83 FR 52950 - Responsibilities of Boards of Directors, Corporate Practices, and Corporate Governance
FEDERAL HOUSING FINANCE AGENCY Federal Register Volume 83, Issue 203 (October 19, 2018)
Federal Register Volume 83, Issue 203 (October 19, 2018)
| Page Range | 52950-52954 | |
| FR Document | 2018-22859 |
[Federal Register Volume 83, Number 203 (Friday, October 19, 2018)] [Rules and Regulations] [Pages 52950-52954] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-22859] ======================================================================= ----------------------------------------------------------------------- FEDERAL HOUSING FINANCE AGENCY 12 CFR Parts 1239 and 1273 RIN 2590-AA90 Responsibilities of Boards of Directors, Corporate Practices, and Corporate Governance AGENCY: Federal Housing Finance Agency. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: The Federal Housing Finance Agency (FHFA) is amending its regulation on the Responsibilities of Boards of Directors, Corporate Practices, and Corporate Governance for its regulated entities. The final rule amends the existing regulation pertaining to Federal Home Loan Bank strategic business plans so that it applies as well to the Enterprises, and makes a number of adjustments and conforming changes to the existing regulation. As amended, the regulation requires that the board of directors of each regulated entity have in effect at all times a strategic business plan that describes its strategy for achieving its mission and public purposes. It extends to the Enterprise boards the existing provision requiring the board of each Federal Home Loan Bank to review the strategic business plan at least annually, re- adopt it at least once every three years, and establish reporting requirements for and monitor implementation of the strategic business plan. The final rule adds a new provision regarding current and emerging risks, repeals two outdated provisions of the existing regulation, and makes a conforming change to the Office of Finance Board of Directors regulation. DATES: The final rule is effective on December 18, 2018. FOR FURTHER INFORMATION CONTACT: Daniel Callis, Principal Risk Analyst, Office of the Chief Accountant, at [email protected] or (202) 649- 3448, or Ming-Yuen Meyer-Fong, Office of General Counsel, at [email protected] or (202) 649-3078 (these are not toll-free numbers), Federal Housing Finance Agency, Constitution Center, 400 Seventh Street SW, Washington, DC 20219. The telephone number for the Telecommunications Device for the Hearing Impaired is (800) 877-8339. SUPPLEMENTARY INFORMATION: I. Background On April 6, 2018, FHFA published a proposed rule that would amend the existing FHFA regulation on Responsibilities of Boards of Directors, Corporate Practices and Corporate Governance Matters. The proposed rule would amend, and extend to apply to the board of directors of each Enterprise, the existing provision requiring the board of directors for each Federal Home Loan Bank to have in effect at all times a strategic business plan for the entity. It would also require the strategic business plan to: (1) Articulate measurable operating goals; (2) address credit needs identified through ongoing market research and stakeholder consultations; (3) describe significant activities being planned, including any changes to business strategy; (4) be supported by appropriate and timely research; and (5) identify current and emerging risks, including those associated with the entity's existing activities or new activities. It would also require a board to review the strategic business plan at least annually, re-adopt it at least once every three years, and establish reporting requirements for and monitor implementation of the strategic business plan. The proposed rule would also repeal two outdated provisions, and make a conforming change to the Office of Finance Board of Directors regulation. II. Summary of Comments and FHFA Responses FHFA received comments on the proposed rule from Fannie Mae and Freddie Mac (Enterprises) and U.S. Mortgage Insurers (USMI), a trade association comprising various private mortgage insurance companies. The commenters generally agreed with the establishment of a regulatory requirement for a strategic business plan. Two commenters also argued that a regulated board should be permitted to articulate goals, strategies, and risks at a high level, rather than with granular specificity. Other comments included one concerning the effect that the new activities process and conservatorship have on the strategic business plan process. The comments are summarized below, along with FHFA's responses and discussion of changes, if any, to the final rule text in consideration of the comments. A. Commenters Agreed on a Requirement for a Board-Approved Strategic Business Plan The commenters agreed generally with the establishment of a regulatory requirement for a board-approved strategic business plan. The commenters also generally agreed that a strategic business plan should have measurable goals and objectives to hold management accountable. B. Appropriate Balance Between High-Level View and Granular Detail (Sec. 1239.14(a) (Opening Provision); Sec. 1239.14(a)(1)(i) and (ii); Sec. 1239.14(a)(3); and Sec. 1239.14(a)(5)) Commenters differed on the appropriate balance between board flexibility to plan from a high-level perspective and at a more detailed level. Two commenters proposed modifying the final rule to permit a board to articulate goals and strategies at a high level, while one commenter supported requirements on the level of individual activities. The commenters offered specific suggestions to revise the language of the regulation to permit high-level discussion. With respect to proposed Sec. 1239.14(a)(1)(ii), FHFA received suggestions for the plan to articulate goals and objectives for ``strategic activities,'' not ``for each significant activity and all authorized new activities'' as proposed. Another commenter suggested that goals and objectives be articulated for ``significant business strategy.'' For proposed Sec. 1239.14(a)(3), one commenter suggested that the requirement should be that the plan describe ``significant strategic activities'' while another suggested ``strategies.'' Commenters suggested that the final regulation exclude from strategic planning changes in business strategy not determined ``significant.'' For proposed Sec. 1239.14(a)(5), commenters suggested excluding less-than-significant risks from being required to be addressed in the strategic business plan. One commenter [[Page 52951]] suggested that the strategic business plan address significant risks associated with significant activities. Another similarly suggested that the rule should not require a strategic business plan to address risks, including significant risks, associated with activities that a board does not determine to be significant. One commenter expressed concern that requiring the plan to address specific activities could be unworkable due to high numbers of Enterprise activities. In contrast, another commenter supported strategic planning requirements for individual activities, and questioned a threshold prescribing planning only for ``significant'' activities, because the metric for ``significance'' remains too broad, and potentially excludes too much from board scrutiny or oversight. This commenter expressed that strategic planning for individual activities and authorized new activities would facilitate a board's monitoring and review of individual activities and market footprint. The same commenter also suggested the rule apply metrics such as stress testing to Enterprise activities to assess their risks. FHFA Response: A strategic business plan articulates a regulated entity's long-term vision, and aligns it with the entity's risk management framework, statutory mission, and public purposes. A strategic business plan also articulates a regulated entity's roadmap for achieving its goals. The management of a regulated entity shall be ``by or under the direction'' of its board of directors, and the board has ``ultimate responsibility'' of oversight over the entity, which responsibility may not be delegated to management.