[Federal Register: September 22, 2005 (Volume 70, Number 183)]
[Rules and Regulations]
[Page 55513-55516]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22se05-2]
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FARM CREDIT ADMINISTRATION
12 CFR Part 627
RIN 3052-AC26
Title IV Conservators, Receivers, and Voluntary Liquidations;
Receivership Repudiation Authorities
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA, we, or our) issues this
final rule amending our regulations governing how the Farm Credit
System Insurance Corporation (FCSIC), as receiver or conservator of a
Farm Credit System (System) institution, will treat financial assets
transferred by the institution in connection with a securitization or
in the form of a participation. This final rule will resolve issues
raised by Financial Accounting Standards Board (FASB) Statement No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities (SFAS 140). Under conditions described in
the final rule, the FCSIC will not seek to recover or reclaim certain
financial assets in exercising its authority to repudiate or disaffirm
contracts pursuant to 12 CFR 627.2725(b)(2), (b)(14) and 627.2780(b)
and (d). Additionally, with this final rule, the FCSIC will not seek to
enforce the ``contemporaneous'' requirement of section 5.61(d) of the
Farm Credit Act of 1971, as amended (Act) (12 U.S.C. 2277a-10(d)). The
final rule is substantially identical to receivership rules issued by
the Federal Deposit Insurance Corporation (FDIC) and the National
Credit Union Administration (NCUA).
EFFECTIVE DATE: This regulation will be effective 30 days after
publication in the Federal Register during which either or both Houses
of Congress are in session. We will publish a notice of the effective
date in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Robert E. Donnelly, Senior Accountant, Office of Policy and Analysis,
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TTY
(703) 883-4434, or
Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703)
883-4020.
SUPPLEMENTARY INFORMATION:
I. Objective
The objective in this final rule is to give certainty to System
institutions regarding how the FCSIC will treat qualifying
participations and securitizations if the institution is subsequently
placed in conservatorship or receivership. The rule will achieve this
by ensuring that the FCSIC will not attempt to ``pull back'' the
subject assets into the conservatorship or receivership estate if the
transaction meets specified conditions.
There is nothing in this final rule that provides any System
institutions with the authority to engage in any transaction that is
not otherwise authorized.
[[Page 55514]]
II. Background
As discussed in the preamble to the proposed rule (see 70 FR 21685,
April 27, 2005), under generally accepted accounting principles (GAAP),
a transfer of financial assets is accounted for as a sale if the
transferor surrenders control over the assets. This principle is set
forth in the SFAS No. 140 issued by the FASB.\1\ Under this principle,
one of the conditions for determining that the transferor has
surrendered control is that the assets have been isolated from the
transferor, i.e., put presumptively beyond the reach of the transferor,
its creditors, a trustee in bankruptcy, or a receiver. This is known as
the ``legal isolation'' condition.
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\1\ SFAS 140 replaced SFAS 125 (which had covered the same
issues and was identically titled) in September 2000. SFAS 140
revised the standards for accounting for securitizations and other
transfers of financial assets and collateral and required certain
disclosures, but it carried over most of the provisions of SFAS 125
without reconsideration. The FDIC receivership issues and its
related rule 12 CFR 360.6, which are discussed later in this
preamble, are described in paragraphs 157-160 of SFAS 140.
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Whether the legal isolation condition has been met is determined
primarily from a legal perspective. This determination involves
considerations of the kind of receivership into which the transferor
may be placed and the powers of the receiver to reach assets that were
transferred prior to its appointment. If the available evidence
provides reasonable assurance that the transferred assets would be
beyond the reach of the powers of a bankruptcy trustee or receiver for
the transferor, then a determination that the transferred assets have
been legally isolated is appropriate.
When the transferor is a System institution, the FCSIC may be
appointed conservator or receiver. The FCSIC has authority to repudiate
burdensome contracts under Sec. Sec. 627.2725(b)(2), (b)(14) and
627.2780(b) and (d) of FCA regulations; and it can repudiate certain
other contracts under section 5.61(d) of the Act.\2\ Due to these
provisions, the question becomes whether financial assets transferred
in connection with a securitization or in the form of a participation
would be beyond the reach of the FCSIC as conservator or receiver.
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\2\ See 12 CFR 627.2725(b)(2), (b)(14) and 627.2780(b) and (d),
and 12 U.S.C. 2277a-10(d).
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Under Sec. Sec. 627.2725(b)(2) and 627.2780(d), the FCSIC may take
any action it considers appropriate or expedient to carry on the
business of the institution during the process of liquidation or during
the conservatorship. Under Sec. 627.2725(b)(14), the FCSIC, when
acting as conservator or receiver of a System institution, has the
power to disaffirm or repudiate any contract or lease to which the
institution is a party, the performance of which the FCSIC determines
to be burdensome. Repudiation of a contract relieves the FCSIC from
performing any unperformed obligations remaining under the contract.
