oversight

Financial Regulation: Review of Selected Operations of the Federal Housing Finance Board

Published by the Government Accountability Office on 2003-02-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to Congressional Requesters




February 2003
                FINANCIAL
                REGULATION
                Review of Selected
                Operations of the
                Federal Housing
                Finance Board




GAO-03-364
                a
                                               February 2003


                                               FINANCIAL REGULATION

                                               Review of Selected Operations of the
Highlights of GAO-03-364, a report to the      Federal Housing Finance Board
Ranking Member, Senate Committee on
Banking, Housing, and Urban Affairs; the
Ranking Member, House Committee on
Financial Services; and the Chairman,
Subcommittee on Capital Markets




The Federal Home Loan Bank                     FHFB’s chair has greater authority to make key administrative decisions
System (System) faces additional               than the chairs at five of the six other financial regulators GAO reviewed.
risks due to the development of                FHFB’s chair has the authority to appoint and remove officials and
new products such as direct                    reorganize the agency without a vote by the board. In contrast, statutes,
mortgage purchase programs.                    regulations, and practices limit the chairs’ authorities at most other
Responding to concern about the
                                               regulators. In particular, the boards or commissions at these agencies
methods used for administrative
decisionmaking, and the ability of             approve most senior-level appointments and several boards approve major
the Federal Housing Finance Board              reorganizations. The basis for the FHFB chair’s comparatively broad
(FHFB) to fulfill its critical mission         administrative authority is a delegation of authority, which the board passed
to regulate the safety and                     in 1990 and 1993 (see excerpt below). The delegation allows the chair to
soundness of the System, GAO was               make and implement key decisions without obtaining or benefiting from the
asked to (1) compare the FHFB                  views of all board members and has contributed to sometimes bitter
chair’s administrative authorities             conflicts among board members over the past 8 years.
with those of other financial
regulators and discuss the basis for           Although FHFB provided significant financial compensation to staff subject
that authority, (2) assess FHFB’s              to the RIF, its procedures were not fully consistent with all applicable
compliance with selected statutes
                                               federal age discrimination statutes and regulations. For example, FHFB
and regulations in connection with
an August 2002 reduction-in-force              presented a settlement agreement to separated staff that offered 3 to 6
(RIF) carried out as part of an                months salary in exchange for, among other things, the employees agreeing
agency reorganization, and (3)                 to waive their rights to file charges, complaints, or appeals with the Equal
assess FHFB’s progress in                      Employment Opportunity Commission (EEOC). EEOC regulations
enhancing its FHLBank safety and               implementing the Age Discrimination in Employment Act do not permit
soundness examination program.                 waivers of employees’ rights to file charges or complaints with EEOC. In
                                               addition, FHFB did not advise the affected employees in writing to consult
                                               an attorney prior to signing the agreements as is required.
GAO recommends (1) that the                    Although for several years FHFB did not take steps to correct weaknesses in
FHFB board consider options that               its FHLBank examination program that GAO identified in a 1998 report,
would help ensure full board
participation in key administrative
                                               FHFB’s current Chair has recently undertaken several steps to improve its
decisions, such as senior                      examinations. In 1998, and again in 2002, GAO found that FHFB performed
appointments and agency                        limited reviews of FHLBank functions that are critical in managing the
reorganizations and (2) FHFB                   banks’ financial and operational risks. Among other changes announced in
comply with applicable federal age             2002, FHFB plans to increase the number of examiners from 10 to 24 and
discrimination requirements in                 revise its examination approach to focus on the major risks and quality of
offering settlements during RIFs.              controls at each FHLBank. Although these changes have the potential to
                                               improve FHFB’s examination program, it is too soon to assess their
In written comments, FHFB said                 effectiveness.
that the delegation of authority
provides the best means to manage              Excerpt from 1993 FHFB Delegation of Authority
the agency. FHFB agreed with one
finding regarding the settlements                 The Board hereby delegates to the Chairperson all authorities,
but disagreed with two others.                    powers, and responsibilities of the Board necessary to effect the
                                                  overall management, functioning and organization of the Finance
www.gao.gov/cgi-bin/getrpt?GAO-03-364.
                                                  Board including, without limitation the authority to…appoint,
To view the full report, including the scope      remove, promote…Finance Board personnel.
and methodology, click on the link above.
For more information, contact Thomas J.
McCool at (202) 512-8678 or                    Source: FHFB.
mcoolt@gao.gov.
Contents



Letter                                                                                                 1
                             Results in Brief                                                          4
                             Background                                                                8
                             FHFB Chair Has Greater Authority to Make Key Administrative
                               Decisions Than the Chairs of Most Other Financial
                               Regulators                                                             11
                             Certain FHFB Reduction-in-Force Actions Were Not Fully
                               Consistent with Applicable Federal Age Discrimination Statutes
                               and Regulations                                                        18
                             FHFB Has Announced Plans to Improve Its FHLBank Examination
                               Program                                                                26
                             Majority of FHLBank Public Interest Directors Made Political
                               Contributions Prior to Their Initial Appointments                      30
                             FHFB’s Use of Schedule C Positions Sometimes Differs from the
                               Practices of Other Financial Regulators                                35
                             Conclusions                                                              37
                             Recommendations                                                          39
                             Agency Comments and Our Evaluation                                       39


Appendixes
              Appendix I:    Objectives, Scope, and Methodology                                       47
             Appendix II:    Administrative Powers of Financial Regulatory Chairs                     50
                             Commodity Futures Trading Commission                                     50
                             Farm Credit Administration                                               51
                             Federal Deposit Insurance Corporation                                    52
                             Federal Housing Finance Board                                            53
                             Board of Governors of the Federal Reserve System                         54
                             National Credit Union Administration                                     54
                             Securities and Exchange Commission                                       55
             Appendix III:   Waivers of Rights Under the Age Discrimination in
                             Employment Act                                                           56
                             OWBPA Compliance Requires Strict Adherence to Terms
                               of Statute                                                             59
                             Waiver of the Right to File an EEOC Complaint                            60
                             Employee Must be Advised in Writing to Consult an Attorney               61
                             OWBPA Informational Requirements                                         62
             Appendix IV:    Comments from the Federal Housing Finance Board                          64




                             Page i                                  GAO-03-364 Review of FHFB Operations
                         Contents




          Appendix V:    Comments from FHFB Board Members Franz S. Leichter and
                         Allan I. Mendelowitz                                                      73
          Appendix VI:   Comments from the Farm Credit Administration                              80


Tables                   Table 1: Median Dollar Value of Total Preappointment Political
                                  Contributions made by each FHLBank Public Interest
                                  Director, by FHFB Chairman (appointed January 1, 1998
                                  through May 8, 2002)                                             33
                         Table 2: Allocation of Newly Appointed FHLBank Public Interest
                                  Director Campaign Contributions, by Recipient and by
                                  FHFB Chairman (January 1, 1998 through May 8, 2002)              34
                         Table 3: Allotment of Schedule C Positions at Financial
                                  Regulators                                                       36


Figures                  Figure 1: Authority of Financial Regulatory Agency Chairs to Make
                                   Key Administrative Decisions Without Board Approval             12
                         Figure 2: Text of FHFB’s 1993 Delegation of Authority                     15
                         Figure 3: FHFB Organization Chart (Pre-Reorganization)                    20
                         Figure 4: FHFB Organization Chart (Post-reorganization)                   21
                         Figure 5: Number and Percentage of FHLBank Public Interest
                                   Directors That Reportedly Made Political Contributions
                                   during the 8-year Period Prior to Their Initial
                                   Appointment, by FHFB Chair (January 1, 1998 through
                                   May 8, 2002)                                                    31
                         Figure 6: Frequency of FHLBank Public Interest Director Political
                                   Contributions Prior to Initial Appointment, by FHFB
                                   Chair (January 1, 1998 through May 8, 2002)                     32




                         Page ii                                  GAO-03-364 Review of FHFB Operations
Contents




Abbreviations

ADEA                         Age Discrimination in Employment Act
CEO                          Chief Executive Officer
CFTC                         Commodity Futures Trading Commission
CRP                          Center for Responsive Politics
EEOC                         Equal Employment Opportunity Commission
Fed Board                    Board of Governors of the Federal Reserve System
FHFB                         Federal Housing Finance Board
FCA                          Farm Credit Administration
FDIC                         Federal Deposit Insurance Corporation
FEC                          Federal Election Commission
FHLBank                      Federal Home Loan Bank
FHLBank System               Federal Home Loan Bank System
FLSA                         Fair Labor Standards Act
HUD                          Department of Housing and Urban Development
NCUA                         National Credit Union Administration
OCC                          Office of the Comptroller of the Currency
OFHEO                        Office of Federal Housing Enterprise Oversight
OGC                          Office of General Counsel
OIG                          Office of Inspector General
OM                           Office of Management
OPM                          Office of Personnel Management
OPRA                         Office of Policy, Research, and Analysis
OS                           Office of Supervision
OTS                          Office of Thrift Supervision
OWBPA                        Older Workers Benefit Protection Act
RIF                          Reduction-in-Force
SEC                          Securities and Exchange Commission




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Page iii                                           GAO-03-364 Review of FHFB Operations
A
United States General Accounting Office
Washington, D.C. 20548



                                    February 28, 2003                                                                           Leter




                                    The Honorable Paul S. Sarbanes
                                    Ranking Minority Member
                                    Committee on Banking,
                                      Housing, and Urban Affairs
                                    United States Senate

                                    The Honorable Barney Frank
                                    Ranking Minority Member
                                    Committee on Financial Services
                                    House of Representatives

                                    The Honorable Richard H. Baker
                                    Chairman, Subcommittee on Capital Markets,
                                      Insurance, and Government Sponsored Enterprises
                                    Committee on Financial Services
                                    House of Representatives

                                    This report responds to your request that we review selected operations of
                                    the Federal Housing Finance Board (FHFB) and its ability to fulfill its
                                    critical mission to regulate the Federal Home Loan Bank System (FHLBank
                                    System). The FHLBank System consists of 12 Federal Home Loan Banks
                                    (FHLBanks), whose mission is to promote housing and community finance.
                                    To do so, the FHLBank System issues debt in the financial markets; and
                                    each of FHLBanks makes loans, also known as advances, to member
                                    financial institutions, such as thrift institutions and commercial banks, that
                                    are located in its district.1 As of September 30, 2002, total FHLBank System
                                    outstanding debt obligations stood at $668 billion. Although due to
                                    conservative underwriting standards the FHLBank System has never
                                    experienced a loss on an advance, it faces additional risks due to the recent
                                    rapid growth of direct mortgage acquisition programs.2 The direct
                                    acquisition of mortgages adds to the FHLBanks’ interest rate and credit




                                    1
                                     As of September 2002, there were about 8,000 members of the FHLBank System.
                                    2
                                     Historically, FHLBank advances have been overcollateralized by assets such as securities
                                    or mortgages. Beginning in 1997, FHLBanks began to purchase mortgages directly from
                                    their member institutions. Total FHLBank System whole mortgage assets nearly tripled from
                                    $16 billion at the end of 2000 to $47 billion by September 30, 2002.




                                    Page 1                                            GAO-03-364 Review of FHFB Operations
risks, and the banks have developed increasingly sophisticated systems to
manage these risks.3

FHFB has a five-member board, of which no more than three members can
be from the same political party. FHFB’s primary mission is to help ensure
that the FHLBanks operate in a safe and sound manner. FHFB is also
responsible for ensuring that FHLBanks carry out their housing and
community development mission and comply with applicable statutes and
regulations. To fulfill its mission, FHFB conducts examinations of
FHLBanks, and other supervisory activities. FHFB also appoints public
interest directors to serve on the boards of each of the FHLBanks.4

In the past year, FHFB board members have been involved in several
publicized disputes.5 The current Chair (John T. Korsmo) has taken several
key administrative initiatives, including reorganizing FHFB, which he
believes are necessary to improve the agency’s oversight.6 However,
FHFB’s Democratic board members, who are currently in the minority on
the board, have stated that the Chair acted unilaterally and did not
adequately consult them about these administrative initiatives. Board
members have also stated that they were not adequately consulted about
other issues that are the responsibility of the FHFB, such as the
appointment of public interest directors. Similar disputes between the
FHFB chair and other board members periodically took place when
Democratic Chair Bruce Morrison served from 1995 through 2000.




3
 Interest rate risk is the potential for loss due to fluctuations in interest rates while credit
risk is the potential for loss from a borrower or counterparty failure to perform on an
obligation. By holding mortgages on their books, FHLBanks increase both types of risks.
FHLBank members retain the credit and interest rate risks for mortgage loans that they fund
with FHLBank advances.
4
 FHFB appoints at least 6 directors to serve on the boards of the FHLBanks, whose boards
each consist of at least 14 members. These appointed directors are commonly referred to as
public interest directors. At least two of the public interest directors are designated as
community interest directors because of their strong ties to the local community. Members
of each of the 12 FHLBank districts elect the remaining directors.
5
 American Banker, March 15, 2002, American Banker, June 3, 2002, and Dow Jones
Newswire Column, August 15, 2002.
6
 We define key administrative authorities as the appointment of senior agency officials and
reorganizing an agency’s structure.




Page 2                                                GAO-03-364 Review of FHFB Operations
As discussed with your staff, we assessed a range of issues relating to
FHFB’s operations and its abilities to fulfill its critical regulatory mission.
Specifically, our report objectives are as follow:

• compare the FHFB chair’s administrative authorities to those of the
  chairs of other financial regulators and discuss the basis for that
  authority;

• assess FHFB’s compliance with selected applicable statutes and
  procedural requirements in connection with a reduction-in-force (RIF)
  that was carried out as part of an agency reorganization announced on
  August 7, 2002;

• assess FHFB’s progress in enhancing its FHLBank safety and soundness
  examination program;

• provide historical data showing the political contributions of FHLBank
  public interest directors prior to their appointments; and

• compare FHFB’s use of Schedule C appointments and the organization
  of its public and congressional affairs functions with the practices of
  other financial regulatory agencies. 7

To address these objectives, we analyzed applicable statutes, regulations,
and practices that determine the scope of authority of the FHFB chair and
the authorities of the heads of six other federal financial regulatory
agencies. These agencies are the Farm Credit Administration (FCA), the
Federal Deposit Insurance Corporation (FDIC), the Securities and
Exchange Commission (SEC), the Commodity Futures Trading
Commission (CFTC), the National Credit Union Administration (NCUA),
and the Board of Governors of the Federal Reserve System (Fed Board).
We also (1) analyzed FHFB’s RIF procedures, applicable statutes, Equal
Employment Opportunity Commission (EEOC) and Office of Personnel


7
 Schedule C appointments are generally noncompetitive and noncareer appointments made
without regard to the rules for competition that govern career appointments. Schedule C
appointees receive noncompetitive appointments to positions graded GS-15 and below that
involve determining policy or other key close, confidential relationship with the agency
head or other key appointed officials of the agency. Agency heads or key appointed officials
may dismiss Schedule C appointees at any time, and such appointees generally leave their
positions at the end of an administration. OPM reviews and authorizes agency applications
for use of Schedule C positions.




Page 3                                              GAO-03-364 Review of FHFB Operations
                   Management (OPM) regulations, and applicable administrative decisions;
                   (2) updated our 1998 report on FHFB’s FHLBank examination program; 8
                   (3) analyzed information from the Center for Responsive Politics (CRP)
                   that shows the political contributions of FHLBank public interest directors
                   prior to their appointments; 9 and (4) compared FHFB’s use of Schedule C
                   positions to the practices of the other six agencies.

                   We conducted our review from April 2002 through February 2003 in
                   Washington, D.C., San Francisco, and Seattle in accordance with generally
                   accepted government auditing standards. Appendix I contains a detailed
                   description of the scope and methodology of our work.



