[Federal Register: January 19, 2005 (Volume 70, Number 12)]
[Proposed Rules]
[Page 2963-2976]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19ja05-15]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 2963]]
FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 612, 614, 615, 618, 619, 620, and 630
RIN 3052-AC19
Organization; Standards of Conduct; Loan Policies and Operations;
Funding and Fiscal Affairs, Loan Policies and Operations, and Funding
Operations; General Provisions; Definitions; Disclosure to
Shareholders; Disclosure to Investors in Systemwide and Consolidated
Bank Debt Obligations of the Farm Credit System
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA, we, or our) is proposing
to amend our regulations affecting the governance of the Farm Credit
System. The proposed rule does not affect the governance of the Federal
Agricultural Mortgage Corporation. The proposed rule provides guidance
on director qualifications; requires Farm Credit System institution
boards of directors to complete training on corporate governance topics
and conduct evaluations of their own performance; and addresses the
number, selection, terms of service, and removal of outside directors.
The proposed rule also addresses board committees, providing
requirements for nominating committees, establishing compensation
committees, and extending audit committee requirements to all Farm
Credit System institutions. Finally, the proposed rule clarifies and
expands the current rule on disclosure of conflicts of interest and
compensation.
DATES: You may send comments on or before March 21, 2005.
ADDRESSES: Comments may be sent by electronic mail to reg-comm@fca.gov,
through the Pending Regulations section of our Web site at http://www.fca.gov,
or through the Government-wide http://www.regulations.gov portal. You may also
send written comments to S. Robert Coleman, Director, Regulation and
Policy Division, Office of Policy and Analysis, Farm Credit
Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090, or
by facsimile transmission to (703) 734-5784. You may review copies of
all comments we receive at our office in McLean, Virginia.
You may review copies of comments we receive at our office in
McLean, Virginia, or from our Web site at http://www.fca.gov. Once you
are in the Web site, select ``Legal Info,'' and then select ``Public
Comments.'' We will show your comments as submitted, but for technical
reasons we may omit items such as logos and special characters.
Identifying information you provide, such as phone numbers and
addresses, will be publicly available. However, we will attempt to
remove electronic-mail addresses to help reduce Internet spam.
FOR FURTHER INFORMATION CONTACT:
Robert R. Andros, Senior Economist, Office of Policy and Analysis, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TTY (703)
883-4434,
or
Laura D. McFarland, Senior Attorney, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703)
883-4020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of this proposed rule are to:
Strengthen the safety and soundness of Farm Credit System
institutions;
Strengthen the independence of Farm Credit System
institution boards;
Incorporate many of the best corporate governance
practices for Farm Credit System institutions; and
Improve disclosures to stockholders and investors in the
Farm Credit System.
II. Background
The Farm Credit Act of 1971, as amended (Act),\1\ authorizes FCA to
issue regulations implementing the provisions of the Act. FCA
regulations ensure the safe and sound operations of Farm Credit System
institutions and govern disclosure of financial information to
stockholders and investors in the Farm Credit System.\2\ Congress
explained in section 514 of the Farm Credit Banks and Associations
Safety and Soundness Act of 1992 (1992 Act) \3\ that disclosure of
financial information and reporting of potential conflicts of interest
by Farm Credit System directors, officers, and employees helps ensure
the financial viability of the Farm Credit System. In the 1992 Act,
Congress required that we review our regulations to ensure that Farm
Credit System institutions provide adequate disclosures to stockholders
and other interested parties. We completed this review in 1993, making
appropriate amendments to our Standards of Conduct regulation (59 FR
24889, May 13, 1994) and Disclosure to Stockholders regulation (59 FR
37406, July 22, 1994). In keeping with today's business environment and
the findings of Congress under the 1992 Act, we believe it is prudent
and timely to update our regulatory guidance on corporate governance.
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\1\ Pub. L. 92-181, 85 Stat. 583.
\2\ Section 5.17(a)(8) to (10) of the Act. 12 U.S.C. 2001, et
seq.
\3\ Pub. L. 102-552, 106 Stat. 4131.
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The structure of the Farm Credit System and its individual
institutions has undergone significant change as a result of the
Agricultural Credit Act of 1987 (1987 Act).\4\ Since 1988, Farm Credit
banks have transferred their direct lending authority to their
affiliated associations, thereby becoming wholesale lenders. Most of
the 13 banks for cooperatives (BCs) merged and then, along with the
remaining BCs, consolidated with a Farm Credit bank to create an
agricultural credit bank. Overall, 37 banks and 377 associations have
consolidated into 5 banks and 97 associations, creating fewer, but
larger and more sophisticated, institutions.\5\ During this same time,
agricultural credit associations with subsidiary structures have become
the dominant Farm Credit System direct lending structure. The continued
growth and increasing complexity of Farm Credit System institutions
places additional demands on their boards of directors. Further, the
recent troubles of a number of publicly held companies resulting from
poor governance practices amplifies the need to ensure Farm Credit
System institutions have
[[Page 2964]]
qualified boards and transparency in reporting to stockholders and
investors.
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\4\ Pub. L. 100-233, 101 Stat. 1568.
\5\ As of September 9, 2004.
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Public attention on corporate governance issues resulted in a
series of investigations, public hearings, and legislative and
regulatory changes for public companies. The predominant legislative
action was passage of the Sarbanes-Oxley Act of 2002 (Sarbanes-
Oxley).\6\ Sarbanes-Oxley establishes stronger reporting requirements
and enhanced oversight for publicly held companies by increasing the
responsibility and independence of corporate boards. The Securities and
Exchange Commission (SEC) issued, and continues to issue, regulations
implementing the provisions of Sarbanes-Oxley. Self-regulating
organizations (SROs) such as the New York Stock Exchange (NYSE), the
American Stock Exchange (AMEX) and the NASDAQ Stock Exchange (NASDAQ)
have also issued requirements designed to enhance the accountability
and transparency of business operations. Likewise, the Conference
Board's Commission on Public Trust and Private Enterprise, the Business
Roundtable, and large institutional investors and insurance companies
issuing director and officer liability insurance recommended changes to
corporate policies and procedures to improve corporate governance.
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\6\ Pub. L. 107-204, July 30, 2002.
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Although Farm Credit banks and associations are not subject to the
governance requirements of Sarbanes-Oxley, we considered its
components, the actions of other regulators, and recent governance
enhancements by the Farm Credit System when developing this proposed
rule. As noted in a Moody's Corporate Governance Assessment in 2003,
the Farm Credit System initiated an extensive review of its governance
practices, intending to adopt best practices and follow relevant
provisions of Sarbanes-Oxley. We have also considered these self-
initiated governance enhancements by the Farm Credit System in
developing this proposed rule. We also sought to balance regulatory
requirements with informal guidance. Regulations ensure an element of
consistency, while informal guidance provides flexibility for
management to adopt practices suitable to the unique needs of
individual Farm Credit System institutions. Our efforts to achieve this
balance are reflected in this proposed rule. The proposed rule also
gives full consideration to our examination of Farm Credit System
institutions and the role examinations play in ensuring safe and sound
operations.
The proposed rule considers the current state of the Farm Credit
System, the increasingly complex market environment within which it
operates, and current best governance practices. Specifically, the
proposed rule addresses five governance areas: (1) Director training,
experience, and performance, (2) board composition, (3) nominating
committees, (4) conflict of interest and compensation disclosures, and
(5) audit and compensation committees. This proposed rule will ensure
timely and accurate System-wide disclosure in a manner consistent with
our regulatory policy.\7\
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\7\ FCA Board Policy Statement on Regulatory Philosophy, 59 FR
32189, June 22, 1994.
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III. Section-by-Section Analysis
A. Definitions
1. Agent and Entity (Sec. 612.2130)
The proposed rule amends existing Sec. 612.2130 to clarify that
the term ``agent'' applies to current, not past, relationships with
Farm Credit System institutions. It also proposes to remove the Farm
Credit System institutions exception from the list of business
institutions and organizations included in the Standards of Conduct
definition of ``entity.'' We believe the interactions between Farm
Credit System institutions should be included in the Standards of
Conduct reporting requirements, providing complete and full disclosure
of potential conflicts of interest. We also propose redesignating
paragraph numbers as a conforming change.
2. Outside Director (Sec. Sec. 611.320, 615.5230, and New Sec.
619.9235)
We propose adding a definition of outside director to the general
definitions in part 619. The proposed Sec. 619.9235 would define an
outside director as a director elected or appointed by the board and
independent of the Farm Credit System. The proposed definition includes
agents in the list of ineligible candidates. Currently Farm Credit
banks, but not associations, may have agents as outside directors. The
proposed definition would remove that option, making requirements
between Farm Credit banks and associations consistent.
We propose using the opportunity created by the introduction of the
term outside director into the regulations to clarify Sec. Sec.
