Banks and OF information on a level or amount of
director compensation FHFA has determined to be reasonable, for
consideration when each Bank and OF develops its directors'
compensation policy.
The existing regulation requires each Bank and OF to submit its
director compensation policy to FHFA for prior

[[Page 87746]]

review and addresses FHFA's obligation to disapprove director
compensation that is not reasonable. The Bank Act does not define
``reasonable,'' but FHFA relies on concepts and processes similar to
those used in its review of Bank executive officer compensation (where,
by statute, FHFA is required to prohibit the regulated entities from
providing executive officers compensation that is not reasonable and
comparable to compensation paid by similar institutions for the
performance of similar duties \61\). When determining if proposed
compensation of Bank or OF directors is ``reasonable,'' FHFA considers
a variety of factors including compensation of directors at other
banking institutions; the Banks' status as government-sponsored
enterprises and features of their statutory charters, governance, and
businesses that may distinguish them from other institutions; their
statutory purposes and mission; and the fact that they were created to
serve a public purpose.
---------------------------------------------------------------------------

\61\ See 12 U.S.C. 4518(a); see also 12 CFR part 1230.
---------------------------------------------------------------------------

Currently, if FHFA determines that proposed director compensation
is not reasonable, it does not provide the relevant Bank or OF
information on an alternative amount of compensation that FHFA would
deem to be reasonable. Instead, the Bank or OF must submit a new
proposal, subject to a new FHFA review. FHFA believes this process
imposes a burden on the Banks and OF which could be reduced or avoided
if FHFA provided notice of a maximum amount of annual director
compensation FHFA has determined would be reasonable. Because FHFA has
not previously exercised that authority, and for consistency with
earlier System regulators which stated such authority in regulation,
FHFA now believes it should state its authority to establish an amount
of ``reasonable'' director compensation and to provide prior notice of
that amount to the Banks and OF in regulation.
FHFA does not propose to establish a maximum amount or level of
compensation in this regulatory action. In the future, FHFA may
establish such an amount and may do so through a regulatory amendment
or an order. FHFA may also provide guidance on an amount of Bank or OF
director compensation it believes would be reasonable. In any case,
FHFA expects any amount or level of ``reasonable'' compensation so
established would reflect consideration factors such as those set forth
above.
Likewise, FHFA does not propose to amend other provisions of
existing subpart C that currently require each Bank and OF, when
submitting its directors' compensation policy to FHFA, to include all
studies or other supporting materials upon which the board relied in
determining the level of compensation and expenses to pay to its
directors; require FHFA to review the policy; and acknowledge FHFA's
authority to disapprove the policy if FHFA determines that compensation
and/or expenses to be paid to the directors are not reasonable.\62\
Should FHFA in the future provide the Banks and OF prior notice of a
maximum amount of director compensation determined to be reasonable,
FHFA does not intend that each Bank or OF simply adopt that amount in
its policy. Instead, FHFA expects that the board of directors of each
Bank and OF would continue to evaluate and affirmatively determine
reasonable director compensation and that each annual policy submission
would continue to provide studies, supporting materials, and
justification for such determinations. As it does currently, FHFA
expects to review each submission in full and may disapprove proposed
compensation that is not supported as reasonable. FHFA may also approve
a proposal to pay compensation that exceeds the amount FHFA has
communicated by prior notice if the Bank or OF provides appropriate
support.
---------------------------------------------------------------------------

\62\ See 12 CFR 1261.22 and 1261.23.
---------------------------------------------------------------------------

Proposed amendment to paragraph (b), ``Reporting.'' As noted above,
existing Sec. 1261.21(b) requires that each Bank report to the
Director annually about the compensation it anticipates paying out in
the following year and director compensation, expenses, and meeting
attendance for the immediately preceding calendar year. One of the
items required to be included in the latter category under the existing
regulation is ``[t]he number of board and designated committee meetings
each director attended in-person or through electronic means such as
video or teleconferencing.'' In order to conform more closely to the
language that would be used in revised Sec. 1261.24 (discussed below),
the proposed rule would revise the description of this item to refer to
``meetings each director attended in person or remotely, through video
or teleconferencing, and in accordance with Sec. 1261.24(b).''
14. Directors' Compensation Policy--Sec. 1261.22
Existing Sec. 1261.22 requires that a Bank adopt a written
compensation policy to ``provide for the payment of reasonable
compensation and expenses to the directors for the time required of
them in performing their duties as directors.'' The policy must
``address the activities or functions for which director attendance or
participation is necessary and which may be compensated, and . . .
explain and justify the methodology used to determine the amount of
compensation to be paid to the Bank director.'' A Bank's compensation
policy must require that compensation be reduced, as necessary, to
reflect lesser attendance or performance at board or committee meetings
during a given year.
The proposed rule would split paragraph (b), addressing minimum
contents for Bank compensation plans, into two paragraphs. It would
also add a third paragraph, Sec. 1261.22(b)(3), requiring each Bank to
establish, as part of its compensation policy, a fair and impartial
process for annually evaluating individual director performance and
participation, including, but not limited to, an assessment of whether
each director: (i) demonstrated understanding of the Bank System; (ii)
demonstrated knowledge of the Bank's policies and governance documents;
(iii) demonstrated understanding of his or her legal and ethical
responsibilities as a board member; (iv) made suggestions congruent
with the Bank's mission, vision and values (even if divergent from
majority opinion); and (v) acted in support of Board decisions,
regardless of initial position. The proposed rule would also revise
newly designated Sec. 1261.22(b)(2) to stipulate that, as a
consequence for poor performance or participation, a Bank's board may
not only reduce a director's pay, but may also remove a director whose
lack of performance or participation is compromising the board's
ability to adequately oversee the operations of the Bank. This
authority is also referenced in proposed Sec. 1261.13, which addresses
a board's authority to remove a director for good cause.
Bank directors hold positions of trust and are well compensated for
their time and efforts. Each Bank needs all of its directors to devote
the time, attention, and thought necessary to properly oversee the Bank
and its operations. It is a matter of strong corporate governance for a
Bank's board of directors to have an effective process for assessing
the performance of board directors; this process can help improve
individual and collective board performance.\63\ It is just as
essential that

[[Page 87747]]

a Bank's board have an effective mechanism for addressing lack of
performance. In extreme cases, where a director's performance is so
poor or detrimental that it poses a risk to the board's ability to
effectively oversee the Bank's operations, this could include removal
of a director using the procedures established under proposed Sec.
1261.13(b).
---------------------------------------------------------------------------