Results in Brief   FHFB’s chair has more power to make key administrative decisions than
                   the chairs at five of the six other financial regulatory agencies that we
                   reviewed.10 Specifically, FHFB’s chair has the authority to appoint and
                   remove officials and reorganize the agency without a vote by the board.
                   FDIC’s chair has similar appointment and reorganization authority. In
                   contrast, statutes, regulations, or practices limit the administrative
                   authority of the chairs of the five other agencies. For example, the boards
                   or commissions at these agencies either vote on or must give their approval
                   for most senior-level appointments.11 At three agencies, major
                   reorganization proposals must be submitted to the board for a vote or
                   approval, while at another agency, CFTC, chairs typically submit such
                   proposals to a commission vote, as a matter of practice.12 The basis for the
                   FHFB chair’s comparatively broad administrative authority is a delegation


                   8
                    Federal Housing Finance Board: Actions Needed to Improve Regulatory Oversight,
                   GAO/GGD-98-203 (Washington, D.C.: September 18, 1998).
                   9
                    CRP is a nonpartisan, nonprofit research group based in Washington, D.C. that tracks
                   money in politics and its effect on elections and public policy. Using data initially reported
                   to the Federal Election Commission, CRP conducts computer-based research on campaign
                   finance issues for the news media, academics, activists, and the public. We took steps to
                   assess the reliability of CRP data and concluded that it is sufficiently reliable for our
                   purposes. See appendix I for more information.
                   10
                        See appendix II for a description of the seven regulatory agencies we reviewed.
                   11
                    Some agency chairs appoint Schedule C officials to run certain staff offices, which is
                   discussed later in this report.
                   12
                      CFTC officials said that the chair has the authority to reorganize the agency without a
                   commission vote, but the practice has been for the commission to vote on such proposals.




                   Page 4                                                 GAO-03-364 Review of FHFB Operations
of authority that the board voted on in 1990 and 1993.13 Under its terms, the
delegation of authority remains in effect until revised or overturned by a
majority board vote.14 Although FHFB’s delegation provides the chair with
the authority to manage the agency, it allows the chair to make and
implement key administrative decisions without obtaining or benefiting
from the views of all board members, and it has contributed to the
sometimes bitter conflicts that have periodically characterized relations
among board members over the past 8 years.

During the August 2002 reorganization, FHFB took certain actions in
conducting a RIF that were not fully consistent with federal age
discrimination statutes and regulations. FHFB provided career transition
assistance to the affected employees, paid required federal severance
benefits, and presented a settlement agreement that offered up to an
additional 6 months pay in exchange for the employees agreeing not to
contest the RIF. Although the settlement agreements provided significant
financial benefits to the affected employees, they include a provision that
required employees who signed them to agree not to file a complaint,
charge, or appeal with EEOC. This provision in the settlement agreement
does not comply with EEOC regulations implementing the Age
Discrimination in Employment Act (ADEA), which do not permit waivers
of rights to file charges or complaints with EEOC. In addition, FHFB did
not advise the employees in writing to consult an attorney prior to signing
the agreements as is required by ADEA and EEOC regulations.

Although for several years FHFB had not taken actions to correct
weaknesses in its FHLBank examination program that we identified in our
1998 report, FHFB’s current Chair has recently undertaken several steps to
improve the agency’s examinations. In 1998, we found that FHFB
performed limited reviews of FHLBank functions—including internal
controls and corporate governance—that are critical in managing the
banks’ financial and operational risks. These functions continued to
receive only limited reviews in examinations conducted from 1999 through
2001. FHFB’s limited reviews of key functions raise questions about the
agency’s fulfillment of its safety and soundness oversight mission,
particularly as interest rate and credit risks potentially increased in that


13
 Delegation of Authority to Chairperson, November 17, 1993, Resolution No. 93-92, and
Delegation of Authority to Chairperson, December 18, 1990, Resolution No. 90-143.
14
     The FDIC chair also operates under a delegation of authority.




Page 5                                                 GAO-03-364 Review of FHFB Operations
period through the rapid growth of direct mortgage acquisition programs.
Although FHFB officials said in 1998 that a limited number of examiners (8
to 10) helped explain the agency’s inability to review these areas
completely, FHFB did not increase or announce plans to increase the
examination staff until August 2002. In late 2002, FHFB began planning to
increase the number of examiners from 10 to 24, base examiners in satellite
locations to reduce examiner travel requirements, and revise the
examination approach by focusing on the major risks facing each bank and
the quality of systems and controls in place to manage those risks. FHFB’s
plans have the potential to significantly improve the FHLBank examination
program, but it is too soon to assess their effectiveness.

According to CRP data, 50 (or 67 percent) of the 75 public interest directors
that the FHFB appointed from January 1, 1998, through May 8, 2002,
reported making one or more political donations prior to their initial
appointments. 15 During that period, three FHFB chairs were in office
(Morrison, Apgar, and Korsmo) when public interest directors were
appointed.16 The percentage of appointees who made political
contributions prior to their initial appointments during the tenures of the
three chairs ranged from 56 percent (Morrison) to 76 percent (Korsmo).
CRP data also indicate that the median value of each contribution that the
directors made prior to their appointments ranged from $3,250 (Apgar) to
$8,364 (Korsmo).

15
 CRP’s findings are reported in terms of “hard money” and “soft money.” This analysis
focuses on “hard money,” which refers to contributions made for the purpose of influencing
a federal election; these contributions are subject to the contribution limitations and
prohibitions of the Federal Election Campaign Act. To ensure a standard comparison, we
determined whether each director reported making a political contribution in the 8-year
period prior to appointment. CRP officials said that their data are standardized from the
1990 election cycle to the present. Prior to the 1990 election cycle, it is difficult to extract
data through automated procedures, so we analyzed appointments made in 1998 and after.
Of the 25 directors listed as not having made contributions in the 8-year period prior to their
appointments, 11 had reported making contributions more than 8 years prior to their initial
appointment. The remaining 14 directors do not appear in the CRP database, which
according to CRP officials indicates that they had not previously made political
contributions. However, it is possible that these 14 individuals made contributions, but CRP
was not able to match these individuals to its list of contributors. For example, one reason
for this could be that contributors made political contributions under a different name. In
addition, Federal Election Commission rules exempt contributions of less than $200 from
reporting requirements. Thus, if these 14 individuals made contributions of less than $200,
they would not appear on the CRP database.
16
 FHFB did not make public interest director appointments during the tenures of Chairs
Allan I. Mendelowitz (December 29, 2000 to June 17, 2001) and J. Timothy O’Neill (June 18,
2001 to December 21, 2001).




Page 6                                                GAO-03-364 Review of FHFB Operations
FHFB’s use of Schedule C positions is sometimes different from that of
other financial regulators. FHFB and five of the six other financial
regulatory agencies that we reviewed allot Schedule C positions to the
chair and other board members.17 Unlike FHFB, four of these five agencies
also allot Schedule C positions to head a limited number of staff offices.
FHFB, alone among the regulators, uses the chair’s personal staff to head
the agency’s public and congressional affairs functions. At the other six
agencies, Schedule C appointees, career staff, or noncareer executives
head separate public or congressional affairs offices that are typically
staffed by career employees.18

This report recommends that the FHFB board consider a range of options
to ensure full board participation in key administrative decisions that have
policy implications, such as senior appointments and major
reorganizations. We also recommend that FHFB comply with all federal age
discrimination requirements in offering settlement agreements to affected
employees.

We provided a draft of this report to FHFB and individual board members
for their review and comment. We also requested comments on relevant
excerpts of the draft report from the six other regulatory agencies that we
analyzed. We received official comments from FHFB and separate
comments from FHFB’s two Democratic board members, which are
described later in this report and reprinted in appendix IV and V.19 FCA’s
Chair also provided written comments, which are provided in appendix VI.
We also received oral comments from representatives of the six other
regulatory agencies.

FHFB stated in its comments that a majority of the board believes that the
current delegation is the best means of managing the agency’s operations

17
     The Fed Board does not use Schedule C positions.
18
 SEC, FCA, and NCUA appoint Schedule C officials to head these offices while the Fed
Board and FDIC use career officials. CFTC appoints a noncareer executive to head its public
and congressional affairs office; this individual does not hold a Schedule C appointment,
which was the focus of our analysis.
19
 According to FHFB board members Franz S. Leichter and Allan I. Mendelowitz, the
comments we received from FHFB do not constitute the agency’s official comments
because they were not voted on by the board. We did not attempt to resolve this difference
between FHFB board members and staff and treated FHFB’s comments as the official
response of the agency. See the report section entitled “Agency Comments and Our
Evaluation.”




Page 7                                                  GAO-03-364 Review of FHFB Operations
             and that board members can state their views under the delegation.20 FHFB
             also agreed with one of our findings regarding the settlement agreements
             offered to employees subject to the RIF but disagreed with two others.
             Among other statements, FHFB’s Democratic board members stated that
             the delegation of authority was contrary to the intent of Congress, which
             vested agency management in the board rather than the chair and
             expressed concern about how the RIF was carried out. The FCA Chairman
             commented on the agency’s Schedule C practices. In addition,
             representatives from all six regulatory agencies agreed with the draft
             report’s findings regarding their agencies.



Background   Congress has authorized two different models for governing financial
             regulatory agencies: a single-director and board. Among financial
             regulators, single directors head the Office of Thrift Supervision (OTS), the
             Office of the Comptroller of the Currency (OCC), and the Office of Federal
             Housing Enterprise Oversight (OFHEO). In contrast, boards or
             commissions run FHFB, the Fed Board, NCUA, SEC, CFTC, FDIC, and
             FCA. Advantages and disadvantages exist for both models. In the single-
             director model, the director is responsible for making all the decisions at
             the agency, without the potential hindrance of having to consult or get the
             approval of board members. The primary advantage of the board model is
             that it provides the potential to benefit from the diverse perspectives and
             experiences of board members. However, one potential disadvantage of the
             board model is that consultation among board members could create
             inefficiencies in running the agency.

             To overcome the potential inefficiencies associated with the board model,
             responsibilities for policy and day-to-day administration are divided
             between the board and chair at many regulatory agencies. Policy decisions
             include making rules and regulations or authorizing enforcement actions.
             Day-to-day administration might include directing staff, overseeing safety
             and soundness examinations, and expending funds as authorized by the
             board. Administrative responsibilities that are often considered to be more




             20
              The delegation of authority allows two or more board members to call a board vote on
             actions taken under the delegation.




             Page 8                                            GAO-03-364 Review of FHFB Operations
significant (that is, not day-to-day) include the hiring and removal of senior
officials and restructuring the agency.21

FHFB has a five-member board of directors. The Secretary of the
Department of Housing and Urban Development (HUD) serves as an ex
officio member, and the remaining four full-time directors are appointed by
the President with the advice and consent of the Senate for 7-year terms.
Each of the four appointed directors must have experience or training in
housing finance or a commitment to providing specialized housing credit.
Not more than three of the five members can be from the same political
party. The President designates one of the four appointed members to serve
as chair. As discussed in this report, since 1990 the board has operated
under a resolution that delegated most administrative functions to the
chair.

The FHFB board operated with all appointed members serving on a full-
time basis for the first time in December 2001.22 From 1990 to 1993, the
board operated with four appointed members who served on a part-time
basis. Beginning in January 1994, FHFB board membership became full
time. However, from 1994 through 2001, the board operated with at least
one vacant seat and sometimes two or three. In December 2001, the
President appointed FHFB’s new chair, and the board operated with four
full-time appointed members plus the HUD designee throughout 2002.

As of September 2002, FHFB’s 104 staff members were organized into four
program offices:




21
 The distinction between more significant administrative decisions and policy decisions is
not always clear. For example, personnel decisions can have significant implications for
how an agency carries out key responsibilities.
22
     This discussion excludes the HUD secretary or designee.




Page 9                                               GAO-03-364 Review of FHFB Operations
• Office of Supervision (OS) – The office is responsible for conducting on-
  site examinations of the FHLBanks and the FHLBank System’s Office of
  Finance and conducting off-site monitoring and analysis. 23 OS is also
  responsible for overseeing the FHLBanks’ implementation of their risk-
  based capital plans.24 In addition, OS is responsible for providing expert
  policy advice and analyzing and reporting on the economic, housing
  finance, community investment, and competitive environments in which
  the FHLBank System and its members operate.

• Office of General Counsel (OGC) - The General Counsel is FHFB’s chief
  legal officer and is responsible for advising the board, the chair, and
  other officials on interpretations of law and regulation. OGC prepares all
  legal documents on behalf of FHFB and prepares opinions, regulations,
  and memorandums of law. The office represents FHFB in all
  administrative adjudicatory proceedings before the board and in all
  other administrative matters involving FHFB. Also, OGC represents
  FHFB in judicial proceedings in which the agency’s supervisory or
  regulatory authority over the FHLBanks is at issue.

• Office of Management (OM) - The OM director is the principal advisor to
  the FHFB chair on management and organizational policies and is
  responsible for the agency’s technology and information systems,
  finance and accounting, budget, personnel, payroll, contracting and
  procurement, and facilities and property management.

• Office of Inspector General (OIG) - OIG is responsible for conducting
  and supervising audits and investigations of FHFB’s programs and
  operations.

The costs of FHFB’s operations are financed through assessments on the
FHLBanks. In fiscal year 2003, FHFB’s operating budget was about $27
million.




23
 The FHLBank System Office of Finance is responsible for borrowing funds in the capital
markets—or issuing consolidated obligations on behalf of the system.
24
  Under the Gramm-Leach-Bliley Act of 1999, FHFB was required to establish capital
standards for the FHLBanks that are based on the risks that they face, such as credit and
interest rate risk. FHFB approved each of the 12 FHLBank plans in 2002 and is currently
monitoring their implementation.




Page 10                                            GAO-03-364 Review of FHFB Operations
FHFB Chair Has              The FHFB chairs’ authority to administer the agency is broader than that of
                            the chairs of the other financial regulators included in our review, with the
Greater Authority to        exception of the FDIC. Under a delegation of authority, the chair can make
Make Key                    important administrative decisions that may have policy implications (such
                            as appointing senior officials) without obtaining the approval of other
Administrative              board members. Over the years, some FHFB board members have
Decisions Than the          complained that the delegation of authority allows the chair to act
Chairs of Most Other        unilaterally, and it has been the source of disputes among board members.
                            On January 29, 2003, the FHFB board considered and rejected by a 3 to 2
Financial Regulators        vote a proposal to revise the delegation and limit the chair’s authority.



FHFB and FDIC Chairs        The FHFB and FDIC chairs have broader authority to make key
Have Broad Administrative   administrative decisions than the chairs of other financial regulators (see
                            fig. 1). Specifically, at FHFB and FDIC, the chairs can appoint senior
Powers
                            officials without a board vote or approval. At each of the other financial
                            regulators we reviewed, appointments of most senior officials require a
                            vote or the approval of a majority of the board. However, in some cases,
                            agency chairs can appoint Schedule C officials to run certain staff offices,
                            which is discussed in more detail later in this report and in appendix II. We
                            also note that at some agencies, such as CFTC, the chair or other senior
                            career agency officials appoint staff responsible for carrying out the
                            agencies’ functions.




                            Page 11                                    GAO-03-364 Review of FHFB Operations
Figure 1: Authority of Financial Regulatory Agency Chairs to Make Key
Administrative Decisions Without Board Approval

                    Appointment of senior
     Agency         officials/personnel decisions             Reorganizations

     FHFB
     FDIC

     SEC
     FCA
     Fed Board
                                                                         a
     CFTC
     NCUA
 Source: GAO.

      Chair has authority to make administrative decision without board approval.
      Chair does not have authority to make administrative decision without board approval.

Note: Analysis of FHFB, FDIC, SEC, FCA, Fed Board, CFTC, and NCUA.
a
 CFTC officials said that the agency’s practice is for the chair to submit reorganization proposals to the
commission for a vote.


As also shown in figure 1, at four of the regulators we reviewed, including
FHFB, the chair can reorganize the agency without seeking board
approval.25 While CFTC officials said that the chair has authority to
reorganize the agency, the practice has been to submit such proposals to
the commission for a vote. At three agencies, major reorganization
proposals must be submitted to the board or commission for a vote or
approval. For example, the Fed Board has a two-tier process by which
reorganizations that meet specific criteria may require the approval of the
entire board.26 At FCA, the board must approve major organizational
changes, but the chair has the authority to make organizational changes
within particular units.




