[Federal Register: December 20, 2006 (Volume 71, Number 244)]
[Rules and Regulations]
[Page 76111-76122]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20de06-1]
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Rules and Regulations
Federal Register
________________________________________________________________________
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[[Page 76111]]
FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 619, 620, 621, 624, 627, and 630
RIN 3052-AC11
Organization; Definitions; Disclosure to Shareholders; Accounting
and Reporting Requirements; Regulatory Accounting Practices; Title IV
Conservators, Receivers, and Voluntary Liquidations; and Disclosure to
Investors in System-Wide and Consolidated Bank Debt Obligations of the
Farm Credit System
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 disclosure and reporting regulations for Farm
Credit System (System) institutions. The final rule clarifies and
enhances existing disclosure requirements for reports to System
shareholders and investors. The rule provides for ``real time''
disclosures to shareholders, investors, and the public by accelerating
the time period for filing annual and quarterly reports. The final rule
requires the Federal Farm Credit Banks Funding Corporation (Funding
Corporation) to issue interim reports to investors in System-wide debt
obligations based on policies and procedures it would have to adopt.
Issuing interim reports will improve the timely and accurate
distribution of System-wide financial information. The rule also
supports financial accuracy certifications in periodic reports for all
System institutions by requiring management of the Funding Corporation
and the largest System institutions (with over $1 billion in assets) to
annually review and report on the internal control over financial
reporting. The Funding Corporation will have to provide for an annual
attestation from its external auditor on the Funding Corporation's
assessment of internal control over financial reporting. Further, this
rule creates a regulatory section on the independence of external
auditors, adding restrictions on non-audit services and conflicts of
interest, as well as requiring auditor rotation.
DATES: 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.
Compliance Date: Compliance with all provisions of the rule must be
achieved by the start of the fiscal year immediately following the
effective date of this rule, unless the start of that fiscal year is
within 3 months or less of the effective date. In that case, full
compliance is delayed until the start of the next full fiscal year.
FOR FURTHER INFORMATION CONTACT:
Thomas Dalton, Senior Staff Accountant, Office of Regulatory Policy,
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4414, TTY
(703) 883-4434,
or
Laura 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
Our objectives in this rulemaking are to:
Incorporate recent changes in industry practices into our
financial disclosure and reporting requirements for System
institutions;
Augment existing reporting timeframes with ``real time
disclosure'' principles to improve shareholder, investor, and public
access to material financial information used in informed investment
decisionmaking;
Strengthen the independence of System financial audits;
Streamline the financial reporting certification
requirement, making them easier to understand and use; and
Enhance shareholders' and investors' understanding of, and
confidence in, the System's operations through improved transparency.
II. Background
The Farm Credit Act of 1971, as amended (Act),\1\ authorizes FCA to
issue regulations implementing the provisions of the Act. The 1985
Amendments to the Act \2\ added provisions requiring FCA to regulate
the disclosure and reporting practices of System institutions and
require each System institution to prepare and publish annual financial
reports to shareholders. The Act at section 5.19(b)(1) also requires
that financial statements be prepared in accordance with generally
accepted accounting principles (GAAP) and be audited by an independent
public accountant.
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\1\ Pub. L. 92-181 (Dec. 10, 1971).
\2\ Farm Credit Amendments Act of 1985, Pub. L. 99-205 (Dec. 23,
1985).
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Our existing regulations require each System institution to prepare
annual and quarterly reports, identifying the minimum information
requirements of the reports. Our existing regulations also set forth
reporting timeframes and signatory requirements for the reports to
ensure that System institutions provide timely and reliable financial
information to multiple audiences, including borrowers, shareholders,
investors and the public.
On March 14, 2006, we published a proposed rule (71 FR 13040) to
amend those sections of parts 620, 621 and 630 affecting reporting
timeframes, certifications and external auditors. We also proposed
other amendments to our reporting and disclosure regulations. In the
course of developing this rule, we considered the disclosure and
reporting practices of publicly traded companies, reporting
requirements of the Federal Deposit Insurance Corporation (FDIC) and
other Federal bank regulatory agencies, the financial reporting and
disclosure provisions of the Sarbanes-Oxley Act of 2002 (Sarbanes-
Oxley) \3\ and the Securities and Exchange Commission (SEC)
implementing regulations. We also considered studies and public
statements of individuals and organizations with knowledge and
expertise in financial disclosure and reporting practices. Throughout
this process we evaluated changes to our rules against our role as the
safety and soundness regulator of the System and the System's
cooperative structure.
