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Proposed Rules Federal Register

Vol. 72, No. 62

Monday, April 2, 2007

This section of the FEDERAL REGISTER Federal eRulemaking Portal, please also investing in a diversified mutual fund
contains notices to the public of the proposed send it by e-mail to the Finance Board that in turn may own shares in a Bank
issuance of rules and regulations. The at to ensure timely member. See H.R. Conf. Rep. 101–209 at
purpose of these notices is to give interested receipt by the agency. Include the 430 (1989). The Bank Act, however,
persons an opportunity to participate in the following information in the subject line does not further define the terms
rule making prior to the adoption of the final
of your submission: Federal Housing ‘‘shares’’ or ‘‘financial interests,’’ nor
Finance Board. Proposed Rule: does it otherwise indicate how the
Financial Interests of Appointive provision should be applied. As a result,
FEDERAL HOUSING FINANCE BOARD Directors. RIN Number 3069-AB34. the Finance Board has had to interpret
Docket Number 2007–05. these terms whenever prospective
12 CFR Part 915 We will post all public comments we appointive directors have asked whether
[No. 2007–05]
receive without change, including any certain of their investments were
personal information you provide, such permissible under this provision. The
RIN 3069–AB34 as your name and address, on the Finance Board has provided guidance to
Finance Board Web site at http:// these individuals in the past on a case-
Financial Interests of Appointive by-case basis, as well as through its
Directors Default.aspx?Page=93&Top=93. regulations.
AGENCY: Federal Housing Finance FOR FURTHER INFORMATION CONTACT: Neil In January 1990, the Finance Board
Board. R. Crowley, Acting General Counsel, adopted an interim final rule
ACTION: Proposed rule. or 202–408–2990; or implementing the FIRREA appointive
Thomas E. Joseph, Senior Attorney- director and conflict of interest
SUMMARY: The Federal Housing Finance provision. See Interim Final Rule:
Advisor, Office of General Counsel,
Board (Finance Board) is proposing to or 202–408–2512. You Election of Directors; Eligibility
clarify the types of financial interests a can send regular mail to the Federal Requirements, 55 FR 1393 (Jan. 18,
Federal Home Loan Bank (Bank) Housing Finance Board, 1625 Eye Street 1990), codified at 12 CFR 932.18 (1991).
appointive director may own in a Bank NW., Washington, DC 20006. The Finance Board later modified this
member. The proposal would rule somewhat based on the comments
incorporate into Finance Board rules its it received on the interim final rule. See
long-standing policy that financial I. Background Final Rule: Eligibility and Financial
interests in a Bank member acquired Disclosure Requirements for Directors of
Section 7(a) of the Federal Home Loan
though ownership of shares of a the Federal Home Loan Banks, 56 FR
Bank Act (Bank Act) (12 U.S.C. 1427(a)),
diversified mutual fund are permissible 55205 (Oct. 25, 1991). The rule, as
provides for management of each Bank
holdings for an appointive director. The amended in October 1991, provided
by a board of directors of at least 14
proposal would extend the rationale for among other things, that no appointive
persons, with 8 directors elected by the
permitting mutual fund investments to director may during his or her term of
members and 6 directors appointed by
other types of vehicles and accounts office have a financial interest in any
the Finance Board. This provision also
that share certain of the same key member (or a subsidiary or non-
states that any individual appointed by
features as mutual funds and thus are diversified holding company thereof, or
the Finance Board may not, ‘‘during
unlikely to pose a risk of conflict of affiliate of such holding company) of the
such Bank director’s term of office,
interest for an appointive director. The Bank on whose board the director
serve as an officer of any Federal Home
proposal also would set forth additional served.2 It also specifically defined a
Loan Bank or a director or officer of any
criteria to define when owning shares of financial interest to include the
member of a Bank, or hold shares, or
a holding company, or having other ownership or control, either directly or
any other financial interest in, any
types of financial interests in a member, indirectly, of any shares of common or
member of a Bank.’’ 1 The provision
would be permissible for an appointive
concerning the qualifications for
director. 2 See 56 FR at 55220. The 1991 amendments
appointive directors was added to the clarified the prohibition on serving on the board of,
DATES: The Finance Board will accept Bank Act by section 706 of the Finance or ownership in, a member, member subsidiary or
written comments on the proposed rule Institutions Reform, Recovery, and a non-diversified holding company of a member or
on or before May 17, 2007. Enforcement Act of 1989 (FIRREA) (Pub. affiliate of such holding company to make clear that
the term ‘‘member’’ meant only a member of the
ADDRESSES: Submit comments to the L. 101–73, 103 Stat. 183 (Aug. 9, 1989)). Bank on whose board an appointive director served
Finance Board using any one of the In adopting the FIRREA amendments, and not a member of another Bank. See 56 FR at
following methods: Congress indicated that it did not intend 55206–207. The 1991 amendments also added a
E-mail: these conflict of interest provisions to definition for the term ‘‘diversified holding
Fax: 202–408–2580. company’’ that read:
preclude an appointive director from A holding company whose member subsidiary
Mail/Hand Delivery: Federal Housing
and related activities, as specified in 12 U.S.C.
Finance Board, 1625 Eye Street NW.,
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1 Should an appointive directorship become 1467a(c)(2), represented on either an actual or pro