\63\ See PwC's, Governance Insights Center, Individual director
assessments, (August 2023), available at <a href="https://www.pwc.com/us/en/services/governance-insights-center/library/assets/pwc-individual-director-assessments.pdf">https://www.pwc.com/us/en/services/governance-insights-center/library/assets/pwc-individual-director-assessments.pdf</a>.
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15. Board Meetings--Sec. 1261.24
The proposed rule would make multiple substantive changes to codify
a waiver FHFA first issued in 2020 permitting Bank System board and
committee meetings to be held in virtual formats.
Existing Sec. 1261.24(a) requires that the board of directors of
each Bank hold as many meetings each year as are necessary and
appropriate to carry out its fiduciary duties regarding its oversight
of the Bank, provided that each board must hold a minimum of six in-
person meetings during each calendar year. A similar regulatory
requirement applies to the board of directors of the OF.\64\ As
mentioned above, FHFA regulations also require that each Bank annually
adopt a written compensation policy to provide for the payment of
reasonable compensation and expenses to the directors for the time
required of them in performing their duties as directors.\65\ The OF is
required to pay reasonable compensation to independent directors in
accordance with the requirements of part 1261 applying to the
compensation of Bank directors, including the requirement that
compensation be reduced to reflect lesser attendance or performance at
board or committee meetings.\66\
---------------------------------------------------------------------------

\64\ See 12 CFR 1273.8(b).
\65\ See 12 CFR 1261.22.
\66\ See 12 CFR 1273.7(f)(2).
---------------------------------------------------------------------------

The requirements for Bank and OF boards to hold at least six in-
person meetings are prudential measures adopted by FHFA as an aid to
promoting sound governance; they are not required by statute. In
response to the COVID-19 pandemic, the FHFA Director issued a letter in
March 2020 waiving the need to comply with the in-person board meeting
regulatory requirements and with provisions of compensation policies
tying compensation to attendance at in-person board and committee
meetings. Over the course of the pandemic, the waiver was extended nine
times and the last extension remains in effect without an expiration
date.
Although the COVID-19 public health emergency has ended and FHFA
prefers that Banks and OF hold in-person board meetings whenever
possible, it also recognizes the benefits of allowing greater
flexibility in fulfilling the Agency's regulatory requirement to hold
at least six board meetings a year, particularly in times of emergency.
The proposed revisions allowing boards to meet remotely at their
discretion without seeking prior Agency approval could promote
efficiency by minimizing delays in response to urgent issues and
reducing travel costs and unexpected travel disruptions while fostering
greater board participation for directors unable to attend in person.
Additionally, the Bank System has already demonstrated its ability to
use electronic platforms to engage in discourse and conduct business
over the past four years. The proposed rule would permanently address
the issue by codifying the substance of the existing waiver into
regulation.
The principal effect of modifying the regulation would be to allow
the Banks and OF an alternative means of holding a board meeting that
would otherwise be held in person. The interests of the members and the
public should be equally represented through either type of board
meeting. Expectations for attendance and performance at meetings and
the compensation methodology should be communicated to board members in
the compensation policy, which, with supporting materials, must be
submitted to the FHFA Director annually.\67\ Consequently, the Agency
would expect the Banks and OF to keep adequate meeting records to
sufficiently document board member attendance and performance. FHFA
also expects the Banks and OF to appropriately mitigate any security
risks that may arise from meeting in a virtual setting.
---------------------------------------------------------------------------

\67\ See 12 CFR 1261.22(d).
---------------------------------------------------------------------------

The proposed rule would revise existing Sec. 1261.24(a) to remove
the requirement that the six minimum board meetings be ``in-person.''
In conjunction with this, the proposed rule would revise Sec.
1261.24(b) to provide that ``[a] Bank's board of directors and its
committees may conduct meetings in-person, through video conferencing
or teleconferencing, or in a hybrid format, provided that all directors
have an opportunity to communicate and have access to all written
documents and presentations.'' Any meeting of the type described can be
counted as one of the minimum six meetings required under Sec.
1261.24(a).
Proposed Sec. 1261.24(b)(2) would state an expectation that that
each Bank will ``generally'' hold board and committee meetings within
the Bank district and would retain the prohibition against holding any
board or committee meeting that is not within a ``State'' as defined by
12 CFR 1201.1. This definition includes ``United States, American
Samoa, the Commonwealth of the Northern Mariana Islands, the District
of Columbia, Guam, Puerto Rico, or the United States Virgin Islands.''
\68\ It would further require that all directors be located within a
State, as so defined, when attending a board or committee meeting via
video conference or teleconference.
---------------------------------------------------------------------------

\68\ See 12 CFR 1201.1.
---------------------------------------------------------------------------

The proposed rule would also add to Sec. 1261.24 a new paragraph
(c) to define ``quorum'' to mean ``for purposes of meetings of a Bank's
board of directors, . . . a majority of sitting directors, which must
include a majority of sitting independent directors.'' This provision
would better ensure that independent voices are heard on critical Bank
issues and provide consistency within the Bank System. The proposed
provision parallels the definition of ``quorum'' as it is currently
stated in the OF regulation at 12 CFR 1273.8(b).

B. Revisions to 12 CFR Part 1239

Although each Bank is required under existing Sec. 1261.11 to
adopt a conflicts-of-interest policy to cover all of its board
directors, there is currently no equivalent requirement with respect to
Bank employees, many of whom are in no less a position of trust at the
Bank than are its board directors.
Part 1239 of FHFA's regulations addresses responsibilities of
boards of directors, corporate practices, and corporate governance for
FHFA's regulated entities. The proposed rule would add to part 1239 a
new Sec. 1239.31 requiring each Bank to adopt a conflicts-of-interest
policy covering its employees and establishing the requirements for
those policies. The content and format of the new section is based on
that of Sec. 1261.11, which addresses the Bank director conflicts-of-
interest policy requirement, appropriately modified to be applicable to
Bank employees.
Proposed Sec. 1239.31(a) would require that each Bank's board of
directors adopt a written conflicts-of-interest policy covering all
employees, which must, at a minimum: (1) require that all employees of
the Bank discharge their official responsibilities in an objective and
impartial manner in furtherance of the interests of the Bank's
membership as a whole and consistent with the public interest; (2)
establish appropriate limitations, standards, and procedures