25
 Reorganizations entail shifting personnel, merging divisions, and, in some cases, creating
or eliminating functions.
26
 Reorganizations that involve the appointing or removal of officers of the Fed Board require
the approval of a majority of board members.




Page 12                                                            GAO-03-364 Review of FHFB Operations
Delegations of Authority      The basis for the FHFB chair’s significant administrative power is a
Serve as Basis for FHFB and   delegation of authority approved by the board in 1990 and 1993. According
                              to former FHFB Chair, Dan Evans, the 1990 delegation of authority
FDIC Chairs’ Powers           facilitated the administration of the agency due in part to the fact that
                              board members served on a part-time basis. According to the FHFB former
                              managing director who served under Evans, the agency’s part-time board
                              members spent most of their time in geographic locations across the
                              United States and came to Washington several days each month to conduct
                              the agency’s business, particularly policy issues. According to Evans and
                              the former managing director, the 1990 delegation facilitated the
                              administration of FHFB as convening the part-time board members for
                              administrative decisions was challenging. The 1990 delegation of authority
                              authorizes the chair to “. . . effect the overall management, functioning, and
                              organization . . .” of the FHFB.27 Although FHFB’s statute authorizes the
                              board to employ and set the compensation of agency staff, the delegation
                              of authority ceded appointment, removal, and pay authorities to the chair.
                              The delegation of authority included a provision that allowed board
                              members to challenge decisions made under the delegation, obligating the
                              chair to call a special session of the board to consider any matter or
                              business at the request of any two or more board members.

                              In November 1993, FHFB’s part-time board made technical revisions to the
                              1990 delegation of authority that allowed the HUD secretary to serve as the
                              chair in the absence of a chair or vice chair.28 Otherwise, the terms of the
                              1993 delegation are substantially similar to the 1990 delegation and grant
                              significant administrative authority to the FHFB chair (see fig. 2).
                              According to a 1996 FHFB OGC memorandum that discusses the basis for
                              the delegation and FHFB’s former managing director, some of the part-time
                              board members did not continue on the board as full-time members. The
                              FHFB memorandum states that the part-time board members were
                              concerned that the agency would not be able to function in the absence of




                              27
                               The delegation was enacted at the first FHFB board of director meeting on December 18,
                              1990.
                              28
                               This provision has been invoked twice, by HUD designee Nicolas Retsinas (Nov. 23, 1993 -
                              May 31, 1995) and by HUD designee William Apgar (July 5, 2000 – Dec. 28, 2000). The board
                              also removed language from the 1990 delegation of authority that required the chair to
                              “consult” with other board members prior to making decisions.




                              Page 13                                           GAO-03-364 Review of FHFB Operations
the chair and other board members.29 The 1993 delegation of authority has
remained in effect because it has not been overturned by a majority vote of
the board.




29
 Evans left the agency in November 1993 and two other board members resigned on
January 1, 1994. FHFB operated with the HUD secretary or designee as the chair and one
full-time board member throughout 1994 and the first half of 1995.




Page 14                                           GAO-03-364 Review of FHFB Operations
Figure 2: Text of FHFB’s 1993 Delegation of Authority

   WHEREAS, the Federal Housing Finance Board ("Finance Board") was created
   to succeed the former Federal Home Loan Bank Board as the regulator of the
   Federal Home Loan Banks ("Banks"); and

   WHEREAS, section 2B of the Federal Home Loan Bank Act vests the
   management of the Finance Board in a five member Board of Directors
   ("Board"), but that, for ease of general operation, the Board desires to delegate
   to its Chairperson certain administrative authorities, powers and
   responsibilities of the Board;

   NOW, THEREFORE, BE IT RESOLVED, that the Board hereby delegates to the
   Chairperson all authorities, powers and responsibilities of the Board necessary
   to effect the overall management, functioning and organization of the Finance
   Board including, without limitation, the authority to execute documents on
   behalf of the Board, including regulations, resolutions and orders duly passed
   by the Board, and to appoint, remove, promote, set compensation for, direct,
   evaluate and pay Finance Board personnel.

   RESOLVED FURTHER, that the Chairperson may call the Board into regular or
   special session whenever any matter or business of the Finance Board so
   requires; Provided however: the Chairperson shall call a special session of the
   Board to consider any matter or business on the request of any two or more
   Board Directors.

   RESOLVED FURTHER, that the Chairperson may, from time to time, further
   delegate to any member, officer, employee or Office of the Finance Board
   any function delegated to the Chairperson by this resolution or by law.

   RESOLVED FURTHER, that in the event that there is no Chairperson or Acting
   Chairperson by virtue of absence, disability, or a vacancy, that all of the
   authority contained herein is delegated to the Secretary of Housing and Urban
   Development ("Secretary").

   RESOLVED FURTHER, that this delegation is not personal to any Chairperson
   or to any Secretary and will neither abate nor lapse on the expiration of the
   term of any Chairperson or Board Director, unless revoked by the Board by
   resolution.

                                    By the Federal Housing Finance Board

                                    Daniel F. Evans, Jr.

Source: FHFB.



The FDIC board has also voted to give significant administrative authority
to its chair through its bylaws and a delegation of authority. Through its
bylaws, the FDIC board delegated certain appointment authority as well as
reorganization authority to the chair. On January 29, 2002, the board



Page 15                                          GAO-03-364 Review of FHFB Operations
                           members voted unanimously to delegate additional authority to the chair.
                           The delegation expanded the chairs’ authority to appoint senior officials
                           without a board vote.30 In contrast to FHFB’s delegation of authority,
                           FDIC’s delegation expires when the current chair leaves office and the
                           rules for administrative decision making revert to the rules in place prior to
                           the revised delegation.



FHFB Chairs’ Exercise of   Disagreements among board members about the chair’s use of the
Administrative Authority   delegation of authority to make unilateral administrative decisions have
                           historically caused tensions between the chair and other board members.
under Delegation Has
                           In a recent example of the disputes among FHFB board members,
Contributed to Conflicts   Democratic members stated that the current Chair did not consult them in
among Board Members        any significant way prior to announcing a major agency reorganization on
                           August 7, 2002 (the specifics of the reorganization are discussed later in
                           this report). As done in 10 previous FHFB reorganizations under the
                           delegation of authority, the Chair did not seek board approval.31 According
                           to the Chair, he notified other board members about the key points of the
                           reorganization several weeks prior to the announcement. However, other
                           board members have stated that they were not involved in the planning of
                           the reorganization and did not receive details about the reorganization until
                           it was announced. For example, at the September 2002 board meeting, one
                           member stated “. . . we’ve just had a major restructuring that wasn’t done
                           by the board, that there wasn’t advance notice, which had a real impact on
                           the office.”

                           FHFB board members who served under former Chair Morrison also stated
                           that he used the delegation of authority to exclude other board members
                           from key administrative decisions. For example, one board member stated
                           that Morrison appointed senior officials and reorganized the agency
                           without any consultation. The board member stated that he disagreed with
                           these decisions and believed that they undermined FHFB’s regulatory
                           effectiveness. Morrison said that his actions were consistent with the
                           administrative powers authorized to the chair under the delegation.


                           30
                            Under the delegation passed on January 29, 2002, the FDIC chair can appoint senior
                           officials (defined as corporate officers and Executive Schedule, level IV and above
                           employees) without board approval. Under the previous delegation, these actions required
                           board approval.
                           31
                            The 10 previous restructurings included such activities as establishing, eliminating, and
                           combining offices.




                           Page 16                                             GAO-03-364 Review of FHFB Operations
Morrison also said that he met frequently with other board members to
explain his actions and that other board members never called special
board meetings to question his decisions, as permitted under the
delegation.

FHFB board members have also complained that chairs have used their
delegated authority as the basis for unilateral actions on policy, which is
the responsibility of the board as a whole. For example, two board
members said that the current Chair acted unilaterally in selecting
FHLBank public interest director candidates in 2002 and had minimal
consultation on these selections with other board members. In past years,
FHFB approved public interest director candidates by notational vote.32 In
2002, these two board members requested that the vote on the candidates
take place in an open meeting, and they expressed their concerns at this
public meeting about not having been consulted. FHFB officials said that
the current Chair has initiated actions to improve the selection of public
interest directors. In particular, the Chair developed new criteria governing
the appointment of public interest directors. The new criteria require
public interest directors to have an understanding of such issues as
finance, political awareness, and corporate governance. On January 29,
2003, the FHFB board voted unanimously to approve the appointment of 28
public interest directors.

Disputes about the FHFB’s powers under the delegation of authority also
took place during Chair Morrison’s tenure, between 1995 and 2000. For
example, in a letter sent to Members of Congress, a former board member
alleged that “Mr. Morrison has used and expanded the delegation of
authority to unilaterally implement his policy objectives by thwarting
Board consideration of issues where there may be disagreement with the
Chairman by the independent directors.”33 Morrison said that his decisions
under the delegation were proper and did not stray into policy matters
reserved for the board.




32
 In notational voting, board members voted on a list of candidates distributed to them
rather than in a board meeting.
33
 Letter from Lawrence Costiglio to Senator Alfonse D’Amato and Senator Paul Sarbanes,
March 12, 1998.




Page 17                                            GAO-03-364 Review of FHFB Operations
FHFB Board Considered        On January 29, 2003, while a draft copy of this report was with FHFB for
and Rejected a Proposal to   official comment, the board debated and rejected by a 3 to 2 party-line vote
                             a proposal to revise the existing delegation of authority and limit the chair’s
Revise the Delegation of     administrative authorities.34 FHFB’s Chair placed the proposal on the
Authority                    agenda for meeting at the request of the agency’s two Democratic board
                             members. Although FHFB board members’ staff said that they exchanged
                             proposed language to revise the delegation of authority prior to the board
                             meeting, they did not engage in substantive discussions over the proposal
                             during that period. The proposed revisions to the delegation discussed at
                             the January 29 board meeting would have allowed the FHFB board to
                             approve the appointment of the agency’s office directors and
                             reorganizations down to the office level. A board member who proposed
                             the revision said that the current delegation had been “misused” by FHFB
                             chairs and used as a basis to usurp the policy-making responsibilities of the
                             board. Among other statements, FHFB’s Chair denied that he had
                             “misused” his authority under the delegation and stated that the delegation
                             was appropriate, among other reasons, because organizations need a single
                             individual to direct operations to ensure efficient administration.



Certain FHFB                 On August 7, 2002, the FHFB Chair announced a major reorganization, and
                             the agency sent RIF notices to nine staff members. Although FHFB
Reduction-in-Force           provided significant financial compensation and career transition services
Actions Were Not Fully       to affected employees, certain FHFB actions in connection with the RIFs
                             do not appear fully consistent with federal age discrimination statutes,
Consistent with
Applicable Federal Age
Discrimination
Statutes and
Regulations




                             34
                              We sent a draft of the report to FHFB for official comment on January 15, 2003. The draft
                             report recommended that the FHFB board consider revising the delegation of authority to
                             provide for board approval of senior agency officials and major reorganizations.




                             Page 18                                            GAO-03-364 Review of FHFB Operations
                      regulations, or court decisions.35 We have informed EEOC of our findings in
                      this area. In addition, FHFB placed each of the affected staff on
                      administrative leave during the 60 day advance notice period (the period
                      from the RIF notification on August 7 until actual separation from federal
                      service). While OPM regulations require federal agencies to keep
                      employees on active duty status during the advance notice period, FHFB
                      officials said the agency had statutory authority to place the staff on
                      administrative leave.



FHFB Reorganization   According to the FHFB Chair and Director of Management, the August 2002
Included a RIF        reorganization was focused on improving supervision of the FHLBank
                      System. Through a review of the organizational structure of FHFB, the
                      Chair concluded that the agency dedicated too few resources to FHLBank
                      supervision and too many resources to support functions and public and
                      congressional relations. Accordingly, the Chair decided to eliminate the
                      Office of Managing Director and the Office of Communications and merge
                      OS with the Office of Policy, Research, and Analysis (OPRA) (see figs. 3
                      and 4). The Chair also decided to shift resources and positions from the
                      eliminated offices to OS. In addition, FHFB changed the title of the Office
                      of Resource Management to the Office of Management. The Chair and the
                      Director of Management assumed responsibility for the day-to-day
                      administrative duties formerly carried out by the Managing Director and, as
                      is discussed later in this report, the Chair’s personal staff assumed
                      responsibility for the Office of Communication’s public and congressional
                      affairs functions.36




                      35
                       The law governing RIFs at federal agencies is grounded in the Veterans’ Preference Act of
                      1944, which states that “in any reduction in personnel in any civilian service of any Federal
                      agency, competing employees shall be released in accordance with Civil Service
                      Commission regulations which shall give due effect to tenure of employment, military
                      preference, length of service, and efficiency ratings.” The current version of the Veterans’
                      Preference Act that pertains to RIFs is codified at 5 U.S.C. §3501-04. 5 U.S.C. §3502 sets forth
                      the basic RIF principles and empowers OPM to promulgate regulations to carry them out.
                      OPM’s governmentwide regulations in part 351 of title 5, Code of Federal Regulations
                      require that an agency undertaking a RIF meet certain specific procedural requirements and
                      provide that an employee who has been separated or demoted by a RIF action may appeal to
                      the Merit Systems Protection Board.
                      36
                       Previously, the FHFB chair delegated day-to-day administrative authorities to the
                      managing director.




                      Page 19                                               GAO-03-364 Review of FHFB Operations
Figure 3: FHFB Organization Chart (Pre-Reorganization)

                                                                                                        Board Member
                                                            Board Member
    Board Member             Board Member                                       Board Member             (Secretary,
                                                               (Chair)
                                                                                                        HUD ex Officio)




                                Inspector General,
                           Office of Inspector General




                                                         Managing Director,
                                                           Office of the
                                                         Managing Director



           Director          General Counsel,                 Director,          Director,              Director,
       Office of Policy,                                                                               Office of
                                Office of                     Office of          Office of
         Research,                                                                                     Resource
        and Analysis         General Counsel                 Supervision      Communications          Management


Source: FHFB.




                                            Page 20                                     GAO-03-364 Review of FHFB Operations
Figure 4: FHFB Organization Chart (Post-reorganization)

                                                                                                                 Board Member
                                                        Board Member
    Board Member            Board Member                                             Board Member                 Secretary,
                                                           (Chair)
                                                                                                                 HUD ex Officio




                               Inspector General,
                          Office of Inspector General




                            General Counsel,               Director,                 Director,
                               Office of                   Office of                 Office of
                            General Counsel               Supervision               Management


Source: FHFB.



                                           As part of the reorganization, FHFB notified nine employees that they were
                                           subject to the RIF and that they would be separated from the federal
                                           service in 60 days (referred to as the advance notice period). To minimize
                                           the effect on the employees, FHFB hired an outplacement firm to help
                                           them prepare resumes and develop job search strategies. FHFB also
                                           notified each employee that he or she would receive federal severance and
                                           accrued annual leave benefits. 37 Further, FHFB presented each of the
                                           affected employees with a “Negotiated Settlement Agreement” that offered
                                           3 to 6 months salary (depending upon employment status) in exchange for
                                           agreement not to file any administrative actions or lawsuits against the
                                           FHFB, its chair, directors, or employees in connection with the employees’




                                           37
                                            An employee of an executive agency who is involuntarily separated from service is entitled
                                           to severance pay calculated on the basis of the employee’s years of civilian service and an
                                           age adjustment allowance. 5 U.S.C. §5595 (c). An employee who is separated from service
                                           also is entitled to receive a lump-sum payment for accumulated and current accrued annual
                                           or vacation leave. 5 U.S.C. §5551(a).




                                           Page 21                                            GAO-03-364 Review of FHFB Operations
                       employment with the agency or involuntary separation.38 According to
                       documentation provided by FHFB, the agency gave the affected employees
                       47 days to decide whether to sign the settlement agreement.39 According to
                       FHFB officials, eight of the nine affected employees signed the settlement
                       agreements.



