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 July 15.

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% from 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 follows:

• 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.
• In determining 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.
• Regulated entities 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.
• Compensation offers 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.