[[Page 87748]]

regarding the holding of outside positions and financial interests by
Bank employees and close family members and associates; (3) prohibit
executive officers and senior management from holding paid positions
with any entity that is, or may be eligible to become, a member or
housing associate of any Bank or with any affiliate of such entity; (4)
prohibit employees from participating in any particular matter in which
the employee or any immediate family member or business associate has a
financial interest; (5) prohibit employees from otherwise holding
financial interests that conflict with the conscientious performance of
duty; (6) require employees to disclose actual or apparent conflicts of
interests and establish procedures for addressing such conflicts,
including recusal; (7) require the establishment of internal controls
to ensure that conflicts-of-interest reports are made and filed and
that conflicts-of-interest issues are disclosed and resolved; and (8)
establish procedures to monitor compliance with the conflicts-of-
interest policy. While the proposed rule would require each Bank's
policy to set appropriate guidelines for all of its personnel, FHFA
would expect a Bank to appropriately calibrate the treatment of
different types of employees under the policy according to the risk
presented, including by setting more stringent standards for executives
and officers.
Paralleling Sec. 1261.11, paragraphs (b) and (c) of proposed Sec.
1239.31 would prohibit employees in most cases from disclosing or using
confidential information they receive by reason of their position with
the Bank and discourage Bank employees from accepting gifts that appear
to be intended to influence the employee's actions.
Proposed paragraph (d) would employ the same definitions that are
used in proposed Sec. 1261.11(f). For purposes of attribution,
``immediate family member'' means a parent, sibling, spouse, child, or
dependent, or any relative sharing the same residence as the director
and the term ``business associate'' means any individual or entity with
whom a director has a business relationship, including, but not limited
to: (1) Any corporation or organization of which the employee is an
officer or partner, or in which the employee beneficially owns ten
percent or more of any class of equity security, including subordinated
debt; (2) Any other partner, officer, or beneficial owner of ten
percent or more of any class of equity security, including subordinated
debt, of any such corporation or organization; and (3) Any trust or
other estate in which an employee has a substantial beneficial interest
or as to which the employee serves as trustee or in a similar fiduciary
capacity. The definition of ``financial interest'' matches the revised
definition of that term in proposed Sec. 1261.11(f).

C. Revisions to 12 CFR Part 1273

The proposed rule would also make several revisions to part 1273,
which governs the OF. Primarily, the proposed rule would amend part
1273 to revise the provision governing the minimum number and site of
OF board meetings to match the revised language with respect to the
Bank's boards in Sec. 1261.24. The remaining proposed revisions are in
response to comments provided by the Bank System in response to FHFA's
Spring 2023 Notice of Regulatory Review.
1. Funding of the OF--Sec. 1273.5
Existing Sec. 1273.5 addresses the funding of the OF. Existing
Sec. 1273.5(b)(1)(ii) limits OF operating funds withdrawals to check,
wire transfer, or draft signed by the Chief Executive Officer (CEO) or
other persons designated by the OF board of directors.
In its letter sent in response to FHFA's Spring 2023 Notice of
Regulatory Review, the Bank System commented that the existing
regulation governing the withdrawal of OF operating funds is both
limited and outdated. It suggested that the regulation be modernized to
permit the use of other widely accepted fund transfer methods that have
been or will be developed in the future and that the regulation be
expanded to allow CEO delegation of authority to achieve greater
operational efficiency. In response, FHFA is proposing to revise Sec.
1273.5(b)(1)(ii) to expand the range of permissible OF withdrawal
methods to include ``draft[s]'' and ``other funds transfer methods with
written authorization by the CEO or other persons designated by the CEO
or OF board of directors in accordance with OF governance documents.''
2. General Duties of the OF Board of Directors--Sec. 1273.8
Existing Sec. 1273.8 addresses the ``general duties of the OF
board of directors.'' Paragraph (b) of this section establishes
requirements for OF board meetings, requiring that the OF board of
directors conduct its business by majority vote of its members at
meetings convened in accordance with its by-laws, and hold no fewer
than six in-person meetings annually.
The proposed rule would subdivide Sec. 1273.8(b) into four
paragraphs for clarity and would revise the existing text concerning
meeting frequency and location in a manner paralleling the proposed
changes to the board meeting requirements for the Banks set forth in
Sec. 1261.24. The reasons for these revisions are discussed in depth
in the discussion of proposed Sec. 1261.24, above.
Proposed Sec. 1273.8(b)(1) would allow the OF board of directors
and its committees to conduct meetings ``in person, through video
conferencing or teleconferencing, or in a hybrid format, provided that
all meeting attendees have an opportunity to communicate and have
access to all written documents and presentations.'' Under the proposed
rule, all such meetings could be counted toward the minimum of six
board meetings per year that is required under the existing regulation
and as proposed. The proposed rule, in Sec. 1273.8(b)(2), would
prohibit the OF from holding any board or committee meeting that is not
within a ``State'' as defined by 12 CFR 1201.1 and would also require
that all directors be located within a State, as so defined, when
attending the meeting via teleconference or video conference. Proposed
Sec. 1273.8(b)(3) and (4) would retain the meeting notice and quorum
provisions, respectively, of the existing regulation.
In existing Sec. 1273.8, paragraph (d) enumerates duties of the OF
board, other than those relating to Bank System consolidated
obligations, among which is included the duty to review and approve all
contracts of the OF, except for contracts for which exclusive authority
is provided to the Audit Committee by regulation. In its letter sent in
response to FHFA's Spring 2023 Notice of Regulatory Review the Bank
System commented that the current requirement seems impractical and
unnecessary, as those activities generally fall under management's
responsibilities. In response, FHFA is proposing to eliminate the
requirement that the OF board of directors review and approve all
contracts of the OF, except for those reserved to the audit committee
by regulation. Instead, proposed Sec. 1273.8(d)(4) would state that
the OF board of directors will review and approve contracts of the OF,
as specified in OF governance documents.

V. Considerations of Differences Between the Banks and the Enterprises

Section 1313(f) of the Safety and Soundness Act requires the
Director of FHFA, when promulgating regulations relating to the Banks,
to consider the differences between the Banks and the Enterprises
(Fannie Mae and Freddie Mac) as they relate to: the Banks' cooperative
ownership structure; the

[[Page 87749]]

mission of providing liquidity to members; the affordable housing and
community development mission; their capital structure; and their joint
and several liability on consolidated obligations.\69\ The Director
also may consider any other differences that are deemed appropriate. In
preparing this proposed rule, the Director considered the differences
between the Banks and the Enterprises as they relate to the above
factors, and determined that the rule is appropriate. FHFA requests
comments regarding whether differences related to those factors should
result in any revisions to the proposed rule.
---------------------------------------------------------------------------

\69\ 12 U.S.C. 4513(f).
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

The proposed rule would not contain any changes to information
collection requirements that would require the approval of the Office
of Management and Budget (OMB) under the Paperwork Reduction Act.\70\
Therefore, FHFA has not submitted any information to OMB for review.
---------------------------------------------------------------------------

\70\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act

The Regulatory Flexibility Act \71\ (RFA) 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.\72\ FHFA has considered the impact of the proposed rule under
the RFA. FHFA certifies that the proposed rule, if adopted as a final
rule, would not have a significant economic impact on a substantial
number of small entities because the proposed rule applies only to the
Banks and OF, which are not small entities for purposes of the RFA.
---------------------------------------------------------------------------

\71\ 5 U.S.C. 601 et seq.
\72\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

VIII. Providing Accountability Through Transparency Act of 2023

The Providing Accountability Through Transparency Act of 2023 (5
U.S.C. 553(b)(4)) requires that a notice of proposed rulemaking include
the internet address of a summary of not more than 100 words in length
of a proposed rule, in plain language, that shall be posted on the
internet website under section 206(d) of the E-Government Act of 2002
(44 U.S.C. 3501 note) (commonly known as <a href="http://Regulations.gov">Regulations.gov</a>). FHFA's
proposal and the required summary can be found at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.