\1\ FHFA recognizes that requirements that are too specific may in some instances involve the board unnecessarily in operational details that it could have otherwise determined to delegate in the absence of such requirements. FHFA also recognizes that granular requirements could mean unwieldy numbers of activities for a strategic business plan to address. Given the interest in avoiding board distraction in its strategic planning by unnecessary or unhelpful operational details, FHFA declines to modify the rule to require strategic goals to be articulated at the level of every existing activity or authorized new activity, regardless of the activity's significance. --------------------------------------------------------------------------- \1\ See 12 CFR 1239.4(a). --------------------------------------------------------------------------- On the other hand, requirements that are too high-level may not provide a board with a sufficient view of the risks of the goals and of strategies deployed to achieve those goals. To support board planning at a meaningful level of involvement, FHFA also declines to modify the rule to permit strategic goals to be articulated at the highest level of generality. FHFA seeks an appropriate balance in the final rule, necessary to support a board's efforts in setting strategic goals, determining a safe and sound strategy to meet those goals, and overseeing execution. The final rule uses a threshold of ``significant'' activities.\2\ --------------------------------------------------------------------------- \2\ This approach is consistent with the standards of other regulators of large financial institutions cited by Freddie Mac. See, e.g., 12 CFR part 30, appendix D, III.B. (OCC) (``A covered bank's board of directors should actively oversee the covered bank's risk-taking activities and hold management accountable for adhering to the risk governance framework''); Federal Reserve Board, Consolidated Supervision Framework for Large Financial Institutions (July 2014), 2124.05.3.2 (each firm's board of directors should ``maintain a clearly articulated corporate strategy and institutional risk appetite. The board should set direction and oversight for revenue and profit generation, risk management and control functions, and other areas essential to sustaining the consolidated organization . . .''). Similarly, the Federal Reserve Board's recent proposed supervisory guidance cited by Freddie Mac provides that a ``clear strategy includes sufficient detail to enable senior management to identify the firm's strategic objectives; [and] to create an effective management structure, implementation strategies, plans and budgets for each business line''). 82 FR 37219, 37224 (Aug. 9, 2017). The Federal Reserve Board's proposed guidance thus provides that a strategic plan is expected to communicate to senior management the board's priorities, objectives, and strategies in sufficient detail for senior management to allocate resources appropriately to each business line. --------------------------------------------------------------------------- A threshold of ``significant'' activities would avoid requiring a board to engage with activities that the board does not determine are significant. The rule does not require a board to perform, by itself, every task necessary to determine those activities that are significant. Instead, subject to its duties, a board may set parameters for senior management to apply in identifying activities that the board considers to be significant activities. These parameters could relate to the risks posed by an activity, including whether the activity contributes to or deviates from the entity's strategic goals, statutory mission, and public purposes. They could also relate to any increased scaling of the activity, either planned or in execution. The final rule does not require specific metrics to address expansion or contraction of activities in response to the entity's mission, public purposes and market assessment. Subject to its duties under applicable law in the absence of specific regulatory requirements, a board will determine, or oversee the determination of, any such appropriate metrics. The final rule in the opening provision of Sec. 1239.14(a), which establishes a general requirement for a strategic business plan, is revised to require a strategic business plan to describe how the ``significant'' business activities of the regulated entity will achieve a regulated entity's mission and public purposes. Though FHFA did not receive specific comments to the proposed opening provision of Sec. 1239.14(a), FHFA made the final rule revision to the opening provision based on comments it received on this issue. The final rule is also revised at Sec. 1239.14(a)(1)(i) and (ii) to state that a board's strategic business plan shall articulate measurable goals and objectives. Also, the proposed reference to ``operating'' is deleted so that a plan is not required, or limited, to articulate ``operating'' goals and objectives. Section 1239.14(a)(1)(ii) is revised to clarify that a plan articulate measurable goals and objectives also for ``significant'' authorized new activities. As a result of this revision, a plan would not be required to address authorized new activities that are not determined to be significant activities. A parallel change was not made to Sec. 1239(a)(1)(i), the provision applying to the Banks. The FHFA regulation covering new business activities process for the Banks already contains a determination that the activity ``entails material risks . . .'' 