Washington DC 20006, Attention: Public vacant during the term of the appointment because forma basis less than fifty (50) percent of both its
Comments. the director no longer meets any of the statutory or consolidated net worth and its consolidated net
Federal eRulemaking Portal: http:// regulatory requirements for serving on a Bank’s earnings at the close of its preceding fiscal year. For
board or for any other reason, section 7(f) of the purposes of the foregoing, consolidated net worth Follow the Bank Act (12 U.S.C. 1427(f)) authorizes the Finance and consolidated net earnings shall be determined
instructions for submitting comments. If Board to fill the vacancy for the remainder of the in accordance with generally accepted accounting
you submit your comment to the unexpired term. principles. 56 FR at 55219.

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15628 Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules

preferred capital stock, any other equity solely through ownership of one or financial planning strategies. At the
security, any debt security or obligation more diversified mutual funds. same time, the Finance Board
(except deposit or savings accounts) Notwithstanding that change, the recognizes that as the Banks have
including subordinated debt, but Finance Board has continued to become involved in more complex
allowed an appointive director to hold interpret section 7(a) as it had done financial activities, it is important that
such interests if they arose solely previously, and has allowed appointive some of a Bank’s individual appointive
through ownership of shares or other directors to have indirect financial directors have more sophisticated skills
investment units of one or more interests in a member if held through and a deeper understanding of financial
diversified mutual funds (as defined in ownership of shares of a diversified markets to provide strong oversight.
section 5(a) and (b)(1) of the Investment mutual fund. Such persons can bring business and
Company Act of 1940, as amended).3 The conflict of interest rules for leadership skills to the boards that will
The rule also prohibited an appointive appointive directors remain complement the skills and expertise
director from having other financial substantively the same as adopted in brought by the elective directors and the
relationships, including loans or other 1998, and currently are found at 12 CFR community interest directors. In some
extensions of credit, with a member of § 915.11. The Finance Board recently cases, persons who possess those
the Bank on whose board the director adopted an interim final rule to address analytical skills and related business
served, or with the member’s subsidiary, procedures for how appointive directors experience may also be sophisticated
or its non-diversified holding company are selected.5 Under the new investors in their own right and have
(or an affiliate of such holding procedures, the boards of directors of investments that go beyond traditional
company), which were not transacted in each Bank have to submit to the Finance stock, bond, and mutual fund holdings.
the ordinary course of business and on Board a list of individuals who could The possibility that persons who can
normal commercial terms, as discussed serve in appointive directorships. Along bring needed skills and experience to
in the rule itself. 56 FR at 55220. with the list, the Banks must submit the board of a Bank might be
In 1998, the Finance Board information regarding each individual’s discouraged from serving as appointive
substantially revised its rules governing eligibility and qualifications to serve as directors due to uncertainty about how
elective and appointive directors.4 a Bank director. the conflict of interest limitations may
Among other things, the 1998 apply to their investments has caused
II. Analysis of the Proposed Rule
amendments required the Banks to the Finance Board to consider whether
adopt conflict of interest policies that A. Reasons for the Proposed Changes it should amend its regulations. The
applied to both elective and appointive The recent changes in the selection Finance Board hopes that in updating
directors. The rule specifically required process for appointive directors have these provisions, a new rule will better
the conflict of interest policy to prohibit prompted questions to the Finance reflect the range of investments or
an appointive director from serving as Board about whether specific investment vehicles (beyond traditional
an officer of any Bank or as an officer investments held by potential investments) through which an
or director of any member or from candidates would be barred by section appointive director may obtain some
owning any equity or debt security 7(a), and thus would have to be sold if interest in a member but which, because
issued by a member or from having any the person were to accept an of the director’s lack of control over the
other financial interest in a member. See appointment to the board of a Bank. investment or the minimal value of the
These questions have brought to light interest obtained, would not present
63 FR at 65690.
the extent to which developments in the concerns that should disqualify such
The 1998 revisions also deleted the
financial services marketplace in recent individual from serving as an
detailed provisions addressing
years have created different types of appointive director. Thus, the Finance
appointive director qualifications and
investment accounts and investment Board is proposing this rule in an
prohibited financial interests in favor of
vehicles that either did not exist when attempt to balance the need to assure
more general references to the Bank Act
FIRREA was enacted or were not as that appointive directors do not have
and somewhat more general definitions
actual or apparent conflicts that would
of terms such as ‘‘financial interests.’’ widely held as they are today, and for
undermine their ability to represent the
The new definition of ‘‘financial which the Finance Board has not
public interest against the need to
interests’’ specifically excluded deposit previously provided formal guidance.
The Finance Board believes that the attract a sufficient pool of candidates
or savings accounts maintained with a with sophisticated skills in areas such
member and loans and other extensions lack of a rule providing clear guidance
as to what investments are encompassed as housing and finance to build boards
of credit from a member so long as they of directors capable of overseeing the
were obtained in the normal course of by the terms ‘‘shares’’ and ‘‘financial
interests’’ could cause some potential Banks as they evolve and undertake new
business on terms generally available to activities.
the public. See 63 FR at 65691. Among appointive director candidates to
The proposal is based primarily on
the provisions that were dropped in decline to consider an appointive
the Finance Board’s experience to date
1998, however, was the one that directorship for fear that they would be in administering section 7(a) and the
specifically had allowed an appointive required to divest certain investments in questions raised about potential
director to hold shares or other financial order to accept the position. Any such conflicts as a result of interests in
interests in a member if they arose divestiture could prove financially various investment vehicles and
costly and disruptive to their personal strategies. The Finance Board recognizes
3 56 FR at 55219, 55220. The definition of

