81 FR 64357 - Indemnification Payments

FEDERAL HOUSING FINANCE AGENCY

Federal Register Volume 81, Issue 182 (September 20, 2016)

Page Range		64357-64360
FR Document		2016-22483
The Federal Housing Finance Agency (FHFA) is issuing a Notice of Proposed Rulemaking that would establish standards for identifying whether an indemnification payment by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, any of the Federal Home Loan Banks (regulated entities), or the Federal Home Loan Bank System's Office of Finance (OF) to an entity-affiliated party in connection with an administrative proceeding or civil action instituted by FHFA is prohibited or permissible. This proposed rule would not apply to a regulated entity operating in conservatorship or receivership, or to a limited-life regulated entity. It would apply to all regulated entities, each Federal Home Loan Bank, the OF, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Association, when not in conservatorship or receivership. This proposed rule takes into account public comments received by FHFA at various stages of the regulation's rulemaking process, including after the initial proposal published in 2009.
Federal Register, Volume 81 Issue 182 (Tuesday, September 20, 2016)
[Federal Register Volume 81, Number 182 (Tuesday, September 20, 2016)]
[Proposed Rules]
[Pages 64357-64360]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-22483]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 81, No. 182 / Tuesday, September 20, 2016 / 
Proposed Rules

[[Page 64357]]



FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1231

RIN 2590-AA68


Indemnification Payments

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed rulemaking; request for comments.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing a Notice 
of Proposed Rulemaking that would establish standards for identifying 
whether an indemnification payment by the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, any of the 
Federal Home Loan Banks (regulated entities), or the Federal Home Loan 
Bank System's Office of Finance (OF) to an entity-affiliated party in 
connection with an administrative proceeding or civil action instituted 
by FHFA is prohibited or permissible. This proposed rule would not 
apply to a regulated entity operating in conservatorship or 
receivership, or to a limited-life regulated entity. It would apply to 
all regulated entities, each Federal Home Loan Bank, the OF, the 
Federal National Mortgage Association, and the Federal Home Loan 
Mortgage Association, when not in conservatorship or receivership. This 
proposed rule takes into account public comments received by FHFA at 
various stages of the regulation's rulemaking process, including after 
the initial proposal published in 2009.

DATES: Comments must be received on or before November 21, 2016. For 
additional information, see SUPPLEMENTARY INFORMATION.

ADDRESSES: You may submit your comments on the proposed rule, 
identified by regulatory information number (RIN) 2590-AA68, by any of 
the following methods:
     Agency Web site: www.fhfa.gov/open-for-comment-or-input.
     Federal eRulemaking Portal: http://www.regulations.gov. 
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 RegComments@fhfa.gov to ensure timely receipt by the agency. 
Please include Comments/RIN 2590-AA68 in the subject line of the 
message.
     Courier/Hand Delivery: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA68, 
Federal Housing Finance Agency, 400 Seventh Street SW., Eighth Floor, 
Washington, DC 20219. Deliver the package to the Seventh Street 
entrance Guard Desk, First Floor, on business days between 9 a.m. to 5 
p.m.
     U.S. Mail, United Parcel Service, Federal Express or Other 
Mail Service: The mailing address for comments is: Alfred M. Pollard, 
General Counsel, Attention: Comments/RIN 2590-AA68, Federal Housing 
Finance Agency, 400 Seventh Street SW., Eighth Floor, Washington, DC 
20219.

FOR FURTHER INFORMATION CONTACT: Mark D. Laponsky, Deputy General 
Counsel, Mark.Laponsky@fhfa.gov, (202) 649-3054 (this is not a toll-
free number), Office of General Counsel (OGC), Federal Housing Finance 
Agency, Constitution Center, 400 Seventh Street SW., Washington, DC 
20219. The telephone number for the Telecommunications Device for the 
Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Comments

    FHFA invites comments on all aspects of this 2016 proposed 
rulemaking and will take all comments into consideration before issuing 
the final rule. Copies of all comments will be posted without change, 
including any personal information you provide, such as your name, 
address, email address, and telephone number, on the FHFA Web site at 
http://www.fhfa.gov. In addition, copies of all comments received will 
be available for examination by the public on business days between the 
hours of 10 a.m. and 3 p.m., at the Federal Housing Finance Agency, 
Constitution Center, Eighth Floor, 400 Seventh Street, SW., Washington, 
DC 20219. To make an appointment to inspect comments, please call the 
Office of General Counsel at (202) 649-3804.

II. Background

    FHFA published an Interim Final Rule on Golden Parachute and 
Indemnification Payments in the Federal Register on September 16, 2008 
(73 FR 53356). Subsequently, it published corrections rescinding that 
portion of the regulation that addressed indemnification payments on 
September 19, 2008 (73 FR 54309) and on September 23, 2008 (73 FR 
54673). On November 14, 2008, a proposed amendment to the Interim Final 
Rule was published in the Federal Register (73 FR 67424). FHFA 
specifically requested comments on whether it would be in the best 
interests of the regulated entities to permit indemnification of first 
and second tier civil money penalties where the administrative 
proceeding or civil action related to conduct occurring while the 
regulated entity was in conservatorship. The public notice and comment 
period closed on December 29, 2008. On January 29, 2009 (74 FR 5101), 
FHFA published a final rule on Golden Parachute Payments. On June 29, 
2009 (74 FR 30975), FHFA published a proposed amendment to that 2009 
Golden Parachute final rule. At the same time, FHFA re-proposed the 
November 14, 2008 proposed amendment on indemnification payments (2009 
re-proposal). The 2009 re-proposal noted that comments received in 
response to the November 14, 2008 publication on indemnification 
payments would be considered along with comments received in response 
to the 2009 re-proposal. The golden parachute provisions of the rule 
were re-proposed in 2013 (78 FR 28452, May 14, 2013), adopted in final 
form in 2014 (79 FR 4394, Jan. 28, 2014), and codified as 12 CFR 
1231.1, 1231.2, and 1231.5.
    In this 2016 proposed rulemaking, FHFA redrafted the proposed 
indemnification payments rule to make it simpler and easier to 
understand. The substance of this 2016 proposed rulemaking has not 
changed since the 2009 re-proposal, other than to replace a provision 
concerning indemnification payments by regulated entities in 
conservatorship with one that clearly states that the regulation does 
not apply to such entities. FHFA further desires to clarify that it 
does not consider