12 CFR 1272.1. If FHFA were to amend the regulations regarding Enterprise new activities and new products to include a threshold equivalent to the ``significant'' activities threshold used in the final rule, FHFA may consider taking a similar approach for the Enterprises in Sec. 1239.14(a)(1)(ii) that it does for the Banks in Sec. 1239.14(a)(1)(i). At Sec. 1239.14(a)(3), the revised final rule requires a plan to describe any ``significant'' changes to business strategy that are planned, and not just any change to business strategy. As a result of this revision, a board is not required to address changes to business strategy that the entity is planning to undertake that it does not determine to be significant. At Sec. 1239.14(a)(5), the revised final rule requires a strategic business plan to identify current and emerging risks associated with the regulated entity's ``significant'' activities, existing or new. The revised final rule also requires that a plan discuss how the entity intends to address such risks, i.e., those risks associated with the entity's significant activities, while furthering its public purposes and mission in a safe and sound manner. The final rule does not [[Page 52952]] require the board to address risks associated with activities that have not been determined to be significant. C. Differences in Roles Between Board and Management (Sec. 1239.14(a)(2); Sec. 1239.14(a)(4)(ii)) FHFA received comments that the proposed rule would impose on the board duties more appropriate for management, and that the final rule should preserve the distinct division of roles between board and management. The comments arose in the context of the proposed requirements that the strategic business plan discuss credit needs and opportunities identified through market research and stakeholder consultation, and be supported by appropriate and timely research and analysis of relevant market developments. Specific comments suggested that any research and analysis supporting the strategic business plan be as Enterprise management deems appropriate. FHFA Response: The management of a regulated entity shall be ``by or under the direction'' of its board of directors, and the board has ``ultimate responsibility'' of oversight over the entity, which responsibility may not be delegated to management.\3\ Except for a board's ultimate responsibility for oversight of the regulated entity, the board has authority to delegate responsibilities to management and to determine the scope of responsibilities delegated to management. --------------------------------------------------------------------------- \3\ See 12 CFR 1239.4(a). --------------------------------------------------------------------------- The proposed rule at Sec. 1239.14(a)(2) does not affect a board's authority, require the board to conduct market research and stakeholder consultations, or prescribe the manner in which such research and consultation must be conducted. The proposed rule does not prohibit a board from delegating market research and stakeholder consultations, consistent with the board's duties. The final rule adopts Sec. 1239.14(a)(2) as proposed. Similarly, the proposed rule at Sec. 1239.14(a)(4)(ii) does not require the board to conduct research and analysis of market developments, or prescribe the type of research and analysis. The proposed rule does not affect the board's authority to determine what research and analysis is appropriate to support the plan. Nor does the proposed rule affect the board's authority to assign research to senior management, while overseeing that it is done to the board's satisfaction. In addition, while Fannie Mae objected to the reference to timely research in Sec. 1239.14(a)(4)(ii), the purpose of that reference is to specify that the supporting research be suitably timed for the plan, and that the research is not stale or expired. The final rule adopts Sec. 1239.14(a)(4)(ii) as proposed. D. Comment Suggested Principles-Based Approach Due to Differences Between the Banks and the Enterprises FHFA received a comment that the minimum requirements for a strategic business plan adapted from existing requirements applying to the Federal Home Loan Banks are not appropriate for the Enterprises. Specifically, the commenter asserted that, unlike the Banks, the Enterprises are SEC-registered, publicly-traded, and operating under New York Stock Exchange requirements. The commenter further noted that the Enterprises are larger than the Banks and securitize mortgages as their core business model. FHFA Response: The commenter's point in noting these differences is that the final rule should take a principles-based approach, not a prescriptive approach. The final rule does not prescribe board functions, such as engaging in market research. The revised final rule also does not prohibit the board from delegating functions, other than its ultimate oversight function, to senior management. In fact, the operative requirement in the revised final rule, which is unchanged from the proposed rule, is for a board to ``adopt and have in effect at all times a strategic business plan for the regulated entity.'' The differences noted by the commenter do not adversely affect the Enterprises. The differences also do not diminish the traditional role that a board plays in setting strategic goals for the entity, and holding management responsible for executing on the plan. E. The Final Rule Requirements Do Not Apply to Diversity and Inclusion Strategic Plans FHFA received a comment that the final rule should not apply to diversity and inclusion strategic plans, which are addressed specifically by 12 CFR 1223.21(b), (d), and (e). FHFA Response: FHFA agrees that the diversity and inclusion strategic plans are subject to separate regulatory requirements. Therefore, this final rule does not apply to such plans. Moreover, the final rule does not prohibit a regulated entity from incorporating its diversity and inclusion strategic plan into its strategic business plan, which is expressly permitted under 12 CFR 1223.21(b)(8). F. Strategic Business Plan To Address Current and Emerging Risks (Sec. 1239.14(a)(5)) The commenters also differed on whether the strategic business plan should address current and emerging risks. With respect to proposed Sec. 1239.14(a)(5), FHFA received a comment that, while current risks may be ascertainable, emerging risks may not be knowable at the outset of a multi-year strategic planning process. Another commenter expressed support for a requirement that the strategic business plan address current and emerging risks. FHFA Response: FHFA acknowledges that while it may be challenging for the board to ascertain emerging risks associated with significant activities at the outset of a multi-year strategic planning process, it should not preclude a board from exercising its duty of care to plan for such risks. A board's goals in strategic planning includes assessing the entity's goals to determine whether they align with the entity's public purposes and mission, and strategies for execution to identify any risks and determine whether the strategies are safe and sound and align with the entity's risk management framework.\4\ A core part of a board's strategic responsibility for the health and prosperity of a company is to look into the future insofar as it can be done, to assess what risks may be approaching. --------------------------------------------------------------------------- \4\ A similar approach is taken by the OCC in its Guidelines, cited by Freddie Mac, establishing ``heightened standards'' for certain large insured financial institutions. Specifically, the OCC guidance provides that the strategic plan cover at a minimum a three-year period and contain ``a comprehensive assessment of risks that currently have an impact on the covered bank or that could have an impact on the covered bank during the period covered by the strategic plan.'' 12 CFR part 30, App. D, sec. D.1. --------------------------------------------------------------------------- With the revision discussed above at II.B., the final rule otherwise adopts, as proposed, the provision on emerging risks and furthering the entity's public purposes and mission in a safe and sound manner. G. The Final Rule During Conservatorship A commenter asked how conservatorship and 12 CFR part 1253 (Prior Approval for Enterprise Products) affects the final rule, how FHFA views the relationship between its conservatorship and regulatory obligations, and how its processes and decisions regarding activities and products are consistent with FHFA's role as conservator. A commenter suggested that FHFA issue guidance on how the final rule would apply to ``significant activities'' in light of 12 CFR part 1253. [[Page 52953]] FHFA Response: As FHFA noted when it most recently adopted its corporate governance regulation, the regulation was not intended to address conservatorship matters. 