‘‘financial interest’’ applied if the interest was held 5 See Interim Final Rule: Federal Home Loan
that it has had only limited experience
in dealing with the types of investment
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by an appointive director or director candidate or Bank Appointive Directors, 72 FR 3028 (Jan. 24,
by his or her immediate family member and related 2007) (adopting new § 915.10). The Finance Board products that are available in today’s
interests, or the related interest of the immediate also solicited comments on this interim final rule. financial marketplace, particularly those
family member. 56 FR at 55219. The Finance Board considered the comments that are available to high net worth
4 See Final Rule: Election of Federal Home Loan received and adopted a final rule to address the
Bank Directors, 63 FR 65683 (Nov. 30, 1998). These selection process at the same meeting in which it
individuals. In order to craft a final rule
rules are now found in part 915 of the Finance approved this proposed rule for publication in the that will strike an appropriate balance
Board’s regulations (12 CFR part 915). Federal Register. between allowing investments that

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Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules 15629

share key characteristics associated with broad definition of ‘‘financial interests’’ own shares or other interests in certain
mutual fund shares, which were now contained in § 915.11(f)(2), the investment vehicles, which in turn may
permitted by Congress, and barring proposed rule would not change the own equity or debt securities issued by
investments that are more like direct extent to, or the manner in which an a member of the director’s Bank,
ownership interests in member stock, individual Bank’s disclosure and without violating section 7(a) of the
the Finance Board will benefit greatly recusal policies must address the types Bank Act. In order for such an
from the perspectives of persons more of investments or activities identified in investment to be permissible, the
familiar with the universe of investment proposed § 915.10(f), even if the investment vehicle must be a legally
products currently available. investments themselves would no separate entity and the appointive
Accordingly, the Finance Board longer be deemed to disqualify an director must not control the investment
welcomes all comments on how to individual from serving as an vehicle or play any role in the selection
further refine the proposal to assure that appointive director. See 12 CFR of the entity’s underlying investments.
the rule will not unintentionally allow §§ 915.11(b) and (f)(2). The Finance By providing that the investment
individuals to hold investments that Board views continued application of vehicle must be organized as a ‘‘legally
may create conflicts with their duties as the rules related to the Bank’s recusal recognized entity,’’ the proposal would
appointive directors but still remain and disclosures policies to the types of require that the vehicle be a corporation,
flexible enough not to create investments identified in proposed limited partnership, trust, or similar
unnecessary barriers to finding § 915.10(f) as an additional safeguard to entity that is recognized as having its
candidates with the skills and assure that these investments would not own corporate existence under state law
experience to be strong Bank directors. create a conflict of interest. The Finance and is legally separate and distinct from
Board, however, requests comments on the individual appointive director. As
B. Proposed Rule Changes
whether this approach is appropriate or drafted, the provision would include
General. The Finance Board is if some modification to §§ 915.11(b) and registered investment companies
proposing to add a new paragraph (f) to (f)(2) may be warranted. The Finance (mutual funds) as well as limited
§ 915.10 of its rules to address the issues Board also requests comment on partnership interests and other passive
described above.6 The proposed whether it should require appointive interests in distinct entities, even if
provision first would set out the general directors to disclose their financial those investment vehicles were not
prohibition against an appointive holdings to the Banks as part of their required to register under the
director owning any debt or equity application so the Banks can verify that Investment Company Act.
securities issued by, or otherwise having the investments—including the vehicles The proposal would require that an
any financial interest in, a member of and accounts described below—do not appointive director not control the
the Bank on whose board the director create a conflict that would be barred by investment entity or be involved in
serves. The provision also would restate section 7(a). decisions involving investments or
the statutory requirements that an Investment Vehicles. Both the trading strategies, which is intended to
appointive director may not serve as an legislative history of FIRREA and the assure that the director could not direct
officer of any Bank or as an officer or Finance Board’s prior regulations the entity to purchase or sell member
director of any member of the Bank on expressly permitted an appointive securities or otherwise manipulate
whose board the director serves.7 This director to own shares of a diversified trading based on knowledge acquired as
proposed language closely follows the mutual fund that in turn owned debt or a result of the individual’s duties on the
wording of section 7(a) of the Bank Act equity securities issued by a member of Bank’s board. Because a general partner
and the requirements of current the Bank on whose board the director typically is deemed under state law to
§ 915.11(a)(2) of the Finance Board’s served. The legislative history offers have the ability to control or otherwise
rules.8 The proposal goes on to describe scant insight into the intent of Congress act on behalf of either a general or
certain types of investments or in adding this provision, but the use of limited partnership, a general
contractual relationships that would not the term ‘‘diversified mutual fund’’ partnership interest would not be
be deemed to constitute shares or appears to reflect a view that an permissible under this proposal.
financial interests in a member for appointive director can own indirectly Investment Accounts. Since the
purposes of determining whether an securities he or she cannot own directly Congress adopted the limitation on
appointive director may hold such under certain circumstances. Thus, in appointive directors’ financial interests
interests while serving on the board of the case of mutual funds, indirect in 1989, the financial investment
a Bank. ownership of member securities would marketplace has evolved considerably.
The Finance Board emphasizes that be permissible, provided the securities It has come to the attention of the
because it is not proposing to amend the are owned by a legally distinct entity Finance Board that among the
(the fund), and the investment decisions investment alternatives used with much
6 As already noted, § 915.10 sets forth the new are made by that entity (or by an greater frequency by the investing
process for the selection of appointive directors. investment adviser acting on its behalf), public are arrangements that, while
7 For purposes of applying the prohibitions on
and the appointive director lacks any structured differently than mutual
financial interests in a member and on serving as
an officer or director of a member, the Finance control over the purchase or sale of the funds, are functionally similar,
Board interprets the term ‘‘member’’ broadly to securities owned by the entity. The especially with respect to the client’s
include the member institutions itself, as well as proposed rule is intended to include lack of control over the investment
any subsidiary, holding company and affiliate. See within the universe of permissible decisions for the portfolio. Such
Federal Home Loan Bank Appointive Director
Application Form, Statutory Eligibility
investments other types of investment investments may have somewhat
vehicles and accounts that share those differing structures and may have
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Requirements § 4, Conflict of Interests (reproduced