611.320(b) and 615.5230(a). We clarify that each voting stockholder's
right to elect directors does not include outside directors.
3. Senior Officer (Sec. Sec. 611.1223, 612.2155, 620.1, and New Sec.
619.9265)
We propose removing the existing definition of senior officer from
Sec. 620.1 and adding a definition to part 619 that expands the Sec.
620.1 definition to include policy makers. The proposed Sec. 619.9265
would apply the definition of senior officer to all our regulations,
unless otherwise noted. In conformance with this proposed change, we
propose removing the Sec. 620.1 definition reference in Sec. Sec.
611.1223(d)(9) and 612.2155(a).
4. Affiliated Organization (Sec. 620.1)
We propose amending the definition of an affiliated organization at
Sec. 620.1(a) by adding the position of director to the list of
positions within an affiliated organization. This change will correct
an inadvertent omission in the existing rule.
B. Bank and Association Boards of Directors
1. Director Qualifications and Training (New Sec. 611.210)
The proposed rule adds a new Sec. 611.210, requiring each Farm
Credit bank and association to establish standards for evaluating the
knowledge and experience of director candidates. Farm Credit bank and
association boards are responsible for providing management oversight,
planning, and policy direction. In addition, they have certain
fiduciary responsibilities to stockholders, which may require some
accounting and financial experience. It is important to identify well-
qualified directors and strengthen the collective knowledge of each
board. Therefore, we propose that Farm Credit System institutions
identify specific board member qualifications to enhance the collective
knowledge of the board in a variety of areas, such as risk management,
agricultural economics, and financial reporting.
The proposed rule requires that new directors receive orientation
training within 1 year of assuming a board position and that incumbent
directors receive periodic training. We recognize that the Farm Credit
System offers some training for directors and seeks increased
opportunities for FCA and the Farm Credit System to jointly offer
director training. We believe our proposed training requirement will
provide these opportunities, as well as improve board performance,
facilitate implementation of best governance practices, and promote
stockholder confidence. Continuing education and training assists
directors in keeping abreast of current issues and
[[Page 2965]]
developments affecting agriculture, banking, and corporate governance.
While we propose some training topics, we expect each Farm Credit
System institution to add others that fit its needs and circumstances.
The rule does not propose requiring Farm Credit bank and
association boards be culturally diverse, but we believe each board
should be representative of its current and potential borrowers. We
believe a board should reflect the age, race, gender, and other
cultural factors of producers within its territory. As such, we
encourage Farm Credit System institutions to consider diversity when
conducting director recruitment.
2. Board Evaluations (Sec. Sec. 615.5200 and 618.8440)
We propose adding a director evaluation requirement to Sec. Sec.
615.5200 and 618.8440. We believe each board needs a systematic
approach for evaluating its performance. Annual board performance
evaluations are acknowledged as a best governance practice and have
been endorsed by the NYSE, prominent trade groups, consulting firms,
and leading schools of management. As such, we are proposing amendments
to Sec. Sec. 615.5200(b) and 618.8440(b) to require that every Farm
Credit System institution board of directors conduct an annual
evaluation of its performance as part of the 3-year operational and
strategic business plan (3-year business plan). Our proposal leaves the
method of conducting this evaluation to the board's discretion.
Whatever method is selected, the goal of this evaluation is to help the
board identify its strengths and weaknesses.
In proposing this requirement, we recognize that we currently
monitor director performance through our examination process. Section
EM-510 of the FCA Examination Manual requires our examiners to assist
each Farm Credit System institution board in understanding our view of
a director's role and responsibilities through an evaluation of a
board's effectiveness in achieving safe and sound operations and
operating within applicable law and regulations. We will continue to
offer this assessment during examinations, but believe its usefulness
would be increased if each Farm Credit System institution board also
conducted a similar evaluation.
A companion to board evaluations is a Code of Ethics. A written
Code of Ethics is intended to reasonably assure customers that a
business offers services in an objective and impartial manner. Section
406 of Sarbanes-Oxley encourages companies to adopt a Code of Ethics
and the SEC, to implement section 406, requires publicly traded
companies to disclose if they have a Code of Ethics or the reason why
no code has been adopted. This rule does not propose requiring Farm
Credit bank and association boards to adopt a Code of Ethics. We
believe the proposed enhancements to our regulations offer sufficient
assurances to customers that the Farm Credit System functions in a fair
manner. However, we are encouraging each board to follow the current
best practice of establishing a Code of Ethics for itself, management
and employees. We believe a voluntary action by the individual
institutions to adopt and publish a Code of Ethics will increase
stockholder and investor goodwill and confidence.
3. Outside Directors (New Sec. 611.220)
The proposed rule adds a new Sec. 611.220 addressing outside
director expertise, number, terms of service, and removal.
a. Expertise and Number. The Act requires each Farm Credit bank and
association board to have at least one director who is independent of
the Farm Credit System and elected or appointed by stockholder-elected
board members. The legislative history of the Act explains that
Congress intended the outside director to provide an independent
perspective and some expertise in appropriate areas. We believe the
current business environment requires financial expertise within each
board of directors and are proposing that all Farm Credit banks and
associations have at least one outside director who is a financial
expert.\8\ This outside director will broaden the board's collective
knowledge, enhance its independence, and improve its ability to carry
out its fiduciary responsibilities on behalf of Farm Credit System
stockholders and investors. We define financial expertise to include
education or experience in accounting, internal accounting controls,
and preparing or reviewing financial statements for financial
institutions or large corporations. We relied on Sarbanes-Oxley when
defining financial expertise, which was also used as a basis for the
Office of the Comptroller of the Currency (OCC) governance rules for
national banks and the proposed amendments to the Office of Federal
Housing Enterprise Oversight (OFHEO) rules.
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\8\ Section 4.9 of the Act requires the Federal Farm Credit
Banks Funding Corporation to have two expert outside directors. 12
U.S.C. 2160(d)(1)(C)(ii).
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The proposed rule would further require Farm Credit banks and
associations with total assets of more than $150 million to have at
least two outside directors. We feel the growth in individual
institution asset size, the increasing complexity in the financial
services sector and related operating risk exposure, as well as the
increasing scrutiny of Government-sponsored enterprises justify our
proposal. We propose exempting Farm Credit System institutions with
total assets of $150 million or less because we believe these
institutions are generally less complex and pose less risk. Although we
propose exempting these smaller institutions, we are not precluding
them from having more than one outside director. However, shareholder-
elected directors must remain the majority presence on a board.
We note that in today's business climate, outside directors provide
a valuable independent voice of experience to Farm Credit System
institutions facing a changing business environment. As such, we
believe outside directors should not be discouraged from serving in
leadership positions on the board. We further encourage Farm Credit
System institutions to select board leaders and committee members based
on their qualifications and not on the manner of their selection to the
board.
b. Terms of Service and Removal. We propose that outside directors
have the same terms of office as directors elected by all voting
stockholders. We believe that a similar term for all directors is
consistent with best governance practices and current Farm Credit
System practices. We also propose that outside directors only be
removed for cause or a change in eligibility status. Although the
removal of outside directors is currently governed by Farm Credit
System institution bylaws, we believe regulating removal improves Farm
Credit System institution governance, provides better System-wide
accountability, and enhances safety and soundness operations.
We consider ``cause'' to include a breach of fiduciary duties,
willful or criminal misconduct, and creating a risk to the Farm Credit
System institution. Removal for cause does not include offering
opposing viewpoints during board deliberations, identifying weaknesses
in the institution's operations, or exercising appropriate authorities
while serving on a committee of the board. We believe permitting
removal for other than a causal basis may have a chilling effect on the
outside director's independence, inhibiting the outside director's
willingness to take controversial positions while serving on the board.
[[Page 2966]]
Further, we are proposing that outside director removal for cause be
achieved only with a majority vote of all voting stockholders. Our
proposal follows our past practice of encouraging stockholder consent
when removing an outside director from office and recognizes the
cooperative principles of the Farm Credit System structure.
We are also proposing regulations requiring the removal of an
outside director when the director no longer meets the definition of an
outside director. The Act requires outside directors to have no
affiliation with the Farm Credit System, and as such, they should not
acquire any prohibited relation with the Farm Credit System while
serving as an outside director. We recognize that an anomaly in the Act
permits Farm Credit bank and association outside directors to serve as
the Federal Farm Credit Banks Funding Corporation's (Funding
Corporation) outside directors, thereby becoming ineligible to continue
as the underlying bank or association outside director.\9\ We believe
the proposed rule remedies this situation. Although we are proposing
that an outside director be removed from the position of outside
director if he or she acquires prohibited affiliations with the Farm
Credit System, we are not restricting a Farm Credit System institution
from converting that director to the proposed board-selected inside
director.
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\9\ Section 4.9(d)(1)(C)(i) of the Act.
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4. Board-Selected Inside Directors (New Sec. 611.230)
We strongly believe that stockholders have the right to vote for
directors, except in limited situations.