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\3\ Pub. L. 107-204 (July 30, 2002).
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The comment period for the proposed rule closed on June 12, 2006.
[[Page 76112]]
III. Comments and Our Response
We received 14 comment letters on our proposed rule, all from
individuals and entities associated with the System. Of the comments
received, eleven were from System associations, two were from Farm
Credit banks, and one was from the Farm Credit Council (FCC), acting
for its membership and the Funding Corporation. In general, most
commenters supported the proposed rule, but suggested changes to our
proposal on internal control assessments, reporting timeframes and
auditor rotation. One association commenter stated our proposed rule
was generally burdensome and not cost effective, while another thanked
us for focusing on eliminating unnecessary burdens for System
institutions. Still another commenter asked us to mitigate the
``negative impact'' of the rule to allow more effective use of
shareholder patronage dollars. We discuss and respond to the comments
to our proposed rule below. Those provisions of the proposed rule on
which we did not receive comments are finalized as proposed.
A. Definition of Qualified Public Accountant [new Sec. 619.9270 and
Sec. 621.2(i)]
We received no comments on our proposed definition of ``qualified
public accountant'' or on moving the term from Sec. 621.2(i) to Sec.
619.9270. We adopt this proposed provision as final. In conformance
with this change, we remove the Sec. 621.2(i) reference in Sec. Sec.
611.1250(a)(3) and (b)(4), 611.1255(a)(3) and (b)(4), 620.5(m)(1), and
630.20(l).
B. Certification and Submission of Financial Reports [Sec. Sec. 620.2,
620.3, 620.5, 627.2785(d), 630.3, 630.4 and 630.5]
1. Report Submissions, Signatures, and Certification of Financial
Accuracy
[Sec. Sec. 620.2, 620.3, 620.5, 627.2785(d), 630.3, 630.4, and 630.5]
We received no comments on our proposal to remove the requirement
that multiple copies of reports be sent to us. We also received no
comments on our proposed changes to the signatory and financial
accuracy requirements for reports. We adopt these proposed provisions
as final with a minor clarification to redesignated Sec. 630.4(c) to
clarify that it is the signature and certification provisions of Sec.
620.3 that are applicable to information submitted to the funding banks
by associations for the System-wide report. We also adopt the
conforming technical changes requiring all reports, regardless of the
recipient, to comply with Sec. Sec. 620.3 and 630.5, as well as
technical changes to Sec. Sec. 630.20(h)(1); 620.5(m)(2); 630.4(a)(4),
(b)(5) and (c)(1); and 627.2785(d).
We received six comments from five associations and one Farm Credit
bank on our existing rule at Sec. 630.4 dealing with the supply of
information to the Funding Corporation. The Farm Credit bank supported
our existing rule, but the associations stated that our rule at Sec.
630.4 obligates the associations to provide their funding bank with the
information necessary for the bank to provide accurate and complete
district information to the Funding Corporation. The commenters stated
it is inappropriate and burdensome to regulate the relationship between
the associations and their funding bank and asked that the provision be
removed. The commenters asked that the associations and banks be
allowed to use contractual relationships to orchestrate how district
information is provided to the Funding Corporation. The commenters
suggested the general financing agreement (GFA) as an appropriate tool
for negotiating how to submit the required information. One commenter
explained that banks should work with associations to determine the
information necessary, rather than giving the bank ``regulatory
authority.'' Another commenter stated that the current information
submission relationship works adequately and does not require a
revision.
While we agree that the Funding Corporation, banks and associations
should work together to identify the information provided for the
System-wide report, we do not believe that a contractual relationship,
or a GFA, is an appropriate method of ensuring the Funding Corporation
receives information necessary to prepare the report to investors. It
is essential that the banks and associations be held accountable to
their regulator for providing the Funding Corporation with necessary
financial information to ensure an accurate, timely and complete report
is provided to System investors. We also point out that this
requirement has been in existence since 1994 and is not a new proposal.