at 72 FR at 3033). The Finance Board currently key concepts, and thus should pose no different names depending on the
intends to continue to interpret the term ‘‘member’’ greater risk of conflict than would exist company offering the investment. One
in this broad manner. such investment alternative has been
8 See 12 U.S.C. 1427(a) and 12 CFR § 915.11(a)(2).
in the case of ownership of shares
As discussed in the next section, the Finance Board through a mutual fund. described as a ‘‘managed account’’ or a
also is proposing conforming changes to Accordingly, proposed § 915.11(f)(1) ‘‘separately managed account.’’ Persons
§ 915.11(a)(2) of its rules. would allow an appointive director to using these accounts may direct the

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15630 Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules

investment adviser to allocate the policies), the Finance Board views institutions that it controlled. See n.2.
portfolio among certain classes of assets, accounts covered by this proposed The Finance Board is proposing to
such as growth stocks, value stocks, provision as not presenting risks of a adopt a similar test for determining
bonds, or foreign equities, but do not conflict of interest greater than those whether an appointive director may
direct the purchase or sale of securities posed by investments in mutual funds own securities issued by a holding
within those asset classes. A key or similar investments. company that controls one or more
distinction between a mutual fund and In applying this provision, an members of the Bank on whose board
a managed account is that in the former investor’s right to identify broad the director serves.
case the investor owns shares of the financial goals or broad investment Accordingly, proposed § 915.10(f)(3)
fund, which in turn owns the portfolio strategies or asset classes (e.g., would deem debt or equity securities
securities in its own name, whereas in aggressive growth, value investing, etc.) issued by a holding company that
the latter case the investor will own the would not constitute sufficient controls one or more members to not
portfolio securities in his or her own investment discretion to violate section constitute ‘‘shares’’ or ‘‘financial
name. A key similarity between the two 7(a), so long as the strategies would not interests’’ in a member, provided that
is that in both cases the investor plays allow a director to direct the purchase the assets of all members of the Bank
no role in the purchase or sale of the of individual securities. The Finance that are controlled by the holding
portfolio securities, as a typical Board understands that persons company constitute less than 25 percent
requirement of the managed account is investing through such accounts of the total assets of the holding
that the investor must confer full sometimes are able to direct an company, on a consolidated basis. The
investment discretion on the investment investment adviser not to purchase Finance Board believes that where the
adviser that manages the portfolio. securities issued by a particular assets of the institutions that are
company, such as where the investor is members of the Bank on whose board
Proposed § 915.10(f)(2) is intended to
an officer or director of a publicly the director sits constitute less than 25
allow appointive directors to hold
traded company and instructs the percent of the total assets of a holding
securities of a member through such an
adviser not to purchase any securities company, the debt or equity instruments
account, based principally on the
issued by that company. In such issued by the holding company
requirement that the director would
circumstances, the Finance Board represent interests that are
have no control over the acquisition of
would not be inclined to view that predominately something other than an
securities for the account. Thus, the limited right to identify specific
proposal would deem any debt or equity interest in a member.
companies whose securities should be The Finance Board believes the
securities issued by a member that an excluded from the account as violating
appointive director owns through proposed standard limiting members’
the statute or the proposed rule. If the assets to less than 25 percent of the
accounts where the director has no type of account held by an appointive
investment discretion not to constitute consolidated assets would be more
director gives the director the ability to restrictive than the standard applied
shares or financial interests in a identify securities to sell on an ad hoc
member. To qualify for the exclusion under the former the definition of
basis or based on current market ‘‘diversified holding company’’ (i.e., 50
under the proposed provision, however, conditions, however, such an
the account would have to be managed percent of consolidated net worth and
arrangement would confer significant net earnings). The Finance Board also
by an investment adviser registered with investment discretion in the client, and
the Securities and Exchange believes the proposed standard would
thus would not fall within the proposed be easier to apply and would be less
Commission under the Investment exclusion established by this provision.
Advisers Act, the appointive director subject to fluctuations over time (so that
Holding Companies. Section 7(a) of companies would be less likely to shift
would have to pay a fee to the adviser the Bank Act speaks in terms of shares
for the advisory services that are status under the exclusion from year-to-
or other financial interests in ‘‘any year). Nonetheless, the Finance Board
provided as an integral component of member’’ of the Bank, but does not refer
the account, and the director would specifically seeks comments on how
expressly to treatment of securities best to measure the relative sizes of the
have to give the adviser complete issued by a holding company for a
discretion to buy or sell all securities in holding company and its member
member. In the current financial subsidiaries (i.e., a percentage of assets
the account. The Finance Board believes services sector, many depository
that where an appointive director has or a percentage of capital or earnings)
institutions are owned by one or more and whether some threshold other than
turned over all investment decisions holding companies and thus do not
regarding the portfolio to a professional 25 percent would be appropriate.
issue their own equity securities to the Moreover, while proposed
adviser and is not otherwise involved in public. Although the statute does not § 915.10(f)(3) would deem interests in
the investment decisions concerning the address this matter, the Finance Board certain holding companies not to
account to have no greater interest in previously had regulations that constitute shares or financial interests in
the member securities, in a practical effectively exempted securities issued a member, the proposed provision does
sense, than does a director who owns by certain holding companies from the not deal with other relationships with a
such securities indirectly through a reach of section 7(a). Under that holding company. Given the current
mutual fund. To further assure that the regulation, which was in effect from practice, however, the Finance Board
director could not indirectly influence 1991 to 1998, securities issued by a would not permit an appointive director
the purchase or sale of securities within diversified holding company were to serve as an officer or director of any
the portfolio, the proposal provides that permissible investments for an holding company that controls a
the director could not be affiliated with appointive director. A bank holding
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member, even if the member constitutes