Our proposed rule adds a new Sec. 611.230 permitting no more than
two board-selected inside director positions, subject to the majority
consent of all voting stockholders of a Farm Credit System institution.
We believe allowing a bylaw provision authorizing Farm Credit bank and
association boards of directors to elect or appoint stockholder-
directors does not adversely impact corporate democracy or a bank or
association's status as a cooperative, provided the stockholders have
agreed to implement this through the institution's bylaws to create the
position. In further preservation of cooperative principles, we are
proposing a ``cooling off'' period, preventing selection of anyone who
was a candidate in the past 5 years for a stockholder-elected position.
We believe permitting board-selected inside directors may serve as a
tool for boards to achieve diversity or acquire needed skills. However,
we are limiting the number of board-selected inside directors to
preserve the cooperative principles of the Farm Credit System. In
addition, shareholder-elected directors must constitute the majority of
a board. We note that the board-selected inside director may run for
election at the next available opportunity.
We are also proposing clarifying amendments addressing this unique
director position in Sec. Sec. 611.320 and 615.5230.
C. Election of Directors
1. Director Candidate Campaign Material (Sec. Sec. 611.320 and
618.8310)
The proposed rule amends Sec. 618.8310 to clarify that Farm Credit
System institutions may provide a list of stockholders to other
stockholders in relation to an election to the board of directors or to
the nominating committee. In addition, we have added the distribution
of campaign materials in board and nominating committee elections to
the permissible purpose list of examples.
In making this clarification, we further propose amending Sec.
618.8310 to prohibit Farm Credit banks and associations from
distributing this same campaign material in lieu of providing a list of
stockholders. We make this change to reconcile the provisions of Sec.
618.8310 with those of Sec. 611.320, which prohibits a Farm Credit
System institution from distributing campaign material. We also clarify
Sec. 611.320 to emphasize that Farm Credit System institutions may not
distribute director candidate campaign material. The amendments we are
proposing to Sec. Sec. 618.8310 and 611.320 are essential to preserve
impartiality in the election of directors, while allowing for candidate
communication with stockholders.
We are also proposing a clarifying amendment to Sec.
618.8310(b)(1) to specify that a ``list of stockholders'' consists of
each stockholder's name, address, and classes of stock held. This
amendment is consistent with our past interpretations and comports with
the Model Business Corporation Act.\10\ We also clarify that Farm
Credit banks and associations may not add conditions to releasing the
list, such as indemnification or ``hold-harmless'' agreements, other
than those named in section 4.12A of the Act and our regulation. We
believe the existing certification provision adequately addresses an
institution's legitimate confidentiality concerns.
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\10\ 1984 Model Business Corporation Act, Sec. 7.20 (3rd Ed.
2002).
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As a technical change, we propose replacing ``agricultural credit
bank, bank for cooperatives, Federal land bank association, production
credit association, merged association, or Farm Credit Bank'' in Sec.
618.8310(b)(1) with ``Farm Credit bank or association'' pursuant to the
definitions contained in Sec. Sec. 619.9140 and 619.9050.
2. Director Candidate Disclosure (Sec. Sec. 615.5230, 620.20, 620.21,
620.30, and 620.31)
We propose consolidating the provisions of subpart F, Bank Director
Disclosure Requirements (Sec. Sec. 620.30 and 620.31), with subpart E,
Association Annual Meeting Information Statement (Sec. Sec. 620.20 and
620.21) into Sec. 620.21 of subpart E, and renaming subpart E ``Annual
Meeting Information Statement (AMIS).'' The proposed change would
establish a uniform set of election disclosure guidelines for Farm
Credit banks and associations.
Our proposed changes to the AMIS would require associations to
include nominee residential and business addresses and for candidates
to disclose any family relationships that would be reportable under
part 612 if elected to the institution's board. These requirements
currently exist for Farm Credit banks. Farm Credit banks would be
required to provide an AMIS to stockholders at least 10 days prior to
director elections, listing the day, time, and place of the meetings.
These changes should encourage further participation of stockholders in
Farm Credit bank and association elections, consistent with cooperative
principles, and establish a uniform set of election disclosure
guidelines. We also propose changing the ``and'' to ``or'' in Sec.
620.21(c)(2), while removing the ``total of'' phrase to provide more
information to stockholders on director attendance.
As part of the proposed consolidation, we propose amending Sec.
615.5230 to require that Farm Credit banks report their efforts to
locate nominees for director positions in the AMIS.
3. Nominating Committees (New Sec. 611.325)
The proposed rule adds a new Sec. 611.325 on nominating
committees. After reviewing surveys on the practices in many Farm
Credit System institutions, we decided to propose regulations
addressing the duties and composition of nominating committees.
Although we issued informal guidance in the past, the Farm Credit
System continues to request additional information on permissible
nominating committee activities. We believe this
[[Page 2967]]
guidance should be formalized in our regulations.
We are proposing that each Farm Credit bank and association have a
nominating committee of at least three members. We believe a minimum of
three members is consistent with best governance practices for
balancing outreach and diversity against potential committees of one.
The proposed rule specifies that committee members may not be director
candidates. We propose this restriction because some Farm Credit banks
and associations have permitted a stockholder to run for the nominating
committee and a directorship position in the same year. We believe
requiring committee members to be free from an interest in a
directorship at the time of service and selection preserves
impartiality.
Our existing rule requires Farm Credit banks and associations to
assure a choice of at least two nominees for each elected office or
document why there are not two nominees. Currently, only associations
are required to disclose this documentation to stockholders. We believe
that Farm Credit bank disclosure of the efforts to locate two qualified
and willing nominees will lead to greater openness in the nomination
process, increase the number of candidates, and provide regulatory
consistency between Farm Credit banks and associations in director
nominations. Therefore, the proposed rule requires Farm Credit bank and
association nominating committees to document and maintain a record of
their efforts to nominate two or more suitable candidates when only one
can be found and for the Farm Credit banks and associations to include
the nominating committee's report in the AMIS.
We further propose requiring Farm Credit banks and associations to
provide all necessary resources to the nominating committee, including
a list of stockholders. We believe these resources are necessary for a
nominating committee to conduct an independent and thorough search for,
and evaluation of, director candidates.
D. Conflict of Interest and Compensation Disclosure (Sec. 620.5)
The proposed rule would increase the level of disclosure for
potential conflicts of interest and executive compensation. Taken
together, these proposed changes will improve the transparency of Farm
Credit System institution governance and operation, strengthen its
safety and soundness, maintain the cooperative principles upon which
the Farm Credit System is based, and improve information flow to
stockholders and investors, consistent with the purposes and objectives
of the Act.
1. Disclosure of Other Business Interests
The proposed rule would amend Sec. 620.5(h) to require disclosure
of director and senior officer business relationships with other
business interests. The existing provision only requires directors to
disclose those business interests where he or she serves on the board
of another entity. We are proposing to expand the coverage of
disclosure reporting to include all senior officers. We also propose
increasing the level of disclosure to include all business interests
where a director or senior officer serves on the board or is employed
as a senior officer.
In proposing these changes, we considered the reporting
requirements of part 612 and the specific business interests that could
create a real or potential conflict of interest. We also looked to the
reporting requirements of other regulators. At a minimum, we believe it
is essential to disclose the individual's relationships with other Farm
Credit System institutions, including the Federal Agricultural Mortgage
Corporation. We considered limiting disclosure to lending institutions
but ultimately chose to retain the existing disclosure requirement of
all other business interests.
2. Disclosure of Compensation
We are proposing to clarify the meaning of compensation in Sec.
620.5(i)(1)(iv) and (i)(2). We are clarifying that compensation for
serving as a Farm Credit System institution director or senior officer
includes both cash and noncash compensation from all sources. For
example, if a senior officer attends an out-of-town meeting in his or
her Farm Credit System official capacity, any expenses paid by a third
party would be reportable.
a. Director Noncash Compensation. We are proposing that all noncash
compensation be disclosed. Existing Sec. 620.5(i)(1) excludes the
reporting of noncash compensation that does not exceed 10 percent of
total compensation. We believe tying a disclosure provision to a
percentage of compensation results in a disparity of reporting. For
example, a director in association A may have compensation of $30,000,
reporting noncash compensation that exceeds $3,000. Conversely, a
director in association B may have compensation of $300,000 and only
have to report noncash compensation that exceeds $30,000. We also
propose reporting any special compensation for serving on a board
committee.
b. Senior Officer Compensation. The proposed rule would amend Sec.
620.5(i)(2) to expand the current compensation disclosure requirement
for senior officers of Farm Credit banks and associations. Our existing
regulation provides for disclosure by Farm Credit System institutions
of compensation to senior officers on an aggregated basis subject to
certain limits. We are proposing that senior officer cash and noncash
compensation be individually disclosed.