List of Subjects

12 CFR Part 1239

Administrative practice and procedure, Federal home loan banks,
Government-sponsored enterprises, Reporting and recordkeeping
requirements.

12 CFR Part 1261

Administrative practice and procedure, Compensation, Conflicts of
interest, Directors, Elections, Eligibility, Federal home loan banks,
Meetings, Reporting and recordkeeping requirements.

12 CFR Part 1273

Administrative practice and procedure, Audit committee,
Consolidated obligations, Directors.

Accordingly, for the reasons stated in the preamble, under the
authority of 12 U.S.C. 4511, 4513, and 4526, FHFA proposes to amend
parts 1239, 1261, and 1273 of chapter XII of title 12 of the Code of
Federal Regulations, as follows:

PART 1239--RESPONSIBILITIES OF BOARDS OF DIRECTORS, CORPORATE
PRACTICES, AND CORPORATE GOVERNANCE

0
1. The authority citation for part 1239 continues to read as follows:

Authority: 12 U.S.C. 1426, 1427, 1432(a), 1436(a), 1440,
4511(b), 4513(a), 4513(b), 4526, and 15 U.S.C. 78oo(b).

0
2. Add Sec. 1239.31 to read as follows:

Sec. 1239.31 Conflicts of interest policy for Bank employees.

(a) Adoption of conflicts-of-interest policy. Each Bank's board of
directors shall adopt a written conflicts-of-interest policy covering
all Bank employees. At a minimum, the conflicts-of-interest policy of
each Bank shall:
(1) Require that all Bank employees discharge their official
responsibilities in an objective and impartial manner in furtherance of
the interests of the Bank's membership as a whole and consistent with
the public interest;
(2) Establish appropriate limitations, standards, and procedures
regarding the holding of outside positions and financial interests by
Bank employees and close family members and associates;
(3) Prohibit Bank executive officers and senior management from
holding paid positions with any entity that is, or may be eligible to
become, a member or housing associate of any Bank or with any affiliate
of such entity;
(4) Prohibit Bank employees from participating in any particular
matter in which the employee or any immediate family member or business
associate has a financial interest;
(5) Prohibit Bank employees from otherwise holding financial
interests that conflict with the conscientious performance of duty;
(6) Require Bank employees to disclose actual or apparent conflicts
of interests and establish procedures for addressing such conflicts,
including recusal;
(7) Require the establishment of internal controls to ensure that
conflicts-of-interest reports are made and filed and that conflicts-of-
interest issues are disclosed and resolved; and
(8) Establish procedures to monitor compliance with the conflicts-
of-interest policy.
(b) Confidential information. Bank employees shall not disclose or
use confidential information they receive solely by reason of their
position with the Bank to obtain any benefit for themselves or for any
other individual or entity.
(c) Gifts. No Bank employee shall accept, and each Bank employee
shall discourage the employee's immediate family members from
accepting, any gift that the employee believes or has reason to believe
is given with the intent to influence the employee's actions, or where
acceptance of such gift would have the appearance of intending to
influence the employee's actions. Any insubstantial gift would not be
expected to trigger this prohibition.
(d) Definitions. For purposes of this section:
Business associate means any individual or entity with whom a Bank
employee has a business relationship, including, but not limited to:
(i) Any corporation or organization of which the employee is an
officer or partner, or in which the employee beneficially owns ten
percent or more of any class of equity security, including subordinated
debt;
(ii) Any other partner, officer, or beneficial owner of ten percent
or more of any class of equity security, including subordinated debt,
of any such corporation or organization; and
(iii) Any trust or other estate in which an employee has a
substantial beneficial interest or as to which the employee serves as
trustee or in a similar fiduciary capacity.
Financial interest means a direct or indirect financial interest in
any activity, transaction, property, or

[[Page 87750]]

relationship that involves receiving or providing something of monetary
value, and includes, but is not limited to any right, contractual or
otherwise, to the payment of money, whether contingent or fixed. It
does not include a deposit or savings account, loan or extension of
credit, or other accounts and products obtained in the normal course of
business on non-preferential terms generally available to the public
from a member institution or from a non-member counterparty to the Bank
by which the individual is employed.
Immediate family member means a parent, sibling, spouse, child, or
dependent of a Bank employee, or any relative sharing the same
residence as a Bank employee.
0
3. Revise and republish part 1261 to read as follows:

PART 1261--FEDERAL HOME LOAN BANK DIRECTORS

Subpart A--Definitions
Sec.
1261.1 [Reserved]
Subpart B--Federal Home Loan Bank Boards of Directors: Eligibility and
Elections
1261.2 Definitions.
1261.3 General provisions.
1261.4 Annual designation of directorships.
1261.5 Director eligibility.
1261.6 Determination of member votes.
1261.7 Nominations for member and independent directorships.
1261.8 Election process.
1261.9 Actions affecting director elections.
1261.10 Independent director independence.
1261.11 Conflicts of interest policy for Bank directors.
1261.12 Reporting requirements for Bank directors.
1261.13 Ineligibility and removal of Bank directors.
1261.14 Vacant Bank directorships.
1261.15 Minimum number of member directorships.
Subpart C--Federal Home Loan Bank Directors' Compensation and Expenses
1261.20 Definitions.
1261.21 General.
1261.22 Directors' compensation policy.
1261.23 Director disapproval.
1261.24 Board meetings.

Authority: 12 U.S.C. 1426, 1427, 1432, 4511 and 4526.

Subpart A--Definitions

Sec. 1261.1 [Reserved]

Subpart B--Federal Home Loan Bank Boards of Directors: Eligibility
and Elections

Sec. 1261.2 Definitions.