the investment adviser and could not company or a savings and loan holding
less than 25 percent of the assets of the
otherwise have control over the choice company was deemed to be
holding company.9 It would appear to
of securities acquired for the account. ‘‘diversified’’ for these purposes if less
Given these proposed safeguards than 50 percent of its net worth and net 9 While the prohibition on an appointive director
(coupled with the continued application earnings, on a consolidated basis, were serving as an officer or director of a holding
of current disclosure and recusal attributable to the depository company or an affiliate or a subsidiary of a member

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Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules 15631

be incompatible with the independence would constitute a financial interest in determine on a case-by-case basis
expected of an appointive director and the member that is prohibited by section whether the contractual relationships
the public interests the director is 7(a).10 The answers to such questions represent a financial interest that would
expected to serve to allow that person are largely dependent on the facts of disqualify an individual from serving as
simultaneously to serve as an officer or each case, and typically have been an appointive director. In making the
director of any holding company that addressed by staff on a case-by-case determination, the Finance Board would
controlled any member of the Bank. As basis. Although it is not practicable to consider, among other things, if the
an appointive director, the individual create a regulation that would address contractual relationships may result in
would owe fiduciary duties to the Bank all such circumstances, the Finance the appointive director not fairly
and the Finance Board does not believe Board believes that the regulations representing the public interest when
that an appointive director also should could be revised to establish a type of considering matters that come before the
owe fiduciary duties to a member or its safe harbor for contractual relationships board or otherwise causing the director
holding company. These competing that do not contribute a significant to be partial toward or biased against
duties could make it difficult for the amount to the person’s income. any member or otherwise partial in his
appointive director to competently serve Accordingly, proposed § 915.11(f)(5) or her judgment. In weighing this
in either capacity. The Finance Board is would establish a presumption that an matter, the Finance Board would
requesting comment on whether it appointive director’s contractual consider whether the contractual
should apply the same standard for relationships with members of the Bank relationships may create an appearance
determining if a holding company’s would not constitute a financial interest of partiality in deciding if the
securities are permissible investments in a member if the money paid to the contractual relationship may disqualify
for an appointive director to other types person under such contracts in any a person from holding an appointive
of relationships, such as service as a calendar year constitutes less than 10 directorship.
director or officer of such company or percent of the appointive director’s Attribution. Proposed § 915.10(f)(6)
contractual relationships with, or adjusted gross income for that year. would establish that debt or equity
receipt of income from, such company. The Finance Board would intend the securities owned by a spouse or minor
Loans and Deposits. Proposed director to calculate his or her adjusted child of an appointive director are
§ 915.10(f)(4) would provide that loans gross income for the purposes of this attributed to the appointive director for
from, or deposits in, a member would proposed test in the same manner as purposes of complying with proposed
not constitute a financial interest in the would be done for federal tax purposes. § 915.10(f). This proposed provision
member if the transaction occurs in the The Finance Board would also expect also would make clear that any
normal course of business and on terms the director to aggregate all amounts contractual relationships between a
that are no more favorable than those earned (or to be earned) under contracts member and the spouse of a director