FHFB Settlement        FHFB’s settlement agreements included provisions that waived employees’
Agreement Waiver       rights to file lawsuits based on the Age Discrimination in Employment Act
                       (ADEA), as amended.40 Waivers of rights under ADEA are valid and
Provisions Not Fully   enforceable only if the waiver is knowing and voluntary, and courts have
Consistent with Age    generally required employers to strictly comply with ADEA standards
Discrimination         regarding waivers. Although FHFB took steps to comply with ADEA and
Requirements           EEOC regulations, certain provisions in the settlement agreements are not
                       consistent with requirements.41 First, the settlement agreements required
                       that employees waive their rights to file complaints, charges, or appeals
                       with EEOC, which is not consistent with statutory and regulatory
                       requirements. Second, FHFB did not advise each affected employee in
                       writing to consult an attorney prior to signing the agreements and waiving


                       38
                         Specifically, the separation agreement provided that the employee agreed not to “file any
                       charges, complaints, grievances or appeals or requests for hearings before any
                       administrative tribunal, including the Equal Employment Opportunity Commission, the
                       Merit Systems Protection Board, the Office of Special Counsel, or under the (FHFB’s)
                       internal grievance procedures, relating to the facts and circumstances of the Employee’s
                       employment with the (FHFB) and involuntary separation.” The separation agreement also
                       provided that the employee agreed to “Not initiate a lawsuit or any other action against the
                       (FHFB), the (FHFB) Chairman, its Directors, or any of the (FHFB’s) employees or former
                       employees under the Civil Rights Act of 1964, 42 U.S.C. §2000-16e, et seq.; the Age
                       Discrimination in Employment Act of 1967, as amended, 29 U.S.C. §633a; the Civil Rights
                       Acts of 1866 and 1871, 42 U.S.C. §§1981, 1983, and 1985; the U.S. Constitution; or any other
                       state, local, or federal law, based on the facts and circumstances surrounding the employee’s
                       employment with the (FHFB) and involuntary separation.”
                       39
                        According to FHFB officials, 8 of the 9 affected staff, including 6 employees aged 40 or
                       over, received notification on August 7, 2002. The standard settlement agreement provided
                       by FHFB included a September 23, 2002, deadline to sign it.
                       40
                        Congress enacted ADEA to promote the employment of older persons, based on ability
                       rather than age, to prohibit arbitrary age discrimination and to help employers and
                       employees resolve problems arising from the impact of age on employment. ADEA forbids
                       arbitrary discrimination against workers, on the basis of age in hiring, promotion, terms of
                       employment, and discharge.
                       41
                        According to FHFB, six of the nine employees subject to the RIF were 40 years of age or
                       older.




                       Page 22                                             GAO-03-364 Review of FHFB Operations
his or her ADEA rights. Third, FHFB did not provide required information
to the affected employees to assist them in determining whether to waive
their rights under ADEA.

The Older Workers Benefit Protection Act (OWBPA) includes detailed
provisions that deal with the validity of releases and waivers under ADEA,
and sets forth minimum requirements for a knowing and voluntary release
of claims under the ADEA. EEOC regulations implementing OWBPA apply
to waivers of rights and claims under ADEA, and the regulations provide
specifically that they apply to all waivers of ADEA rights and claims,
regardless of whether the employee is employed in the private sector or
public sector, including federal employment. The statute and regulations
require that the agreement be in writing, refer specifically to claims under
ADEA, be given in exchange for consideration that is above and beyond
any benefit to which the employee is already entitled, and give the
employee adequate time to consider the waiver before signing it.

The settlement agreements appear designed to comply with several of
these requirements. For example, employees were given 47 days to
consider the waiver and the settlement agreement refers specifically to
claims under ADEA.42 As required by ADEA, the settlement agreements
also provided affected employees over 40 years of age 7 days after signing
the agreement to revoke the agreement. In addition, the settlement
agreements included payments above and beyond what the employees
were entitled to receive by statute. That is, FHFB agreed to pay each
affected employee 3 to 6 months salary in exchange for agreeing to sign the
settlement agreement.

However, a provision in the settlement agreements requiring employees to
waive their rights to file charges, complaints, or appeals with EEOC does
not appear to be consistent with OWBPA requirements and EEOC
regulations. OWBPA provides that “No waiver agreement may affect the
Commission’s rights and responsibilities to enforce this chapter. No waiver
may be used to justify interfering with the protected right of an employee to
file a charge or participate in an investigation or proceeding conducted by
the Commission.”43 The EEOC regulations provide that “no waiver
agreement may include any provision prohibiting any individual from “. . .


42
     Employers must provide at least 45 days to consider waivers.
43
     29 U.S.C. §626(f)(4).




Page 23                                               GAO-03-364 Review of FHFB Operations
(i) Filing a charge or complaint, including a challenge to the validity of a
waiver agreement, with EEOC, or (ii) Participating in any investigation or
proceeding conducted by EEOC.”44

The settlement agreements also do not appear consistent with OWBPA
requirements and EEOC regulations that require employers to notify
employees in writing to consult with an attorney prior to agreeing to waive
their rights under ADEA. The courts have determined that employers must
specifically advise employees to consult an attorney. In FHFB’s settlement
agreements, the relevant provision states that the “employee understands
that he has had the opportunity to contact a representative of his choice to
discuss the terms and conditions of this Negotiated Settlement Agreement.
. .” An FHFB attorney stated that agency officials pointed out this statement
in the settlement agreements to the affected employees. However, the
settlement agreement does not advise the employees in writing to consult
an attorney before agreeing to waive their rights under ADEA, and FHFB
did not provide any other written advice for employees to consult an
attorney.

In addition, FHFB did not provide information to the affected employees as
is required under OWBPA and EEOC regulations. Employers that offer
additional benefits to a group of involuntarily terminated employees in
exchange for a waiver of claims under ADEA must satisfy additional
requirements. These employers must provide detailed written information
to employees describing the group termination program, including a listing
of the job titles and ages of the employees selected for the program, and
similar information for individuals who were not selected. This information
is designed to permit older workers to make more informed decisions
concerning waiver of ADEA rights. FHFB’s settlement agreements were
part of a group termination program (e.g., a RIF). However, FHFB officials
said that while the names of the terminated employees were provided,
written information on the job titles and ages of all employees who were
offered the settlement agreement was not provided. According to FHFB,
the EEOC regulations do not require that this information be provided if
the employer decides to eliminate all of the positions in a particular unit, as
FHFB did with respect to the Office of the Managing Director and the
Office of Communications. However, OWBPA and EEOC regulations do not
distinguish between situations where employers terminate selected
positions in a particular unit and others where all positions are terminated.


44
     29 C.F.R. § 1625.22 (i).




Page 24                                     GAO-03-364 Review of FHFB Operations
                            Employers are required to provide information on employee ages and job
                            titles under either circumstance.



FHFB Placed Staff Subject   FHFB restricted the access of employees subject to the RIF to the agency’s
to the RIF on 60 Days of    headquarters during the 60-day advance notice period—the period from the
                            RIF notification on August 7, 2002, until actual separation from federal
Administrative Leave        service—and placed them on administrative leave.45 FHFB’s decision to
                            restrict staff access during the advance notice period was not consistent
                            with OPM regulations, but FHFB officials said that the agency had
                            statutory authority to take this action.

                            OPM regulations that apply to RIFs state that, when possible, employees
                            should remain in active-duty status during the advance notice period. When
                            in an emergency the agency lacks work or funds for all or part of the notice
                            period, it may place employees on annual leave with or without their
                            consent, leave without pay without their consent, or nonpay status without
                            consent. While no statute governs the use of administrative leave, OPM
                            regulations and federal administrative decisions have established
                            standards for its use. These regulations and decisions have permitted
                            agencies, in certain situations, to excuse an employee for brief periods
                            without a loss of pay. However, agencies generally may not place
                            employees on administrative leave for long periods unless their absence
                            furthers an agency’s mission.

                            FHFB officials said that the agency’s authorizing statute provides authority
                            to place employees on administrative leave during the advance notice
                            period. FHFB officials said that the statute allows the agency to set the
                            compensation of its employees without regard to the statutes affecting
                            other agencies. FHFB officials said that all forms of leave, including
                            administrative leave, are forms of compensation, and therefore, the agency
                            was authorized to place the affected staff on administrative leave. Further,
                            FHFB officials said that (1) placing the staff on administrative leave
                            allowed them to take full advantage of the job placement services that the
                            agency offered and (2) requiring the employees to report to the agency
                            during the advance notice period when there was insufficient work for


                            45
                               While the staff were not allowed to access their offices during the advance notice period,
                            FHFB officials said that they could enter the building if they planned to enter a specific
                            destination, checked in at the guard desk, and had the guard call the individuals that they
                            planned to visit.




                            Page 25                                              GAO-03-364 Review of FHFB Operations
                       them to do was not cost effective. Although FHFB’s statute provides broad
                       authority to set compensation of its employees, we note that the scope of
                       FHFB’s authority and whether it appropriately supercedes OPM’s RIF
                       regulations has not been established.



FHFB Has Announced     Although we identified weaknesses in FHFB’s examination program in a
                       1998 report, FHFB did not address these weaknesses, and they persisted
Plans to Improve Its   for several years.46 In August 2002, FHFB announced plans that could
FHLBank Examination    significantly improve its examination program and more than double the
                       number of examiners. However, because FHFB has just started to revise
Program                its examination program, it is too early to evaluate the effectiveness of
                       these plans.



FHFB Did Not Fully     Our 1998 report identified limitations in FHFB’s examination program,
Address Examination    which raised questions about the agency’s ability to help ensure that
                       FHLBanks operate in a safe and sound manner. 47 For example, the report
Program Weaknesses     found that FHFB examiners did not thoroughly review FHLBank internal
                       control systems. Internal controls are defined as arrangements, such as
                       procedures, organization structure, and technical methods, designed to
                       provide reasonable assurance that (1) assets are protected from
                       unauthorized use or disposition; (2) transactions are in compliance with
                       law, regulation, FHFB policy, and the policy directives of the FHLBank’s
                       director and management; and (3) financial reporting is accurate.
                       According to our report, in September 1996, 48 FHFB examinations stated
                       that internal control reviews were “limited.” FHFB officials cited the
                       limited number of examiners, 8 to 10 individuals, as one explanation for not
                       conducting thorough internal control evaluations.

                       From 1998 through 2001, FHFB did not develop an examination program to
                       ensure that each FHLBank has established an adequate internal control
                       system. We reviewed all 36 FHFB bank examinations conducted in 1999 to




                       46
                            GAO-98-203.
                       47
                            GAO-98-203.
                       48
                            GAO-98-203.




                       Page 26                                    GAO-03-364 Review of FHFB Operations
2001.49 Each of the 36 examinations stated that the review of internal
controls was “limited in scope and did not involve a comprehensive review
of the entire system of controls.” As of late July 2002, FHFB had 10
examiners, or the same number as in 1998. Moreover, from 1998 through
2002, direct mortgage acquisition programs added risks to the FHLBank
System and the FHLBanks developed increasingly complex approaches to
manage these risks.

Further, our 1998 report50 noted that FHFB examination workpapers did
not adequately document corporate governance reviews or indicate that
such reviews were conducted. Board of director and management
oversight are essential elements of the corporate governance of financial
institutions and financial and other risk management. At the September
2002 FHFB board meeting, discussion among board members suggested a
concern about the lack of emphasis on corporate governance in the
examinations.51 One board member stated that he believes the FHLBanks’
corporate governance is “uneven” and that FHFB’s examinations have not
devoted sufficient attention to this critical area. The Chair and the other
board member discussed directing FHFB’s examination staff to conduct an
audit of corporate governance in the FHLBank System. The next section
discusses this audit.

Our 1998 report52 noted that off-site monitoring in the FHFB examination
program was weak and conducted in an uncoordinated manner. Off-site
monitoring involves the analysis of financial data to monitor bank financial
performance and to identify risks. Off-site monitoring can serve as an
effective means to supplement the work of examiners working on-site.
Regular monitoring between examinations, which generally take place on
an annual basis, is important because the FHLBanks’ financial conditions
and risks can change significantly in a short period. The 1998 report noted
that OS off-site monitoring consisted of four periodic reports as well as
monthly reviews of various bank information. While these reports were
potentially beneficial, FHFB suspended them in 1997 due to staff



49
     Twelve FHLBank examinations over 3 years accounts for 36 examinations.
50
     GAO-98-203.
51
     FHFB board meeting transcript, open meeting, Thursday, September 12, 2002.
52
     GAO-98-203.




Page 27                                              GAO-03-364 Review of FHFB Operations
                              constraints in OS. The 1998 report also noted that coordination between
                              OPRA and OS on off-site monitoring activities was lacking.

                              We found that FHFB’s off-site monitoring program is still limited. For
                              example, FHFB’s OS director said that in July 2002 that only one individual
                              performs off-site monitoring functions. Rather than assess the financial
                              performance of the FHLBanks, the director said that the individual tracks
                              FHLBank compliance with existing examination recommendations.
                              Although this function is important, it does not provide FHFB with
                              information about safety and soundness issues, such as changes in the
                              FHLBanks’ financial condition. A more comprehensive off-site monitoring
                              program could help alert FHFB officials to the need for an on-site
                              examination.



FHFB Has Initiated Steps to   In August 2002, FHFB’s Chair announced that FHFB would significantly
Significantly Revise the      increase the resources devoted to OS. FHFB set the fiscal year 2003 budget
                              for OS at $9.7 million, a $2.8 million increase from fiscal year 2002 funding
FHLBank Examination
                              levels. FHFB also hired a new OS director and deputy director, both of
Program                       whom have experience in examinations at other financial regulatory
                              agencies. FHFB also plans to increase the number of examination staff
                              from 10 to 24 by fiscal year 2004 and to open satellite locations in different
                              parts of the country in which to base examiners. Under the previous
                              examination approach, 8 to 10 examination staff spent 6 to 7 months on
                              travel each year. FHFB officials said satellite locations would reduce travel
                              demands on the examination staff and aid in hiring and retaining qualified
                              staff. At the time of our review, OS was in transition; however, FHFB had
                              increased the number of examiners. As of February 5, 2002, there were 14
                              examiners on staff at FHFB, an increase of 4.

                              According to the OS Director, FHFB also plans to significantly change its
                              approach to conducting examinations to obtain a fuller understanding of
                              FHLBank operations as FHLBank System business becomes more
                              complex. Prior to September 2002, FHFB assigned its examiners to teams
                              that included 4 to 5 members. In general, each examiner was responsible
                              for conducting annual examinations at 6 of the 12 FHLBanks. According to
                              FHFB officials, the examination teams reviewed different banks from year
                              to year, and their membership was rotated as well. Therefore, an FHFB
                              examiner might work on a particular bank’s examination one year but not
                              the next. Moreover, FHFB examiners did not necessarily specialize in the
                              areas (e.g., credit risk, interest rate risk, or affordable housing programs)




                              Page 28                                     GAO-03-364 Review of FHFB Operations
that are examined on an annual basis. 53 Instead, an examiner might review
a bank’s interest rate risk operations at one examination and review
another bank’s affordable housing program at the next examination.

The OS Director said that under the revised examination approach, by the
fourth quarter of fiscal year 2003, FHFB plans to have three examination
teams in place. Each team will consist of 8 members, with each team
responsible for 4 of the 12 FHLBanks for 3 to 4 years. In addition, each
examiner will focus on a particular area, such as interest rate risk or
affordable housing compliance, at each of the four FHLBank examinations
for which the individual is responsible annually. For example, the OS
Director said that two recent hires on the examination staff have expertise
in the area of corporate governance. According to FHFB, as of February
2003, OS had completed ten targeted corporate governance reviews at the
FHLBanks, and expects to complete a final report on all 12 banks’
corporate governance by March 2003.

The OS Director also said that FHFB plans to develop a proactive and risk-
based management approach to conducting FHLBank examinations. Prior
to FHFB’s recently announced changes to its examination program,
examiners might examine a particular FHLBank as of June 30 of a
particular year. The examiners would then assess whether the bank was
operated in a safe and sound manner and complied with all laws and
regulations as of that date. Under the new risk management approach, the
OS director said that the examination staff would try to identify the future
risks facing each FHLBank and develop plans to help ensure that FHLBank
management establish systems and controls to adequately manage those
risks.