[[Page 64358]]

indemnification payments to be subject to FHFA rules and procedures 
related to compensation, including 12 CFR part 1230.
    The 2009 re-proposal structured its indemnification provisions in a 
manner similar to the indemnification provisions of the Federal Deposit 
Insurance Corporation's (FDIC) regulation. 12 CFR part 369. This 2016 
proposed rulemaking generally carries over the structure from the 2009 
re-proposal, but clarifies several provisions. Consistent with the 
Director's statutory discretion to ``prohibit or limit any . . . 
indemnification payment,'' \1\ the 2009 re-proposal defined most 
indemnification payments to entity-affiliated parties as impermissible. 
Like the FDIC's regulation, it also identified exceptions to that 
definition based on stated standards and criteria and defined the 
characteristics required for a payment to be permissible. These 
criteria and standards, as they are carried over into this 2016 
proposed rulemaking, constitute the ``factors'' that would be used for 
the Director to ``prohibit or limit'' indemnification payments by this 
regulation. In application, each regulated entity would be required to 
ensure that no indemnification payments under this rule were made 
unless the criteria and standards were met.
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    \1\ 12 U.S.C. 4518(e)(1).
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III. Comments on the 2009 Re-Proposal

    In response to the 2009 re-proposal, FHFA received comments from 
the following: The 12 Federal Home Loan Banks (Banks); \2\ the Council 
of Federal Home Loan Banks, the Banks' Office of Finance (OF); Fannie 
Mae; and Freddie Mac. FHFA gave careful consideration to all issues 
raised by the commenters.
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    \2\ In 2015, the Seattle and Des Moines Federal Home Loan Banks 
merged. There are now 11 Federal Home Loan Banks.
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    In response to FHFA's request for comments regarding 
indemnification of first and second tier civil money penalties under 
section 1376(b)(1) and (2) of the Federal Housing Enterprises Financial 
Safety and Soundness Act (the Safety and Soundness Act) (12 U.S.C. 
4636(b)(1) and (2)) where the administrative proceeding or civil action 
initiated by FHFA relates to conduct occurring while the regulated 
entity was in conservatorship, several Banks requested that FHFA expand 
indemnification authority for first and second tier civil money 
penalties to all regulated entities, not just those that are in 
conservatorship (currently, Fannie Mae and Freddie Mac). The commenters 
assert that, by not extending the indemnification authority to all 
regulated entities, healthy, solvent institutions would be penalized by 
the regulation. FHFA has considered the comments and determined not to 
extend first and second tier civil money penalties indemnification to 
all regulated entities. The basis for the 2009 re-proposal's provision 
for regulated entities in conservatorship was that such regulated 
entities are operating with directors and some executives who govern 
and manage the entities in accordance with conservator or receiver 
instructions of varying levels of specificity and have significant 
limitations on their ability to take independent action. Given these 
circumstances, FHFA concluded that it was appropriate that regulated 
entities in conservatorship or receivership (or a limited-life 
regulated entity) and their entity-affiliated parties be subject to a 
different indemnification regime. FHFA continues to be of this view and 
has decided that they should be excluded from the rulemaking to avoid 
restricting a conservator's or receiver's options. In this 2016 
proposed rulemaking, new Sec.  1231.4(d) \3\ would provide that the 
regulation does not apply to regulated entities in conservatorship or 
receivership or to limited-life regulated entities. In each 
circumstance, FHFA's power over such a regulated entity is sufficiently 
extensive that FHFA as conservator itself can directly require the 
adoption of an indemnification regime appropriate to administrating the 
conservatorship or receivership (or limited-life regulated entity) in 
the circumstances and environment actually encountered by that 
regulated entity.\4\
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    \3\ This 2016 proposed rulemaking includes changes to the 
numbering of several sections. In this Supplementary Information, 
the sections affected by this 2016 proposed rulemaking are 
identified by numbers used in the current proposal rather than those 
used in the 2009 re-proposal. Where necessary, a cross-reference to 
the 2009 re-proposal is provided in a footnote at the first 
appearance of an affected section number.
    \4\ See 12 U.S.C. 4617(b)(2)(A) (powers of FHFA as conservator 
or receiver), 4617(i)(2)(D), and 4617(i)(2)(E) (FHFA appoints the 
directors of a limited-life regulated entity and must approve its 
bylaws, in which an institution's indemnification policies commonly 
are embodied).
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    The 2009 re-proposal would have permitted partial indemnification 
when there has been a final adjudication, settlement, or finding 
favorable to the entity-affiliated party on some, but not all, charges, 
unless the proceeding or action resulted in a final prohibition order. 
Several Banks requested clarification of this provision with a 
definition of the term ``final prohibition order.'' FHFA has considered 
the comment. The 2016 proposal clarifies that a final prohibition order 
is an order under section 1377 of the Act (12 U.S.C. 4636a) prohibiting 
an entity-affiliated party from continuing or commencing to hold any 
office in, or participate in any manner in the conduct of the affairs 
of, a regulated entity, which order has become and remains effective as 
described in section 1377(c)(5) of the Safety and Soundness Act (12 
U.S.C. 4636a(c)(5)).
    One commenter noted that, as a practical matter, most settlements 
do not include affirmative findings of non-violation; instead 
settlements typically include broad language stating that the 
settlement is entered into without admission. That commenter therefore 
requested that FHFA revise the language of the exception to 
``prohibited indemnification payment'' in the previously proposed Sec.  
1231.2 to state that, unless the proceeding results in a final 
prohibition order, indemnification is permissible in connection with a 
settlement in which the entity-affiliated party does not admit 
wrongdoing. FHFA has considered the comment. This 2016 proposed 
rulemaking would permit payment of expenses of defending an action, 
subject to the entity-affiliated party's agreeing to repay those 
expenses if the entity-affiliated party: Is not exonerated of the 
charges to which the expenses specifically relate; enters into a 
settlement of those charges in which the entity-affiliated party admits 
culpability with respect to them; or is subject to a final order 
prohibiting the entity-affiliated party from participating in the 
affairs of the regulated entity. FHFA believes that within these 
reasonably flexible boundaries for permissible and impermissible 
indemnification, the parties involved will be able to negotiate an 
appropriate resolution of legal expenses, which may itself bar or 
significantly limit indemnification. This flexibility, in FHFA's view, 
is preferable to strictly dictating a result in a regulation.
    Several Banks requested clarification of the scope of Sec.  1231.4, 
in the 2009 re-proposal, with respect to application of its process 
involving specific findings by the regulated entity's board of 
directors after a good faith inquiry, reflected in Sec.  1231.4(c). 
Specifically, the Banks sought clarity about whether the process was 
considered a precondition to the advancement of legal or professional 
expenses by a third-party insurer under insurance or bonds purchased by 
the regulated entity pursuant to the definition of ``prohibited 
indemnification payments'' in Sec.  1231.4(b)(2)(i) of the 2009 re-