80 FR 72327, 72328 (Nov. 19, 2015). Rather, the regulation was intended to address matters of corporate practice and governance at the regulated entities, and was adopted consistent with FHFA's regulatory authority under the Safety and Soundness Act. Separately, pursuant to its conservatorship authority, FHFA has provided for Enterprise boards to exercise the functions of management oversight that exist under applicable law and regulation, including FHFA's corporate governance regulation at 12 CFR part 1239. Although the Enterprises remain in conservatorship, their boards of directors have been operating under FHFA regulations, including most recently 12 CFR part 1239, that govern board members outside of conservatorship, except as modified by the conservator. Therefore, under this final rule, the board of directors at each Enterprise is required to adopt and have in effect a strategic business plan. The Enterprise new activities process (12 CFR part 1253) and the final rule both reference ``new activity.'' However, they use the term for different supervisory purposes. Part 1253 defines new activities inclusively to support determination of new products, while the final rule establishes strategic plan requirements involving ``significant'' new activities, which is a smaller subset of new activities. In addition, the Enterprise new activities process is separate from the strategic business plan process. For example, the Enterprise new activities process may result in the review and authorization of new activities that are not required to be addressed in the strategic business plan because the board does not determine them significant. Similarly, a strategic business plan may address significant activities that are not new activities. The availability or denial of individual new activities may augment or limit a regulated entity's tools for meeting its chosen strategic goals. A strategic business plan could help identify significant activities on which the regulated entity plans to rely to achieve its strategic goals. It could also help identify alternative strategies that may be safer and more effective, and to explain the role, relevance, and risks of significant activities that the regulated entity is planning to undertake. However, FHFA decisions relating to new activities do not affect a board's process for developing and adopting a strategic business plan. Given that strategic planning and new activities processes operate separately, guidance explaining the connection between the two rules and processes is inappropriate at this time. III. Final Rule A. Overview The final rule retains the general requirement for a strategic business plan to address activities the board determines significant. Clarifying revisions are made to specific provisions. In addition, the final rule requires a strategic business plan to articulate measurable goals, address credit needs and market opportunities, describe significant activities being planned including significant changes in business strategy, be supported by appropriate and timely research, and identify current and emerging risks. It also requires a board to review the strategic business plan at least annually, re-adopt it at least once every three years, and establish reporting requirements for and monitor implementation of the strategic business plan. The final rule also repeals two outdated provisions that required Bank strategic business plans to include quantitative performance goals for Bank products related to multifamily housing and to community financial institution collateral, and that required related reporting. It also makes a conforming change to the Office of Finance Board of Directors regulation. B. Section-by-Section Analysis Sec. 1239.14(a)--opening provision: The final rule is revised to add ``significant'' to circumscribe the business activities that a strategic business plan is required to describe. Thus, a board of directors is required to adopt and have in effect at all times a strategic business plan that describes how the ``significant'' business activities of the regulated entity will achieve its mission and public purposes consistent with its authorizing statute, the Safety and Soundness Act, and, in the case of a Bank, 12 CFR part 1265. The focus of the requirement is on those business activities a board determines significant. Sec. 1239.14(a)(1)(i): The final rule deletes ``operating'' to provide that, in the case of a Bank, a strategic business plan is required to articulate measurable goals and objectives for each significant business activity and all authorized new business activities. As a result of the revision, the focus of the requirement is on measurable goals and objectives. Sec. 1239.14(a)(1)(ii): The final rule deletes ``operating'' and replaces ``all'' with ``significant'' to provide that, in the case of an Enterprise, a strategic business plan is required to articulate measurable goals and objectives for each significant existing activity and for significant authorized new activities. As a result of the revision, the focus of the requirement is on measurable goals and objectives for significant activities, both existing and new. Sec. 1239.14(a)(2): The final rule adopts paragraph 1239.14(a)(2) as proposed. Sec. 1239.14(a)(3): The final rule adds ``significant'' to provide that a strategic business plan is required to describe any significant activities in which the regulated entity is planning to be engaged, including any significant changes to business strategy or approach that the regulated entity is planning to undertake. As a result of the revision, the requirement to describe any significant activities in which the regulated entity is planning to be engaged includes significant changes to business strategy or approach that the entity is planning to undertake. Sec. 1239.14(a)(4)(ii): The final rule adopts Sec. 1239.14(a)(4)(ii) as proposed. Sec. 1239.14(a)(5): The final rule deletes ``including those'' and adds ``significant'' to provide that a strategic business plan is required to identify current and emerging risks associated with the regulated entity's significant existing activities or new activities, and to discuss how it plans to address such risks while furthering its public purposes and mission in a safe and sound manner. As a result of the revision, the focus of the requirement is on risks associated with the entity's significant activities, existing or new. Sec. 1239.14(b): The final rule adopts Sec. 1239.14(b)(1) and (2) as proposed and makes a conforming change to Sec. 1239.14(b)(3) by deleting ``operating'' to provide that each board of directors establish management reporting requirements and monitor implementation of the strategic business plan and the goals and objectives contained therein. Sec. 1273.8(d)(2): Section 1273.8(d)(2) of the Office of Finance Board of Directors regulation makes a conforming change to update the reference from ``Sec. 1239.31'' to ``Sec. 1239.14.'' The amendment is adopted as proposed. C. Consideration of Differences Between the Banks and the Enterprises When promulgating regulations that relate to the Banks, section 1313(f) of the Safety and Soundness Act requires FHFA to consider the differences between the Banks and the Enterprises with respect to the Banks' cooperative ownership structure, mission of [[Page 52954]] providing liquidity to members, affordable housing and community development mission, capital structure, and joint and several liability. 