We believe that the interests of Farm Credit System stockholders
and investors require full disclosure, as evidenced by congressional
statements on disclosure in the 1992 Act. Further, it is generally
considered a best practice to publicly disclose executive compensation
(both cash and noncash) on an individual basis. We further clarify in
the proposed rule that noncash compensation includes stock and stock
options. The proposed rule also removes the option for associations to
disclose senior officer compensation in the AMIS as an alternative to
the annual report. Farm Credit banks do not currently have this option;
therefore, we are removing the option for the associations in order to
improve disclosure to stockholders and provide consistency in reporting
requirements.
As a conforming change, we propose removing the provision at Sec.
620.5(i)(2), which provides for the disclosure of individual senior
officer compensation when requested.
c. CEO Compensation Threshold. We propose removing the reporting
exclusion for Chief Executive Officer (CEO) salaries below $150,000, as
adjusted for the Consumer Price Index. We reviewed the existing CEO
disclosure requirement and the associated limit of that disclosure. Our
review found no basis for retaining the $150,000 minimum reporting
limit. Further, in the course of our review, we noted that the SEC and
OCC require CEO compensation disclosure regardless of the amount. In
light of the stockholders' right to know and the events leading up to
the passage of Sarbanes-Oxley, we believe the existing provision can no
longer be supported. Therefore, we propose that every Farm Credit
System institution report the full amount of CEO compensation.
d. Senior Officer Perquisites. The existing rule at Sec.
620.5(i)(2) requires reporting perquisites over $25,000 or 10 percent
of a senior officer's salary. The proposed rule would reduce this
amount to $5,000. The reduced amount is the same as the reportable loan
[[Page 2968]]
transaction threshold at Sec. 620.5(k). Perquisites, by their nature,
are nominal privileges and benefits. However, amounts of $25,000 are
not nominal. As such, we believe the same disclosure level for loan
transactions is a reasonable level.
E. Audit and Compensation Committees
1. Audit Committees (Sec. Sec. 620.30 and 630.6)
An audit committee is the guardian of a corporation's financial
integrity. The events outside of the Farm Credit System involving
alleged misdeeds by corporate executives and independent auditors
damaged stockholder confidence in the financial markets. These events
highlight the need for strong, competent, and vigilant audit
committees. As such, we believe it is important for all Farm Credit
System institutions to have audit committees. Therefore, we are
proposing that each Farm Credit System association have an audit
committee. Currently, the Funding Corporation and Farm Credit banks are
the only Farm Credit System institutions required to have audit
committees under Sec. 630.6.
In conjunction with the proposed expansion, we propose moving the
Farm Credit bank audit committee provisions from Sec. 630.6(b) to
Sec. 620.30 for organizational purposes and adding a requirement for
association audit committees to Sec. 620.30. This section and Sec.
620.31 currently contain provisions on Farm Credit bank disclosure
statements. As discussed earlier, we propose consolidating Farm Credit
bank disclosures with association disclosure in Sec. 620.21.
We are also proposing changes in the structure, responsibilities,
and authority of audit committees. Audit committees recommend actions
needed to ensure full and accurate disclosure of an institution's
operations and financial well being. We believe an audit committee must
be comprised of at least three well-qualified board members. This view
is shared by Sarbanes-Oxley, which also requires audit committees to be
composed of directors. Therefore, the proposed rule requires each audit
committee to be composed solely of board members, including at least
one outside director.
Audit committee independence is essential to stockholder confidence
in the transparency of audited financial statements and the integrity
of the audit committee. By effectively carrying out its
responsibilities, an independent audit committee helps to ensure that
management properly develops and adheres to a sound system of internal
controls, that procedures are in place to objectively assess
management's practices, and that the outside auditors objectively
assess the institution's financial reporting practices. In furtherance
of these objectives, we propose that a director with financial
expertise serve on the audit committee as its chair.
We are also proposing that audit committees approve the engagement
or discharge of an institution's outside auditor. We believe it is
appropriate that the audit committee hire the outside auditor to
minimize potential or perceived undue management influence in the
review of financial reports and accounting procedures. The audit
committee's oversight will provide auditors with a knowledgeable
authority other than management with which to discuss controversial
matters.
We propose authorizing each audit committee to hire experts and
legal counsel, when necessary. Access to outside experts and legal
counsel provides an independent source of information or advice. Other
resources are also to be made available and, as part of the proposed
rule, we require a supermajority board vote to deny resources to an
audit committee. We propose requiring this level of control to increase
the independence of the audit committee and to act as a check on both
the audit committee and management expectations for the Farm Credit
System institution's financial resources. The proposed rule would also
add a 3-year recordkeeping requirement similar to the voting record
retention timeframe contained in Sec. 611.340.
In conjunction with the enhanced role of audit committees, we are
proposing to amend Sec. Sec. 618.8430, 620.5(m), 620.11(d) and (e),
630.20(l), and 630.40(d) to include a reference to the oversight
responsibility of audit committees.
2. Compensation Committees (Sec. Sec. 620.31 and 630.6)
The proposed rule would add a requirement that each Farm Credit
bank and association have a compensation committee comprised of at
least three board members. We also propose that compensation committees
have approval authority for senior officer compensation. We are
proposing this provision to ensure that senior officer salaries are
commensurate with the duties and responsibilities of their positions.
In drafting our proposal, we reviewed the regulations issued by
OFHEO, several compensation committee charters of publicly traded
companies, and published studies of best governance practices. These
emphasized the importance of a well-defined compensation program, a
qualified, objective compensation committee to oversee the program, and
the importance of transparency in administering the program.
We propose placing compensation committee provisions in Sec.
620.31 for Farm Credit banks and associations and Sec. 630.6(b) for
the Funding Corporation.
IV. Miscellaneous
1. Technical Changes (Sec. Sec. 611.1030, 612.2130, 614.4511, and
630.20)
Our proposed amendments require additional conforming technical
changes to other regulatory provisions. We propose removing Sec.
611.1030 as it contains provisions rendered obsolete by the 1988
technical amendments to section 7.1 of the Act and is redundant of
statutory language. We also propose amending Sec. 612.2130(d) to
remove the definition of ``director'' because it is unnecessary,
resulting in redesignated paragraphs. We propose removing Sec.
614.4511 as it has been rendered obsolete. We also propose changing the
management reference in Sec. 630.20 to ``senior officer'' for
consistency. The change to Sec. 630.20 would include incorporating the
proposed changes of Sec. 620.5(i) regarding senior officer
disclosures.
2. Bank Director Compensation (Sec. 611.400)
We recognize that the proposed rule may increase the
responsibilities of some Farm Credit System directors, such as those
serving on board committees. We further appreciate that some Farm
Credit banks have reported director recruitment difficulties, due in
part to the statutory compensation limit for Farm Credit bank
directors. In addition, prior to this rulemaking we received several
requests from Farm Credit banks to revise our rules on director
compensation waivers.
The Act at section 4.21 establishes the compensation for Farm
Credit bank directors at $20,000, adjusted annually to reflect changes
in the Consumer Price Index. The Act, however, gives FCA the authority
to waive this compensation level under exceptional circumstances. Use
of the waiver authority is designed to provide a higher level of
compensation for the duration of the exceptional circumstances. We have
exercised this authority in existing Sec. 611.400, which authorizes
Farm Credit banks to pay directors up to 30 percent more than the
statutory compensation limit in documented exceptional circumstances
and without prior
[[Page 2969]]
submission to FCA. Farm Credit banks are required to document the need
for the additional compensation before exercising this authority and
report its use, and the associated exceptional circumstances, in the
annual report to stockholders.
We are inviting comment on whether we should retain, reduce,
increase, or remove the current regulatory 30-percent waiver amount and
at what level we should remove the authority of Farm Credit banks to
exercise the waiver without prior submission to FCA. We request that
comments suggesting an appropriate percentage be accompanied by
independent data. We are seeking separate comment on what constitutes
an appropriate exceptional circumstance. Example of exceptional
circumstances might include taking a leadership role on the board or
one of its committees, serving as a recognized financial expert, or
addressing one-time unusual bank business, such as a merger. In
addition, we would like to receive comments identifying objective
criteria. The criteria should address the special knowledge, skills,
and abilities required by the exceptional circumstances.
3. Implementation Date
We recognize that some Farm Credit System institutions may have to
recruit outside directors who have financial expertise or hire an
additional outside director to satisfy certain provisions of the
proposed rule. Therefore, we are proposing a 1-year delay in the
implementation of these two requirements, beginning after publication
of the final rule. Full compliance with all other provisions must be
achieved beginning on the day following the effective date of the final
rule.
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 proposed 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
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 612
Agriculture, Banks, banking, Conflict of interests, Crime,
Investigations, Rural areas.
12 CFR Part 614
Agriculture, Banks, banking, Foreign trade, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
12 CFR Part 618
Agriculture, Archives and records, Banks, banking, Insurance,
Reporting and recordkeeping requirements, Rural areas, Technical
assistance.