[[Page 64359]]

proposal.\5\ Under this 2016 proposed rulemaking, FHFA would not 
require a board of directors' inquiry and findings as a precondition 
for legal and professional expense advances paid directly to the 
entity-affiliated party by a third-party insurer under such insurance 
or bonds purchased by the regulated entity.
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    \5\ This provision was designated in the 2009 re-proposal as 
Sec.  1231.2(2)(i).
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    Several Banks requested confirmation that the issuance of a notice 
of charges in an administrative action and the filing of a complaint in 
a civil action would be the triggers for the indemnification provisions 
of Sec.  1231.4(a), in these respective circumstances. These Banks are 
correct. Section 1231.4(a) is triggered by the Director issuing a 
notice of charges; or by the filing of a complaint in a civil action.
    In connection with partial indemnification, one commenter requested 
a revision to the provision on ``prohibited indemnification payments'' 
in Sec.  1231.4(b)(2)(i) \6\ to provide that legal and professional 
fees incurred may be reimbursed on a proportional basis using the ratio 
of charges as to which the entity-affiliated party is entitled to 
reimbursement to the total charges. FHFA has considered the requested 
revision and has determined not to accept it. In many cases the 
appropriate amount of partial indemnification will be difficult to 
ascertain with certainty. The value of each charge may not equal each 
other charge. Services provided often will relate to multiple charges 
or all charges and cannot conveniently be segregated. FHFA believes 
that the appropriate amount of any partial indemnification is best 
determined on a case-by-case basis rather than by applying a 
predetermined formula.
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    \6\ This provision was designated in the 2009 re-proposal as 
Sec.  1231.2(2)(i).
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    The OF requested that the restriction on indemnification payments 
not apply to the OF; and further, confirmation that there is no 
intention by FHFA to assert that any funding provided by a Bank to the 
OF that might ultimately be used to indemnify an OF director or officer 
would be considered to be an indemnification payment by the Bank for 
purposes of the rule. FHFA considered the comment in connection with 
the Golden Parachute Final Rule (79 FR 4395) and determined that the OF 
is appropriately included in that final rule and for reasons of 
prudential supervision this 2016 proposed rulemaking also extends to 
the OF. In the Golden Parachute Final Rule, the definition of ``entity-
affiliated party,'' applying to all of part 1231, reads: ``(1) With 
respect to the Office of Finance, any director, officer, or manager of 
the Office of Finance.'' 12 CFR 1231.2. This definition is appropriate 
because of those persons' participation in the conduct of the affairs 
of the Banks, specifically their funding activities.
    Only the OF, including its board of directors, is responsible for 
OF's compliance; Banks themselves are not responsible for any improper 
indemnification payments by OF simply because the OF draws its funding 
from the Banks. However, a majority of the OF's board comprises the 11 
Bank presidents, who would be responsible in their capacity as OF 
directors for approving indemnification payments in violation of this 
regulation. The issue does not require additional examination in the 
context of this 2016 proposal.
    One commenter requested that the grandfathering provision relating 
to existing indemnification agreements (now reflected in Sec.  
1231.4(b)(4) of this 2016 proposed rulemaking) also be applicable to 
bylaw indemnification provisions that are asserted to be contractual in 
nature. The commenter also sought confirmation that any person who is 
covered by such an existing indemnification bylaw provision, which may 
be considered contractual, or an existing separate indemnification 
agreement will not be subject to any new restrictions contained in a 
final indemnification rule. FHFA considered the comment and determined 
that the grandfathering provisions are applicable only to specific 
indemnification agreements entered into by a regulated entity or the OF 
with a named entity-affiliated party on or before the day this 2016 
proposed rulemaking is published in the Federal Register. In FHFA's 
view, only agreements of that type present equities that justify 
grandfathering. Accepting the argument that a Bank's bylaws are 
contractual in nature and that general indemnification provisions 
contained in them should be considered specific agreements and 
grandfathered could immunize a Bank's entire corps of managers and 
directors from the effect of this regulation in perpetuity.\7\
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    \7\ The restriction, of course, will not apply until a final 
rule reflecting it is adopted. FHFA considers it important to the 
integrity of indemnification regulation that bylaws are not 
routinely converted to individualized contracts, and therefore 