12 U.S.C. 4513(f). FHFA has considered these areas of differences between the Banks and the Enterprises, and has determined that the final rule is unlikely to adversely affect the Banks in these areas of differences. IV. Paperwork Reduction Act The final rule does not contain any collections of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). Therefore, FHFA has not submitted any information to the Office of Management and Budget for review. V. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an agency to analyze a regulation's impact on small entities if the regulation is expected to have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b). FHFA has considered the impact of this final rule and the General Counsel of FHFA certifies that it is not likely to have a significant economic impact on a substantial number of small entities because it applies only to the regulated entities, which are not small entities for purposes of the Regulatory Flexibility Act. VI. Congressional Review Act In accordance with the Congressional Review Act, FHFA has determined that this action is not a major rule and has verified this determination with the Office of Information and Regulatory Affairs of the Office of Management and Budget (OMB). See 5 U.S.C. 804(2). List of Subjects 12 CFR Part 1239 Administrative practice and procedure, Federal home loan banks, Government-sponsored enterprises, Reporting and recordkeeping requirements. 12 CFR Part 1273 Federal home loan banks, Securities. Accordingly, for reasons stated in the Supplementary Information, FHFA hereby amends parts 1239 and 1273 of chapter XII of title 12 of the Code of Federal Regulations as follows: Subchapter B--Regulated Entities PART 1239--[AMENDED] 0 1. The authority citation for part 1239 continues to read as follows: Authority: 12 U.S.C. 1426, 1427, 1432(a), 1436(a), 1440, 4511(b), 4513(a), 4513(b), 4526, and 15 U.S.C. 78oo(b). 0 2. Add Sec. 1239.14 to subpart C to read as follows: Sec. 1239.14 Strategic business plan. (a) Adoption of strategic business plan. Each board of directors shall adopt and have in effect at all times a strategic business plan for the regulated entity that describes, at a minimum, how the significant business activities of the regulated entity will achieve its mission and public purposes consistent with its authorizing statute, the Safety and Soundness Act, and, in the case of a Bank, part 1265 of this chapter. Specifically, each regulated entity's strategic business plan shall at a minimum: (1)(i) In the case of a Bank, articulate measurable goals and objectives for each significant business activity and for all authorized new business activities, which must include plans for maximizing activities that further the Bank's housing finance and community lending mission, consistent with part 1265 of this chapter; (ii) In the case of an Enterprise, articulate measurable goals and objectives for each significant existing activity and for significant authorized new activities; (2) Discuss how the regulated entity will address credit needs and market opportunities identified through ongoing market research and stakeholder consultations; (3) Describe any significant activities in which the regulated entity is planning to be engaged, including any significant changes to business strategy or approach that the regulated entity is planning to undertake, and discuss how such activities would further the regulated entity's mission and public purposes; (4)(i) In the case of a Bank, be supported by appropriate and timely research and analysis of relevant market developments and member and housing associate demand for Bank products and services; (ii) In the case of an Enterprise, be supported by appropriate and timely research and analysis of relevant market developments; and (5) Identify current and emerging risks associated with the regulated entity's significant existing activities or new activities, and discuss how the regulated entity plans to address such risks while furthering its public purposes and mission in a safe and sound manner. (b) Review and monitoring. Each board of directors shall: (1) Review the regulated entity's strategic business plan at least annually; (2) Re-adopt the strategic business plan for the regulated entity at least every three years; and (3) Establish management reporting requirements and monitor implementation of the strategic business plan and the goals and objectives contained therein. Sec. 1239.31 [Removed and reserved] 0 3. Remove and reserve Sec. 1239.31. Subchapter D--Federal Home Loan Banks PART 1273--[AMENDED] 0 4. The authority citation for part 1273 continues to read as follows: Authority: 12 U.S.C. 1431, 1440, 4511(b), 4513, 4514(a), 4526(a). Sec. 1273.8 [Amended] 0 5. Section 1273.8(d)(2) is amended by removing the reference to ``Sec. 1239.31'' and adding in its place ``Sec. 1239.14.'' Dated: October 16, 2018. Melvin L. Watt, Director, Federal Housing Finance Agency. [FR Doc. 2018-22859 Filed 10-18-18; 8:45 am] BILLING CODE 8070-01-P
![52950 Federal Register / Vol. 83, No. 203 / Friday, October 19, 2018 / Rules and Regulations
[Subpart Redesignated as Subpart D] Office of Finance Board of Directors plan. Two commenters also argued that
regulation. a regulated board should be permitted to
■10. Redesignate ‘‘Subpart— articulate goals, strategies, and risks at
Assessment Rates’’ as ‘‘Subpart D— DATES: The final rule is effective on
December 18, 2018. a high level, rather than with granular
Assessment Rates’’. specificity. Other comments included
FOR FURTHER INFORMATION CONTACT:
[Subpart Redesignated as Subpart E one concerning the effect that the new
Daniel Callis, Principal Risk Analyst,
and Amended] activities process and conservatorship
Office of the Chief Accountant, at
have on the strategic business plan
■ 11. Redesignate ‘‘Subpart— Daniel.Callis@fhfa.gov or (202) 649–
process.
Administrative Rules and Regulations’’ 3448, or Ming-Yuen Meyer-Fong, Office The comments are summarized
as subpart E and revise the heading to of General Counsel, at Ming- below, along with FHFA’s responses
read as follows: Yuen.Meyer-Fong@fhfa.gov or (202) and discussion of changes, if any, to the
649–3078 (these are not toll-free final rule text in consideration of the
Subpart E—Administrative numbers), Federal Housing Finance comments.