available under like circumstances to with all members of the Bank on whose would be attributed to the appointive
members of the public. This provision board the director serves in determining director. How the calculation would be
does not represent a change in current the amount due the director for performed to determine whether such
Finance Board practices. Loans and purposes of applying the proposed test. contracts exceeded the proposed
deposits meeting the proposed criteria Given the attribution provision in threshold in § 915.10(f)(5) has already
already are excluded from the definition proposed § 915.11(f)(6), if an appointive been discussed above. The Finance
of financial interest contained in director’s spouse has contractual Board has not included minor children
§ 915.11(f)(2) and holding such loans relationships with Bank members, the in the proposed attribution provision
and deposits does not currently amounts due under those contracts also with regard to contracts because it
disqualify a candidate from would be combined with those of the would not expect that minor children
consideration for an appointive director (and the adjusted gross income would, or could legally, enter into such
directorship. See 12 CFR § 915.11(f)(2); would represent that of both the director agreements. The Finance Board believes
see also Federal Home Loan Bank and the spouse) to determine if the that the financial interests of a spouse
Appointive Director Application Form, contracts exceed the 10 percent or minor child of a director would be so
Statutory Eligibility Requirements § 4, threshold. If only the director’s spouse closely aligned with the interests of the
Conflict of Interest. Such items also had had a contract with Bank members, the director that these proposed attribution
been permitted under the prior adjusted gross income used in applying provisions are fair and are generally
regulations. See, e.g., 56 FR at 55220 the test would be that of the spouse consistent with how attribution
(adopting §§ 931.30 and 932.18 of the only. provisions dealing with conflict of
Finance Board’s rules). The proposed rule also would require interests and similar matters are
Contractual Relationships. There have an appointive director to disclose all generally structured.
been instances in the past in which contractual relationships with members
of the Bank on whose board the director C. Other Conforming Amendments
individuals have asked if certain
contractual relationships with a serves (or will serve) whether or not the The Finance Board also is proposing
member, such as those associated with amounts due exceed 10 percent of the amendments to § 915.11(a)(2) to
serving as legal counsel or as auditor, director’s adjusted gross income, as well conform this provision to the changes
as those of a spouse. Where the amounts proposed in new § 915.10(f). As now
is not set out in the current rules, it has been agency due under such contracts would be 10 written, § 915.11(a)(2), given the broad
policy to interpret the term ‘‘member’’ for purposes percent or more of the director’s definition of financial interest in
of applying the conflict of interest rules broadly to adjusted gross income, the proposed § 915.11, could be read to require the
refer to the member itself, any subsidiary or affiliate
rule would require the Finance Board to Banks to adopt policies for appointive
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of the member or any holding company of the

member. See n.7. As previously noted, this directors that would be more restrictive
interpretation currently is embodied in the 10 As already noted, when determining if a with regard to allowable investments
explanation addressing conflict of interest provided contractual relationship with a member exists, the than the changes proposed in
in the application form for appointive directors, but Finance Board would interpret the term ‘‘member’’
the Finance Board specifically is requesting broadly to include a member itself, any subsidiary
§ 915.10(f). Because the Bank Act
comment as to whether this interpretation should or affiliate of a member, and any holding company provides the Finance Board the sole
be clearly incorporated into the text of its rules. of a member. See n.7 and n.9. discretion to select appointive directors,

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15632 Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules

the Finance Board would not intend the collection. Consequently, the Finance et seq.), for which the director pays a fee
Banks to apply more restrictive criteria Board has not submitted any for advisory services and with respect to
in determining when an appointive information to OMB for review. which the director has given the
director may hold certain investments investment adviser complete discretion
IV. Regulatory Flexibility Act
than that set forth in the Finance Board to buy and sell all securities in the
rules and policies. Thus, proposed The proposed rule would apply only account, shall not be deemed to
§ 915.11(a)(2) would state that a Bank’s to the Banks and to individuals who constitute the shares or other financial
conflict of interest policy must require may be willing to serve as Bank interests in a member, provided that the
appointive directors to comply with appointive directors. Neither the Banks appointive director is not affiliated with
§ 915.10(f). nor individuals come within the the investment adviser and has no
The Finance Board also is proposing meaning of ‘‘small entities’’ as defined control over the selection of securities
to delete §§ 915.16 and 915.17, which in the Regulatory Flexibility Act (RFA). acquired for the account.
applied only to election cycles that See 5 U.S.C. 601(6). Thus, in accordance
(3) Holding companies. Debt or equity
occurred between 1999 and 2001 and with section 605(b) of the RFA, 5 U.S.C.
securities issued by a holding company
primarily were needed to implement 605(b), the Finance Board hereby
that controls one or more members of
changes made by the Gramm-Leach- certifies that the proposed rule, if
the Bank on whose board an appointive
Bliley Act 11 to the Bank Act’s election promulgated as a final rule, will not
director serves shall not be deemed to
and director provisions. Thus, the have a significant economic impact on
constitute the shares or other financial
regulatory provisions in §§ 915.16 and a substantial number of small entities.
interest in a member, provided that the
915.17 no longer serve any purpose and
Lists of Subjects in 12 CFR Part 915 assets of all such members constitute
are not applicable to current or future
Conflict of interests, Elections, less than 25 percent of the assets of the
election cycles. Similarly, the Finance
Federal home loan banks, Reporting and holding company, on a consolidated
Board is proposing to delete Appendix
recordkeeping requirements. basis.
A to part 915, which includes matrices
that were created in conjunction with For the reasons stated in the (4) Loans and deposits. Loans
earlier elections and appointments and preamble, the Finance Board is obtained from a member and money
related to the directorships of the Banks. proposing to amend 12 CFR Part 915 as placed on deposit with a member shall
Over the past few years, as part of its follows: not be deemed to constitute a financial
annual designation of elective interest in a member, provided that the
directorships, the Finance Board has PART 915—BANK DIRECTOR transactions occur in the normal course
created updated versions of these ELIGIBILITY, APPOINTMENT, AND of business of the member and are on
matrices to reflect the revised board ELECTIONS terms that are no more favorable than
structure for each Bank for that year, those that would be available under like
1. The authority citation for part 915 circumstances to members of the public.
and expects to continue to create new
continues to read as follows:
matrices as part of each annual (5) Contractual relationships. Any
designation exercise. Because the Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), contractual relationship between an
matrices in Appendix A relate to prior 1426, 1427, and 1432. appointive director and one or more
years and have been superseded by 2. Amend § 915.10 by adding a new members of the Bank on whose board an
more current versions, it no longer is paragraph (f) to read as follows: appointive director serves, under which
necessary to include them in the the director has a contractual right to
regulations. § 915.10 Selection of appointive directors.
the payment of money, shall be
* * * * * presumed not to constitute a financial
III. Paperwork Reduction Act (f) Financial interests. Except as interest in a member if the amount due
The appointive director application otherwise provided in this section, an to the director under such contracts in
form is part of the information appointive director may not own any any calendar year is less than 10 percent
collection entitled ‘‘Federal Home Loan debt or equity securities issued by, or of the director’s adjusted gross income
Bank Directors.’’ Under the Paperwork have any other financial interest in, a for that calendar year. An appointive
Reduction Act of 1995 (44 U.S.C. 3501 member of the Bank on whose board the director with any such contractual
et seq.), the Office of Management and director serves. An appointive director relationships, or any contractual
Budget (OMB) has assigned control also may not serve as an officer or relationship involving amounts greater
number 3069–0002, which is due to director of any member of the Bank on than the above threshold, shall disclose
expire on November 30, 2007. The whose board the director serves or serve the relationship to the board of directors
Finance Board and the Banks use the as an officer of any Bank. of the Bank and to the Finance Board.
information contained in the (1) Investment vehicles. An The Finance Board shall determine, on
application form to determine whether appointive director’s investment in a a case by case basis, whether any
prospective appointive Bank directors legally recognized entity that owns debt contractual relationships greater than
satisfy the statutory and regulatory or equity securities issued by a member the above threshold constitutes a
eligibility requirements and are well shall not be deemed to constitute the financial interest in a member.
qualified to serve as a Bank director. shares or other financial interests in a
member, provided that the appointive (6) Attribution. Any debt or equity
Only individuals meeting these
director does not control the entity and securities owned by the spouse or minor
requirements may serve as Bank
plays no role in the purchase or sale of children of an appointive director shall
directors. See 12 U.S.C. 1427. The
the securities owned by the entity. be attributed to the director for purposes
proposed rule, if adopted as a final rule,
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(2) Investment accounts. Debt or of complying with this section, as shall

would not make substantive or material
equity securities owned by an be any contractual relationships
modifications to the ‘‘Federal Home
appointive director through an account between a member and the spouse of an
Loan Bank Directors’’ information
managed by an investment adviser appointive director.
11 Pub. L. No. 106–102, 133 Stat. 1338 (Nov. 12, registered under the Investment 3. Amend § 915.11 by revising
1999). Advisers Act of 1940 (15 U.S.C. 80b–1 paragraph (a) to read as follows:

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Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed Rules 15633