12 CFR Part 619
Agriculture, Banks, banking, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 630
Accounting, Agriculture, Banks, banking, Organization and functions
(Government agencies), Reporting and recordkeeping requirements, Rural
areas.
For the reasons stated in the preamble, parts 611, 612, 614, 615,
618, 619, 620, and 630 of chapter VI, title 12 of the Code of Federal
Regulations are proposed to be amended as follows:
PART 611--ORGANIZATION
1. The authority citation for part 611 is amended to read as
follows:
Authority: Secs. 1.3, 1.4, 1.13, 2.0, 2.1, 2.10, 2.11, 3.0, 3.2,
3.21, 4.12, 4.15, 4.20, 4.21, 5.9, 5.10, 5.17, 6.9, 6.26, 7.0-7.13,
8.5(e) of the Farm Credit Act (12 U.S.C. 2011, 2013, 2021, 2071,
2072, 2091, 2092, 2121, 2123, 2142, 2183, 2203, 2208, 2209, 2243,
2244, 2252, 2278a-9, 2278b-6, 2279a-2279f-1, 2279aa-5(e)); secs. 411
and 412 of Pub. L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414
of Pub. L. 100-399, 102 Stat. 989, 1003, and 1004.
2. Add a new subpart B, consisting of Sec. Sec. 611.210, 611.220,
and 611.230, to read as follows:
Subpart B--Bank and Association Board of Directors
Sec.
611.210 Director qualifications and training.
611.220 Outside directors.
611.230 Board-selected inside directors.
Subpart B--Bank and Association Board of Directors
Sec. 611.210 Director qualifications and training.
(a) Each bank and association must establish standards for director
candidates that consider the knowledge and experience of individual
candidates in risk management, agricultural economics, financial
reporting, agricultural production and marketing, or other appropriate
areas.
(b) At a minimum, banks and associations must require newly elected
or appointed directors to complete director orientation training within
1 year of assuming their position and require incumbent directors to
attend training periodically to advance their skills. Orientation and
advanced training courses should address corporate governance,
strategic planning, financial reporting, electronic banking, and other
areas deemed appropriate by the Farm Credit bank or association.
Sec. 611.220 Outside directors.
(a) Eligibility, number and term. (1) No candidate for an outside
director position may be a director, officer, employee, agent, or
stockholder of an institution in the Farm Credit System. Farm Credit
banks and associations must make a reasonable effort to recruit outside
directors possessing a level of financial knowledge, but must have at
least one outside director with financial expertise. Financial
expertise includes, but is not limited to, education or experience in:
accounting, preparing or reviewing financial statements for financial
institution or large corporations, or internal accounting controls.
(2) Each bank and association with total assets exceeding $150
million as of January 1 of each year must have no fewer than two
outside directors on the board. Banks and associations with $150
million or less in total assets as of January 1 of each year must have
one outside director. Nothing in this section prohibits a bank or
association board from exceeding the minimum number of outside
directors. Stockholder-elected directors must constitute a majority of
the board at all times.
(3) Banks and associations may not establish a different term of
office for outside directors than that established for directors
elected by the majority vote of all voting stockholders.
(b) Removal. When the majority of the board determines the removal
of an outside director is necessary before the
[[Page 2970]]
expiration of the outside director's term, the board must document the
reason for removal. Outside directors may only be removed when the
director no longer meets the definition of an outside director or for
cause. Removal for cause includes, but is not limited to, risk to the
institution's operations, breach of fiduciary duties, willful or
criminal misconduct, or violations of law. Removal for cause requires a
majority vote of all voting stockholders.
Sec. 611.230 Board-selected inside directors.
A board-selected inside director is a stockholder who has been
elected to a Farm Credit bank or association board of directors by the
other board members. Board-selected inside directors are not elected by
a general or regional vote of all voting stockholders. Board-selected
inside directors are not outside directors as defined in part 619 of
this chapter.
(a) Creation of the position. A Farm Credit bank or association may
only establish a board-selected inside director position with the
majority consent of all voting stockholders. The position must be
established in the bank or association bylaws. The qualifications,
training and disclosure requirements of directors elected by voting
stockholders apply to board-selected inside directors. Board-selected
inside director candidates are not subject to the nominating committee
process of Sec. 611.325.
(b) Eligibility and number. A board-selected inside director may
not be a stockholder in any institution of the Farm Credit System,
except the Farm Credit bank or association on whose board he or she
will serve. No board-selected inside director may have been a candidate
for a stockholder-elected director position in the Farm Credit bank or
association in the 5 years prior to accepting the board-selected inside
director position. No Farm Credit bank or association may have more
than two board-selected inside directors serving on the board at any
one time. Stockholder-elected directors must constitute a majority of
the board at all times.
(c) Duration of term. The term of office for board-selected inside
directors must be the same as for directors elected by the majority
vote of all voting shareholders.
Subpart C--Election of Directors and Other Voting Procedures
3. Amend Sec. 611.320 by revising paragraphs (b) and (e) to read
as follows:
Sec. 611.320 Impartiality in the election of directors.
* * * * *
(b) No employee or agent of a Farm Credit institution shall take
any part, directly or indirectly, in the nomination or election of
members to the board of directors of a Farm Credit institution, or make
any statement, either orally or in writing, which may be construed as
intended to influence any vote in such nominations, or elections. This
paragraph shall not prohibit employees or agents from providing
biographical and other similar information or engaging in other
activities pursuant to policies and procedures for nominations and
elections. This paragraph does not affect the right of an employee or
agent to nominate or vote for shareholder-elected directors of an
institution in which the employee or agent is a voting member.
* * * * *
(e) No Farm Credit institution may in any way distribute or mail,
whether at the expense of the institution or another, any campaign
materials for director candidates. Institutions may request
biographical, as well as the disclosure information required under
Sec. 620.21(d) of this chapter, from all declared candidates who
certify that they are eligible, restate such information in a standard
format, and distribute or mail it with ballots or proxy ballots.
4. Add a new Sec. 611.325 to read as follows:
Sec. 611.325 Bank and association nominating committees.
Nominating committees must conduct themselves in the impartial
manner prescribed by the policies and procedures adopted by their
institution under Sec. 611.320.
(a) Composition. The voting stockholders of each bank and
association must elect at their annual meeting a nominating committee
of no fewer than three members who will serve for the following year.
No individual may serve on a nominating committee who, at the time of
selection to a nominating committee, is an employee, director, or agent
of that bank or association. A nominating committee member may not be a
candidate for election to the board in the same election for which the
committee is identifying nominees.
(b) Responsibilities. It is the responsibility of each nominating
committee to identify, evaluate, and nominate candidates for
stockholder election to a bank or association board of directors.
(1) Each nominating committee must seek individuals whom the
committee determines meet the eligibility requirements to run for
director positions. The committee must endeavor to assure
representation from all areas of the institution's territory and as
nearly as possible all types of agriculture practiced within the
territory.
(2) The nominating committee must perform an independent critical
evaluation of the qualifications and suitability of the director
candidates. The evaluation process must consider whether each candidate
has a level of training and experience to perform the duties required
by the position and whether there are any known obstacles that would
prevent a candidate from performing the duties of the position.
(3) Each committee must nominate at least two candidates for each
director position being voted on by stockholders. If two nominees
cannot be identified, the nominating committee must provide written
explanation to the existing board of the efforts to locate candidates
or the reasons for disqualifying any other candidate that resulted in
fewer than two nominees.
(c) Resources. Bank and association bylaws must provide that
nominating committees have reasonable access to administrative
resources in order to perform the nominating committee duties. Each
bank and association must, at a minimum, provide their nominating
committees with a current list of stockholders, the most recent bylaws,
and a copy of the policies and procedures that the bank or the
association has adopted pursuant to Sec. 611.320(a) to assure
impartial elections. On the request of the nominating committee, the
bank or association must also provide a copy of the current operational
and strategic business plan prepared pursuant to Sec. 618.8440 of this
chapter, including the board self-evaluation. The bank or association
may require a pledge of confidentiality by committee members prior to
releasing business plan or evaluation documents.
Subpart F--Bank Mergers, Consolidations and Charter Amendments
Sec. 611.1030 [Removed and reserved]
5. Remove and reserve Sec. 611.1030.
Subpart P--Termination of System Institution Status
6. Amend Sec. 611.1223 by revising paragraph (d)(9) to read as
follows:
Sec. 611.1223 Information statement--contents.
* * * * *
(d) * * *
[[Page 2971]]
(9) Employment, retirement, and severance agreements. Describe any
employment agreement or arrangement between the successor institution
and any of your senior officers or directors. Describe any severance
and retirement plans that cover your employees or directors and state
the costs you expect to incur under the plans in connection with the
termination.
* * * * *
PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED
CRIMINAL VIOLATIONS
7. The authority citation for part 612 continues to read as
follows:
Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12
U.S.C. 2243, 2252, 2254).