Overall, FHFB’s planned examination program is similar to the
examination program of OFHEO, which regulates Fannie Mae and Freddie
Mac. Fannie Mae and Freddie Mac are large government-sponsored,
privately owned and operated corporations chartered by Congress to
enhance the availability of mortgage credit across the nation during good
and bad economic times. Similar to FHFB’s proposed examination
program, OFHEO has established a risk-based examination program that


53
 Each of the 12 FHLBanks is required to contribute at least 10 percent of its annual earnings
to support the Affordable Housing Program. These funds may be in the form of a grant or a
below-market interest rate on an advance to a member and subsidize the cost of owner-
occupied or rental housing for very low-income, low-income, or moderate-income groups.




Page 29                                             GAO-03-364 Review of FHFB Operations
                          assesses the controls Fannie Mae and Freddie Mac use to manage
                          significant risks. In addition, OFHEO assigns staff with specialized skills,
                          such as interest rate risk management, to its examination teams. OCC,
                          FDIC, OTS and the Fed Board have also implemented similar risked-based
                          examination programs.54

                          FHFB has plans to expand off-site monitoring. Specifically, as of October
                          21, 2002, an FHLBank analyst was assigned to each FHLBank in an effort to
                          enhance the OS off-site monitoring program. According to the OS Director,
                          the recently announced merger between OS and OPRA (see figs. 3 and 4)
                          provides opportunities for FHFB to enhance its off-site monitoring
                          capability. In particular, examination and OPRA staff will now work in the
                          same unit, which should allow better coordination of their activities.



Majority of FHLBank       Available data indicate that 50 (67 percent) of the 75 public interest
                          directors that FHFB appointed for the first time from January 1, 1998,
Public Interest           through May 8, 2002, made one or more political contributions in the 8-year
Directors Made            period prior to their initial appointments (see fig. 5). We obtained public
                          interest director appointment data from FHFB and contribution data from
Political Contributions   CRP. CRP provided data that covers all federal election cycles from 1990
Prior to Their Initial    through 2002. We organized and presented the CRP contribution data to
Appointments              cover the tenures of the three FHFB chairs who were in office when FHFB
                          made public interest director appointments during 1998 to 2002: Bruce
                          Morrison, June 1995 to July 2000; William Apgar, July 2000 to December
                          2000; and John T. Korsmo, December 2001 to present. We focused our
                          analysis on the 8-year period prior to each public interest director’s
                          appointment to ensure a standard means of comparison between the three
                          FHFB chairs.55




                          54
                           Risk-Focused Examinations: Regulators of Large Banking Organizations Face
                          Challenges, GAO/GGD-00-48 (Washington, D.C.: January 24, 2000).
                          55
                            CRP data are not reliable prior to the 1990 election cycle. We chose the 8-year period to
                          ensure that FHFB’s appointments during the tenures of each of the three chairs would be
                          standardized. For example, since FHFB made appointments under Korsmo for the first time
                          in 2002, available data cover seven federal election cycles (1990, 1992, 1994, 1996, 1998,
                          2000, and 2002). In contrast, CRP could only provide reliable data for five election cycles for
                          appointments made under Morrison in 1998 (1990, 1992, 1994, and 1996, and 1998).




                          Page 30                                              GAO-03-364 Review of FHFB Operations
Figure 5: Number and Percentage of FHLBank Public Interest Directors That Reportedly Made Political Contributions during the
8-year Period Prior to Their Initial Appointment, by FHFB Chair (January 1, 1998 through May 8, 2002)




                                                                                                                                         24%
                                                                               29%                                                        (8)
                                                                                (2)
                                 44%
                                 (15)
      56%
      (19)
                                                    71%
                                                     (5)                                                              76%
                                                                                                                      (26)


                 Morrison                                     Apgar                                                           Korsmo
        (Number of appointments: 34)                (Number of appointments: 7)                                     (Number of appointments: 34)

                                                                                         a
                                                 No reported contributions (Total: 25)

                                                 One or more contributions in 8-year period prior to appointment (Total: 50)

Source: GAO.


                                          Note: Analyis of FHFB and CRP data.
                                          a
                                           Of the 25 appointees, 11 had reported making contributions more than 8 years prior to their
                                          appointments. The remaining 14 directors do not appear in the CRP database, which according to
                                          CRP officials indicates that they had not previously made political contributions.


                                          Figure 6 shows that 28 (or 56 percent) of the public interest directors who
                                          reported making contributions prior to their appointments had done so 1 to
                                          10 times while 22 (44 percent) had done so 11 or more times. Of the 5
                                          directors appointed during Apgar’s tenure, all reported making 1 to 10
                                          donations. The public interest directors appointed during the Morrison and
                                          Korsmo tenures were generally divided equally between those who
                                          reported 1 to 10 donations and those who reported giving 11 or more
                                          contributions.




                                          Page 31                                                         GAO-03-364 Review of FHFB Operations
Figure 6: Frequency of FHLBank Public Interest Director Political Contributions Prior to Initial Appointment, by FHFB Chair
(January 1, 1998 through May 8, 2002)




                                                                                                                  19%
                                                                                                                   (5)
         32%
          (6)
                                                                  100%                                                                 50%
                                53%                                (5)                                                                 (13)
                                (10)
                                                                                                               31%
                                                                                                                (8)
           16%
            (3)


                 Morrison                                       Apgar                                                   Korsmo
        (Number of appointments: 19)                  (Number of appointments: 5)                             (Number of appointments: 26)

                                                                                       a
                                                   1 to 10 contributions (Total: 28)
                                                                                        a
                                                   11 to 19 contributions (Total: 11)
                                                                                            a
                                                   20 or more contributions (Total: 11)
Source: GAO.


                                           Note: Analysis of FHFB and CRP data.
                                           a
                                            Based on contributions made in the 8-year period prior to each director’s initial appointment.


                                           Table 1 summarizes the number of contributions and the total amount of
                                           those contributions that each FHFB public interest director appointee
                                           made prior to his or her appointment. When we totaled each director’s
                                           contributions, we found the median value of those totals ranged from
                                           $3,250 for the 5 appointments made during Apgar’s tenure to $8,364 for the
                                           26 appointments made during Korsmo’s tenure.




                                           Page 32                                                    GAO-03-364 Review of FHFB Operations
Table 1: Median Dollar Value of Total Preappointment Political Contributions made
by each FHLBank Public Interest Director, by FHFB Chairman (appointed January 1,
1998 through May 8, 2002)

                                 Number of first                    Median         Median number
Tenure of chair                 time appointees                    amounta         of contributions
Morrison                                        19                   $4,500                      7
Apgar                                             5                  $3,250                      4
Korsmo                                          26                   $8,364                      10
Source: GAO.

Note: Analysis of FHFB and CRP data.
Based on contributions made in the 8-year period prior to each director’s initial appointment.
a

Dollar amounts are not shown in constant dollars.


As shown in table 2, during the Morrison and Korsmo tenures, FHFB did
not appoint public interest directors who give exclusively to the party that
is not the party of the chair. That is, FHFB did not appoint any public
interest directors who had made contributions exclusively to the
Republican Party during Morrison’s tenure, nor did FHFB appoint any
public interest directors who gave exclusively to the Democratic Party
during Korsmo’s tenure. However, during the Morrison and Korsmo
tenures, FHFB appointed public interest directors who gave to both
parties. During Apgar’s tenure, FHFB appointed three individuals who gave
exclusively to the Democratic Party, one who gave exclusively to the
Republican Party, and one who gave to both parties.




Page 33                                                   GAO-03-364 Review of FHFB Operations
Table 2: Allocation of Newly Appointed FHLBank Public Interest Director Campaign
Contributions, by Recipient and by FHFB Chairman (January 1, 1998 through May 8,
2002)

                                                       Democratic
                                                               and
Tenure of           Democratic        Republican       Republican         PAC/other
chair                recipientsa      recipientsa       recipientsa      recipientsa             Total
Morrison
(Democrat)                     15                 0                4                 0             19
Apgar
(Democrat)                       3                1                1                 0              5
Korsmo
(Republican)                     0               16                9                 1             26
Source: GAO.

Note: Analysis of FHFB and CRP data.
a
Based on contributions made in the 8-year period prior to each director’s initial appointment.


We also analyzed data obtained from Fannie Mae and Freddie Mac to
determine the political contributions of members of their boards of
directors who are appointed by the President.56 Using CRP data, we
determined the political contributions of Fannie Mae and Freddie Mac
directors appointed from January 1, 1998, through 2002. Our analysis
shows that 18 of the 19 (95 percent) of the Fannie Mae and Freddie Mac
directors appointed during that period had made political contributions in
the 8-year period prior to their initial appointments.57 The median value of
the total number of contributions for an individual was 11, and the median
of the total preappointment donations was $7,000.


56
 As specified in their charters, Fannie Mae and Freddie Mac each have 18-member boards
of directors. The President appoints 5 of the directors at each company while shareholders
elect the other 13. The boards of directors shall at all times have members appointed by the
President that fall into the following categories (1) at least one person from the home-
building industry, (2) at least one from the mortgage lending industry, (3) at least one from
the real estate industry, and (4) at least one from an organization that has represented
consumer or community interests for not less than 2 years or one person who has
demonstrated a career commitment to the provision of housing for low-income households.
57
  One board member did not appear in the CRP database, which according to CRP officials
indicates that they had not previously made political contributions. However, it is possible
that this individual made contributions, but CRP was not able to match the individual to its
list of contributors. In addition, Federal Election Commission rules exempt contributions of
less than $200 from reporting requirements. Thus, if the individual made contributions of
less than $200, they would not appear on the CRP database.




Page 34                                                   GAO-03-364 Review of FHFB Operations
FHFB’s Use of               In some cases, FHFB’s use of Schedule C positions differs from the
                            practices of other financial regulators. At FHFB and five of the six other
Schedule C Positions        financial regulatory agencies that we reviewed, the agencies allot Schedule
Sometimes Differs           C positions to the chair and other board members.58 Unlike FHFB, four of
                            these five agencies appoint Schedule C officials to head certain staff
from the Practices of       offices, such as Office of Policy or the Office of General Counsel. The
Other Financial             FHFB chair’s personal staff, including a Schedule C appointee, are
Regulators                  responsible for the agency’s public and congressional affairs functions, a
                            practice unique among the regulatory agencies that we reviewed.



FHFB Schedule C Positions   Schedule C appointees at FHFB and five other agencies work directly for
Are Allotted to the Chair   the agencies’ policymakers: the chair and other board members (see table
                            3). Unlike FHFB and CFTC, the other four agencies allot Schedule C
and Other Board Members     positions to head some staff offices. For example, FCA has Schedule C
                            appointees in positions such as Director of the Office of Congressional and
                            Public Affairs, Director of the Office of Policy and Analysis, and Chief
                            Operating Officer.59 SEC has Schedule C appointees for three director
                            positions: Director of the Office of Communications, Director of the Office
                            of Legislative Affairs, and the Director of Office of Public Affairs. SEC also
                            allots Schedule C positions to several nondirector-level positions within the
                            organization.




                            58
                                 The Fed Board does not use Schedule C positions.
                            59
                             While FCA’s Chief Operating Officer is a Schedule C appointee, FCA officials said that the
                            board approved the appointment.




                            Page 35                                                 GAO-03-364 Review of FHFB Operations
Table 3: Allotment of Schedule C Positions at Financial Regulators

Financial regulatory   Positions allocated to chair and
agency                 board                            Positions allocated to program officesa                                                  Total
FHFB                   Special advisors to the chair (3)                                                                                              7
                       1 special assistant per board
                       member (4)
SEC                    Confidential assistants to the chair   Director, Office of Communications (1)                                                18
                       (2)                                    Director and 1 advisor, Office of
                       Senior advisor to the chair (1)           Legislative Affairs (2)
                       1 confidential assistant per           Director, Office of Public Affairs (1)
                       commissioner (4)                       Office of General Counsel (1)
                                                              Office of Chief Accountant (1)
                                                              Division of Corporate Finance (1)
                                                              Division of Investment Management (1)
                                                              Division of Enforcement (1)
                                                              Division of Market Regulation (2)
FCA                    Office of the chair (2)                Chief Operating Officer (1)                                                           12
                       2 special assistants per board         Secretary to the board (1)
                       member (4)                             Director, Office of Congressional
                                                                 and Public Affairs and two specialists (3)
                                                              Director, Office of Policy and Analysis (1)
CFTC                   Office of the chair (2)                                                                                                      10
                       2 special assistants per
                       commissioner (8)
NCUA                   Chief of Staff and                     Director and 1 special assistant,                                                       7
                       Counsel to the chair (1)                Office of Public and Congressional
                       Special assistant to the chair (1)      Affairs (2)
                       1 executive assistant per board
                       member (3)
FDIC                   Chief of Staff (1)                     General Counsel,                                                                        5
                       Deputy to the chair (1)                  Office of General Counsel (1)
                       Special advisor to the chair (1)
                       Secretary to the board (1)
Source: GAO.

                                              Note: Analysis of FHFB, SEC, FCA, CFTC, NCUA, and FDIC data.
                                              a
                                               Unless otherwise noted (i.e., Director, Chief Operating Officer, General Counsel), positions included in
                                              the table are staff-level positions within the program office listed.




FHFB Chair’s Staff is                         We compared FHFB’s approach to managing its public and congressional
Responsible for Public and                    affairs functions to the approaches of the six other financial regulatory
                                              agencies. Unlike FHFB, each of these six agencies has a separate public
Congressional Affair
                                              and congressional affairs office, typically staffed by full-time career
Functions                                     employees. At SEC, FCA, and NCUA, the chairs appoint Schedule C
                                              officials to run these offices; while career officials run the offices at the Fed



                                              Page 36                                                    GAO-03-364 Review of FHFB Operations
              Board and FDIC. At CFTC, a noncareer and non-Schedule C executive
              heads the public and congressional affairs office.60

              Since FHFB’s August 7, 2002, reorganization, the Chair’s personal staff has
              been responsible for the agency’s public and congressional affairs
              functions. Specifically, FHFB officials said that a Schedule C appointee
              from the Chair’s staff has assumed responsibility for managing media
              relations and a career staff member who is also on the Chair’s staff is
              responsible for congressional relations. According to the FHFB officials,
              the Chair’s personal staff have been able to incorporate the public and
              congressional affairs functions into their normal duties. FHFB officials said
              that the Chair’s staff have been able to assume these responsibilities
              because, with about 100 employees, FHFB is a comparatively small agency
              with limited congressional and public affairs responsibilities.



Conclusions   Due to the delegation of authority, the FHFB chair has relatively broad
              administrative power, compared with most financial regulatory chairs, to
              appoint senior officials and reorganize the agency without obtaining a
              board vote or approval. The delegation prevents the full board from
              participating in key administrative decisions that have potential policy
              implications. At a January 29, 2003, FHFB board meeting, the board in a
              close 3 to 2 vote along party lines rejected a proposal to revise the
              delegation of authority that would have required board approval for senior
              appointments and major agency reorganizations. Although FHFB board
              member staff exchanged proposed language to revise the delegation of
              authority prior to the meeting, there was little collaboration among the
              staff. While the FHFB board has determined that the delegation remains
              the most efficient means to administer the agency, we continue to believe
              that the decision potentially frustrates one of Congress’ objectives in
              establishing a board to regulate the FHLBank System. That is, the board
              structure is designed to help ensure that key decisions benefit from the
              experiences and perspectives of all board members. In addition, the FHFB
              board’s decision will likely result in the continuation of the sometimes
              bitter conflicts that have periodically characterized the relationships
              among board members over the past 8 years.




              60
               The appointee holds a position higher than GS-15 grade, which is the highest grade for
              Schedule C appointees.




              Page 37                                            GAO-03-364 Review of FHFB Operations
Going forward, the FHFB board would benefit from considering a range of
options that would involve all board members in key administrative
decisions. Some of these options may not involve any changes to the
current delegation of authority. For example, the chair could notify and
brief other board members of key administrative decisions prior to their
implementation and seek other board members’ advice and counsel on
these decisions. Or, the FHFB board could consider practices at other
financial regulatory agencies that provide for board or commission
involvement in key administrative decisions. At CFTC, for instance, the
chair’s authority to reorganize the agency is similar to that of the FHFB
chair, but CFTC’s practice has been for the chair to submit major
reorganization proposals to the commission for a vote. In addition, board
members and their staffs could work together to determine if there are any
areas of agreement on approaches—including revising the delegation of
authority—that would increase board participation in key administrative
decisions while preserving the chair’s authority to administer the agency on
a day-to-day basis. While there is no requirement or guarantee that FHFB
board members agree on all key administrative decisions, establishing
processes and practices to ensure full board participation could enhance
the quality of such decisions and improve relations among board members.