We only proposed changes to the certification and signatory
requirements to the existing submission requirements, as well as
limiting access to the individual institution's external auditor. These
changes were proposed to reduce the burden on associations and banks by
using the same signatures and certifications for both the Report to
Shareholders and for the information submitted to the Funding
Corporation. We are not removing the existing requirement in Sec.
630.4 that associations provide their funding bank with information
needed by the Funding Corporation and adopt the proposed modifications
to Sec. 630.4 to require banks and associations to submit information
complying with the signature and certification requirements in Sec.
620.3. We also remove, as proposed, the provision that previously
allowed the Funding Corporation and banks to question another System
institution's external auditor about submissions for the System-wide
report.
2. Bank and Association Assessment of Internal Control Over Financial
Reporting
[Sec. 620.3(d)]
We proposed adding a new Sec. 620.3(d) requiring each institution
with total assets over $500 million (as of the end of the previous
fiscal year) to perform a management assessment of the institution's
internal financial controls and report the results of the assessment in
the annual and quarterly reports of the institution. We received
comments from the FCC, two Farm Credit banks and nine associations
opposing the type and frequency of the assessment of internal financial
controls. The commenters first asked that we replace the phrase
``assessment of the internal financial controls of the institution''
with ``assessment of internal control over financial reporting.''
Commenters stated the suggested change conforms to the industry
standard, explaining that any language different from the industry
standard may be confusing or lead to misunderstandings. Commenters also
said that an ``assessment of internal control over financial
reporting'' is distinguishable from the general requirements for
internal controls in part 618 of our regulations.
We agree that an assessment of internal control over financial
reporting has a narrow focus when compared to the general requirements
for internal controls in part 618 of our regulations; part 618
addresses an institution's internal controls associated with enterprise
risk management and corporate governance. We also agree that using the
industry phrase ``internal control over financial reporting''
facilitates an application of uniform procedures in internal control
assessments, minimizing potential confusion. The SEC, in adopting
regulations implementing Sarbanes-Oxley, explained that ``internal
control over financial reporting'' is the predominant term used by
companies and auditors and best encompasses the
[[Page 76113]]
objectives of the Sarbanes-Oxley Act.'' \4\ Although System
institutions are not covered by this provision of Sarbanes-Oxley, nor
regulated by the SEC, the SEC rule is generally regarded as the
industry standard in this area. Accordingly, we replaced the proposed
references to ``internal control over financial reporting'' in the
final rule.
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\4\ See 68 FR 36636 (June 18, 2003).
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Second, the commenters asked that the frequency of the assessment
requirement be changed to an annual requirement, following industry
standards and best practices. The commenters stated that current best
practices only require such assessments on an annual basis, not
quarterly as we proposed. One Farm Credit bank acknowledged that
Sarbanes-Oxley requires a quarterly evaluation of internal controls,
but does not require that the evaluation be disclosed or included in
quarterly reports. Two commenters specifically asked that the quarterly
update be part of the certification of financial accuracy. Three
commenters stated that quarterly assessments create an undue burden and
estimated the cost at $30,000 for each assessment, increasing the
association's cost by $90,000 over that of publicly traded companies
who only conduct an annual assessment.
We agree that both a quarterly and annual assessment may be too
burdensome given the cooperative nature of the System and have replaced
the proposed quarterly requirement with a quarterly update on material
changes in the internal control over financial reporting. Although most
commenters suggested a quarterly update only at the System-wide level,
we are keeping the requirement at the entity level for the same reasons
that we are keeping the requirement for an annual assessment at the
entity level. In the final rule, we require that an institution
disclose any material change in the internal control over financial
reporting occurring during the reporting period. We expect institutions
to disclose changes that materially affected, or are reasonably likely
to materially affect, the institution's internal control over financial
reporting. We believe disclosing material changes in internal control
over financial reporting is more efficient and less costly than
requiring an institution to perform a quarterly assessment and responds
to commenters concerns in this area. Such a requirement is also more
consistent with industry best practices. We decline the suggestion that
the internal control assessment be part of the certification. We
consider the certification of financial accuracy to be a separate and
extremely important process. Internal control updates, while they may
impact the financial reporting, should not be blended into an accuracy
certification. We expect internal control quarterly updates to be
separate from the financial accuracy certification.
