The Federal Housing Finance Agency
(FHFA) published an interim final rule in the Federal Register on Tuesday which may mean that the long drawn-out
saga over compensation for executives of the Federal Home Loan Banks (FHLBanks)
and Freddie Mac and Fannie Mae (the GSEs) is drawing a close. The interim rule, four years in the making,
is set to go into effect in June and FHFA will accept public comments until
As background, in June 2009 FHFA
published rulemaking with requests for comments on an executive compensation
rule. The comment period closed on
August 4, 2009. That rule basically set out the authority of
the agency and its director to set compensation for executives of the regulated
entities that were reasonable and comparable and set out various ways in which
that reasonableness and comparability would be determined.
In the intervening years, executive
compensation at the GSEs became a flash point with Congress. Acting FHFA Director Edward J. DeMarco was called
on several occasions before congressional hearings specifically dealing with
that issue. In 2011 HR1221 which would have reduced the
compensation of the CEOs of the two GSEs from an average of 5.5 million that
year to $218,978 died in the House.
In 2012, both GSEs hired new CEOs under executive
compensation packages approved by FHFA in March of that
year. The packages eliminated long term incentives and reduced
executives' annual compensation, other than that of the CEOs, by 10%. Although FHFA initially targeted CEO total direct compensation at $500,000, Freddie Mac's newly hired CEO was to earn $600,000. This
represents a reduction of cash compensation of 88%
the $5.1 million
that the former CEO received in 2011.
In December of 2012 the FHFA Office of Inspector General said that FHFA
should establish three priorities for oversight of GSE senior compensation: general structures, processes,
and cost controls
for senior professional compensation; controls over compensation offers to
new hires; enforcing GSEs' compliance with the pay freeze with respect to the use of promotions and
changes in responsibility.
With the exception of consumer comments
that compensation overall was too high, comments on the 2009 rulemaking were
centered on compensation issues at the FHLBanks. In
general the comments
requested that FHFA acknowledge the difference between the FHLBanks member-controlled, cooperative structure and financial
performance and what may be justified for FHFA's review of executive compensation
at the Enterprises in view of their conservatorship status. That FHFA's compared the compensation of
comparable institutions to proscribe a set or specific level of compensation was
viewed as dictating an outcome to the FHLBanks boards of directors.
With that as
background, the interim rule published by FHFA today can be summarized as
In general the
Director may review compensation for an executive officer of the regulated
entities and prohibit any that is not reasonable and comparable to compensation
for similar businesses.
No bonuses will be
paid to any senior executive during the period of conservatorship.
reasonable and comparable the Director can take into consideration any factors
he considers relevant including wrongdoing and abuse.
The Director may not
prescribe a set a specific level or range of compensation.
must give 30 days' written notice to the Director before entering into any
written arrangement that provides a term of employment exceeding six months,
provides compensation in connection with termination of employment, or pay for
performance or incentive pay.
for new hires require five days' notice to the Director
A GSE may not enter
into an agreement or contract for payment of money or anything of value in connection
with the termination of employment of an executive without advance approval of
the Director except that contracts of this nature entered into before October
28, 1992 are not retroactively subject to such approval or disapproval. Renegotiation, amendment or change to these
grandfathered agreements are subject to the Director's approval.
The rule, Federal Register posting, information on the old rule and its
comments, can be read here.