Requirements Agency, Constitution Center, 400
Seventh Street SW, Washington, DC A. Commenters Agreed on a
Dated: October 15, 2018. 20219. The telephone number for the Requirement for a Board-Approved
Bruce Summers, Telecommunications Device for the Strategic Business Plan
Administrator, Agricultural Marketing Hearing Impaired is (800) 877–8339. The commenters agreed generally
Service. SUPPLEMENTARY INFORMATION: with the establishment of a regulatory
[FR Doc. 2018–22762 Filed 10–18–18; 8:45 am] requirement for a board-approved
I. Background
BILLING CODE 3410–02–P strategic business plan. The commenters
On April 6, 2018, FHFA published a also generally agreed that a strategic
proposed rule that would amend the business plan should have measurable
existing FHFA regulation on goals and objectives to hold
FEDERAL HOUSING FINANCE Responsibilities of Boards of Directors, management accountable.
AGENCY Corporate Practices and Corporate
Governance Matters. The proposed rule B. Appropriate Balance Between High-
12 CFR Parts 1239 and 1273 would amend, and extend to apply to Level View and Granular Detail
the board of directors of each Enterprise, (§ 1239.14(a) (Opening Provision);
RIN 2590–AA90 § 1239.14(a)(1)(i) and (ii);
the existing provision requiring the
board of directors for each Federal § 1239.14(a)(3); and § 1239.14(a)(5))
Responsibilities of Boards of
Directors, Corporate Practices, and Home Loan Bank to have in effect at all Commenters differed on the
Corporate Governance times a strategic business plan for the appropriate balance between board
entity. It would also require the strategic flexibility to plan from a high-level
AGENCY: Federal Housing Finance business plan to: (1) Articulate perspective and at a more detailed level.
Agency. measurable operating goals; (2) address Two commenters proposed modifying
ACTION: Final rule. credit needs identified through ongoing the final rule to permit a board to
market research and stakeholder articulate goals and strategies at a high
SUMMARY: The Federal Housing Finance consultations; (3) describe significant level, while one commenter supported
Agency (FHFA) is amending its activities being planned, including any requirements on the level of individual
regulation on the Responsibilities of changes to business strategy; (4) be activities.
Boards of Directors, Corporate Practices, supported by appropriate and timely The commenters offered specific
and Corporate Governance for its research; and (5) identify current and suggestions to revise the language of the
regulated entities. The final rule amends emerging risks, including those regulation to permit high-level
the existing regulation pertaining to associated with the entity’s existing discussion. With respect to proposed
Federal Home Loan Bank strategic activities or new activities. It would also § 1239.14(a)(1)(ii), FHFA received
business plans so that it applies as well require a board to review the strategic suggestions for the plan to articulate
to the Enterprises, and makes a number business plan at least annually, re-adopt goals and objectives for ‘‘strategic
of adjustments and conforming changes it at least once every three years, and activities,’’ not ‘‘for each significant
to the existing regulation. As amended, establish reporting requirements for and activity and all authorized new
the regulation requires that the board of monitor implementation of the strategic activities’’ as proposed. Another
directors of each regulated entity have business plan. commenter suggested that goals and
in effect at all times a strategic business The proposed rule would also repeal objectives be articulated for ‘‘significant
plan that describes its strategy for two outdated provisions, and make a business strategy.’’
achieving its mission and public conforming change to the Office of For proposed § 1239.14(a)(3), one
purposes. It extends to the Enterprise Finance Board of Directors regulation. commenter suggested that the
boards the existing provision requiring requirement should be that the plan
the board of each Federal Home Loan II. Summary of Comments and FHFA describe ‘‘significant strategic activities’’
Bank to review the strategic business Responses while another suggested ‘‘strategies.’’
plan at least annually, re-adopt it at FHFA received comments on the Commenters suggested that the final
least once every three years, and proposed rule from Fannie Mae and regulation exclude from strategic
establish reporting requirements for and Freddie Mac (Enterprises) and U.S. planning changes in business strategy
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monitor implementation of the strategic Mortgage Insurers (USMI), a trade not determined ‘‘significant.’’
business plan. The final rule adds a new association comprising various private For proposed § 1239.14(a)(5),
provision regarding current and mortgage insurance companies. The commenters suggested excluding less-
emerging risks, repeals two outdated commenters generally agreed with the than-significant risks from being
provisions of the existing regulation, establishment of a regulatory required to be addressed in the strategic
and makes a conforming change to the requirement for a strategic business business plan. One commenter
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![Federal Register / Vol. 83, No. 203 / Friday, October 19, 2018 / Rules and Regulations 52951
suggested that the strategic business of the goals and of strategies deployed oversee the determination of, any such
plan address significant risks associated to achieve those goals. To support board appropriate metrics.
with significant activities. Another planning at a meaningful level of The final rule in the opening
similarly suggested that the rule should involvement, FHFA also declines to provision of § 1239.14(a), which
not require a strategic business plan to modify the rule to permit strategic goals establishes a general requirement for a
address risks, including significant to be articulated at the highest level of strategic business plan, is revised to
risks, associated with activities that a generality. FHFA seeks an appropriate require a strategic business plan to
board does not determine to be balance in the final rule, necessary to describe how the ‘‘significant’’ business
significant. support a board’s efforts in setting activities of the regulated entity will
One commenter expressed concern strategic goals, determining a safe and achieve a regulated entity’s mission and
that requiring the plan to address sound strategy to meet those goals, and public purposes. Though FHFA did not
specific activities could be unworkable overseeing execution. The final rule receive specific comments to the
due to high numbers of Enterprise uses a threshold of ‘‘significant’’ proposed opening provision of
activities. activities.2 § 1239.14(a), FHFA made the final rule
In contrast, another commenter A threshold of ‘‘significant’’ activities revision to the opening provision based
supported strategic planning would avoid requiring a board to engage on comments it received on this issue.