FHFB offered significant financial compensation to staff that received RIF
notices during the August 2002 reorganization. However, provisions in the
settlement agreements do not appear fully consistent with federal age
discrimination statutes and regulations. For example, a provision in the
settlement agreements that required employees to waive their rights to file
charges, complaints, or appeals with EEOC is not consistent with ADEA’s
prohibition against waivers of these rights. FHFB also (1) did not include
required language in the settlement agreements advising employees in
writing to consult with an attorney prior to signing the settlement
agreements and waiving their ADEA rights and (2) failed to provide the
affected staff with information on the job titles and ages of staff, as
required under ADEA and EEOC regulations. We have informed the EEOC
about our findings regarding the FHFB settlement agreement provisions
pertaining to the waiver of ADEA rights.

FHFB did not take actions in a timely way to address FHLBank
examination program weaknesses that we identified in a 1998 report.61
However, in 2002, current FHFB Chair Korsmo announced plans and


61
     GAO-98-203.




Page 38                                   GAO-03-364 Review of FHFB Operations
                      initiated actions, such as hiring more examiners that have the potential to
                      improve the quality of the agency’s safety and soundness oversight.
                      Continued FHFB management focus on the examination program is
                      essential over the next several years to ensure that the reforms are fully
                      implemented and their effectiveness evaluated.

                      We also note that FHFB’s Chair, initiated these changes to the examination
                      program under the delegation of authority. While these changes hold out
                      the potential for improving FHFB’s examination program, the unilateral
                      manner in which they were carried out resulted in further disputes among
                      board members. Permitting greater board involvement in such key
                      decisions would provide greater opportunity for consensus without
                      necessarily delaying any changes. Decisions that have the potential to
                      affect the critical means by which FHFB ensures FHLBank safety and
                      soundness merit the attention and consideration of the full board.



Recommendations       To ensure full board participation in key administrative decisions that have
                      policy implications, such as senior appointments and major
                      reorganizations, we recommend that the FHFB board consider a range of
                      options that could be implemented within the current delegation of
                      authority. These options include the chair (1) notifying, briefing, and/or
                      soliciting input from other board members on major administrative
                      decisions prior to their implementation and (2) submitting key
                      administrative decisions to the board for a vote or approval. We also
                      recommend that board members and their staffs hold discussions on
                      approaches—including potential revisions to the delegation of authority—
                      that would ensure board participation in key administrative decisions while
                      preserving the chair’s authority to administer the agency on a day-to-day
                      basis.

                      We also recommend that FHFB fully comply with applicable federal age
                      discrimination statutes and regulations in offering settlement agreements
                      to employees subject to RIFs.



Agency Comments and   We received FHFB’s comments on a draft of this report from the Director of
                      the Office of Management and written comments from FHFB board
Our Evaluation        members Franz S. Leichter and Allan I. Mendelowitz, which are reprinted in
                      appendix IV and V, respectively. We also provided relevant excerpts from a
                      draft of this report to the six other financial regulatory agencies that we



                      Page 39                                    GAO-03-364 Review of FHFB Operations
                          reviewed (SEC, FDIC, NCUA, Fed Board, CFTC, and FCA). FCA’s Chair
                          provided written comments, which are reprinted in appendix VI.
                          Representatives from all six regulatory agencies that we contacted
                          provided oral comments and we received technical comments, which we
                          have incorporated as appropriate.

                          FHFB disagreed that the board should revise the delegation of authority to
                          allow for board participation in key administrative decisions. FHFB agreed
                          with one of our findings regarding the settlement agreements offered to
                          employees subject to the 2002 RIF but disagreed with two others. FHFB
                          also commented on the draft report’s findings regarding the examination
                          program, public interest director appointments, and Schedule C positions.
                          Among other statements, Leichter and Mendelowitz agreed with our
                          recommendation regarding the delegation of authority and expressed
                          concern about how the agency conducted the RIF. The FCA Chairman’s
                          comments related to the number of Schedule C positions that are filled at
                          the agency. Representatives from each of the six agencies that we
                          contacted agreed with the draft report’s findings regarding their agency’s
                          operations. The following summarizes FHFB’s comments and, where
                          appropriate, our evaluation for the five report sections: (1) the delegation
                          of authority, (2) FHFB’s compliance with age discrimination requirements
                          in connection with the RIF, (3) FHFB’s examination program, (4) public
                          interest director appointments, and (5) Schedule C positions at financial
                          regulatory agencies. We also summarize the comments of Leichter,
                          Mendelowitz, and the FCA Chairman.



FHFB Comments and Our
Evaluation

Delegation of Authority   FHFB noted that at the January 29, 2003, meeting the board had
                          considered, as we recommended in the draft report, and rejected a
                          proposal to revise the delegation of authority that would have required
                          board approval for senior appointments and major reorganizations. FHFB
                          stated that a majority of the board believes that vesting broad
                          administrative responsibility in the chair is the best method to manage the
                          agency’s day-to-day operations. However, we continue to believe that full
                          board participation in key administrative decisions is essential.

                          FHFB also made several points to support its view that the board should
                          not revise the delegation of authority. First, FHFB stated that the current



                          Page 40                                    GAO-03-364 Review of FHFB Operations
delegation of authority allows individual board members to propose items
to the board for action. Second, FHFB stated that we did not provide
sufficient evidence to support the assertion that there was tension and
conflict among board members regarding the delegation of authority. FHFB
also stated that Congress intended for tension to exist in creating FHFB—
due to the divided partisan composition of the board—and that such
tension can serve a “constructive purpose.” Third, FHFB stated that we
made an error in figure 1 of the draft report “ . . . in asserting that the
appointment of senior officials and personnel decisions at the Securities
and Exchange Commission must be made with board approval.” FHFB
stated that reorganization and top-level appointments at SEC do not require
a board vote. In addition, FHFB included a lengthy attachment to its official
agency comments, which has not been included in this report. The
attachment discussed a range of issues, including a history of the
delegation of authority, theories on management and delegations of
authority at other agencies, and information on FHFB’s examination and
supervision program for the FHLBanks.

Regarding FHFB’s first point, we believe that the provision in the
delegation allowing board members to call board meetings to challenge the
chair’s key administrative decisions does not provide for enhanced board
collegiality and consultation. Rather, the delegation of authority allows the
chair to make and implement such decisions without consulting other
board members and requires any board members who oppose these
decisions to marshal a majority vote to overturn the decision. In our view,
board member collaboration would be enhanced if consultations and votes
or approvals took place before key administrative decisions were made and
implemented. While there is no requirement or guarantee that all board
members would agree to vote for or approve key administrative decisions,
full board participation in the process could serve to improve the decisions
and enhance collegiality.

We disagree with FHFB’s second point and believe that this report offers
significant evidence of tensions and conflicts between board members
resulting from the delegation. Such tension and conflicts have periodically
characterized the board member relations over the past 8 years. We
acknowledge that tension and conflict are inevitable at any board with
divided representation and that such tension can in some cases be
beneficial. However, we note that at FHFB, unlike most other financial
regulatory agencies, there is no appropriate process or forum for board
members to consider key administrative decisions before they are made
and implemented.



Page 41                                    GAO-03-364 Review of FHFB Operations
                             We also disagree with FHFB’s final assertion that our report incorrectly
                             described the process for appointing senior officials at SEC. The report
                             draft stated that at most other financial regulators boards either vote on or
                             must give approval for senior appointments. The relevant authority
                             regarding SEC—Reorganization Plan No. 10 of 1950—states that the
                             commission is responsible for approving senior appointments. The
                             commission has established a practice to fulfill this responsibility whereby
                             the chair obtains the approval of other commissioners prior to making
                             senior appointments. SEC officials agreed with our report’s statements
                             regarding the agency’s appointment process.

FHFB’s Compliance with Age   FHFB said it agreed with one of our findings regarding the settlement
Discrimination and Other     agreements but disagreed with two others. FHFB said it concurs that the
Requirements in Connection   settlement agreements should have advised employees to consult with an
with the RIF                 “attorney” rather than a “representative” prior to signing. However, FHFB
                             also stated that the language in the settlement agreements was not
                             intended to interfere with EEOC’s enforcement authority. FHFB stated that
                             any employee was clearly free to challenge the settlement agreement at a
                             later date. FHFB also stated that it disagreed with a statement in the draft
                             report that it was required to provide the names, ages, and positions of
                             employees who were not selected for separation from the agency. FHFB
                             also stated that since it abolished all of the positions in the former Office of
                             Communications and the Office of Managing Director, OWBPA and EEOC
                             requirements on providing information to employees who were offered the
                             settlement agreement did not apply. Additionally, FHFB disagreed with a
                             statement in the draft report that FHFB’s decision to place staff subject to
                             the RIF on administrative leave during the advance notice period was
                             inconsistent with OPM regulations. FHFB said that its statute authorizes
                             the agency to pay the compensation of its employees without regard to the
                             laws affecting federal employees, and that administrative leave is a form of
                             compensation.

                             While FHFB agreed with our findings regarding advising employees to
                             consult with an attorney prior to signing the agreements, we need to clarify
                             that the problem with the separation agreements was not confined to the
                             use of the term “representative” rather than the term “attorney.” OWBPA
                             and EEOC regulations require that the employer advise the employee in
                             writing to consult an attorney prior to waiving their ADEA rights. FHFB’s
                             settlement agreements were deficient in that they did not directly advise or
                             recommend that employees consult with an attorney prior to signing them.
                             Rather, the settlement agreements used more passive language stating that
                             each employee had the opportunity to contact a representative to discuss



                             Page 42                                      GAO-03-364 Review of FHFB Operations
                             the terms and conditions of the agreements, which the courts have held
                             does not meet the statutory requirements. If FHFB had replaced the word
                             “representative” in the settlement agreement with the word “attorney,” the
                             agreements still would not have been consistent with OWBPA and EEOC
                             requirements.

                             We disagree with FHFB that the settlement agreement provisions
                             pertaining to EEOC and information requirements were consistent with
                             applicable requirements. EEOC regulations clearly prohibit any agreement
                             that interferes with an individual’s right to file a complaint with EEOC or
                             affects the EEOC’s rights and responsibilities to enforce the ADEA. While
                             FHFB asserts that employees were clearly free to challenge the agreements
                             at a later date, the broad language of the settlement agreement states that
                             employee agrees not to file a complaint or appeal with the EEOC. Such a
                             broad prohibition could deter an individual from contesting the agreement
                             and the validity of the waiver of ADEA rights. Additionally, the draft report
                             stated that FHFB did not provide information on the job titles and ages of
                             staff offered settlement agreements to all such staff. The draft report did
                             not state that FHFB should have provided such information for staff who
                             were not subject to separation. There is also no requirement that
                             employers provide names of employees, and the draft report did not state
                             that FHFB should have done so. Nonethless, FHFB’s failure to provide
                             information on the job titles and ages of employees subject to the RIF to all
                             such employees was inconsistent with EEOC regulations. While the EEOC
                             regulations define the scope of the information requirement, the
                             regulations do not suggest that when all of the positions in a particular
                             office are eliminated, no information needs to be supplied. The purpose for
                             providing the information is for employees to have the opportunity to
                             assess the viability of an age discrimination claim and whether or not to
                             waive their rights to pursue such a claim. FHFB employees were not
                             provided with the information necessary to make such a decision.

                             Regarding FHFB’s comments on placing staff on administrative leave, we
                             have added language to the report stating that FHFB believes it has
                             statutory authority to disregard OPM regulations requiring staff to be kept
                             on active status during the advance notice period. However, we note that
                             the scope of FHFB’s authority and whether it appropriately supercedes
                             OPM’s RIF regulations has not been established.

FHFB’s FHLBank Examination   FHFB stated that Chair Korsmo initiated significant changes to enhance the
Program                      capabilities of the agency’s FHLBank examination program and that the
                             draft report did not sufficiently recognize that he was responsible for these



                             Page 43                                    GAO-03-364 Review of FHFB Operations
                           initiatives. FHFB stated that at the start of Korsmo’s tenure in December
                           2001, the agency’s Office of Supervision was understaffed and insufficiently
                           focused on the FHLBanks’ risk assessment processes, internal control
                           systems, and systems of corporate governance. FHFB also listed the steps
                           that the Chair initiated to improve supervision, including hiring
                           experienced management for OS and increasing the number of examiners.
                           FHFB also stated that while it agrees with our assertion that these changes
                           have the potential to improve the agency’s examination program, it believes
                           that the changes have already resulted in significant progress.

                           We agree that Chair Korsmo has initiated important steps to improve its
                           examination program and have added language to the report describing
                           these initiatives. However, we continue to believe that additional time and
                           management oversight is needed to ensure that this critical FHLBank
                           examination function is improved.

Public Interest Director   FHFB stated that the draft report had a narrow focus on the political
Appointments               contributions of FHLBank public interest directors and that this narrow
                           focus resulted in an incomplete portrayal of the selection process, recent
                           improvements in that process, and the critical roles played by public
                           interest directors. FHFB also stated that the draft report’s focus called into
                           question the integrity of the appointment process and that political
                           contributions are a determining factor in the appointment process. FHFB
                           stated that public interest directors are now appointed in public votes and
                           that the Chair instituted new criteria for the selection of public interest
                           directors. FHFB also noted that the board voted unanimously to approve 28
                           public interest directors at the January 29, 2003, board meeting.

                           We were asked to provide an analysis of the political contributions of
                           public interest directors prior to their initial appointments. We did not
                           conduct a broader review of the appointment process or the qualifications
                           and capabilities of public interest directors. Our review was not intended to
                           call into question the appointment process or the integrity or qualifications
                           of individual public interest directors. We have added language to this
                           report discussing the Chair’s criteria for appointing public interest
                           directors and the January 29, 2003, board meeting.

Schedule C Positions       FHFB noted that the report did not identify any Schedule C practices at
                           FHFB that violated OPM rules and that Chair Korsmo has instituted
                           changes to correct past practices that improperly categorized employees
                           who should have had Schedule C appointments. FHFB stated that all of the
                           agency’s Schedule C officials serve as confidential advisers to board



                           Page 44                                     GAO-03-364 Review of FHFB Operations
                       members. FHFB also reiterated that the small size of the agency serves as
                       an appropriate basis for assigning its public and congressional affairs
                       functions to the Chair’s personal staff.



Comments of Board      In their comments, Leichter and Mendelowitz said that because the FHFB
Members Leichter and   board did not consider or vote on an agency response to our draft report,
                       there is no official agency response to the report. We have not attempted to
Mendelowitz
                       resolve this dispute among FHFB officials, and we treat the response from
                       FHFB’s Director of Management as the agency’s official response.

                       Regarding the major issues discussed in the draft report, Leichter and
                       Mendelowitz made the following comments:

                       • Delegation of Authority: Leichter and Mendelowitz stated that the
                         delegation of authority (1) resulted in conflicts between board
                         members; (2) was contrary to FHFB’s authorizing legislation, which
                         vests agency management in the board rather than the chair; and (3) was
                         “anachronistic” because it was enacted when the board had a part-time
                         membership. In response to a comment from Leichter and Mendelowiz
                         regarding changes that the FHFB board made to the delegation of
                         authority in 1993, we have added language to the report.

                       • FHFB Actions in Connection with the RIF: Leichter and Mendelowitz
                         said that they were “deeply concerned” about the way in which FHFB
                         conducted the RIF and expressed concern about the elimination of the
                         Office of Managing Director because the action impeded
                         communication between board members and agency staff. They also
                         raised concern that the draft report did not discuss other procedures
                         that FHFB followed in conducting the RIF. Such an analysis was outside
                         the scope of this review.