§ 915.11 Conflict of interests policy for products listed above. This proposed ADs related to MCAI. This streamlined
Bank directors. AD results from mandatory continuing process will allow us to adopt MCAI
(a) Adoption of conflict of interest airworthiness information (MCAI) safety requirements in a more efficient
policy. Each Bank shall adopt a written originated by an aviation authority of manner and will reduce safety risks to
conflict of interest policy that shall another country to identify and correct the public. This process continues to
apply to all Bank directors. At a an unsafe condition on an aviation follow all FAA AD issuance processes to
minimum, the conflict of interest policy product. The MCAI describes the unsafe meet legal, economic, Administrative
of each Bank shall: condition as: Procedure Act, and Federal Register
(1) Require the directors to administer Abnormal manufacturing variations of the requirements. We also continue to meet
the affairs of the Bank fairly and universal joints in combination with our technical decision-making
impartially and without discrimination mechanical wear can lead to a joint failure responsibilities to identify and correct
in favor of or against any member or and subsequent disconnection between unsafe conditions on U.S.-certificated
nonmember borrower; selector and the fuel valve. This result in a products.
(2) Require appointive directors to loss of capability to select the fuel tank for This proposed AD references the
comply with § 915.10(f) of this part; supply. This condition might remain MCAI and related service information
unrecognised by the pilot and can result in
(3) Prohibit the use of a director’s fuel starvation during flight and/or
that we considered in forming the
official position for personal gain; unavailability of emergency fuel shutoff. engineering basis to correct the unsafe
(4) Require directors to disclose actual condition. The proposed AD contains
or apparent conflict of interests and The proposed AD would require actions text copied from the MCAI and for this
establish procedures for addressing such that are intended to address the unsafe reason might not follow our plain
conflicts; condition described in the MCAI. language principles.
(5) Provide internal controls to ensure DATES: We must receive comments on
this proposed AD by May 2, 2007. Comments Invited
that reports are filed and that conflicts
are disclosed and resolved in ADDRESSES: You may send comments by We invite you to send any written
accordance with this section; and any of the following methods: relevant data, views, or arguments about
(6) Establish procedures to monitor • DOT Docket Web site: Go to this proposed AD. Send your comments
compliance with the conflict of interests and follow the to an address listed under the
policy. instructions for sending your comments ADDRESSES section. Include ‘‘Docket No.
* * * * * electronically. FAA–2007–27348; Directorate Identifier
• Fax: (202) 493–2251. 2007–CE–015–AD’’ at the beginning of
§ 915.16 [Removed] • Mail: Docket Management Facility, your comments. We specifically invite
4. Remove § 915.16. U.S. Department of Transportation, 400 comments on the overall regulatory,
Seventh Street, SW., Nassif Building, economic, environmental, and energy
§ 915.17 [Removed] Room PL–401, Washington, DC 20590– aspects of this proposed AD. We will
5. Remove § 915.17. 0001. consider all comments received by the
• Hand Delivery: Room PL–401 on closing date and may amend this
Appendix A to Part 915—[Removed] the plaza level of the Nassif Building, proposed AD because of those
6. Remove Appendix A to part 915. 400 Seventh Street, SW., Washington, comments.
Dated: March 27, 2007. DC, between 9 a.m. and 5 p.m., Monday We will post all comments we
through Friday, except Federal holidays. receive, without change, to http://
By the Board of Directors of the Federal
• Federal eRulemaking Portal: http://, including any personal
Housing Finance Board. Follow the information you provide. We will also
Ronald A. Rosenfeld,
instructions for submitting comments. post a report summarizing each
Examining the AD Docket substantive verbal contact we receive
[FR Doc. E7–5973 Filed 3–30–07; 8:45 am]
about this proposed AD.
BILLING CODE 6725–01–P You may examine the AD docket on
the Internet at; or in Discussion
person at the Docket Management The European Aviation Safety Agency
DEPARTMENT OF TRANSPORTATION Facility between 9 a.m. and 5 p.m., (EASA), which is the Technical Agent
Monday through Friday, except Federal for the Member States of the European
Federal Aviation Administration holidays. The AD docket contains this Community, has issued AD No. 2006–
proposed AD, the regulatory evaluation, 0067, dated March 24, 2006 (referred to
14 CFR Part 39 any comments received, and other after this as ‘‘the MCAI’’), to correct an
[Docket No. FAA–2007–27348; Directorate
information. The street address for the unsafe condition for the specified
Identifier 2007–CE–015–AD] Docket Office (telephone (800) 647– products. The MCAI states:
5227) is in the ADDRESSES section.
RIN 2120–AA64 Abnormal manufacturing variations of the
Comments will be available in the AD universal joints in combination with
docket shortly after receipt. mechanical wear can lead to a joint failure
Airworthiness Directives; Diamond
FOR FURTHER INFORMATION CONTACT: Mr. and subsequent disconnection between
Aircraft Industries GmbH Model DA 40
Airplanes Sarjapur Nagarajan, Aerospace Engineer, selector and the fuel valve. This result in a
FAA, Small Airplane Directorate, 901 loss of capability to select the fuel tank for
AGENCY: Federal Aviation Locust, Room 301, Kansas City, supply. This condition might remain
Administration (FAA), Department of Missouri 64106; telephone: (816) 329– unrecognised by the pilot and can result in
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fuel starvation during flight and/or

Transportation (DOT). 4145; fax: (816) 329–4090. unavailability of emergency fuel shutoff.
ACTION: Notice of proposed rulemaking SUPPLEMENTARY INFORMATION: Revision History:
(NPRM). Streamlined Issuance of AD This inspection was initially addressed by
Austrian AD A–2004–003. The design of the
SUMMARY: We propose to adopt a new The FAA is implementing a new fuel selector/fuel valve universal joint has
airworthiness directive (AD) for the process for streamlining the issuance of than been changed by design change M–M

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