Subpart A--Standards of Conduct
8. Amend Sec. 612.2130 as follows:
a. Add the word ``currently'' after the word ``who'' each time it
appears in paragraph (a);
b. Remove paragraph (d);
c. Redesignate existing paragraphs (e) through (u) as paragraphs
(d) through (t), consecutively; and
d. Revise newly designated paragraph (e) to read as follows:
Sec. 612.2130 Definitions.
* * * * *
(e) Entity means a corporation, company, association, firm, joint
venture, partnership (general or limited), society, joint stock
company, trust (business or otherwise), fund, or other organization or
institution.
* * * * *
9. Amend Sec. 612.2155 by revising paragraph (a) introductory text
to read as follows:
Sec. 612.2155 Employee reporting.
(a) Annually, as of the institution's fiscal yearend, and at such
other times as may be required to comply with paragraph (c) of this
section, each senior officer must file a written and signed statement
with the Standards of Conduct Official that fully discloses:
* * * * *
PART 614--LOAN POLICIES AND OPERATIONS
10. The authority citation for part 614 continues to read as
follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; Secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25,
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8,
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013,
2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093,
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183,
2184, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207,
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a,
2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413
of Pub. L. 100-233, 101 Stat. 1568, 1639.
Subpart N--Loan Servicing Requirements; State Agricultural Loan
Mediation Programs; Right of First Refusal
Sec. 614.4511 [Removed and reserved]
11. Remove and reserve Sec. 614.4511.
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
12. The authority citation for part 615 continues to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10,1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of
Pub. L. 100-233, 101 Stat. 1568, 1608.
Subpart H--Capital Adequacy
13. Amend Sec. 615.5200 by revising paragraph (b)(1) to read as
follows:
Sec. 615.5200 General.
* * * * *
(b) * * *
(1) Capability of management and the board of directors;
* * * * *
Subpart I--Issuance of Equities
14. Amend Sec. 615.5230 by revising paragraphs (a)(1) introductory
text, (a)(1)(ii), (a)(2) introductory text, (a)(2)(ii), (a)(3)
introductory text, and (b)(5) to read as follows:
Sec. 615.5230 Implementation of cooperative principles.
(a) * * *
(1) Each voting shareholder of an association or bank for
cooperatives must:
(i) * * *
(ii) Have the right to vote in the election of each director,
except outside directors, unless the regional election of directors is
provided for in the bylaws pursuant to Sec. 615.5230(a)(3) or the
bylaws provide for the board selection of an inside director pursuant
to Sec. 611.230 of this chapter;
* * * * *
(2) Each voting shareholder of a Farm Credit Bank must:
(i) * * *
(ii) Have the right to vote in the election of each director,
except outside directors and board-selected inside directors, and be
allowed to cumulate such votes and distribute them among the candidates
in the shareholder's discretion, except that cumulative voting for the
directors may be eliminated if 75 percent of the associations that are
shareholders of the Farm Credit Bank vote in favor of elimination. In a
vote to eliminate cumulative voting, each association must be accorded
one vote.
(3) The regional election of stockholder-elected directors is
permitted under the following conditions:
* * * * *
(b) * * *
(5) Each bank must endeavor to assure that there is a choice of at
least two nominees for each elective office to be filled and that the
board represents as nearly as possible all types of agriculture in the
district. If fewer than two nominees for each position are named, the
efforts to locate two willing nominees must be documented in the
records of the bank and provided as part of the Annual Meeting
Information Statement of part 620, subpart E of this chapter. The bank
must also maintain a list of the type or types of agriculture engaged
in by each director on its board.
PART 618--GENERAL PROVISIONS
15. The authority citation for part 618 continues to read as
follows:
Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183,
2200, 2211, 2218, 2243, 2244, 2252).
Subpart G--Releasing Information
16. Amend Sec. 618.8310 by revising paragraph (b) to read as
follows:
Sec. 618.8310 Lists of borrowers and stockholders.
* * * * *
(b)(1) Within 7 days after receipt of a written request by a
stockholder, each Farm Credit bank or association must provide a
current list of its stockholders' names, addresses, and classes of
stock held to such requesting stockholder. As a condition to providing
the list, the bank or association may only require
[[Page 2972]]
that the stockholder agree and certify in writing that the stockholder
will:
(i) Utilize the list exclusively for communicating with
stockholders for permissible purposes; and
(ii) Not make the list available to any person, other than the
stockholder's attorney or accountant, without first obtaining the
written consent of the institution.
(2) As an alternative to receiving a list of stockholders, a
stockholder may request the institution mail or otherwise furnish to
each stockholder a communication for a permissible purpose on behalf of
the requesting stockholder. This alternative may be used at the
discretion of the requesting stockholder, provided that the requester
agrees to defray the reasonable costs of the communication. In the
event the requester decides to exercise this option, the institution
must provide the requester with a written estimate of the costs of
handling and mailing the communication as soon as practicable after
receipt of the stockholder's request to furnish a communication.
However, a stockholder may not exercise this option when requesting the
list to distribute campaign material for election to the institution
board or board committees. Farm Credit banks and associations are
prohibited from distributing or mailing campaign material under Sec.
611.320(e) of this chapter.
(3) For purposes of this paragraph (b), ``permissible purpose'' is
defined to mean matters relating to the business operations of the
institutions. This includes matters relating to the effectiveness of
management, the use of institution assets, the distribution by
stockholder candidates of campaign material for election to the
institution board or board committees, and the performance of directors
and officers. This does not include communications involving
commercial, social, political, or charitable causes, communications
relating to the enforcement of a personal claim or the redress of a
personal grievance, or proposals advocating that the bank or
association violate any Federal, State, or local law or regulation.
Subpart J--Internal Controls
17. Amend Sec. 618.8430 by revising the introductory text and
adding a new paragraph (d) to read as follows:
Sec. 618.8430 Internal controls.
Each Farm Credit institution's board of directors must adopt an
internal control policy, providing adequate direction to the
institution in establishing effective control over, and accountability
for, operations, programs, and resources. The policy must include, at a
minimum, the following:
* * * * *
(d) The role of the audit committee in providing oversight and
review of the institution's internal controls.
18. Amend Sec. 618.8440 by revising paragraphs (b) introductory
text and (b)(2) to read as follows:
Sec. 618.8440 Planning.
* * * * *
(b) The plan must include, at a minimum, the following:
(1) * * *
(2) An annual review of the internal and external factors likely to
affect the institution during the planning period. The review must
include:
(i) An assessment of management capabilities;
(ii) A self-evaluation of the board's performance; and
(iii) Strategies for correcting identified weaknesses.
* * * * *
PART 619--DEFINITIONS
19. The authority citation for part 619 is revised to read as
follows:
Authority: Secs. 1.4, 1.7, 2.1, 2.4, 2.11, 3.2, 3.21, 4.9, 5.9,
5.12, 5.17, 5.18, 6.22, 7.0, 7.1, 7.6, 7.7, 7.8, 7.12 of the Farm
Credit Act (12 U.S.C. 2011, 2015, 2072, 2075, 2092, 2123, 2142,
2160, 2243, 2244, 2252, 2253, 2278b-2, 2279a, 2279a-1, 2279b, 2279b-
1, 2279b-2, 2279f).
20. Amend part 619 by adding new Sec. Sec. 619.9235 and 619.9265,
to read as follows:
Sec. 619.9235 Outside director.
A member of a board of directors selected or appointed by the
board, who is not a director, officer, employee, agent, or stockholder
of any Farm Credit System institution.
Sec. 619.9265 Senior officer.
The Chief Executive Officer, the Chief Operations Officer, the
Chief Financial Officer, the Chief Credit Officer, and the General
Counsel, or persons in similar positions; and any other person
responsible for a major policy-making function.
PART 620--DISCLOSURE TO SHAREHOLDERS
21. The authority citation for part 620 continues to read as
follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11) sec. 424 of Pub. L. 100-233, 101 Stat.
1568, 1656.
Subpart A--General
22. Amend Sec. 620.1 as follows:
a. Remove paragraph (p);
b. Redesignate existing paragraphs (q) through (s) as paragraphs
(p) through (r), consecutively; and
c. Revise paragraph (a).
Sec. 620.1 Definitions.
* * * * *
(a) Affiliated organization means any organization, other than a
Farm Credit organization, of which a director, senior officer or
nominee for director of the reporting institution is a partner,
director, officer, or majority shareholder.
* * * * *
Subpart B--Annual Report to Shareholders
23. Amend Sec. 620.5 as follows:
a. Revise paragraphs (h)(3), (i)(1), (i)(2) and (i)(2)(i)
introductory text;
b. Remove paragraph (i)(2)(iii); and
c. Add new paragraph (m)(3).