As used in this subpart:
Advisory Council means the Advisory Council each Bank is required
to establish pursuant to section 10(j)(11) of the Bank Act (12 U.S.C.
1430(j)(11)), and part 1291 of this chapter.
Bona fide resident of a Bank district means an individual who:
(1) Maintains a principal residence in the Bank district; or
(2) If serving as an independent director, owns or leases in his or
her own name a residence in the Bank district and is employed in a
voting State in the Bank district.
FHFA ID number means the number assigned to a member by FHFA and
used by FHFA and the Banks to identify a particular member.
Independent directorship and independent director mean,
respectively, a directorship designated as provided under Sec. 1261.4
to be filled by an individual meeting the eligibility requirements of
Sec. 1261.5(b) and an individual serving in such a directorship.
Member directorship and member director mean, respectively, a
directorship designated as provided under Sec. 1261.4 to be filled by
an individual meeting the requirements of Sec. 1261.5(a) and an
individual serving in such a directorship.
Method of equal proportions means the mathematical formula used by
FHFA to allocate member directorships among the States in a Bank's
district based on the relative amounts of Bank stock required to be
held as of the record date by members located in each State.
Nominee means an individual who has been nominated for a Bank
directorship under the applicable provision of Sec. 1261.7.
Public interest independent directorship and public interest
independent director mean, respectively, an independent directorship
designated by a Bank to be filled by an individual having the
qualifications specified in Sec. 1261.5(c)(2) and an individual
serving in such a directorship.
Record date means December 31 of the calendar year immediately
preceding the election year.
Regular independent directorship and regular independent director
mean, respectively, an independent directorship designated by a Bank to
be filled by a person having the qualifications specified in Sec.
1261.5(c)(1) and an individual serving in such a directorship.
Voting State means the State in which a member's principal place of
business, as determined in accordance with 12 CFR part 1263, is located
as of the record date. The voting State of a member with a principal
place of business located in the U.S. Virgin Islands as of the record
date is Puerto Rico, and the voting State of a member with a principal
place of business located in American Samoa, Guam, or the Commonwealth
of the Northern Mariana Islands as of the record date is Hawaii.

Sec. 1261.3 General provisions.

(a) Term of directorships. The term of office of each directorship
shall be four years, except as adjusted pursuant to Sec. 1261.4(e) or
(f) to achieve a staggered board, and shall commence on January 1 of
the calendar year so designated by FHFA.
(b) Annual elections. Each Bank annually shall conduct an election
the purpose of which is to fill all directorships designated by FHFA as
commencing on January 1 of the calendar year immediately following the
year in which such election is commenced. Subject to the provisions of
the Bank Act and in accordance with the requirements of this subpart,
the disinterested directors of each Bank, or a committee of
disinterested directors, shall administer and conduct the annual
election of directors. In so doing, the disinterested directors may use
Bank staff or independent contractors to perform ministerial and
administrative functions concerning the elections process.
(c) Location of members. For purposes of the election of member
directors, a member is deemed to be located in its voting State, unless
otherwise specified by the Director.
(d) Dates. If any date specified in this subpart for action by a
Bank, or specified by a Bank pursuant to this subpart, falls on a
Saturday, Sunday, or Federal holiday, the relevant time period is
deemed to be extended to the next calendar day that is not a Saturday,
Sunday, or Federal holiday.

Sec. 1261.4 Annual designation of directorships.

(a) Designation of directorships order. As provided in this
section, the Director will by June 1 of each year issue a written order
designating for each Bank's board of directors for the following
calendar year:
(1) The total number of member directorships and their allocation
among the voting States of the Bank's district;
(2) The total number of independent directorships; and
(3) The directorships for which an election will be held for terms
beginning on the January 1 of the following year, and the length of
those terms.

[[Page 87751]]

(b) Capital stock reports. (1) On or before April 10 of each year,
each Bank shall deliver to FHFA a capital stock report that indicates,
as of the record date, the number of members located in each voting
State in the Bank's district, the number of shares of Bank stock that
each member (identified by its FHFA ID number) was required to hold,
and the number of shares of Bank stock that all members located in each
voting State were required to hold. If a Bank has issued more than one
class of stock, it shall report the total shares of each class of stock
required to be held by the members. The Bank shall certify to FHFA
that, to the best of its knowledge, the information provided in the
capital stock report is accurate and complete, and that it has notified
each member of its minimum capital stock holding requirement as of the
record date.
(2) The number of shares of Bank stock that any member was required
to hold as of the record date shall be determined in accordance with
the minimum investment established by the capital plan for that Bank.
(c) Allocation of member directorships. For each Bank's board of
directors, the Director will designate a total number of member
directorships and allocate them among the voting States of the Bank's
district as follows:
(1) Method of equal proportions. (i) FHFA will choose a base number
of member directorships and, using the method of equal proportions,
allocate those among the voting States of the Bank district according
to the ratio of the number of shares of Bank stock required to be held
by the members in each State to the number of shares required to be
held by all members of the Bank.
(ii) In no case shall the number of member directorships allocated
to a voting State be fewer than one or more than six.
(iii) If a Bank has issued more than one class of stock, the
Director will allocate the member directorships based on the combined
number of shares required to be held by members.
(iv) The Director will allocate a Bank's member directorships based
upon members' minimum required stock holdings as of the record date, as
shown in the Bank's capital stock report required by paragraph (b) of
this section.
(2) Grandfather provision. If, after completing the process
described in paragraph (c)(1) of this section for a Bank, the number of
member directorships allocated to any voting State is not at least
equal to the minimum number shown for that voting State on the table in
Sec. 1261.15, the Director will allocate to that voting State such
number of additional member directorships as are necessary to increase
the total number of member directorships allocated to that voting State
to the number shown on the table. If a voting State does not appear on
the table in Sec. 1261.15, the minimum number of member directorships
for that voting State is deemed to be one for purposes of this
paragraph (c)(2).
(d) Independent directorships. After designating the member
directorships for a Bank's board of directors as provided in paragraph
(c) of this section, the Director will designate a number of
independent directorships for the Bank's board that is at least 40
percent, but less than 50 percent, of the total number of directorships
on the board.
(e) Adjustments--(1) Redesignated member directorships. If the
annual designation of directorships results in an existing member
directorship being redesignated as representing members in a different
voting State, that directorship shall be deemed to terminate in the
previous voting State as of December 31 of the current year, and a new
directorship to begin in the succeeding voting State as of January 1 of
the next year. The new directorship shall be filled by vote of the
members in the succeeding voting State and, in order to maintain the
staggered terms of directorships, shall be adjusted to a term equal to
the remaining term of the previous directorship if it had not been
redesignated to another State.
(2) New directorships. If the annual designation of directorships
results in the addition of one or more directorships to a Bank's board,
the Director may truncate the initial term of any such new directorship
if required to ensure that the terms of the Bank's directorships are
staggered with approximately one quarter of the terms expiring each
year.
(f) Public interest independent directorships. Annually, the board
of directors of each Bank shall determine the number of public interest
independent directorships to be included among its designated
independent directorships for the following year, ensuring that at all
times the Bank will have at least two such directorships. In its
discretion, a Bank's board may change the number of public interest
independent directorships during the year, provided that there are at
all times at least two such directorships.