requirements for individual activities, with activities that the board does not The final rule is also revised at
and questioned a threshold prescribing determine are significant. The rule does § 1239.14(a)(1)(i) and (ii) to state that a
planning only for ‘‘significant’’ not require a board to perform, by itself, board’s strategic business plan shall
activities, because the metric for every task necessary to determine those articulate measurable goals and
‘‘significance’’ remains too broad, and activities that are significant. Instead, objectives. Also, the proposed reference
potentially excludes too much from subject to its duties, a board may set to ‘‘operating’’ is deleted so that a plan
board scrutiny or oversight. This parameters for senior management to is not required, or limited, to articulate
commenter expressed that strategic apply in identifying activities that the ‘‘operating’’ goals and objectives.
planning for individual activities and board considers to be significant Section 1239.14(a)(1)(ii) is revised to
authorized new activities would activities. These parameters could relate clarify that a plan articulate measurable
facilitate a board’s monitoring and to the risks posed by an activity, goals and objectives also for
review of individual activities and including whether the activity ‘‘significant’’ authorized new activities.
market footprint. The same commenter contributes to or deviates from the As a result of this revision, a plan would
also suggested the rule apply metrics entity’s strategic goals, statutory not be required to address authorized
such as stress testing to Enterprise mission, and public purposes. They new activities that are not determined to
activities to assess their risks. be significant activities. A parallel
could also relate to any increased
FHFA Response: A strategic business change was not made to § 1239(a)(1)(i),
scaling of the activity, either planned or
plan articulates a regulated entity’s the provision applying to the Banks.
in execution.
long-term vision, and aligns it with the The FHFA regulation covering new
entity’s risk management framework, The final rule does not require
business activities process for the Banks
statutory mission, and public purposes. specific metrics to address expansion or
already contains a determination that
A strategic business plan also articulates contraction of activities in response to
the activity ‘‘entails material risks . . .’’
a regulated entity’s roadmap for the entity’s mission, public purposes
12 CFR 1272.1. If FHFA were to amend
achieving its goals. and market assessment. Subject to its
the regulations regarding Enterprise new
The management of a regulated entity duties under applicable law in the
activities and new products to include
shall be ‘‘by or under the direction’’ of absence of specific regulatory a threshold equivalent to the
its board of directors, and the board has requirements, a board will determine, or ‘‘significant’’ activities threshold used
‘‘ultimate responsibility’’ of oversight in the final rule, FHFA may consider
2 This approach is consistent with the standards
over the entity, which responsibility taking a similar approach for the
of other regulators of large financial institutions
may not be delegated to management.1 cited by Freddie Mac. See, e.g., 12 CFR part 30, Enterprises in § 1239.14(a)(1)(ii) that it
FHFA recognizes that requirements that appendix D, III.B. (OCC) (‘‘A covered bank’s board does for the Banks in § 1239.14(a)(1)(i).
are too specific may in some instances of directors should actively oversee the covered At § 1239.14(a)(3), the revised final
involve the board unnecessarily in bank’s risk-taking activities and hold management rule requires a plan to describe any
accountable for adhering to the risk governance
operational details that it could have framework’’); Federal Reserve Board, Consolidated
‘‘significant’’ changes to business
otherwise determined to delegate in the Supervision Framework for Large Financial strategy that are planned, and not just
absence of such requirements. FHFA Institutions (July 2014), 2124.05.3.2 (each firm’s any change to business strategy. As a
also recognizes that granular board of directors should ‘‘maintain a clearly result of this revision, a board is not
articulated corporate strategy and institutional risk
requirements could mean unwieldy appetite. The board should set direction and
required to address changes to business
numbers of activities for a strategic oversight for revenue and profit generation, risk strategy that the entity is planning to
business plan to address. Given the management and control functions, and other areas undertake that it does not determine to
interest in avoiding board distraction in essential to sustaining the consolidated be significant.
organization . . .’’). At § 1239.14(a)(5), the revised final
its strategic planning by unnecessary or
Similarly, the Federal Reserve Board’s recent
unhelpful operational details, FHFA proposed supervisory guidance cited by Freddie
rule requires a strategic business plan to
declines to modify the rule to require Mac provides that a ‘‘clear strategy includes identify current and emerging risks
strategic goals to be articulated at the sufficient detail to enable senior management to associated with the regulated entity’s
level of every existing activity or identify the firm’s strategic objectives; [and] to ‘‘significant’’ activities, existing or new.
create an effective management structure,
authorized new activity, regardless of The revised final rule also requires that
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implementation strategies, plans and budgets for
the activity’s significance. each business line’’). 82 FR 37219, 37224 (Aug. 9, a plan discuss how the entity intends to
On the other hand, requirements that 2017). The Federal Reserve Board’s proposed address such risks, i.e., those risks
are too high-level may not provide a guidance thus provides that a strategic plan is associated with the entity’s significant
expected to communicate to senior management the
board with a sufficient view of the risks board’s priorities, objectives, and strategies in
activities, while furthering its public
sufficient detail for senior management to allocate purposes and mission in a safe and
1 See 12 CFR 1239.4(a). resources appropriately to each business line. sound manner. The final rule does not
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![52954 Federal Register / Vol. 83, No. 203 / Friday, October 19, 2018 / Rules and Regulations
providing liquidity to members, Authority: 12 U.S.C. 1426, 1427, 1432(a), (1) Review the regulated entity’s
affordable housing and community 1436(a), 1440, 4511(b), 4513(a), 4513(b), strategic business plan at least annually;
development mission, capital structure, 4526, and 15 U.S.C. 78oo(b). (2) Re-adopt the strategic business
and joint and several liability. 12 U.S.C. ■ 2. Add § 1239.14 to subpart C to read plan for the regulated entity at least
4513(f). FHFA has considered these as follows: every three years; and
areas of differences between the Banks (3) Establish management reporting
and the Enterprises, and has determined § 1239.14 Strategic business plan. requirements and monitor
that the final rule is unlikely to (a) Adoption of strategic business implementation of the strategic business
adversely affect the Banks in these areas plan. Each board of directors shall adopt plan and the goals and objectives
of differences. and have in effect at all times a strategic contained therein.
