Banking and Finance Law Daily Wrap Up, GOVERNMENT SPONSORED ENTERPRISES—FHFA finalizes executive compensation rule for GSEs and FHLBanks, (Jan 27, 2014)

By Andrew A. Turner, J.D.

The Federal Housing Finance Agency has published a final rule governing the compensation practices of government-sponsored enterprises Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and the FHLBanks’ fiscal agent, the Office of Finance. The final rule, which is effective in 30 days, affirms the establishment of 12 C.F.R. Part 1230.

The final rule establishes requirements and processes with respect to compensation provided to executive officers of the regulated entities. The compensation requirements implement provisions of the Federal Housing Enterprises Financial Safety and Soundness Act that authorize the FHFA director to prohibit and withhold compensation of the executive officers.

Termination benefits. The total payment or value derived from termination benefits is included in a review of compensation provided to executive officers, to determine whether the overall compensation is reasonable and comparable. FHFA considers the term “compensation” to include benefits to an executive officer that are derived from post-employment benefit plans or programs and other compensatory benefit arrangements containing termination benefits, which affect the executive officer individually or as part of a group.

Reasonable, comparable. FHFA aggregates the benefits provided under such plans, programs, and arrangements with all other payments of money or any other thing of current or potential value to determine whether an officer’s overall compensation is reasonable and comparable. FHFA may also determine that a particular element of compensation is not reasonable or comparable. For example, incentive compensation that provides incentives for unsound risk management could be prohibited on that basis.

Advance notice. The executive compensation rule also provides that the GSEs and Office of Finance must provide the FHFA director with advance written notice of information relating to compensation for services during employment and termination benefits for their executive officers.

Comments. FHFA rejected two comments from the FHLBanks on the rule’s effect on compensation. The first comment asserted that the rule in effect prescribes a level or range of executive compensation; and the second contended that FHFA’s review “in whole or in part” should instead be review “taken as a whole.”

FHFA responded that the rulemaking “avoided translating” the statutory requirement of comparability “into specific mandates to create a certain peer group of a certain size, or even use of a certain process to create the group of comparators, which could have limited the flexibility of the Banks in implementing the mandate.” In determining to retain the language in the interim rule regarding the second comment point, FHFA reiterated that it reviews all aspects of compensation, but may specifically note that a particular component appears to be the source of the problem and should be reassessed to align the total package with the reasonable and comparable standard.

However, FHFA did narrow its interpretation as to how the definition of executive officer applies in response to the FHLBanks’ requests that the term apply only to those individuals who qualify as executive officers as of the time of a required notice regarding such individual’s compensation. In addition, FHFA narrowed the scope of the advance notice requirement to clarify that approval of a broad-based benefit or policy (such as a travel reimbursement policy or health benefit plan) can serve to satisfy the notice requirement for individual payments under those plans.

Companies: Fannie Mae; Freddie Mac

RegulatoryActivity: DirectorsOfficersEmployers GovernmentSponsoredEnterprises