                       • Public Interest Director Appointments: Leichter and Mendelowitz said
                         that the appointment of public interest directors has become
                         increasingly “political,“and they expressed concerns that public interest
                         directors lack expertise in the FHLBanks increasingly sophisticated
                         financial practices. As discussed previously, our review was limited to
                         an analysis of public interest director political contributions prior to
                         their initial appointments.

                       • Schedule C Practices: Leichter and Mendelowitz questioned whether it
                         was “appropriate” for one board member’s staff to perform functions



                       Page 45                                    GAO-03-364 Review of FHFB Operations
                         that the former Office of Communications previously performed for the
                         entire board. While the FHFB Chair’s staff currently performs these
                         functions, we note that at other agencies (SEC, CFTC, NCUA) the chairs
                         can appoint and remove the Schedule C officials who run public or
                         congressional affairs offices. Therefore, it is not clear that the FHFB
                         Chair exercises greater control over these functions than is the case at
                         the other agencies.



Comments of the FCA   The FCA Chairman stated that of the agencies’ 12 Schedule C positions, 6
Chairman              are currently held by career staff.

                      We will send copies of this report to Chairman of the Senate Committee on
                      Banking, Housing and Urban Affairs; the Chairman of the House Financial
                      Services Committee; and the Ranking Minority Member of the
                      Subcommittee on Capital Markets, Insurance, and Government Sponsored
                      Enterprises of the House Committee on Financial Services. We will also
                      send copies to FHFB, NCUA, FCA, CFTC, SEC, FDIC, and the Fed Board.
                      We will also make copies available to others upon request. In addition, this
                      report will be available at no charge on the GAO Web site at http://
                      www.gao.gov.

                      Please contact Mathew J. Scire at (202) 512-6794 if you or your staff have
                      any questions concerning this report. Key contributors to this report were
                      Rachel M. DeMarcus, M’Baye Diagne, Nadine Garrick, Ayeke Messam, Marc
                      W. Molino, Andy Pauline, Wesley M. Phillips, Mitchell B. Rachlis, and
                      Barbara M. Roesmann.




                      Thomas J. McCool
                      Managing Director Financial Markets
                        and Community Investment




                      Page 46                                    GAO-03-364 Review of FHFB Operations
Appendix I

Objectives, Scope, and Methodology                                                                    AA
                                                                                                       ppp
                                                                                                         ep
                                                                                                          ned
                                                                                                            n
                                                                                                            x
                                                                                                            id
                                                                                                             e
                                                                                                             x
                                                                                                             Iis




              As discussed with your staff, our report objectives are to (1) compare the
              Federal Housing Finance Board (FHFB) chair’s administrative authorities
              to those of the chairs of other financial regulators and discuss the basis for
              that authority; (2) assess FHFB’s compliance with selected applicable
              statutes and procedural requirements in connection with a reduction-in-
              force (RIF) that was carried out as part of an agency reorganization
              announced on August 7, 2002; (3) assess FHFB’s progress in enhancing its
              Federal Home Loan Bank (FHLBank) safety and soundness examination
              program; (4) provide data showing the political contributions of FHLBank
              public interest directors prior to their appointments; and (5) compare
              FHFB’s use of Schedule C appointments and the organization of its public
              and congressional affairs functions with the practices of other financial
              regulatory agencies.

              To study the source of the FHFB chairs’ administrative authorities and how
              they compare to those of other financial regulators, we reviewed the
              Federal Home Loan Bank Act, the Financial Institutions Reform, Recovery,
              and Enforcement Act of 1989, and FHFB’s delegation of authority to its
              chair. We also reviewed the legislation, regulations, delegations of
              authority, and other legal documents that govern or describe the scope and
              limitations of each chair’s authority at six other selected financial
              regulators.1 We interviewed officials from each of the selected financial
              regulators, including former FHFB officials, to obtain their views on the
              authorities of chairs and board members at each of these entities. Using
              this information, we compared the FHFB chairs’ administrative authorities
              to those of the selected financial regulators.

              To study FHFB’s compliance with required Reduction-in-Force (RIF) and
              other procedures, we reviewed the Age Discrimination in Employment Act,
              as amended, the Older Workers Benefits Protection Act, applicable Equal
              Employment Opportunity Commission (EEOC) and Office of Personnel
              Management (OPM) regulations, and case law. We also contacted senior
              FHFB officials regarding the RIF. Our review did not include an analysis of
              the “bumping rights” procedures that FHFB followed in carrying out the
              RIF.2


              1
               The Farm Credit Administration, Securities and Exchange Commission, Commodities
              Futures Trading Commission, Federal Deposit Insurance Corporation, National Credit
              Union Administration, and Board of Governors of the Federal Reserve System.
              2
               Under federal statutes and OPM regulations, employees subject to RIFs may have the right
              to take (or “bump”) the positions of other employees who have less seniority.




              Page 47                                           GAO-03-364 Review of FHFB Operations
Appendix I
Objectives, Scope, and Methodology




To study FHFB’s progress in enhancing its FHLBank safety and soundness
examination program, we assessed whether FHFB addressed
recommendations about its examination program that we made in a 1998
report.3 We reviewed 1999 to 2001 examination reports for the 12
FHLBanks. We also interviewed FHFB officials, as well as officials at
OFHEO, to which we compared FHFB’s examination program.

To study the data showing the political contributions of FHLBank public
interest directors prior to their appointments, we obtained public interest
director appointment data from FHFB for 1998 to 2002 and contribution
data from the Center for Responsive Politics (CRP) for 1990 to 2002. CRP
organizes and provides political contribution data that is initially reported
to the Federal Election Commission (FEC). To ensure a standard
comparison, we determined whether directors made a political
contribution in the 8-year period prior to their appointment. 4 We matched
and merged the two data sets and analyzed the data to determine the
number of public interest directors who made contributions prior to their
initial appointments. We also collected data from Fannie Mae and Freddie
Mac on the names and appointment dates of board members who received
their initial presidential appointments from 1998 through 2002. We obtained
data from CRP to determine the Fannie Mae and Freddie Mac directors’
political contributions in the 8-year period prior to their appointments.

We took several steps to assess the reliability of the CRP data and
concluded that the data were sufficiently reliable for our purposes. First,
we interviewed CRP officials to determine their data management
procedures and the approach that they followed to match the list of public
interest directors that we provided to the CRP contribution database.
Second, we reviewed the matched data set that CRP provided and
corrected erroneous matches between directors and contributors. Third, in
performing our analysis, we conducted basic tests on the data we used. In
performing our analysis, however, we did not verify the accuracy of the
FEC political contribution data on which CRP records are based. Our
review did not include an analysis of FHFB’s appointment process or the
integrity and qualifications of individual board members.




3
GAO-98-203.
4
 CRP officials said that data prior to the 1990 election cycle is not necessarily reliable, so we
chose appointments starting in 1998 as the beginning point of our analysis.




Page 48                                                GAO-03-364 Review of FHFB Operations
Appendix I
Objectives, Scope, and Methodology




To study FHFB’s use of Schedule C appointments and organization of the
public and congressional affairs functions and compare it with the other
financial regulatory agencies, we interviewed agency officials at each of the
selected financial regulators, and reviewed documents that described the
allocation of Schedule C appointments, as well as the management and
staffing structure of the agencies’ public and congressional functions.

We conducted our review in Washington, D.C., San Francisco, and Seattle
from April 2002 through February 2003 in accordance with generally
accepted government auditing standards.




Page 49                                    GAO-03-364 Review of FHFB Operations
Appendix II

Administrative Powers of Financial
Regulatory Chairs                                                                                  Appendx
                                                                                                         Ii




                     We compared FHFB to six other regulatory boards and commissions. We
                     reviewed each board or commission’s statute and policies relating to the
                     administrative authority of the chair. We focused on two administrative
                     areas: appointment of senior officials and reorganization decisions. In
                     cases where the chair is authorized to make key administrative decisions
                     without board approval, we also determined whether board members had
                     authority to review decisions made by a chair in these circumstances.

                     We reviewed the following seven agencies:

                     • Commodity Futures Trading Commission (CFTC),

                     • Farm Credit Administration (FCA),

                     • Federal Deposit Insurance Corporation (FDIC),

                     • Federal Housing Finance Board (FHFB),

                     • Board of Governors of the Federal Reserve System (Fed Board),

                     • National Credit Union Administration (NCUA), and

                     • Securities and Exchange Commission (SEC).



Commodity Futures    The commission consists of five members, appointed by the President with
                     the advice and consent of the Senate, and each serve staggered 5-year
Trading Commission   terms.

                     General Administrative Powers of the Chair:

                     According to the statute that established CFTC, the chair is the chief
                     administrative officer. Executive and administrative functions are generally
                     exercised solely by the chair, according to budget categories, plans,
                     programs, and priorities established and approved by the commission.

                     Key Administrative Powers of the Chair:

                     Appointment of Senior Officials: According to the statute establishing
                     CFTC, the chair’s appointment of heads of major administrative units is
                     subject to approval of the commission.



                     Page 50                                    GAO-03-364 Review of FHFB Operations
                 Appendix II
                 Administrative Powers of Financial
                 Regulatory Chairs




                 Reorganizations: While the chair is generally authorized to reorganize the
                 staff of the agency pursuant to his or her power over executive and
                 administrative functions, as a practice the commission votes on agency
                 reorganizations.



Farm Credit      The board consists of three members, appointed by the President with the
                 advice and consent of the Senate, and each serve staggered 6-year terms.
Administration
                 General Administrative Powers of the Chair:

                 The President designates one of the members as chairman, and the
                 chairman serves as the agency’s chief executive officer (CEO). The powers
                 of the chair as CEO that are necessary for day-to-day management may be
                 exercised and performed by the chairman through such other officers and
                 employees of the FCA as the chair shall designate. Policy Statement 64,
                 originally adopted by the board of FCA in 1994 and revised as recently as
                 September 24, 1999, provides rules for the transaction of business (Rules)
                 and operational responsibilities of the board.1

                 Key Administrative Powers of the Chair:

                 Appointment of Senior Officials: According to the statute that established
                 the FCA, the appointment of the heads of major administrative divisions is
                 subject to the board’s approval. Under Policy Statement 64, the board
                 interprets “heads of major administrative divisions” to mean the chief
                 operating officer and career office directors. However, in some cases, such
                 as the Director of the Office of Congressional and Public Affairs, the chair
                 can appoint Schedule C officials to run these offices.

                 Reorganizations: Under Policy Statement 64, the board approves the FCA
                 organizational chart down to the office level along with relevant functional
                 statements for each office. Under Policy Statement 64, the authority to
                 make organizational changes within any division rests with the CEO.




                 1
                  Rules for the Transaction of Business and Operational Responsibilities of the Farm
                 Credit Administration Board, FCA-PS-64, revised September 24, 1999.




                 Page 51                                          GAO-03-364 Review of FHFB Operations
                        Appendix II
                        Administrative Powers of Financial
                        Regulatory Chairs




                        Review of Decisions Made by Chair:

                        As noted in Article V and Article IX of Policy Statement 64, Special
                        Meetings of the board may be called:

                        1. by the Chairman;

                        2. by any two members; or

                        3. if there is at the time a vacancy on the board, by any member.

                        Any call for a Special Meeting shall set forth the business to be transacted
                        and shall state the place and time of such a meeting. Except with the
                        unanimous consent of all members, no business shall be brought before a
                        Special Meeting that has not been specified in the notice of call of such a
                        meeting.

                        Section 1. The business of the Board shall be transacted in accordance with
                        these Rules (Policy Statement 64) as the same may be amended from time
                        to time: Provided, however, that upon agreement of at least two members
                        convened in a duly called meeting, the Rules may be waived in any
                        particular instance, except that action may be taken on items at a Special
                        Meeting only in accordance with Article V, Section (3) b, hereof.

                        Section 2. These Rules may be changed or amended by the concurring vote
                        of at least two members upon notice of the proposed change or
                        amendments having been given at least 30 days before such vote.



Federal Deposit         The President with the advice and consent of the Senate appoints three
                        members of the five-member board for a term of 6 years. In addition to the
Insurance Corporation   three appointive directors, there are two ex officio members of the FDIC
                        board: the Comptroller of the Currency and the Director of the Office of
                        Thrift Supervision.

                        General Administrative Powers of the Chair:

                        One of the appointive directors shall be designated by the President, with
                        the advice and consent of the Senate, to serve as chair of the board for a
                        term of 5 years. The chair serves as the CEO. The board has delegated to
                        the chair the authority to manage the FDIC’s day-to-day operations and the




                        Page 52                                    GAO-03-364 Review of FHFB Operations
                  Appendix II
                  Administrative Powers of Financial
                  Regulatory Chairs




                  general powers and duties usually vested in the office of the CEO of a
                  corporation.

                  Key Administrative Powers of the Chair:

                  Appointment of Senior Officials: A delegation of authority to chair,
                  approved on January 29, 2002, gave authority to the chair to appoint and
                  remove senior officers.

                  Reorganizations: Under the delegation of authority, the chair has authority
                  to reorganize the agency.

                  Challenging Administrative Decisions Made under Delegation:

                  Two or more board members may initiate a review of any decision made
                  under the delegation of authority.



Federal Housing   The board consists of four members appointed by the President with the
                  advice and consent of the Senate and each serve staggered 7-year terms,
Finance Board     and the fifth member is an ex-officio member, the Secretary of Housing and
                  Urban Development.

                  General Administrative Powers of the Chair:

                  The President designates an appointed director as chair. The board has
                  adopted a delegation of authority that authorizes the chair to effect the
                  overall management, functioning, and, organization of the board.

                  Key Administrative Powers of the Chair:

                  Appointment of Senior Officials: Under the delegation of authority, a chair
                  can appoint agency personnel without a board vote or obtaining board
                  approval.

                  Reorganizations: Under the delegation of authority, a chair can reorganize
                  the agency without a board vote or consent.




                  Page 53                                    GAO-03-364 Review of FHFB Operations
                        Appendix II
                        Administrative Powers of Financial
                        Regulatory Chairs




                        Challenging Administrative Decisions Made under Delegation:

                        Under the delegation of authority, the chair must call a special session of
                        the board to consider any matter of business on the request of any two or
                        more board members.



Board of Governors of   The board consists of seven members appointed by the President with the
                        advice and consent of the Senate. The full term of a board member is 14
the Federal Reserve     years, and the seven terms are staggered so that one expires in each 2-year
System                  period.

                        General Administrative Powers of the Chair:

                        The chair, subject to board supervision, serves as its “active executive
                        officer.”

                        Key Administrative Powers of the Chair:

                        Appointment of Senior Officials: The board votes on the appointment of
                        senior officials.

                        Reorganizations: The board votes on major administrative reorganizations,
                        which are defined as those that involve changing officers (appointing or
                        removing an officer).



National Credit Union   The NCUA has a full-time, three-member board, which is appointed by the
                        President with the advise and consent of the Senate.
Administration
                        General Administrative Powers of the Chair:

                        The Federal Credit Union Act provides that the chair is the spokesperson
                        for the board and implements policies and regulations adopted by the
                        board.

                        Key Administrative Powers of the Chair:

                        Appointment of Senior Officials: The board votes on the appointment of
                        senior officials. However, in some cases, such as the directors of the Office




                        Page 54                                    GAO-03-364 Review of FHFB Operations
                      Appendix II
                      Administrative Powers of Financial
                      Regulatory Chairs




                      of Congressional and Public Affairs, the chairs can appoint Schedule C
                      officials to run it.

                      Reorganizations: The board votes on reorganizations of the agency.



Securities and        Five members serve staggered 5-year terms, and are appointed by the
                      President with the advice and consent of the Senate.
Exchange Commission
                      General Administrative Powers of the Chair:

                      There is no statutory reference to the selection of a chair. However, under
                      section 3 of the Reorganization Plan No. 10 of 1950, the function of the
                      commission, with respect to choosing a chair from among the members
                      was transferred to the President. The Reorganization Plan also transferred
                      to the chair from the commission the administrative and executive
                      functions of the commission, including appointment and supervision of
                      personnel, the distribution of business, and the use and expenditure of
                      funds. Appointment by the chair of the heads of the major administrative
                      units is subject to the approval of the commission. However, in some cases,
                      such as the Director of the Office of Public Affairs, the chair can appoint
                      Schedule C officials to run these offices.