Third, some commenters objected to the assessment being required at
an entity level (i.e., the individual institution level), stating that
a System-wide assessment would provide the most meaningful protection
to shareholders and investors. Commenters stated a significant amount
of time and expense would be required for each System institution to
perform an assessment of internal control over financial reporting. One
commenter stated that an entity-level assessment would harm, not help,
shareholders, while another argued entity-level assessments were not
practical, cost effective and not beneficial to shareholders. The
commenters also disagreed with our statement in the preamble of the
proposed rule that most institutions already plan to prepare the
assessments, stating System institutions assess their internal control
over financial reporting as part of an overall System-wide evaluation
of internal controls over financial reporting. The commenters clarified
that the System has conducted an annual assessment of internal control
over financial reporting for the System-wide Report to Investors since
the 2005 reporting year. The FCC specifically described the nature of
the current System-wide assessment, explaining the scope of work is
limited at the bank and association level to information that would be
provided to the Funding Corporation to develop the System-wide report.
The commenters also asserted that the scope of work for this System-
wide evaluation is at a much higher materiality level than an
assessment made on an individual entity basis and, as a result, the
amount of work necessary to perform an entity-level assessment is
significantly greater than that currently being performed. One Farm
Credit bank explained internal controls relevant to a System-wide
assessment are different from controls needed at an entity level,
making the two types of assessments fundamentally different. This
commenter also asked us to weigh the benefit versus the cost,
explaining the lack of traded stock at the entity level reduced the
critical need for the assessment.
We recognize additional work may be required for an entity-level
assessment and may involve additional time and expense. We do not
agree, however, that the benefit of an entity-level assessment is not
as great as it may be for a System-wide assessment. We continue to
believe that the requirement for management's assessment of internal
control over financial reporting provides a valuable assurance to
System shareholders, investors, and potential investors that internal
control procedures are periodically reviewed. While System stock is not
publicly traded, we do not believe this fact necessarily minimizes the
interest, financial and otherwise, that System stockholders have in the
operations of the institutions of which they are members, and
particularly if those institutions allocate patronage to their
shareholders. Management's responsibility for establishing and
maintaining adequate internal control over financial reporting, and for
assessing the effectiveness of that control, serves to enhance the
quality of reporting by identifying potentially damaging practices
within the institution. Furthermore, we believe the requirement to
provide an assessment of internal control over financial reporting
serves to enhance the safety and soundness of these institutions,
reflects best practices and promotes comparability of reporting with
other businesses in the financial services sector. While a requirement
for an entity-level assessment may increase the costs, we believe these
costs are justified, especially in the largest institutions, to
maintain the quality of reporting in more complex operations and are
mitigated somewhat by the current efforts of banks and associations to
facilitate an assessment of internal control over financial reporting
at the System level. We adopt as final the requirement that the Funding
Corporation and the largest institutions provide an assessment of
internal control over financial reporting in their annual reports.
Fourth, commenters asked that we change the minimum requirement for
the assessment to more closely reflect industry practices. We agree
that we do not need to regulate, at the present time, the specific
content of the assessment since there are sufficient guidelines for
System institutions to follow. The final rule requires a report on
management's assessment of internal control over financial reporting to
be included in the annual report to shareholders without specifying the
content of the internal control report. We believe removing this
specificity gives institutions the flexibility to pattern the content
of their management report, including any topics addressed or
recitations made by
[[Page 76114]]
management, after industry standards and best practices. For example,
institutions may wish to consider SEC rules for assessments of internal
control over financial reporting in publicly traded companies. Publicly
traded companies state in their assessment management's responsibility
for establishing and maintaining adequate internal control over
financial reporting for the institution; the framework used by
management to evaluate the effectiveness of the internal control over
financial reporting; and whether or not the internal control over
financial reporting is effective. These companies also discuss any
material weakness in internal control over financial reporting and may
not conclude that the internal control over financial reporting is
effective if one or more material weakness exists.
While we have removed some of the proposed content requirements of
the internal control assessment, the final rule maintains the
requirement that the assessment be reported to the institution's board.