grandfathered, before a final rule becomes effective. FHFA believes 
it best to set the date of this 2016 proposed rulemaking's 
publication as the grandfathering date for individualized 
indemnification agreements.
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    One commenter raised the issue of the standard to be used by a 
board of directors in conducting an investigation and making findings 
with respect to an entity-affiliated party. The comment suggested that 
for an entity-affiliated party to be eligible for advancement of 
expenses to the individual, the board of directors should find that the 
entity-affiliated party acted in good faith and in a manner that he or 
she believed to be in the best interests of the regulated entity. FHFA 
confirms that this 2016 proposed rulemaking intends that the board of 
directors conclude, after a good faith inquiry based on the information 
reasonably available to it and before agreeing to advance expenses, 
that the individual acted in a way that he or she believed to be in the 
best interest of the regulated entity or the OF. FHFA reminds the 
regulated entities and the OF that in addition to the standard set 
forth in this 2016 proposed rulemaking, they also have a concurrent 
obligation to follow proper corporate governance procedures in 
conducting their investigations.
    A commenter asked about the selection of applicable state law for 
purposes of corporate governance practices and procedures, and 
indemnification consistent with the Office of Federal Housing 
Enterprise Oversight Corporate Governance Rule.\8\ After considering 
the comment, FHFA has determined not to address the subject in this 
rulemaking. FHFA published a final rule on corporate governance that 
addresses this issue.\9\ The regulated entities are reminded that an OF 
rule \10\ authorizes the OF to select an appropriate body of governance 
law and to follow it with respect to practices and procedures related 
to indemnification, which would apply to the extent not inconsistent 
with this regulation.
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    \8\ 12 CFR 1710.10, relocated and consolidated with revisions at 
80 FR 72327 (Nov. 19, 2015), recodified at 12 CFR 1239.3.
    \9\ 12 CFR 1239.3, 80 FR 72327 (Nov. 19, 2015).
    \10\ 12 CFR 1273.7(i)(2).
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    FHFA considered a request by one Bank to allow indemnification by a 
ruling from the judge before whom the underlying case was heard, 
asserting that some jurisdictions recognize this as an alternative 
means by which a person may obtain indemnification. FHFA has determined 
not to accept the suggestion. FHFA believes that in actions brought by 
the Agency, the standards prescribed in this rule, within the framework 
of the Safety and Soundness Act, are the appropriate standards.

IV. Consideration of Differences between the Banks and the Enterprises

    Section 1313(f) of the Safety and Soundness Act, as amended, 
requires

[[Page 64360]]

the Director, when promulgating regulations relating to the Banks, to 
consider the differences between Fannie Mae and Freddie Mac 
(collectively, the Enterprises) and the Banks with respect to: the 
Banks' cooperative ownership structure; mission of providing liquidity 
to members; affordable housing and community development mission; 
capital structure; joint and several liability; and any other 
differences the Director considers appropriate. See 12 U.S.C. 4513(f). 
In preparing this 2016 proposed rulemaking, the Director considered the 
differences between the Banks and the Enterprises as they relate to the 
above factors, and determined that the Banks should not be treated 
differently from the Enterprises for purposes of this 2016 proposed 
rulemaking. Any regulated entity in conservatorship (or receivership or 
a limited-life regulated entity), whether a Bank or an Enterprise, 
would be outside the scope of the proposed rule.

V. Paperwork Reduction Act

    This proposed rulemaking does not contain any information 
collection requirement that requires the approval of the Office of 
Management and Budget (OMB) under the Paperwork Reduction Act (44 
U.S.C. 3501 et seq.). Therefore, FHFA has not submitted any information 
to OMB for review.

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). FHFA has considered the impact of the 2016 
proposed rulemaking under the Regulatory Flexibility Act. The General 
Counsel of FHFA certifies that this 2016 proposed rulemaking, if 
adopted as a final rule, is not likely to have a significant economic 
impact on a substantial number of small entities because it would apply 
primarily to the regulated entities and the OF, which are not small 
entities for purposes of the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1231

    Indemnification payments, Government-sponsored enterprises.

    Accordingly, for reasons stated in the preamble, under the 
authority of 12 U.S.C. 4518(e) and 4526, FHFA proposes to amend part 
1231 of subchapter B of chapter XII of title 12 of the CFR as follows:

PART 1231--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS

0
1. The authority citation for part 1231 continues to read as follows:

    Authority:  12 U.S.C. 4518(e), 4518a, 4526.