Section 5.61(d) of the Act provides that no agreement that tends to
diminish or defeat the FCSIC's interest in an asset acquired by the
FCSIC as conservator or receiver is enforceable against the FCSIC
unless the agreement meets certain requirements. One of those
requirements is that the agreement must be executed, by the institution
and by any person claiming an adverse interest under it,
contemporaneously with the acquisition of the asset by the institution.
This is referred to as the ``contemporaneous'' requirement. These
provisions are discussed below.
III. Description of the Final Rule
This final rule will add a new Sec. 627.2726 to the
conservatorship and receivership provisions in part 627 of FCA's
regulations. The rule will apply only to those securitizations or
participations in which the transfer of financial assets meets all
conditions for sale accounting treatment under GAAP, other than the
``legal isolation'' condition as it applies to institutions for which
the FCSIC may be appointed as conservator or receiver, which is
addressed by this rule. The final rule provides that, for these
transfers, the FCSIC will not, by exercise of its authority to
repudiate contracts under Sec. 627.2725(b)(2) or (b)(14), reclaim,
recover, or recharacterize as property of the institution or the
receivership any financial assets transferred by a System institution
in connection with a securitization or in the form of a participation.
Although the repudiation of a securitization or participation will not
affect transferred financial assets, repudiation will excuse the FCSIC
from performing any continuing obligations imposed by the
securitization or participation. If the FCSIC, in order to terminate
such continuing obligations or duties, seeks to repudiate an agreement
or contract under which a System institution has transferred financial
assets in connection with a securitization or in the form of a
participation, the FCSIC will not seek to reclaim, recover, or
recharacterize as property of the institution or the receivership such
financial assets.
The definitions in the final rule are limited to this rule only,
and language has been added to the final rule to clarify this point.
The definition of ``participation'' is specifically limited to
participations that are ``without recourse'' to the selling or ``lead''
institution. ``Without recourse'' means that the participation must not
be subject to any agreement that requires the selling or ``lead''
institution to repurchase the participant's interest or to otherwise
compensate the participant upon the borrower's default on the
underlying obligation. The term ``without recourse'' will not, however,
preclude the lead institution from retaining a subordinated interest in
the participated obligation, against which losses are initially
allocated. The final rule will not apply unless the System institution
received adequate consideration for the transfer of financial assets at
the time of the transfer, and the documentation effecting the transfer
of financial assets reflects the intent of the parties to treat the
transaction as a sale, and not as a secured borrowing, for accounting
purposes.
The final rule further provides that it will not be construed as
waiving, limiting, or otherwise affecting the rights or powers of the
FCSIC to take any action or to exercise any power not specifically
limited by this section. Such rights or powers include, but are not
limited to, any rights, powers or remedies of the FCSIC regarding
transfers taken in contemplation of the institution's insolvency or
with the intent to hinder, delay, or defraud the institution or the
creditors of such institution, or that is a fraudulent transfer under
applicable law.
The final rule further provides that the FCSIC will not seek to
avoid an otherwise legally enforceable securitization agreement or
participation agreement executed by a System institution solely because
such agreement does not meet the ``contemporaneous'' requirement of
section 5.61(d) of the Act.
The final rule will apply to securitizations and participations
engaged in by System institutions while the rule is in effect, even if
the rule is later amended or repealed. Section 627.2726(g) provides
that any repeal or amendment of the rule by the FCA will not apply to
any transfer of financial assets made in connection with a
securitization or participation that was in effect before such repeal
or amendment. As a result of Sec. 627.2726(g), where a transfer of
financial assets in connection with a securitization or in the form of
a participation is made by a System institution and the securitization
or participation was in effect before any repeal or amendment of the
rule by the FCA, such transfer
[[Page 55515]]
will continue to satisfy the legal isolation requirement
notwithstanding the repeal or amendment.
The final rule makes a conforming change to Sec. 627.2780(b) to
clarify that the provisions of this final rule apply to a
conservatorship as well as to a receivership.
IV. Comments
The FCA received no written comments on the proposed rule. The FCA
adopts the rule as final with no substantive changes other than the
change to the definitions section described above.
V. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
Each of the banks in the Farm Credit System, considered together with
its affiliated associations, has assets and annual income in excess of
the amounts that would qualify them as small entities. Therefore, Farm
Credit System institutions are not ``small entities'' as defined in the
Regulatory Flexibility Act.
List of Subjects in 12 CFR Part 627
Agriculture, Banks, banking, Claims, Rural areas.
