Banking and Finance Law Daily Wrap Up, DIRECTORS, OFFICERS AND EMPLOYERS—FHFA issues proposed rulemaking on corporate governance matters, (Jan 27, 2014)

By Stephanie K. Mann, J.D.

The Federal Housing Finance Agency is seeking comments on its proposal to amend its regulations by relocating and consolidating certain Federal Housing Finance Board (Finance Board) and Office of Federal Housing Enterprise Oversight (Enterprise Oversight) regulations that pertain to the responsibilities of board of directors, corporate practices, and corporate governance matters. The Enterprise Oversight regulations address corporate governance matters at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (Enterprises), while the Finance Board regulations address the powers and responsibilities of the boards of directors and management of the Federal Home Loan Banks (Banks).

The proposed rule would consolidate most of those existing regulations into a new FHFA regulation, parts of which would apply to both the entities, and parts of which would apply only to the Banks or only to the Enterprises. Most of the content of the new regulation has been derived from the existing regulations. The proposal also would include a new provision on risk management and a new definition of “credit risk,” which is a term that is used only within the proposed risk management provision.

The FHFA is also proposing to amend a definition within its Prudential Management and Operations Standards (Prudential Standards) regulations and the introductory language to the standards themselves. Together, those amendments would explicitly include certain introductory language—pertaining to the general responsibilities of senior management and boards of directors—as part of the standards. The proposed rule also would repeal a separate provision of the Enterprise Oversight regulations that relate to minimum safety and soundness requirements.

All comments must be received within 60 days after the proposed rule’s publication in the Federal Register.

Board of Directors. The proposed rule would set forth certain basic duties and responsibilities of directors of a regulated entity. This provision states that the ultimate responsibility for managing a regulated entity lies with the board of directors. It also requires directors to, among other things:

1. act in good faith and with due care, in the 12 best interest of the regulated entity, and in a fair and impartial manner;

2. direct the affairs of an entity in a manner consistent with applicable statutes and regulations;

3. have a working familiarity with basic finance and accounting practices; and

4. adopt bylaws governing the manner in which the regulated entity administers its affairs. Under the proposed rule, directors must also put in place policies relating to the board’s oversight of risk management, compensation, financial reporting, and responsiveness to FHFA supervisory concerns.

Board committees. Additionally, the proposed regulation would require each regulated entity to have certain specified committees of the board of directors. Each entity would be required to have committees of the board of directors that are responsible for each of the following matters: (1) risk management; (2) audit; (3) compensation; and (4) corporate governance. The rule would not require the entities to establish committees with those specific names, only that they establish committees that are responsible for overseeing those matters. The proposed rule would also provide that the risk management committee and the audit committee cannot be combined with any of the other committees. The proposal would further require that each committee have a formal written charter and that it meet with sufficient frequency to carry out its responsibilities.

Code of conduct. Under the proposed regulation, each regulated entity would be required to establish a written code of conduct for directors, executive officers, and employees that is designed to ensure that they discharge their duties in an objective and impartial manner. Each code of conduct must include standards that promote:

1. honest and ethical conduct, including the handling of conflicts of interest between personal and professional relationships;

2. full, fair, accurate, timely, and understandable disclosures in periodic reports filed with the Securities and Exchange Commission; and

3. compliance with applicable rules and regulations.

In addition, each regulated entity must review the code at least once every three years and make any necessary revisions.

RegulatoryActivity: DirectorsOfficersEmployers