We also remind institutions that each audit committee has oversight
responsibility for the internal control over financial reports under
existing Sec. 620.30(d)(3) and to involve them accordingly in the
assessment reporting process.
Finally, the commenters asked that, should we retain the
requirement for an entity-level assessment, we re-define a large
institution as one with over $1 billion in assets and that they be the
only institutions required to conduct the assessment of internal
control over financial reporting. The commenters stated that an entity-
level assessment by institutions of this size conforms more closely to
current best practices and such a requirement is consistent with other
regulators. One Farm Credit bank specifically commented that the FDIC
uses $1 billion for commercial banks and that we offered no reason for
proposing a lower level.
We continue to consider a large institution as one with $500
million or more in total assets, but agree that a higher threshold for
identifying institutions that must conduct the assessment of internal
control over financial reporting is appropriate. We have changed the
requirement to only require the largest institutions to conduct the
internal control assessment, which we define as those institutions with
total assets over $1 billion (as of the end of the previous fiscal
year). We were persuaded by the commenters' arguments that smaller
institutions may have more difficulty in evaluating their internal
control over financial reporting because they have more limited
resources and may not have as sophisticated a system of internal
control over financial reporting as the largest institutions. We
believe a $1 billion threshold level appropriately balances the
additional effort, resources, and costs against the benefits derived by
the largest institutions, who tend to have more complex operations. We
are also mindful that the $1 billion threshold level encompasses
approximately 70 percent of the System assets and includes institutions
in each Farm Credit district.
While mandatory compliance with the provision for an annual
management assessment of internal control over financial reporting is
not required for those institutions with total assets of $1 billion or
less, we encourage those institutions to voluntarily assess their
internal control over financial reporting as we believe it is
representative of industry best practices. We also encourage System
institutions to consider, where appropriate, enhanced disclosures to
shareholders that address the work performed by an institution in
evaluating its internal controls to facilitate the Funding Corporation
management's assessment of internal control over financial reporting
and related external auditor attestation regarding the System's
assessment.
3. Funding Corporation Assessment of Internal Control Over Financial
Reporting and Auditor Attestation
[Sec. 630.5(d)]
We proposed requirements for the System-wide Report to Investors
that are similar to those for banks and associations pertaining to
management assessment of the internal control over financial reporting
in the annual and quarterly reports. Commenters reiterated their
earlier remarks regarding the terminology, frequency, and detail of the
internal control assessment. For reasons discussed in Section III.B.2
of this preamble, we make the corresponding changes to Sec. 630.5 for
System-wide reports.
We proposed an additional requirement at the System-wide level for
an external auditor attestation on management's assessment of the
internal control over financial reporting. We received comments from
the FCC, two banks and eight associations concerning this provision.
The commenters, while not objecting to the external auditor
attestation, stated that the external auditor might not be able to make
the statement required by the proposed regulation. They explained that
accounting firms must comply with Auditing Standard No. 2, ``An Audit
of Internal Control Over Financial Reporting Performed in Conjunction
with an Audit of Financial Statements,'' issued by the Public Company
Accounting Oversight Board (PCAOB) for clients registered with the
SEC.\5\ Commenters pointed out that the differences between our
proposed rule and the PCAOB standard might cause a conflict for the
external auditor and requested we reconcile our rule to the PCAOB
standard.
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\5\ See PCAOB Auditing Standard No. 2, ``An Audit of Internal
Control Over Financial Reporting Performed in Conjunction with an
Audit of Financial Statements.'' Among other things, Auditing
Standard No. 2 establishes specific requirements for the elements
that must be included in the auditor's report on management's
assessment of internal control over financial reporting.
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We are removing specific statements that an auditor must make from
the final rule provision on an auditor attestation. We agree that
describing the content of the auditor's report on management's
assessment of internal control over financial reporting may have
potentially created a conflict between the rule and the relevant PCAOB
standard. We believe that the external auditor's attestation report
should conform to applicable industry standards. Accordingly, we have
adopted as final the requirement for an attestation report in Sec.
630.5(d)(2) in a manner that does not conflict with the PCAOB standard
by removing any specificity as to the content of the report.