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(h) * * *
(3) For each director and senior officer, list any other business
interest where the director or senior officer serves on the board or as
a senior officer. Name the position held and state the principal
business in which the business is engaged.
* * * * *
(i) * * *
(1) Director compensation. Describe the arrangements under which
directors of the institution are compensated for all services as a
director (including total cash compensation and noncash compensation)
and state the total cash compensation and total value of noncash
compensation paid to all directors as a group during the last fiscal
year. If applicable, describe any exceptional circumstances justifying
the additional director compensation as authorized by Sec. 611.400(c)
of this chapter. For each director, state:
(i) The number of days served at board meetings;
(ii) The total number of days served in other official activities,
including any board committee(s);
(iii) Any additional compensation paid for service on a board
committee, naming the committee; and
(iv) The total cash and noncash compensation paid to each director
during the last fiscal year. Compensation reported must include the
amount of cash, or value of noncash items, provided by anyone to a
director for services rendered by the director on behalf of the
reporting Farm Credit institution.
[[Page 2973]]
(2) Senior officer compensation. Disclose the information on senior
officer compensation and compensation plans as required by this
paragraph. Compensation reported must include the amount of cash and
the value of noncash items provided by anyone to a senior officer for
services rendered by the senior officer on behalf of the reporting Farm
Credit institution.
(i) The institution must disclose the total amount of cash and
noncash compensation, including stock and stock options, paid to each
senior officer in substantially the same manner as the tabular form
specified in the following Summary Compensation Table (table):
Summary Compensation Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual
---------------------------------------------------------------------------------------------------------------------------------------------------------
Deferred/
Name, position of senior officer (a) Year (b) Salary (c) Bonus (d) perquisite Other (f) Total (g)
(e)
--------------------------------------------------------------------------------------------------------------------------------------------------------
(X), CEO....................................... 20XX ............ ............ ............ ............ ............
20XX
20XX
(X)............................................ 20XX ............ ............ ............ ............ ............
20XX
20XX
(X)............................................ 20XX ............ ............ ............ ............ ............
20XX
20XX
(X)............................................ 20XX ............ ............ ............ ............ ............
20XX
20XX
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) Report the total amount of cash and noncash compensation paid
and the amount of each component of compensation paid to the
institution's chief executive officer (CEO) and each senior officer for
each of the last 3 completed fiscal years, naming the individuals. If
more than one person served in the capacity of CEO during any given
fiscal year, individual compensation disclosures must be provided for
each CEO.
(B) Amounts shown as ``Salary'' (column (c)) and ``Bonus'' (column
(d)) must reflect the dollar value of salary and bonus earned by the
senior officer during the fiscal year. Amounts contributed during the
fiscal year by the senior officer pursuant to a plan established under
section 401(k) of the Internal Revenue Code, or similar plan, must be
included in the salary column or bonus column, as appropriate. If the
amount of salary or bonus earned during the fiscal year is not
calculable by the time the report is prepared, the reporting
institution must provide its best estimate of the compensation
amount(s) and disclose that fact in a footnote to the table.
(C) Amounts shown as ``deferred/perquisites'' (column (e)) must
reflect the dollar value of other annual compensation not properly
categorized as salary or bonus, including but not limited to:
(1) Deferred compensation earned during the fiscal year, whether or
not paid in cash; or
(2) Perquisites and other personal benefits, unless the aggregate
value of such compensation is less than $5,000.
(D) Compensation amounts reported under the category ``Other''
(column (f)) shall reflect the dollar value of all other compensation
not properly reportable in any other column. Items reported in this
column shall be specifically identified and described in a footnote to
the table. Such compensation includes, but is not limited to:
(1) The amount paid to the senior officer pursuant to a plan or
arrangement in connection with the resignation, retirement, or
termination of such officer's employment with the institution; or
(2) The amount of contributions by the institution on behalf of the
senior officer to a vested or unvested defined contribution plan unless
the plan is made available to all employees on the same basis.
(E) Amounts displayed under ``Total'' (column (g)) shall reflect
the sum total of amounts reported in columns (c), (d), (e), and (f).
* * * * *
(m) * * *
(3) State that the financial statements were prepared under the
oversight of the audit committee, identifying the members of the audit
committee.
* * * * *
Subpart C--Quarterly Report
24. Amend Sec. 620.11 by adding a new paragraph (d)(5) and
revising paragraphs (d) introductory text and (e) to read as follows:
Sec. 620.11 Content of quarterly report to shareholders.
* * * * *
(d) Financial statements. The following financial statements must
be provided:
* * * * *
(5) State that the financial statements were prepared under the
oversight of the audit committee.
(e) Review by independent public accountant. The interim financial
information need not be audited or reviewed by an independent public
accountant prior to filing. If, however, a review of the data is made
in accordance with the established professional standards and
procedures for such a review, the institution may state that the
independent accountant has performed such a review under the
supervision of the institution's audit committee. If such a statement
is made, the report of the independent accountant on such review must
accompany the interim financial information.
* * * * *
Subpart E--Annual Meeting Information Statement
25. Revise the heading of subpart E to read as set forth above.
Sec. 620.20 [Removed and reserved]
26. Remove and reserve Sec. 620.20.
27. Amend Sec. 620.21 by revising the introductory paragraph,
paragraphs (c)(2) and (d) to read as follows:
[[Page 2974]]
Sec. 620.21 Contents of the information statement and other
information to be furnished in connection with the annual meeting.
Each bank or association of the Farm Credit System must provide an
information statement (``statement'' or ``AMIS'') to its stockholders
at least 10 days prior to any meeting at which directors are to be
elected. The AMIS must reference the annual report required by subpart
B of this part and such other material information as is necessary to
make the required statement, in light of the circumstances under which
it is made, not misleading. The AMIS must address the following items:
* * * * *
(c) * * *
(2) State the name of any incumbent director who attended fewer
than 75 percent of the board meetings or any meetings of board
committees on which he or she served during the last fiscal year.
* * * * *
(d) Nominees. (1) For each nominee, state the nominee's name,
residential address, business address if any, age, and business
experience during the last 5 years, including each nominee's principal
occupation and employment during the last 5 years. List all business
interests on whose board of directors the nominee serves or is
otherwise employed in a position of authority, and state the principal
business in which the business interest is engaged. Identify any family
relationship of the nominee that would be reportable under part 612 of
this chapter if elected to the institution's board.
(2) If fewer than two nominees for each position are named,
describe the efforts of the nominating committee to locate two willing
nominees.
(3) State that nominations shall be accepted from the floor.
(4) For each nominee who is not an incumbent director, except a
nominee from the floor, provide the information referred to in Sec.
620.5(j) and (k) and paragraph (d)(1) of this section. If stockholders
will vote by paper mail or electronic mail ballot upon conclusion of
all sessions, each floor nominee must provide the information referred
to in Sec. 620.5(j) and (k) and paragraph (d)(1) of this section in
paper or electronic form to the Farm Credit institution within the time
period prescribed by the institution's bylaws. If the institution's
bylaws do not prescribe a time period, state that each floor nominee
must provide the disclosure to the institution within 5 business days
of the nomination. The institution must ensure that the information is
provided to the voting stockholders by delivering the ballots for the
election of directors in the same format as the comparable information
contained in the annual meeting information statement. If stockholders
will not vote by paper mail or electronic mail ballot upon conclusion
of all sessions, each floor nominee must provide the information
referred to in Sec. 620.5(j) and (k) and paragraph (d)(1) of this
section in paper or electronic form at the first session at which
voting is held.
(5) If association directors are nominated or elected by region,
describe the regions and state the number of voting stockholders
entitled to vote in each region. Any association director nominee from
the floor must be an eligible candidate for the association director
position for which the person has been nominated.
(i) If association directors are not elected by region, the
following must apply:
(A) If the annual meeting is to be held in more than one session
and paper mail or electronic mail balloting will be conducted upon the
conclusion of all sessions, state that nominations from the floor may
be made at any session or, if the association's bylaws so provide,
state that nominations from the floor shall be accepted only at the
first session.
(B) If stockholders will not vote solely by paper mail or
electronic mail ballot upon conclusion of all sessions, state that
nominations from the floor may be made only at the first session.
(ii) If association directors are elected by region, the following
must apply:
(A) If more than one session of an annual meeting is held in a
region, and if paper mail or electronic mail balloting will be
conducted at the end of all sessions in a region, state that
nominations from the floor may be made at any session in the region or,
if the association's bylaws so provide, state that nominations from the
floor shall be accepted only at the first session held in the region.
(B) If stockholders will not vote solely by paper mail or
electronic mail ballot upon conclusion of all sessions in a region,
state that nominations from the floor may be made only at the first
session held in the region.
(6) Each bank and association must adopt policies and procedures
that assure a disclosure statement is prepared by each director
candidate. Copies of completed and signed disclosure statements must be
provided to voting stockholders with the election ballots. No person
may be a nominee for director who does not make the disclosures
required by this subpart.