IV. Paperwork Reduction Act business plan for the regulated entity
§ 1239.31 [Removed and reserved]
that describes, at a minimum, how the
The final rule does not contain any significant business activities of the ■ 3. Remove and reserve § 1239.31.
collections of information under the regulated entity will achieve its mission Subchapter D—Federal Home Loan Banks
Paperwork Reduction Act of 1995 (44 and public purposes consistent with its
U.S.C. 3501 et seq.). Therefore, FHFA authorizing statute, the Safety and PART 1273—[AMENDED]
has not submitted any information to Soundness Act, and, in the case of a
the Office of Management and Budget Bank, part 1265 of this chapter. ■ 4. The authority citation for part 1273
for review. Specifically, each regulated entity’s continues to read as follows:
V. Regulatory Flexibility Act strategic business plan shall at a Authority: 12 U.S.C. 1431, 1440, 4511(b),
minimum: 4513, 4514(a), 4526(a).
The Regulatory Flexibility Act (5 (1)(i) In the case of a Bank, articulate
U.S.C. 601 et seq.) requires an agency to measurable goals and objectives for each § 1273.8 [Amended]
analyze a regulation’s impact on small significant business activity and for all ■ 5. Section 1273.8(d)(2) is amended by
entities if the regulation is expected to authorized new business activities, removing the reference to ‘‘§ 1239.31’’
have a significant economic impact on which must include plans for and adding in its place ‘‘§ 1239.14.’’
a substantial number of small entities. 5 maximizing activities that further the Dated: October 16, 2018.
U.S.C. 605(b). FHFA has considered the Bank’s housing finance and community
Melvin L. Watt,
impact of this final rule and the General lending mission, consistent with part
Counsel of FHFA certifies that it is not Director, Federal Housing Finance Agency.
1265 of this chapter;
likely to have a significant economic (ii) In the case of an Enterprise, [FR Doc. 2018–22859 Filed 10–18–18; 8:45 am]
impact on a substantial number of small articulate measurable goals and BILLING CODE 8070–01–P
entities because it applies only to the objectives for each significant existing
regulated entities, which are not small activity and for significant authorized
entities for purposes of the Regulatory new activities; DEPARTMENT OF TRANSPORTATION
Flexibility Act. (2) Discuss how the regulated entity
will address credit needs and market Federal Aviation Administration
VI. Congressional Review Act
opportunities identified through
In accordance with the Congressional ongoing market research and 14 CFR Part 91
Review Act, FHFA has determined that stakeholder consultations; [Docket No.: FAA–2014–0225; Amdt. No.
this action is not a major rule and has (3) Describe any significant activities 91–331E]
verified this determination with the in which the regulated entity is
Office of Information and Regulatory planning to be engaged, including any RIN 2120–AL39
Affairs of the Office of Management and significant changes to business strategy
Budget (OMB). See 5 U.S.C. 804(2). Amendment of the Prohibition Against
or approach that the regulated entity is
Certain Flights in Specified Areas of
List of Subjects planning to undertake, and discuss how
the Simferopol and Dnipropetrovsk
such activities would further the
12 CFR Part 1239 Flight Information Regions (FIRs)
regulated entity’s mission and public
(UKFV and UKDV)
purposes;
Administrative practice and
(4)(i) In the case of a Bank, be AGENCY: Federal Aviation
procedure, Federal home loan banks,
supported by appropriate and timely Administration (FAA), Department of
Government-sponsored enterprises,
research and analysis of relevant market Transportation (DOT).
Reporting and recordkeeping
developments and member and housing ACTION: Final rule.
requirements.
associate demand for Bank products and
12 CFR Part 1273 services; SUMMARY: This action extends, with
(ii) In the case of an Enterprise, be modifications to reflect changed
Federal home loan banks, Securities.
supported by appropriate and timely conditions in specified areas of Ukraine,
Accordingly, for reasons stated in the research and analysis of relevant market the Special Federal Aviation Regulation
Supplementary Information, FHFA developments; and (SFAR) prohibiting certain flight
hereby amends parts 1239 and 1273 of (5) Identify current and emerging risks operations in the Simferopol Flight
chapter XII of title 12 of the Code of associated with the regulated entity’s Information Region (FIR) (UKFV) and
Federal Regulations as follows: significant existing activities or new Dnipropetrovsk Flight Information
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Subchapter B—Regulated Entities activities, and discuss how the regulated Region (FIR) (UKDV) by all: U.S. air
entity plans to address such risks while carriers; U.S. commercial operators;
PART 1239—[AMENDED] furthering its public purposes and persons exercising the privileges of an
mission in a safe and sound manner. airman certificate issued by the FAA,
■ 1. The authority citation for part 1239 (b) Review and monitoring. Each except when such persons are operating
continues to read as follows: board of directors shall: U.S.-registered aircraft for a foreign air
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Document Created: 2018-10-19 01:25:13
Document Modified: 2018-10-19 01:25:13
| 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 | Rules and Regulations | |
| Action | Final rule. | |
| Dates | The final rule is effective on December 18, 2018. | |
| Contact | Daniel Callis, Principal Risk Analyst, Office of the Chief Accountant, at [email protected] or (202) 649- 3448, or Ming-Yuen Meyer-Fong, Office of General Counsel, at Ming- [email protected] or (202) 649-3078 (these are not toll-free numbers), Federal Housing Finance Agency, Constitution Center, 400 Seventh Street SW, Washington, DC 20219. The telephone number for the Telecommunications Device for the Hearing Impaired is (800) 877-8339. | |
| FR Citation | 83 FR 52950 | |
| RIN Number | 2590-AA90 | |
| CFR Citation | 12
CFR
1239 12 CFR 1273 | |
| CFR Associated | Administrative Practice and Procedure; Federal Home Loan Banks; Government-Sponsored Enterprises; Reporting and Recordkeeping Requirements and Securities |
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