0
2. In Sec.  1231.2 add the definitions of ``Indemnification payment'' 
and ``Liability or legal expense'' in alphabetical order to read as 
follows:


Sec.  1231.2  Definitions.

* * * * *
    Indemnification payment means any payment (or any agreement to make 
any payment) by any regulated entity or the OF for the benefit of any 
current or former entity-affiliated party, to pay or reimburse such 
person for any liability or legal expense.
    Liability or legal expense means--
    (1) Any legal or other professional expense incurred in connection 
with any claim, proceeding, or action;
    (2) The amount of, and the cost incurred in connection with, any 
settlement of any claim, proceeding, or action; and
    (3) The amount of, and any cost incurred in connection with, any 
judgment or penalty imposed with respect to any claim, proceeding, or 
action.
* * * * *
0
3. Add Sec.  1231.4 to read as follows:


Sec.  1231.4  Indemnification payments.

    (a) Prohibited indemnification payments. Except as permitted in 
paragraph (b) of this section, a regulated entity or the OF may not 
make indemnification payments with respect to an administrative 
proceeding or civil action that has been initiated by FHFA.
    (b) Permissible indemnification payments. A regulated entity or the 
OF may pay:
    (1) Premiums for professional liability insurance or fidelity bonds 
for directors and officers, to the extent that the insurance or 
fidelity bond covers expenses and restitution, but not a judgment in 
favor of FHFA or a civil money penalty.
    (2) Expenses of defending an action, subject to the entity-
affiliated party's agreement to repay those expenses if the entity-
affiliated party either:
    (i) When the proceeding results in an order, is not exonerated of 
the charges that the expenses specifically relate to; or
    (ii) Enters into a settlement of those charges in which the entity-
affiliated party admits culpability with respect to them; or
    (iii) Is subject to a final prohibition order under 12 U.S.C. 
4636a.
    (3) Amounts due under an indemnification agreement entered into 
with a named entity-affiliated party on or prior to [DATE OF 
PUBLICATION OF THE FINAL RULE IN THE FEDERAL REGISTER].
    (c) Process; factors. With respect to payments under paragraph 
(b)(2) of this section:
    (1) The board of directors of the regulated entity or the OF must 
conduct a due investigation and make a written determination in good 
faith that:
    (i) The entity-affiliated party acted in good faith and in a manner 
that he or she reasonably believed to be in the best interests of the 
regulated entity or the OF; and
    (ii) Such payments will not materially adversely affect the safety 
and soundness of the regulated entity or the OF.
    (2) The entity-affiliated party may not participate in the board's 
deliberations or decision.
    (3) If a majority of the board are respondents in the action, the 
remaining board members may approve payment after obtaining written 
opinion of outside counsel that the conditions of this regulation have 
been met.
    (4) If all of the board members are respondents, they may approve 
payment after obtaining written opinion of outside counsel that the 
conditions of this regulation have been met.
    (d) Scope. This section does not apply to a regulated entity 
operating in conservatorship or receivership or to a limited-life 
regulated entity.

    Dated: September 13, 2016.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2016-22483 Filed 9-19-16; 8:45 am]
 BILLING CODE 8070-01-P
64357

