Banking and Finance Law Daily Wrap Up, DIRECTORS, OFFICERS AND EMPLOYERS—FHFA amends golden parachute rules, (Jan 27, 2014)

By Richard A. Roth, J.D.

The Federal Housing Finance Agency has amended its rules on golden parachute payments by Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Office of Finance. According to the agency, the amendments are intended to bring its regulations into closer alignment with the Federal Deposit Insurance Corporation’s golden parachute regulations. The rule, which is at 12 CFR Part 1231, puts significant restrictions on the ability of any of the companies to make golden parachute payments, but it does not ban golden parachutes altogether.

Under the rule, a golden parachute payment is a payment or agreement to make a payment to a covered individual that is related to the termination of the individual’s employment and is received after, on, or in contemplation of a triggering event. Triggering events include the company’s insolvency, receivership, conservatorship, or deterioration to a troubled condition.

Current or former directors, officers, managers, employees, controlling shareholders, affiliates, consultants, or joint venture partners all are covered by the rules. In limited situations, even independent contractors are covered.

Exceptions. The rule exempts some payments from its terms. These include payments under qualified pension or retirement plans, qualifying benefit plans, bona fide deferred compensation plans, death or disability payments, and payments under nondiscriminatory severance plans for persons other than executives with base salaries that exceed $300,000.

Payment restrictions. A golden parachute payment is prohibited unless it satisfies the requirements of the regulation. Two specific situations are outlined in the rule, and a company can ask the FHFA Director for approval if neither is the case. However, the approval of the FHFA Director always will be required at some point in the process.

One described situation covers a payment to an individual who was hired essentially to rescue an institution that is in financial difficulty. In this situation, the director’s prior approval of the amount and terms of the payment is required.

The second situation covers a severance payment to an individual in the event of a change in control other than a conservatorship or receivership. In this case, the director must consent before each payment is made.

In any case, the individual who is to receive the payment cannot have engaged in any activity that harmed the company.

Amendments. The FHFA’s Federal Register notice addresses comments on the May 14, 2013, amendment proposal (see Banking and Finance Law Daily, May 13, 2013) offered by the FHLBanks and Office of Finance. The agency made few changes to its proposal in response to those comments.

In its response, the FHFA noted that approval was not needed in the absence of a triggering event. In some cases, payments that began before a triggering event can continue without approval. Also, all retirement and deferred compensation plans that were in place when the amendments were proposed are grandfathered. However, severance plans and change-in-control agreements are not grandfathered, and the agency refused to change that result.

The agency declined to change a part of the amendments that require some payments to be approved twice—once when the agreement is reached and again before a payment is made, if the company is subject to a triggering event. The double-approval process is required in case the company’s condition deteriorates after the agreement is reached, especially if the individual to be paid contributed to that deterioration, the agency said.

Also, the FHFA decided not to remove the $300,000 annual salary cap that applies to payments under nondiscriminatory severance plans. Payments to executive officers whose base salaries exceed $300,000 are not covered by the exception for nondiscriminatory severance plans, although director approval still may be sought.

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