Sec. 1261.5 Director eligibility.

(a) Eligibility requirements for member directors and nominees. (1)
Each member director, and each nominee for a member directorship, shall
be:
(i) A citizen of the United States; and
(ii) An officer or director of a member that is located in the
voting State of the Bank district to which the directorship being
occupied, sought, or filled has been allocated under Sec. 1261.4(c)
and that meets all minimum capital requirements established by its
appropriate Federal banking agency or appropriate State regulator.
(2) In the case of a director elected by a Bank's members under
Sec. 1261.8, the institution of which the director is an officer or
director must have been a member as of the record date. In the case of
a director elected by a Bank's board of directors to fill a vacancy
under Sec. 1261.14, the institution of which the director is an
officer or director must be a member at the time the board acts.
(b) Eligibility requirements for independent directors and
nominees. Each independent director, and each nominee for an
independent directorship, shall at all times:
(1) Be a citizen of the United States;
(2) Be a bona fide resident of the district in which the Bank is
located;
(3) Meet the independence requirements of Sec. 1261.10; and
(4) Meet the applicable qualifications requirements specified in
paragraph (c) of this section.
(c) Independent director qualifications--(1) Regular independent
directors. Each regular independent director and each nominee for a
regular independent directorship shall have experience in, or knowledge
of, one or more of the following areas: auditing and accounting;
derivatives; financial management; organizational management; project
development; risk management practices; artificial intelligence;
information technology and security; climate-related risk; Community
Development Financial Institution (CDFI) business models; modeling; the
law; and such other areas as the Director shall determine. Before
nominating any individual for a regular independent directorship, the
board of directors of a Bank shall determine that such knowledge or
experience of the nominee is commensurate with that needed to oversee a
financial institution with a size and complexity that is comparable to
that of the Bank.
(2) Public interest independent directors. Each public interest
independent director and each nominee for a public interest independent
directorship shall have more than four years of experience representing
consumer or community interests in banking services, credit needs,
housing, or consumer financial protection. For

[[Page 87752]]

purposes of this paragraph (c)(2), representing means advocating for,
or otherwise acting primarily on behalf of or for the direct benefit
of, consumers or the community. Qualifying experience in one of the
four enumerated areas may have been acquired in professional, public
service, or significant volunteer positions, so long as the work done
was substantial in terms of time commitment and responsibility. Such
experience must have accrued from activities personally undertaken by
the director or nominee, as opposed to being attributed based solely on
the activities of organizations with which the person was associated.
(3) Relevance of experience to be considered. In considering
potential nominees for independent directorships, a Bank's board of
directors shall give special consideration to individuals that:
(i) Possess knowledge and experience that are relevant to the
business, programs, and mission of the Bank and that provide a basis
for understanding the actual and potential impact of the Bank's
activities on its members and on communities within the Bank's
district; and
(ii) Have gained their knowledge and experience primarily through
full time paid executive, management, or other senior positions.
(d) Term limits. (1) The following are ineligible for nomination or
election to a directorship of a Bank:
(i) Any incumbent director whose term of office would not expire
before the new term of office would begin; and
(ii) Any person that has been elected to each of three consecutive
full terms as a director of a Bank and has served for all or part of
each of those terms, unless the term of the directorship to be filled
begins at least two years after the expiration of the third consecutive
term.
(2) For purposes of determining whether a person is ineligible
under the term limit provision of paragraph (d)(1)(ii) of this section:
(i) A four-year term of office shall count as a full term;
(ii) A term of office that is adjusted to a period of fewer than
four years as provided in Sec. 1261.4(e) shall not count as a full
term;
(iii) Any full term of office that ends immediately before a term
of office that is adjusted to a period of fewer than four years as
provided in Sec. 1261.4(e), and any full term of office commencing
immediately following such adjusted term of office, shall count as
consecutive full terms of office; and
(iv) Any period of time served by a director who has been elected
by the board of directors to fill a vacancy under Sec. 1261.14 shall
not count as a full term.
(e) Loss of eligibility. A director shall become ineligible to
remain in office if, during the director's term of office, the
directorship to which the director has been elected is eliminated
through the annual designation of directorships process described in
Sec. 1261.4. The incumbent director shall become ineligible after the
close of business on December 31 of the year in which the directorship
is eliminated.

Sec. 1261.6 Determination of member votes.

(a) In general. Each Bank shall determine, in accordance with this
section, the number of votes that each member of the Bank may cast for
each directorship that is to be filled by the vote of the members.
(b) Number of votes. For each member directorship and each
independent directorship that is to be filled in an election, each
member shall be entitled to cast one vote for each share of Bank stock
that the member was required to hold as of the record date.
Notwithstanding the preceding sentence, the number of votes that any
member may cast for any one directorship shall not exceed the average
number of shares of Bank stock required to be held as of the record
date by all members located in the same State as of the record date. If
a Bank has issued more than one class of stock, it shall calculate the
average number of shares separately for each class of stock, using the
total number of members in a State as the denominator, and shall apply
those limits separately in determining the maximum number of votes that
any member owning that class of stock may cast in the election. The
number of shares of Bank stock that a member was required to hold as of
the record date shall be determined in accordance with the minimum
investment requirement established by the Bank's capital plan.
(c) Voting preferences. If the board of directors of a Bank
includes any voting preferences as part of its approved capital plan,
those preferences shall supersede the provisions of paragraph (b) of
this section that otherwise would allow a member to cast one vote for
each share of Bank stock it was required to hold as of the record date.
If a Bank establishes a voting preference for a class of stock, the
members with voting rights shall remain subject to the provisions of
section 7(b) of the Bank Act (12 U.S.C. 1427(b)) that prohibit any
member from casting any vote in excess of the average number of shares
of stock required to be held by all members in its state.

Sec. 1261.7 Nominations for member and independent directorships.