Proposed Rules Federal Register
Vol. 81, No. 182

Tuesday, September 20, 2016

This section of the FEDERAL REGISTER • Federal eRulemaking Portal: http:// please call the Office of General Counsel
contains notices to the public of the proposed www.regulations.gov. Follow the at (202) 649–3804.
issuance of rules and regulations. The instructions for submitting comments. If
purpose of these notices is to give interested II. Background
you submit your comment to the
persons an opportunity to participate in the Federal eRulemaking Portal, please also FHFA published an Interim Final
rule making prior to the adoption of the final
send it by email to FHFA at Rule on Golden Parachute and
rules.
RegComments@fhfa.gov to ensure Indemnification Payments in the
timely receipt by the agency. Please Federal Register on September 16, 2008
FEDERAL HOUSING FINANCE include Comments/RIN 2590–AA68 in (73 FR 53356). Subsequently, it
AGENCY the subject line of the message. published corrections rescinding that
• Courier/Hand Delivery: The hand portion of the regulation that addressed
12 CFR Part 1231 delivery address is: Alfred M. Pollard, indemnification payments on
General Counsel, Attention: Comments/ September 19, 2008 (73 FR 54309) and
RIN 2590–AA68
RIN 2590–AA68, Federal Housing on September 23, 2008 (73 FR 54673).
Indemnification Payments Finance Agency, 400 Seventh Street On November 14, 2008, a proposed
SW., Eighth Floor, Washington, DC amendment to the Interim Final Rule
AGENCY: Federal Housing Finance 20219. Deliver the package to the was published in the Federal Register
Agency. Seventh Street entrance Guard Desk, (73 FR 67424). FHFA specifically
ACTION: Notice of proposed rulemaking; First Floor, on business days between 9 requested comments on whether it
request for comments. a.m. to 5 p.m. would be in the best interests of the
• U.S. Mail, United Parcel Service, regulated entities to permit
SUMMARY: The Federal Housing Finance indemnification of first and second tier
Agency (FHFA) is issuing a Notice of Federal Express or Other Mail Service:
The mailing address for comments is: civil money penalties where the
Proposed Rulemaking that would administrative proceeding or civil
establish standards for identifying Alfred M. Pollard, General Counsel,
Attention: Comments/RIN 2590–AA68, action related to conduct occurring
whether an indemnification payment by while the regulated entity was in
the Federal National Mortgage Federal Housing Finance Agency, 400
Seventh Street SW., Eighth Floor, conservatorship. The public notice and
Association, the Federal Home Loan comment period closed on December
Mortgage Corporation, any of the Washington, DC 20219.
29, 2008. On January 29, 2009 (74 FR
Federal Home Loan Banks (regulated FOR FURTHER INFORMATION CONTACT: 5101), FHFA published a final rule on
entities), or the Federal Home Loan Mark D. Laponsky, Deputy General Golden Parachute Payments. On June
Bank System’s Office of Finance (OF) to Counsel, Mark.Laponsky@fhfa.gov, (202) 29, 2009 (74 FR 30975), FHFA
an entity-affiliated party in connection 649–3054 (this is not a toll-free published a proposed amendment to
with an administrative proceeding or number), Office of General Counsel that 2009 Golden Parachute final rule.
civil action instituted by FHFA is (OGC), Federal Housing Finance At the same time, FHFA re-proposed the
prohibited or permissible. This Agency, Constitution Center, 400 November 14, 2008 proposed
proposed rule would not apply to a Seventh Street SW., Washington, DC amendment on indemnification
regulated entity operating in 20219. The telephone number for the payments (2009 re-proposal). The 2009
conservatorship or receivership, or to a Telecommunications Device for the Deaf re-proposal noted that comments
limited-life regulated entity. It would is (800) 877–8339. received in response to the November
apply to all regulated entities, each SUPPLEMENTARY INFORMATION: 14, 2008 publication on indemnification
Federal Home Loan Bank, the OF, the payments would be considered along
Federal National Mortgage Association, I. Comments
with comments received in response to
and the Federal Home Loan Mortgage FHFA invites comments on all aspects the 2009 re-proposal. The golden
Association, when not in of this 2016 proposed rulemaking and parachute provisions of the rule were re-
conservatorship or receivership. This will take all comments into proposed in 2013 (78 FR 28452, May 14,
proposed rule takes into account public consideration before issuing the final 2013), adopted in final form in 2014 (79
comments received by FHFA at various rule. Copies of all comments will be FR 4394, Jan. 28, 2014), and codified as
stages of the regulation’s rulemaking posted without change, including any 12 CFR 1231.1, 1231.2, and 1231.5.
process, including after the initial personal information you provide, such In this 2016 proposed rulemaking,
proposal published in 2009. as your name, address, email address, FHFA redrafted the proposed
DATES: Comments must be received on and telephone number, on the FHFA indemnification payments rule to make
or before November 21, 2016. For Web site at http://www.fhfa.gov. In it simpler and easier to understand. The
additional information, see addition, copies of all comments substance of this 2016 proposed
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SUPPLEMENTARY INFORMATION. received will be available for rulemaking has not changed since the
ADDRESSES: You may submit your examination by the public on business 2009 re-proposal, other than to replace
comments on the proposed rule, days between the hours of 10 a.m. and a provision concerning indemnification
identified by regulatory information 3 p.m., at the Federal Housing Finance payments by regulated entities in
number (RIN) 2590–AA68, by any of the Agency, Constitution Center, Eighth conservatorship with one that clearly
following methods: Floor, 400 Seventh Street, SW., states that the regulation does not apply
• Agency Web site: www.fhfa.gov/ Washington, DC 20219. To make an to such entities. FHFA further desires to
open-for-comment-or-input. appointment to inspect comments, clarify that it does not consider

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Federal Register / Vol. 81, No. 182 / Tuesday, September 20, 2016 / Proposed Rules 64359