0
For the reasons stated in the preamble, part 627 of chapter VI, title
12 of the Code of Federal Regulations is amended as follows:
PART 627--CONSERVATORS, RECEIVERS, AND VOLUNTARY LIQUIDATIONS
0
1. The authority citation for part 627 is amended to read as follows:
Authority: Secs. 4.2, 5.9, 5.10, 5.17, 5.51, 5.58, 5.61 of the
Farm Credit Act (12 U.S.C. 2183, 2243, 2244, 2252, 2277a, 2277a-7,
2277a-10).
Subpart B--Receivers and Receiverships
0
2. Add a new Sec. 627.2726 to read as follows:
Sec. 627.2726 Treatment by the conservator or receiver of financial
assets transferred in connection with a securitization or
participation.
(a) Definitions. For the purposes of this section, the following
definitions apply:
Beneficial interest means debt or equity (or mixed) interests or
obligations of any type issued by a special purpose entity that entitle
their holders to receive payments that depend primarily on the cash
flow from financial assets owned by the special purpose entity.
Financial asset means cash or a contract or instrument that conveys
to one entity a contractual right to receive cash or another financial
instrument from another entity.
Participation means the transfer or assignment of an undivided
interest in all or part of a loan or a lease from a seller, known as
the ``lead'', to a buyer, known as the ``participant'', without
recourse to the lead, pursuant to an agreement between the lead and the
participant. Without recourse means that the participation is not
subject to any agreement that requires the lead to repurchase the
participant's interest or to otherwise compensate the participant due
to a default on the underlying obligation.
Securitization means the issuance by a special purpose entity of
beneficial interests:
(1) The most senior class of which at the time of issuance is rated
in one of the four highest categories assigned to long-term debt or in
an equivalent short-term category (within either of which there may be
sub-categories or gradations indicating relative standing) by one or
more nationally recognized statistical rating organizations, or
(2) Which are sold in transactions by an issuer not involving any
public offering for purposes of section 4 of the Securities Act of 1933
(15 U.S.C. 77d), as amended, or in transactions exempt from
registration under such Act pursuant to Regulation S thereunder (or any
successor regulation).
Special purpose entity means a trust, corporation, or other entity
demonstrably distinct from the Farm Credit institution that is
primarily engaged in acquiring and holding (or transferring to another
special purpose entity) financial assets, and in activities related or
incidental thereto, in connection with the issuance by such special
purpose entity (or by another special purpose entity that acquires
financial assets directly or indirectly from such special purpose
entity) of beneficial interests.
(b) The receiver shall not, by exercise of its authority to
repudiate contracts under Sec. 627.2725(b)(2) and (b)(14), reclaim,
recover, or recharacterize as property of the institution or the
receivership any financial assets transferred by a Farm Credit
institution in connection with a securitization or participation,
provided that such transfer meets all conditions for sale accounting
treatment under generally accepted accounting principles, other than
the ``legal isolation'' condition as it applies to institutions for
which the FCSIC may be appointed as receiver which is addressed by this
section.
(c) Paragraph (b) of this section shall not apply unless the Farm
Credit institution received adequate consideration for the transfer of
financial assets at the time of the transfer, and the documentation
effecting the transfer of financial assets reflects the intent of the
parties to treat the transaction as a sale, and not as a secured
borrowing, for accounting purposes.
(d) Paragraph (b) of this section shall not be construed as
waiving, limiting, or otherwise affecting the power of the receiver to
disaffirm or repudiate any agreement imposing continuing obligations or
duties upon the institution in receivership.
(e) Paragraph (b) of this section shall not be construed as
waiving, limiting or otherwise affecting the rights or powers of the
receiver to take any action or to exercise any power not specifically
limited by this section, including, but not limited to, any rights,
powers or remedies of the receiver regarding transfers taken in
contemplation of the institution's insolvency or with the intent to
hinder, delay, or defraud the institution or the creditors of such
institution, or that is a fraudulent transfer under applicable law.
(f) The receiver shall not seek to avoid an otherwise legally
enforceable securitization agreement or participation agreement
executed by a Farm Credit institution solely because such agreement
does not meet the ``contemporaneous'' requirement of section 5.61(d) of
the Act.
(g) This section may be repealed or amended by the Farm Credit
Administration, but any such repeal or amendment shall not apply to any
transfers of financial assets made in connection with a securitization
or participation that was in effect before such repeal or modification.
Subpart C--Conservators and Conservatorships
0
3. Amend Sec. 627.2780(b) by adding a second sentence to read as
follows:
Sec. 627.2780 Powers and duties of conservators.
* * * * *
(b) * * * The provisions of Sec. 627.2726 shall also apply to the
conservator of a Farm Credit institution.* * *
* * * * *
[[Page 55516]]
Dated: September 16, 2005.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 05-18892 Filed 9-21-05; 8:45 am]
BILLING CODE 6705-01-P