                      Key Administrative Powers of the Chair:

                      Appointment of Senior Officials: Under Reorganization Plan No. 10 of 1950,
                      the board approves the appointment of senior officials.

                      Reorganizations: Under Reorganization Plan No. 10, the chair can
                      reorganize the agency.




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Appendix III

Waivers of Rights Under the Age
Discrimination in Employment Act                                                                           Appendx
                                                                                                                 iI




               While employees generally may agree to waive rights to pursue
               employment related claims if the waiver is knowing and voluntary, special
               considerations apply to waivers of rights under the Age Discrimination in
               Employment Act (ADEA).1 Title VII of the Civil Rights Act of 1964 (Title
               VII)2 does not include age as a basis for illegal discrimination in the
               workplace. However, in 1967, Congress enacted the ADEA to promote the
               employment of older persons based on their ability rather than age, to
               prohibit arbitrary age discrimination, and to help employers and employees
               find ways of meeting problems arising from the impact of age on
               employment. The ADEA forbids arbitrary discrimination against workers
               on the basis of age in hiring, promotion, terms of employment and
               discharge. The ADEA was enacted with characteristics of both Title VII and
               the Fair Labor Standards Act of 1928 (FLSA); 3 while Title VII’s substantive
               prohibitions on discrimination were included, the enforcement
               mechanisms of FLSA were also incorporated.

               This structure caused controversy over waivers of rights under ADEA
               because Title VII waivers are treated differently from FLSA waivers. Title
               VII rights may be waived without government supervision so long as the
               waiver is knowing and voluntary.4 In contrast, rights provided by the FLSA
               cannot be waived without government supervision. Waivers must be
               supervised by the Secretary of Labor or under a federal court-supervised
               settlement of a lawsuit filed pursuant to FLSA.

               On August 27, 1987, EEOC issued a final rule that allowed unsupervised
               waivers if the waiver was knowing and voluntary and provided that a valid
               ADEA waiver may not release prospective claims and may not be in
               exchange for consideration that includes employee benefits to which the
               employee was already entitled.5 The EEOC rule also listed several factors


               1
                29 U.S.C. §§621-634. The ADEA was amended in 1974 to extend to federal employees the
               protection of older workers against discrimination in the workplace based on age. 29 U.S.C.
               §633a.
               2
               42 U.S.C. §2000e et seq.
               3
               29 U.S.C. §§201-219.
               4
                Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974). The Supreme Court found that an
               employee might waive his rights under Title VII as part of a voluntary settlement, so long as
               the employee’s consent to the waiver is knowing and voluntary.
               5
                Legislative Regulation and Administrative Exemption Allowing for Non-EEOC Supervised
               Waivers Under the ADEA, 29 C.F.R Pt. 1927, 52 Fed.Reg. 32293 (August 27, 1987).




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as being relevant to determining whether a waiver is knowing and
voluntary. These factors included whether the employee was encouraged to
consult with an attorney. However, Congress suspended the rule, citing
concerns that the rule was contrary to public policy and, in the spring of
1988, held hearings concerning waivers of ADEA rights and EEOC’s
regulation.

In October 1990, the Older Workers Benefit Protection Act (OWBPA)
amended ADEA to add specific requirements for releases of ADEA claims.
The legislative history of OWBPA provides that the legislation is intended
to protect individuals covered by ADEA, and it further provides that the
legislation establishes minimum requirements that must be satisfied before
a court can proceed to determine factually whether a waiver was knowing
and voluntary. All of the requirements are necessary independent of the
knowing and voluntary considerations. The informational requirements are
designed to permit older workers to make more informed decisions and to
determine whether an employment termination program gives rise to a
valid claim under ADEA.

OWBPA requires that no individual may waive any right or claim under
ADEA unless the waiver is knowing and voluntary. OWBPA specifies the
minimum requirements for a knowing and voluntary release of claims
under ADEA. The waiver must, at a minimum, comply with the following
requirements:

1. Be written in a manner calculated to be understood by the average
   individual eligible to participate,

2. Specifically refer to rights and claims arising under ADEA,

3. Not waive rights and claims that may arise after the date the waiver is
   executed;

4. Provide for consideration in addition to anything of value to which the
   individual already is entitled,

5. Advise the individual in writing to consult with an attorney prior to
   executing the waiver,

6. Give an individual a period of at least 21 days within which to consider
   the agreement, and




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7. Provide that the individual may revoke the agreement for a period of at
   least 7 days following the agreement’s execution.6

A waiver in settlement of a charge filed with EEOC or a court action must
meet the first five factors listed above, and the individual must be given a
reasonable period of time within which to consider the agreement.
Additional informational requirements apply in the case of a waiver
requested in connection with an exit incentive or other employment
termination program offered to a group or class of employees. The
employer must inform the individual in writing as to the following:

1. Any class or group of individuals covered by the program, and

2. The job titles and ages of all individuals, eligible or selected for the
   program, and the ages of all individuals in the same job classification or
   organizational unit who are not eligible or selected for the program.

In addition, the individual must be given at least 45 days within which to
consider the agreement. These additional requirements were added
because, in the case of group termination programs, additional protections
are required for individuals from whom a waiver is sought. More time is
provided to weigh options, understand the program, and consult with an
attorney. Employers are required to provide detailed, written information
describing the group termination program.

The OWBPA also mandates that a waiver not affect EEOC’s rights and
responsibilities to enforce ADEA and further states that “[no] waiver may
be used to justify interfering with the protected right of an employee to file
a charge or participate in an investigation or proceeding conducted by the
Commission.” 7

In June 1998, 8 EEOC published final regulations that provide guidance on
all waivers of ADEA rights and claims, regardless of whether the employee

6
29 U.S.C. §626(f)(1)(A)-(G).
7
29 U.S.C. §626(f)(4).
8
 Waiver of Rights and Claims Under the Age Discrimination in Employment Act (ADEA),
Equal Employment Opportunity Commission, 29 C.F.R. Pt. 1625, 63 Fed. Reg. 30624 (June 5,
1998). In one case decided prior to the publication of the regulations, Juhola v. Secretary of
the Army, 1994 WL 740459 (E.E.O.C.), EEOC applied OWBPA waiver requirements to a
settlement agreement entered into by a federal agency and an individual employee.




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                        Discrimination in Employment Act




                        is employed in the private or public sector, including employment by the
                        United States.9



OWBPA Compliance        The requirements of the OWBPA were enacted to set out threshold
                        standards for waivers of ADEA rights. Courts applying the requirements of
Requires Strict         OWBPA have found that strict adherence is necessary. The Supreme Court
Adherence to Terms of   considered the operation of the ADEA requirements in Oubre v. Entergy
                        Operations, Inc., 522 U.S. 422, 118 S.Ct. 838 (1998), where the Court
Statute                 determined that an employee who executed a waiver that failed to meet the
                        requirements of OWBPA could bring an ADEA claim without first repaying
                        the benefits she had received in exchange for the release. The Court
                        described the purpose of the OWBPA as protecting the rights and benefits
                        of older workers, and observed that

                        “The OWBPA implements Congress’ policy via a strict, unqualified statutory stricture on
                        waivers, and we are bound to take Congress at its word. Congress imposed specific duties
                        on employers who seek releases of certain claims created by statute. Congress delineated
                        these duties with precision and without qualification: An employee ‘may not waive’ an
                        ADEA claim unless the employer complies with the statute . . . The OWBPA governs the
                        effect under federal law of waivers or releases on ADEA claims and incorporates no
                        exceptions or qualifications.”10

                        Other courts have used similar language in describing the operation of
                        OWBPA. “Since the OWBPA establishes minimum or threshold
                        requirements, absolute technical compliance with its provisions is
                        required. The absence of even one of the OWBPA’s requirements invalidates
                        a waiver.” Butcher v. Gerber Products Company, 8 F. Supp. 2d 307, 314
                        (S.D.N.Y. 1998). “Under the OWBPA, a release cannot be deemed knowing
                        and voluntary unless all of the requirements of the OWBPA have first been
                        satisfied.” Collins v. Outboard Marine Corp., 808 F.Supp. 590, 594 (N.D. Ill.
                        1992). “When an employee signs a purported release of claims arising under
                        the ADEA, that release will not bar an ADEA claim unless the release
                        strictly complies with the statutory requirements of the OWBPA.” Thiessen


                        9
                         29 C.F.R. §1625.22(a)(4). EEOC regulations apply OWBPA waiver requirements to
                        employment by federal government. But cf. Lehman v. Nakshian, 453 U.S. 156 (1981)
                        (interpreting 29 U.S.C. §633a(f), which provides that federal personnel actions covered by
                        §633a are not subject to any other section of the ADEA, as evidence that Congress did not
                        intend to grant the right to a jury trial to federal employees suing the government under
                        ADEA.)
                        10
                             Oubre, 522 U.S. at 425.




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                         Waivers of Rights Under the Age
                         Discrimination in Employment Act




                         v. General Electric Capital Corporation, 232 F.Supp.2d 1230, 1233 (D. Kan.
                         2002).



Waiver of the Right to   While an employee can waive the right to recover from an employer based
                         on a claim of age discrimination under ADEA, OWBPA provides that a
File an EEOC             waiver may not affect the EEOC’s rights and responsibilities to enforce
Complaint                ADEA. In addition, no waiver may be used to justify interfering with the
                         protected right of an employee to file a charge or participate in EEOC
                         investigations or proceedings.11 EEOC regulations also provide that no
                         waiver agreement may include any provision imposing any limitation
                         adversely affecting any individual’s right to file a charge or complaint,
                         including a challenge to the validity of the waiver, with the EEOC.12

                         According to EEOC guidance, the OWBPA language is evidence that
                         Congress reaffirmed the public policy against interference with EEOC
                         enforcement efforts. EEOC’s guidance cites the legislative history of
                         OWBPA, which states that the provision is intended as a clear statement of
                         support for the principle that the elimination of age discrimination in the
                         workplace is a matter of public as well as private interest, and that no
                         waiver agreement may be permitted to interfere with the achievement of
                         that goal.13

                         In connection with the OWBPA’s statutory prohibition, the Senate
                         Committee report expresses support for the holding and reasoning of the
                         Fifth Circuit in EEOC v. Cosmair, Inc., 821 F. 2d 1085 (5th Cir. 1987).14 In
                         Cosmair, the court found that a waiver of the right to file a charge with the
                         EEOC is void as against public policy in part because the public interest in
                         private dispute settlement is outweighed by the public interest in EEOC




                         11
                              29 U.S.C. §626(f)(4).
                         12
                              29 C.F.R. §1625.22(i)(2).
                         13
                          Waivers Under the Civil Rights Laws, EEOC guidance effective April 10, 1997. EEOC
                         notes that although the guidance addresses the issues primarily in the context of the private
                         sector, the principles and considerations discussed are equally applicable to the federal
                         sector.
                         14
                          S. Rep. 101-263 (1990), The Older Workers Benefit Protection Act, April 4, 1990, 1990
                         U.S.C.C.A.N. 1509,1532.




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                        Discrimination in Employment Act




                        enforcement of ADEA. Allowing the filing of charges to be obstructed by
                        enforcing a waiver of the right to file a charge could impede EEOC
                        enforcement of the civil rights laws. The court found that the EEOC
                        depends on the filing of charges to notify it of possible discrimination. The
                        court determined that an employer and an employee cannot agree to deny
                        to the EEOC the information it needs to advance the public interest in
                        preventing employment discrimination. However, an employee can waive
                        the underlying cause of action and the right to recover from the employer
                        in a lawsuit.



Employee Must be        Both the OWBPA and EEOC regulations provide that an employee must be
                        advised in writing to consult an attorney. Courts analyzing waivers have
Advised in Writing to   applied the requirement strictly. In American Airlines v. Cardoza-
Consult an Attorney     Rodriguez, 133 F. 3d 111 (1st Cir. 1998), the court considered a waiver of
                        rights offered to certain employees in connection with an early retirement
                        program. The First Circuit found that language contained in the release that
                        stated “I have had reasonable and sufficient time and opportunity to
                        consult with an independent legal representative of my own choosing
                        before signing this . . . [release]” was insufficient because employer did not
                        advise employees to consult with counsel before executing the release.

                        In Thiessen, the court considered a release stating “the Company advised
                        the employee in writing to consult with a lawyer before signing this
                        Agreement.” The court found that this language suggests that the Company,
                        at some previous time, advised the employee to consult with an attorney
                        and determined that this language, standing alone, does not comply with
                        OWBPA’s requirement that an employer advise the employee in writing to
                        consult an attorney prior to executing the release. The court also said,
                        however, that the employee could have complied with the statute by
                        providing the employee with prior written advice so that the statement in
                        the release was factually accurate.

                        In Cole v. Gaming Entertainment, L.L.C., 199 F. Supp. 2d 208 (D. Del.
                        2002), the court considered a provision in a written release of employment
                        claims that the “[e]mployee acknowledges that he/she has been advised to
                        consult with an attorney prior to executing this Agreement.” The court
                        found that the language was insufficient to satisfy the requirements of
                        ADEA. Citing American Airlines, the court found that the passive language
                        used by the release was insufficient under current case law. However, the
                        court found that the release language might have met OWBPA standards if




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                      Discrimination in Employment Act




                      the employer’s representatives had advised the employee of his right to
                      counsel as contemplated by the release language.



OWBPA Informational   The OWBPA provides that a waiver cannot be considered knowing and
                      voluntary unless, at a minimum, if the waiver is requested in connection
Requirements          with an exit incentive or other employment termination program offered to
                      a group or class of employees, the employer informs the individuals in
                      writing in a manner calculated to be understood by the average individual
                      eligible to participate, as to (1) any class, unit, or group of individuals
                      covered by the program; any eligibility factors for such program; and any
                      time limits applicable to such program and (2) the job titles and ages of all
                      individuals eligible or selected for the program and the ages of all
                      individuals in the same job classification or organizational unit who are not
                      eligible or selected for the program.15

                      The EEOC regulations provide that “other employment termination
                      program” as set out in OWBPA usually means a group or class of employees
                      who were involuntarily terminated and who are offered additional
                      consideration in return for their decision to sign a waiver. The regulations
                      go on to state that the existence of a program will be determined based
                      upon the facts and circumstances of each case. A “program” exists when an
                      employer offers additional consideration for the signing of a waiver
                      pursuant to an exit incentive or other employment termination (e.g., a
                      reduction in force) to two or more employees. The regulations also state
                      that typically, an involuntary termination program is a standardized
                      formula or package of benefits that is available to two or more employees.
                      The terms of the program are generally not subject to negotiation between
                      the parties. The regulations make clear that the number and identity of
                      employees who must be provided with the information will depend on how
                      the employer chose persons who would be offered consideration for
                      signing a waiver. In some cases, the information requirement extends to all
                      employees within a certain job category; and in some cases, extends to all
                      employees within a particular division or to all employees in the employer’s
                      facility.

                      The legislative history of OWBPA indicates that group termination
                      programs raise additional issues and require additional protection for


                      15
                           29 U.S.C. §626(f)(1)(H).




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Discrimination in Employment Act




individuals from whom a waiver is sought. These informational
requirements are designed to permit older workers to make more informed
decisions in group termination programs. The employees affected by these
programs have little or no basis to suspect that action is being taken based
on their individual characteristics. The Senate Report16 explains that the
principal difficulty encountered by older workers in these circumstances is
their inability to determine whether the program gives rise to a valid claim
under ADEA and that the need for adequate information and access to
advice before waivers are signed is especially acute.




16
     S. Rep. No. 101-263, 1990 U.S.C.C.A.N. 1509, 1539.




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Comments from the Federal Housing Finance
Board                                                           Appendx
                                                                      iIV




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Comments from FHFB Board Members Franz
S. Leichter and Allan I. Mendelowitz                          Append
                                                                   x
                                                                   i
                                                                   V




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Comments from FHFB Board Members Franz
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Appendix VI

Comments from the Farm Credit
Administration                                                     Appendx
                                                                         iVI




(250082)      Page 80           GAO-03-364 Review of FHFB Operations
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