proposal.5 Under this 2016 proposed applying to all of part 1231, reads: ‘‘(1) and making findings with respect to an
rulemaking, FHFA would not require a With respect to the Office of Finance, entity-affiliated party. The comment
board of directors’ inquiry and findings any director, officer, or manager of the suggested that for an entity-affiliated
as a precondition for legal and Office of Finance.’’ 12 CFR 1231.2. This party to be eligible for advancement of
professional expense advances paid definition is appropriate because of expenses to the individual, the board of
directly to the entity-affiliated party by those persons’ participation in the directors should find that the entity-
a third-party insurer under such conduct of the affairs of the Banks, affiliated party acted in good faith and
insurance or bonds purchased by the specifically their funding activities. in a manner that he or she believed to
regulated entity. Only the OF, including its board of be in the best interests of the regulated
Several Banks requested confirmation directors, is responsible for OF’s entity. FHFA confirms that this 2016
that the issuance of a notice of charges compliance; Banks themselves are not proposed rulemaking intends that the
in an administrative action and the responsible for any improper board of directors conclude, after a good
filing of a complaint in a civil action indemnification payments by OF simply faith inquiry based on the information
would be the triggers for the because the OF draws its funding from reasonably available to it and before
indemnification provisions of the Banks. However, a majority of the agreeing to advance expenses, that the
§ 1231.4(a), in these respective OF’s board comprises the 11 Bank individual acted in a way that he or she
circumstances. These Banks are correct. presidents, who would be responsible in believed to be in the best interest of the
Section 1231.4(a) is triggered by the their capacity as OF directors for regulated entity or the OF. FHFA
Director issuing a notice of charges; or approving indemnification payments in reminds the regulated entities and the
by the filing of a complaint in a civil violation of this regulation. The issue OF that in addition to the standard set
action. does not require additional examination forth in this 2016 proposed rulemaking,
In connection with partial in the context of this 2016 proposal. they also have a concurrent obligation to
indemnification, one commenter One commenter requested that the follow proper corporate governance
requested a revision to the provision on grandfathering provision relating to procedures in conducting their
‘‘prohibited indemnification payments’’ existing indemnification agreements investigations.
in § 1231.4(b)(2)(i) 6 to provide that legal (now reflected in § 1231.4(b)(4) of this A commenter asked about the
and professional fees incurred may be 2016 proposed rulemaking) also be selection of applicable state law for
reimbursed on a proportional basis applicable to bylaw indemnification purposes of corporate governance
using the ratio of charges as to which provisions that are asserted to be practices and procedures, and
the entity-affiliated party is entitled to contractual in nature. The commenter indemnification consistent with the
reimbursement to the total charges. also sought confirmation that any Office of Federal Housing Enterprise
FHFA has considered the requested person who is covered by such an
Oversight Corporate Governance Rule.8
revision and has determined not to existing indemnification bylaw
After considering the comment, FHFA
accept it. In many cases the appropriate provision, which may be considered
has determined not to address the
amount of partial indemnification will contractual, or an existing separate
subject in this rulemaking. FHFA
be difficult to ascertain with certainty. indemnification agreement will not be
published a final rule on corporate
The value of each charge may not equal subject to any new restrictions
governance that addresses this issue.9
each other charge. Services provided contained in a final indemnification
The regulated entities are reminded that
often will relate to multiple charges or rule. FHFA considered the comment
an OF rule 10 authorizes the OF to select
all charges and cannot conveniently be and determined that the grandfathering
an appropriate body of governance law
segregated. FHFA believes that the provisions are applicable only to
specific indemnification agreements and to follow it with respect to practices
appropriate amount of any partial and procedures related to
indemnification is best determined on a entered into by a regulated entity or the
OF with a named entity-affiliated party indemnification, which would apply to
case-by-case basis rather than by the extent not inconsistent with this
applying a predetermined formula. on or before the day this 2016 proposed
rulemaking is published in the Federal regulation.
The OF requested that the restriction FHFA considered a request by one
on indemnification payments not apply Register. In FHFA’s view, only
agreements of that type present equities Bank to allow indemnification by a
to the OF; and further, confirmation that ruling from the judge before whom the
there is no intention by FHFA to assert that justify grandfathering. Accepting
the argument that a Bank’s bylaws are underlying case was heard, asserting
that any funding provided by a Bank to that some jurisdictions recognize this as
the OF that might ultimately be used to contractual in nature and that general
indemnification provisions contained in an alternative means by which a person
indemnify an OF director or officer may obtain indemnification. FHFA has
would be considered to be an them should be considered specific
agreements and grandfathered could determined not to accept the suggestion.
indemnification payment by the Bank FHFA believes that in actions brought
for purposes of the rule. FHFA immunize a Bank’s entire corps of
managers and directors from the effect by the Agency, the standards prescribed
considered the comment in connection in this rule, within the framework of the
of this regulation in perpetuity.7
with the Golden Parachute Final Rule Safety and Soundness Act, are the
One commenter raised the issue of the
(79 FR 4395) and determined that the appropriate standards.
standard to be used by a board of
OF is appropriately included in that
directors in conducting an investigation IV. Consideration of Differences
final rule and for reasons of prudential
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supervision this 2016 proposed between the Banks and the Enterprises
7 The restriction, of course, will not apply until
rulemaking also extends to the OF. In a final rule reflecting it is adopted. FHFA considers Section 1313(f) of the Safety and
the Golden Parachute Final Rule, the it important to the integrity of indemnification Soundness Act, as amended, requires
definition of ‘‘entity-affiliated party,’’ regulation that bylaws are not routinely converted
to individualized contracts, and therefore 8 12 CFR 1710.10, relocated and consolidated
grandfathered, before a final rule becomes effective.
5 This provision was designated in the 2009 re- FHFA believes it best to set the date of this 2016 with revisions at 80 FR 72327 (Nov. 19, 2015),
proposal as § 1231.2(2)(i). proposed rulemaking’s publication as the recodified at 12 CFR 1239.3.
6 This provision was designated in the 2009 re- 9 12 CFR 1239.3, 80 FR 72327 (Nov. 19, 2015).
grandfathering date for individualized
proposal as § 1231.2(2)(i). indemnification agreements. 10 12 CFR 1273.7(i)(2).

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64360 Federal Register / Vol. 81, No. 182 / Tuesday, September 20, 2016 / Proposed Rules