(a) Election announcement. Within a reasonable time in advance of
an election, a Bank shall notify each member in its district of the
commencement of the election process. Such notice shall include:
(1) The number of member directorships designated for each voting
State in the Bank district and the number of independent directorships
designated for the Bank, including the number of independent
directorships designated by the Bank as public interest independent
directorships, for the following calendar year;
(2) The name of each incumbent Bank director, the name and location
of the member at which each member director serves, and the name and
location of the organization with which each independent director is
affiliated, if any, and the expiration date of each Bank director's
term of office;
(3) Identification of the member directorships, regular independent
directorships, and public interest independent directorships for which
an election will be held;
(4) A brief statement describing the skills and experience the Bank
believes are most likely to add strength to the board of directors, as
determined through the annual assessment required under Sec. 1261.9;
(5) An attachment indicating the name, location, and FHFA ID number
of every member in the member's voting State, and the number of votes
each such member may cast for each directorship to be filled by such
members, as determined in accordance with Sec. 1261.6; and
(6) If a member directorship is to be filled by members in a voting
State, a nominating certificate for those members.
(b) Member directorship nominations--(1) Nominating certificates.
(i) Any member that is entitled to vote in the election may nominate an
eligible individual to fill each available member directorship for its
voting State by delivering to its Bank, prior to a deadline to be
established by the Bank and set forth in the notice required in
paragraph (a) of this section, a nominating certificate duly adopted by
the member's governing body or by an individual authorized by the
member's governing body to act on its behalf.
(ii) The nominating certificate shall include the name of the
nominee and the name, location, and FHFA ID number of the member the
nominee serves as an officer or director.
(iii) The Bank shall establish a deadline for delivery of
nominating

[[Page 87753]]

certificates, which shall be no earlier than 30 calendar days after the
date on which the Bank delivers the notice required by paragraph (a) of
this section, and the Bank shall not accept certificates received after
that deadline.
(2) Accepting member directorship nominations. Promptly after
receipt of any nominating certificate, a Bank shall notify in writing
any individual nominated for a member directorship. An individual may
accept the nomination only by delivering to the Bank, prior to a
deadline established by the Bank and set forth in its notice, an
executed member director eligibility certification form prescribed by
FHFA. A Bank shall allow each nominee at least 30 calendar days after
the date the Bank delivered the notice of nomination within which to
deliver the executed form. A nominee may decline the nomination by so
advising the Bank in writing, or by failing to deliver a properly
executed member director eligibility certification form prior to the
deadline.
(c) Independent directorship nominations--(1) Potential nominees.
Any individual may request to be considered for nomination to an
independent directorship of the board of directors of a Bank by
delivering to the Bank, on or before the deadline set by the Bank for
delivery of nominating certificates, an executed independent director
application form prescribed by FHFA. Any other interested party also
may recommend to the Bank that it consider a particular individual as a
nominee for an independent directorship, but the Bank shall not
nominate any individual unless the individual has delivered to the
Bank, on or before the date the Bank has set for delivery of nominating
certificates, an executed independent director application form
prescribed by FHFA.
(2) Application form. The independent director application form
prescribed by FHFA will provide a means by which an individual can
indicate an intent to be considered for a public interest independent
directorship. The board of directors of the Bank shall nominate for a
public interest independent directorship only an individual who
indicates on the application form a desire to be considered for a
public interest independent directorship.
(3) Advisory Council. The board of directors of the Bank shall
consult with the Bank's Advisory Council before nominating any
individual for any independent directorship.
(4) Procedures. Each Bank shall include in its bylaws the
procedures it intends to use for the nomination and election of the
independent directors.
(5) Minimum number of nominees. Each Bank shall nominate at least
as many individuals as there are respective regular and public interest
independent directorship to be filled in that year's election.
(d) Eligibility verification--(1) Member directorship nominees.
Using the information provided on executed member director eligibility
certification forms prescribed by FHFA, each Bank shall verify that
each nominee for each member directorship meets all the eligibility
requirements of Sec. 1261.5(a).
(2) Independent directorship nominees. (i) Using the information
provided on executed independent director application forms prescribed
by FHFA, each Bank shall verify that each nominee for each public
interest independent directorship and each regular independent
directorship meets the eligibility requirements of Sec. 1261.5(b).
(ii) Before announcing any independent director nominee, the Bank
shall deliver to FHFA for its review a copy of the independent director
application forms executed by the individuals nominated for independent
directorships. If within two weeks of such delivery FHFA provides
comments to the Bank on any independent director nominee, the board of
directors of the Bank shall consider FHFA's comments in determining
whether to proceed with those nominees or to reopen the nomination.
(3) Eligible nominees. A Bank's board shall neither nominate any
individual for an independent directorship nor include any nominee for
a member directorship on the ballot required under Sec. 1261.8(a) if
it has not concluded based on the submissions required under this part
and any pertinent supplementary material that the individual meets the
applicable eligibility requirements set forth in Sec. 1261.5(a) or (b)
and is not term-limited as provided under Sec. 1261.5(d).
(e) Background checks. A Bank's board shall neither nominate any
individual for an independent directorship nor include any nominee for
a member directorship on the ballot required under Sec. 1261.8(a),
without having first concluded, based on a thorough background check,
that the individual is fit to serve in a fiduciary role with the Bank.
Each Bank shall include with its submission required under paragraph
(d)(2)(ii) of this section a discussion of the results of the
background check for each independent directorship nominee, including
any potentially concerning information that was revealed and how the
Bank's concerns were allayed.
(f) Record retention. Subject to a duly enacted record retention
policy, each Bank shall retain all information received under this
section for at least seven years after the date of the election in
question and, in the case of any information about a specific director,
for at least seven years after that director leaves the board.

Sec. 1261.8 Election process.

(a) Ballots. Promptly after fulfilling the requirements of Sec.
1261.7(d), each Bank shall prepare and deliver a ballot to each member
that was a member as of the record date. The Bank shall include with
each ballot a closing date for the Bank's receipt of voted ballots,
which date shall be no earlier than 30 calendar days after the date
such ballot is delivered to the member. A ballot shall include at least
the following provisions:
(1) For states in which one or more member directorships are to be
filled in the election, an alphabetical listing of the names of each
nominee for such directorship, the name, location, and FHFA ID number
of the member each nominee serves, the nominee's title or position with
the member, a brief description of the skills and experience of each
nominee, and the number of member directorships to be filled by the
members in that voting State in the election;
(2) An alphabetical listing of the names of each nominee for a
public interest independent directorship and a brief description of how
each nominee meets the qualifications requirements for public interest
independent directors set forth in Sec. 1261.5(c)(2);
(3) An alphabetical listing of the names of each nominee for
regular independent directorships and a brief description of how each
nominee meets the required qualification requirements for regular
independent directors set forth in Sec. 1261.5(c)(1);
(4) A statement of the results of assessments conducted under Sec.
1261.9 and, if the statement differs from the statement provided under
Sec. 1261.7(a)(4), an explanation of why the statements differ;
(5) A statement that write-in candidates are not permitted; and
(6) A confidentiality statement prohibiting the Bank from
disclosing how any member voted.
(b) Lack of member directorship nominees. If, for any voting State,
the number of nominees for the member directorships for that State is
equal to or fewer than the number of such directorships to be filled in
that year's