* * * * *
28. Revise subpart F to read as follows:
Subpart F--Bank and Association Audit and Compensation Committees
Sec.
620.30 Audit committees.
620.31 Compensation committees.
Subpart F--Bank and Association Audit and Compensation Committees
Sec. 620.30 Audit committees.
Each Farm Credit bank and association must establish and maintain
an audit committee. An audit committee is established by adopting a
written charter describing the committee's composition, authorities,
and responsibilities in accordance with this section. All audit
committees must maintain records of meetings, including attendance, for
at least 3 fiscal years.
(a) Composition. Each member of an audit committee must be a member
of the Farm Credit institution's board of directors. An audit committee
may not consist of less than three members and at least one member must
be an outside director. All audit committee members should be
knowledgeable in at least one of the following: public and corporate
finance, financial reporting and disclosure, or accounting procedures.
The chair of an audit committee must be a financial expert. A financial
expert is one who either has experience with internal controls and
procedures for financial reporting or experience in preparing or
auditing financial statements.
(b) Independence. Every audit committee member must be free from
any relationship that, in the opinion of the board, would interfere
with the exercise of independent judgment as a committee member.
(c) Resources. Farm Credit institutions must permit their audit
committees to contract for independent legal counsel and expert
advisors. Each institution is responsible for providing monetary and
nonmonetary resources to enable its audit committee to contract for
independent auditors, outside advisors, and ordinary administrative
expenses. A two-thirds majority vote of the full board of directors is
required to deny an audit committee's request for resources.
(d) Duties. Each audit committee must report only to the board of
directors. In its capacity as a committee of the board, the audit
committee is responsible for the following:
(1) Financial reports. Each audit committee must oversee
management's preparation of the report to
[[Page 2975]]
stockholders; review the impact of any significant accounting and
auditing developments; review accounting policy changes relating to
preparation of financial statements; and review annual and quarterly
reports prior to release. After the audit committee reviews a financial
policy, procedure, or report, it must record in its minutes its
agreement or disagreement with the item(s) under review.
(2) Independent (external) auditors. Each audit committee must
determine the appointment, compensation, and retention of independent
auditors to issue audit reports of the institution. The audit committee
must review the independent auditor's work. The independent auditor
reports directly to the audit committee.
(3) Internal controls. Each audit committee must oversee the
institution's system of internal controls relating to preparation of
the report, including controls relating to the institution's compliance
with applicable laws and regulations. Any internal audit functions of
the institution must also be subject to audit committee review and
supervision.
Sec. 620.31 Compensation committees.
Each Farm Credit bank and association must establish and maintain a
compensation committee by adopting a written charter describing the
committee's composition, authorities, and responsibilities in
accordance with this section. All compensation committees will be
required to maintain records of meetings, including attendance, for at
least 3 fiscal years.
(a) Composition. Each compensation committee must consist of at
least three members. Each committee member must be a member of the
institution's board of directors. Every member must be free from any
relationship that, in the opinion of the board, would interfere with
the exercise of independent judgment as a committee member.
(b) Duties. Each compensation committee must report only to the
board of directors. In its capacity as a committee of the board, the
compensation committee is responsible for reviewing the compensation
policies and plans for senior officers and employees. Each compensation
committee must approve the cash and non-cash compensation of senior
officers.
(c) Resources. Each institution must provide monetary and
nonmonetary resources to enable its compensation committee to function.
PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM
29. The authority citation for part 630 continues to read as
follows:
Authority: Secs. 5.17, 5.19 of the Farm Credit Act (12 U.S.C.
2252, 2254).
Subpart A--General
30. Revise Sec. 630.6 to read as follows:
Sec. 630.6 Funding Corporation committees.
(a) Farm Credit System audit committee. The Funding Corporation
must establish and maintain a Farm Credit System Audit Committee by
adopting a written charter describing the committee's composition,
authorities, and responsibilities in accordance with this section. The
Farm Credit System Audit Committee must maintain records of meetings,
including attendance, for at least 3 fiscal years.
(1) Composition. Each member of the Farm Credit System Audit
Committee must be a member of the Funding Corporation's board of
directors. The Farm Credit System Audit Committee may not consist of
less than three members and at least one member must be an outside
director. All audit committee members should be knowledgeable in at
least one of the following: Public and corporate finance, financial
reporting and disclosure, or accounting procedures. The chair of an
audit committee must be a financial expert. A financial expert is one
who either has experience with internal controls and procedures for
financial reporting or experience in preparing or auditing financial
statements.
(2) Independence. Every audit committee member must be free from
any relationship that, in the opinion of the board, would interfere
with the exercise of independent judgment as a committee member.
(3) Resources. The Funding Corporation must permit the Farm Credit
System Audit Committee to contract for independent legal counsel and
expert advisors. The Funding Corporation is responsible for providing
monetary and nonmonetary resources to enable the Farm Credit System
Audit Committee to contract for independent auditors, outside advisors,
and ordinary administrative expenses. A two-thirds majority vote of the
full board of directors is required to deny the Farm Credit System
Audit Committee's request for resources.
(4) Duties. The Farm Credit System Audit Committee reports only to
the board of directors. In its capacity as a committee of the board,
the audit committee is responsible for the following:
(i) Financial reports. The Farm Credit System Audit Committee must
oversee the Funding Corporation management's preparation of the report
to stockholders and investors; review the impact of any significant
accounting and auditing developments; review accounting policy changes
relating to preparation of the System-wide combined financial
statements; and review annual and quarterly reports prior to release.
After the Farm Credit System Audit Committee reviews a financial
policy, procedure, or report, it must record in its minutes its
agreement or disagreement with the item(s) under review.
(ii) Independent (external) auditors. The Farm Credit System Audit
Committee must determine the appointment, compensation, and retention
of independent auditors to issue audit reports of the Farm Credit
System. The audit committee must review the independent auditor's work.
The independent auditor reports directly to the Farm Credit System
Audit Committee.
(iii) Internal controls. The Farm Credit System Audit Committee
must oversee the Funding Corporation's system of internal controls
relating to preparation of the report, including controls relating to
the Farm Credit System's compliance with applicable laws and
regulations. Any internal audit functions of the Funding Corporation
must also be subject to the Farm Credit System Audit Committee's review
and supervision.
(b) Compensation committee. The Funding Corporation must establish
and maintain a compensation committee by adopting a written charter
describing the committee's composition, authorities, and
responsibilities in accordance with this section. The compensation
committee will be required to maintain records of meetings, including
attendance, for at least 3 fiscal years.
(1) Composition. The committee must consist of at least three
members. Each committee member must be a member of the Funding
Corporation's board of directors. Every member must be free from any
relationship that, in the opinion of the board, would interfere with
the exercise of independent judgment as a committee member.
(2) Duties. The compensation committee must report only to the
board of directors. In its capacity as a committee of the board, the
compensation committee is responsible for reviewing the compensation
policies and plans for senior officers and
[[Page 2976]]
employees. Each compensation committee must approve the cash and non-
cash compensation of senior officers.
(3) Resources. The Funding Corporation must provide monetary and
nonmonetary resources to enable its compensation committee to function.
Subpart B--Annual Report to Investors
31. Amend Sec. 630.20 by revising the introductory heading for
paragraph (h), paragraphs (h)(2) and (l) introductory text to read as
follows:
Sec. 630.20 Contents of the annual report to investors.
* * * * *
(h) Directors and senior officers.
* * * * *
(2) Senior officers. List the names of all senior officers employed
by the disclosure entities, including position title and length of
service at current position.
* * * * *
(l) Financial statements. Furnish System-wide combined financial
statements and related footnotes prepared in accordance with GAAP, and
accompanied by supplemental information prepared in accordance with the
requirements of Sec. 630.20(m). The System-wide combined financial
statements must provide investors and potential investors in FCS debt
obligations with the most meaningful presentation pertaining to the
financial condition and results of operations of the Farm Credit
System. The System-wide combined financial statement and accompanying
supplemental information must be audited in accordance with generally
accepted auditing standards by a qualified public accountant (as
defined in Sec. 621.2(i) of this chapter) and indicate that the
financial statements were prepared under the oversight of the Farm
Credit System Audit Committee, identifying the members of this audit
committee. The System-wide combined financial statements must include
the following:
* * * * *
Subpart C--Quarterly Reports to Investors
32. Amend Sec. 630.40 by revising paragraph (d) introductory text
to read as follows:
Sec. 630.40 Contents of the quarterly report to investors.
* * * * *
(d) Financial statements. Interim combined financial statements
must be provided in the quarterly report to investors as set forth in
paragraphs (d)(1) through (4). Indicate that the financial statements
were prepared under the oversight of the Farm Credit System Audit
Committee.
* * * * *
Dated: January 12, 2005.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 05-913 Filed 1-18-05; 8:45 am]
BILLING CODE 6705-01-P