the Director, when promulgating U.S.C. 4518(e) and 4526, FHFA party admits culpability with respect to
regulations relating to the Banks, to proposes to amend part 1231 of them; or
consider the differences between Fannie subchapter B of chapter XII of title 12 (iii) Is subject to a final prohibition
Mae and Freddie Mac (collectively, the of the CFR as follows: order under 12 U.S.C. 4636a.
Enterprises) and the Banks with respect (3) Amounts due under an
to: the Banks’ cooperative ownership PART 1231—GOLDEN PARACHUTE indemnification agreement entered into
structure; mission of providing liquidity AND INDEMNIFICATION PAYMENTS with a named entity-affiliated party on
to members; affordable housing and or prior to [DATE OF PUBLICATION OF
community development mission; ■ 1. The authority citation for part 1231
THE FINAL RULE IN THE FEDERAL
capital structure; joint and several continues to read as follows:
REGISTER].
liability; and any other differences the Authority: 12 U.S.C. 4518(e), 4518a, 4526. (c) Process; factors. With respect to
Director considers appropriate. See 12 ■ 2. In § 1231.2 add the definitions of payments under paragraph (b)(2) of this
U.S.C. 4513(f). In preparing this 2016 ‘‘Indemnification payment’’ and section:
proposed rulemaking, the Director ‘‘Liability or legal expense’’ in (1) The board of directors of the
considered the differences between the alphabetical order to read as follows: regulated entity or the OF must conduct
Banks and the Enterprises as they relate a due investigation and make a written
to the above factors, and determined § 1231.2 Definitions. determination in good faith that:
that the Banks should not be treated * * * * * (i) The entity-affiliated party acted in
differently from the Enterprises for Indemnification payment means any good faith and in a manner that he or
purposes of this 2016 proposed payment (or any agreement to make any she reasonably believed to be in the best
rulemaking. Any regulated entity in payment) by any regulated entity or the interests of the regulated entity or the
conservatorship (or receivership or a OF for the benefit of any current or OF; and
limited-life regulated entity), whether a former entity-affiliated party, to pay or (ii) Such payments will not materially
Bank or an Enterprise, would be outside reimburse such person for any liability adversely affect the safety and
the scope of the proposed rule. or legal expense. soundness of the regulated entity or the
V. Paperwork Reduction Act Liability or legal expense means— OF.
(1) Any legal or other professional (2) The entity-affiliated party may not
This proposed rulemaking does not expense incurred in connection with participate in the board’s deliberations
contain any information collection any claim, proceeding, or action; or decision.
requirement that requires the approval (2) The amount of, and the cost (3) If a majority of the board are
of the Office of Management and Budget incurred in connection with, any respondents in the action, the remaining
(OMB) under the Paperwork Reduction settlement of any claim, proceeding, or board members may approve payment
Act (44 U.S.C. 3501 et seq.). Therefore, action; and after obtaining written opinion of
FHFA has not submitted any (3) The amount of, and any cost outside counsel that the conditions of
information to OMB for review. incurred in connection with, any this regulation have been met.
VI. Regulatory Flexibility Act judgment or penalty imposed with (4) If all of the board members are
respect to any claim, proceeding, or respondents, they may approve payment
The Regulatory Flexibility Act (5 action.
U.S.C. 601 et seq.) requires that a after obtaining written opinion of
* * * * * outside counsel that the conditions of
regulation that has a significant
■ 3. Add § 1231.4 to read as follows: this regulation have been met.
economic impact on a substantial
number of small entities, small § 1231.4 Indemnification payments. (d) Scope. This section does not apply
businesses, or small organizations must to a regulated entity operating in
(a) Prohibited indemnification
include an initial regulatory flexibility conservatorship or receivership or to a
payments. Except as permitted in
analysis describing the regulation’s limited-life regulated entity.
paragraph (b) of this section, a regulated
impact on small entities. Such an entity or the OF may not make Dated: September 13, 2016.
analysis need not be undertaken if the indemnification payments with respect Melvin L. Watt,
agency has certified that the regulation to an administrative proceeding or civil Director, Federal Housing Finance Agency.
will not have a significant economic action that has been initiated by FHFA. [FR Doc. 2016–22483 Filed 9–19–16; 8:45 am]
impact on a substantial number of small (b) Permissible indemnification BILLING CODE 8070–01–P
entities. 5 U.S.C. 605(b). FHFA has payments. A regulated entity or the OF
considered the impact of the 2016 may pay:
proposed rulemaking under the (1) Premiums for professional liability
Regulatory Flexibility Act. The General insurance or fidelity bonds for directors DEPARTMENT OF TRANSPORTATION
Counsel of FHFA certifies that this 2016 and officers, to the extent that the
proposed rulemaking, if adopted as a insurance or fidelity bond covers Federal Aviation Administration
final rule, is not likely to have a expenses and restitution, but not a
significant economic impact on a judgment in favor of FHFA or a civil 14 CFR Part 25
substantial number of small entities money penalty.
because it would apply primarily to the [Docket No. FAA–2016–6137; Notice No. 25–
(2) Expenses of defending an action,
16–05–SC]
regulated entities and the OF, which are subject to the entity-affiliated party’s
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not small entities for purposes of the agreement to repay those expenses if the Special Conditions: The Boeing
Regulatory Flexibility Act. entity-affiliated party either: Company Model 787–10 Airplane;
(i) When the proceeding results in an Aeroelastic Stability Requirements,
List of Subjects in 12 CFR Part 1231
order, is not exonerated of the charges Flaps-Up Vertical Modal-Suppression
Indemnification payments, that the expenses specifically relate to; System
Government-sponsored enterprises. or
Accordingly, for reasons stated in the (ii) Enters into a settlement of those AGENCY:Federal Aviation
preamble, under the authority of 12 charges in which the entity-affiliated Administration (FAA), DOT.

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Document Created: 2018-02-09 13:20:37
Document Modified: 2018-02-09 13:20:37
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Proposed Rules
Action		Notice of proposed rulemaking; request for comments.
Dates		Comments must be received on or before November 21, 2016. For additional information, see SUPPLEMENTARY INFORMATION.
Contact		Mark D. Laponsky, Deputy General Counsel, [email protected], (202) 649-3054 (this is not a toll- free number), Office of General Counsel (OGC), Federal Housing Finance Agency, Constitution Center, 400 Seventh Street SW., Washington, DC 20219. The telephone number for the Telecommunications Device for the Deaf is (800) 877-8339.
FR Citation		81 FR 64357
RIN Number		2590-AA68
CFR Associated		Indemnification Payments and Government-Sponsored Enterprises