[[Page 87754]]

election, the Bank shall deliver a notice to the members in the
affected voting State (in lieu of including any member directorship
nominees on the ballot for that State) that such nominees shall be
deemed elected without further action, due to an insufficient number of
nominees to warrant balloting. Thereafter, the Bank shall declare
elected all such eligible nominees. The nominees declared elected shall
be included as directors-elect in the report of election required under
paragraph (f) of this section. Any member directorship that is not
filled due to a lack of nominees shall be deemed vacant as of January 1
of the following year and shall be filled by the Bank's board of
directors in accordance with Sec. 1261.14.
(c) Voting. For each directorship to be filled, a member may cast
the number of votes determined by the Bank pursuant to Sec. 1261.6. A
member may not split its votes among multiple nominees for a single
directorship, and, where there are multiple directorships to be filled,
either within the member's voting State or at large, in the case of
independent directorships, a member may not cumulatively vote for a
single nominee. If any member votes, it shall by resolution of its
governing body either authorizing the voting for specific nominees or
delegating to an individual the authority to vote for specific
nominees. To vote, a member shall:
(1) Mark on the ballot the name of not more than one of the
nominees for each directorship to be filled. Each nominee so selected
shall receive all of the votes that the member is entitled to cast.
(2) Execute and deliver the ballot to the Bank on or before the
closing date. A Bank shall not allow a member to change a ballot after
it has been delivered to the Bank.
(d) Counting ballots. A Bank shall not review any ballot until
after the closing date, and shall not include in the election results
any ballot received after the closing date. Promptly after the closing
date, each Bank shall tabulate the votes cast in the election: for the
member directorships, the Bank shall tabulate votes by each voting
State; for the independent directorships, the Bank shall tabulate votes
for the district at-large. Any ballots cast in violation of paragraph
(c) of this section shall be void.
(e) Declaring results--(1) For member directorships. The Bank shall
declare elected the nominee receiving the highest number of votes. If
more than one member directorship is to be filled for a particular
State, the Bank shall declare elected each successive nominee receiving
the next highest number of votes until all such open directorships are
filled.
(2) For independent directorships. (i) The bank shall tabulate
separately the votes received for public interest independent
directorship nominees and those received for regular independent
directorship nominees, in each case in accordance with paragraph
(e)(2)(ii) of this section.
(ii) If the number of nominees exceeds the number of directorships
to be filled, the Bank shall declare elected the nominee receiving the
highest number of votes. If more than one directorship is to be filled,
the Bank shall declare elected each successive nominee receiving the
next highest number of votes for such directorship until all such open
directorships are filled.
(iii) If the number of nominees is no more than the number of
directorships to be filled, the Bank shall declare elected each nominee
receiving at least 20 percent of the number of votes eligible to be
cast in the election. If any directorship is not filled due to any
nominee's failure to receive at least 20 percent of the votes eligible
to be cast, the Bank shall continue the election process for that
directorship under the procedures in paragraph (g) of this section.
(3) Tie votes. In the event of a tie for the last available
directorship, the disinterested incumbent directors of the Bank, by a
majority vote, shall declare elected one of the nominees for whom the
number of votes cast was tied.
(4) Eligibility. A Bank's board shall not declare elected a nominee
that it has reason to know is ineligible or unfit to serve, nor shall
it seat a director-elect that it has reason to know is ineligible or
unfit to serve.
(5) Record retention. The Bank shall retain all ballots it receives
for at least seven years after the date of the election, and shall not
disclose how any member voted.
(f) Report of election. Promptly following the election, each Bank
shall deliver a notice to its members, to each nominee, and to FHFA
that contains the following information:
(1) For each member directorship, the name of the director-elect,
the name and location of the member at which he or she serves, his or
her title or position at the member, the voting State represented, and
the expiration date of the term of office;
(2) For each independent directorship, the name of the director-
elect, whether the director-elect will fill a public interest or a
regular independent directorship and, as appropriate, the consumer or
community interest represented by such director, any qualifications
under Sec. 1261.5(c)(1), and the expiration date of the term of
office;
(3) For member directorships, the total number of eligible votes,
the number of members voting in the election, and the total number of
votes cast for each nominee, which shall be reported by State; and
(4) For independent directorships, the total number of eligible
votes, the number of members voting in the election, and the total
number of votes cast for each nominee, which shall be reported for the
district at large.
(g) Failure to fill all independent directorships. If any
independent directorship is not filled due to the failure of any
nominee to receive at least 20 percent of the eligible vote, the Bank
shall continue the election process for that directorship under the
following procedures:
(1) The Bank's board of directors, after again consulting with the
Bank's Advisory Council, shall nominate at least as many individuals as
there are independent directorships to be filled. It may nominate
individuals who failed to be elected in the initial vote. The Bank
thereafter shall deliver to FHFA a copy of the independent director
application form executed by each nominee.
(2) The Bank then shall follow the provisions in this section that
are applicable to the election process for independent directors,
except for the following:
(i) The Bank shall not place the name of any nominee on a ballot
without prior approval of FHFA; and
(ii) The Bank may adopt a closing date that is earlier than 30
calendar days after delivery of the ballots to the eligible voting
members, provided the Bank determines that an earlier closing date
provides a reasonable amount of time to vote the ballots.

Sec. 1261.9 Actions affecting director elections.

(a) Annual assessment of skills and experience. Each Bank, acting
through its board of directors pursuant to policies adopted by the
board, shall conduct an annual assessment of the skills and experience
possessed by its board of directors as a whole and may determine
whether the capabilities of the board would be enhanced through the
addition of individuals with particular skills and experience. If the
board of directors determines that the Bank could benefit by the
addition to the board of directors of individuals with particular
qualifications such as those described in Sec. 1261.5(c)(1), it shall
identify those qualifications and inform the members that the Bank is
seeking

[[Page 87755]]

member and independent director nominees that have those qualifications
as part of its election announcement pursuant to Sec. 1261.7(a).
(b) Support for nomination or election. (1) A Bank director,
officer, attorney, employee, or agent, acting in his or her personal
capacity, may support the nomination or election of any individual for
a member directorship, provided that no such individual shall purport
to represent the views of the Bank or its board of directors in doing
so.
(2) A Bank director, officer, attorney, employee or agent and the
board of directors and Advisory Council (including members of the
Council) of a Bank may support the candidacy of any individual
nominated by the board of directors for election to an independent
directorship.
(c) Prohibition. Except as provided in paragraphs (a) and (b) of
this section, or Sec. 1223.21(b)(7) of this chapter, no director,
officer, attorney, employee, or agent of a Bank shall:
(1) Communicate in any manner that a director, officer, attorney,
employee, or agent of a Bank, directly or indirectly, supports o

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