C. Timing of Periodic Reports to Shareholders and Investors
1. Annual and Quarterly Report Filing Deadlines
[Sec. Sec. 620.4(a), 620.10(a) and 630.3(a)]
We proposed reducing the quarterly reporting deadline to 40
calendar days and reducing the annual reporting deadline to 75 calendar
days. We received comments from the FCC, two banks and eight
associations opposing the reduction of filing deadlines for quarterly
or annual reports or both. Most commenters asked that the timeframes
for quarterly reports remain at 45 days. Three commenters recommended
that the reporting timeframe for quarterly reports be in the range of
75 days, the same as annual reports. Some commenters stated that 40
days does not provide adequate time to prepare the quarterly reports
and address any unforeseen contingencies, such as litigation matters,
and subsequent events. A Farm Credit bank commented that while
technology has improved the ability to process and disseminate reports,
time is still needed to ensure that information is accurate
[[Page 76115]]
and timely. The bank also asked us to consider the variations in the
sizes and complexities of the System institutions while remarking that
though FCA filing deadlines appear longer than those of the SEC, they
aren't. The SEC makes a distinction between accelerated filers and
others, providing different deadlines due to market needs. The
commenters asked us to balance the burden against the shareholder need
before requiring the same deadlines as the SEC. We considered the same
information presented by this commenter when proposing abbreviated
deadlines and point out that the proposed deadlines are not the same as
the SEC. The SEC gives 60 days to file annual reports and we proposed
75 days. While the commenter did not object to our annual report filing
timeframe, they did object to the timeframe for quarterly reports. One
Farm Credit bank specifically stated that the additional time is more
critical for quarterly reports than annual reports and therefore did
not object to the proposed reduction in annual report filing deadlines,
only to quarterly report deadlines.
Commenters also stated it would be difficult for the Funding
Corporation to meet the 40-day deadline in view of the information that
must be provided by the associations to the banks and the banks to the
Funding Corporation. The commenters explained that requiring System-
wide information statements to be published within 40 days after the
end of the quarter is an unduly tight timeframe given the need to
combine approximately 100 entities. Commenters stated that, since it
would only take one institution to cause the Funding Corporation to not
make the deadline, they believe a more appropriate timeframe for
quarterly reports is 45 days. They also remarked on the responsibility
to provide information to the Funding Corporation while completing
their own quarterly reports.
We continue to believe the System's ability to capture, process,
and disseminate financial statement information has improved
significantly with the advancement of technology. We also do not
believe increasing the quarterly deadline to 75 days is a reasonable
suggestion, especially as the existing rule provides a maximum of 45
days for bank and association quarterly reports and 60 days for the
Funding Corporation. System institutions have enhanced technological
resources that improve their ability to process financial data.
Therefore, a longer filing deadline at the entity level cannot be
justified, especially as industry practices call for faster, ``real
time'' disclosure to shareholders and investors. However, we understand
the importance of having adequate time to prepare financial information
that is accurate and meaningful, and the complications of having
information reported from the associations to the banks, and by the
banks to the Funding Corporation. Accordingly, we increased the
deadline for the issuance of the System-wide quarterly report to
investors to 45 calendar days, while keeping the quarterly reporting
due date for banks and associations at 40 calendar days. We believe
this change will facilitate furnishing information to the Funding
Corporation without unduly delaying bank and association quarterly
reports. However we are not increasing the proposed filing time for
annual reports. We believe the 75-day filing requirement for bank,
association, and System-wide annual reports is well within the
reporting capabilities of these institutions and most commenters did
not object to this requirement. The filing time for annual reports in
both our existing rule and in this final rule is 30 days longer than
the time provided for filing quarterly reports. While we appreciate
that extra time may be desirable for compilation of the System-wide
annual report to investors, we believe sufficient time is already
incorporated into the overall annual reporting deadline so that a
separate, longer filing deadline for the annual System-wide report is
unnecessary. Accordingly, we adopt this proposed provision as final.
2. System-wide Interim Reports
[new Sec. 630.3(a)(3)]
We proposed that the Funding Corporation issue interim reports to
disclose significant events or material changes in System-wide
operations occurring after publication of a quarterly or annual System-
wide report. We received no comments on this proposed requirement and
adopt this provision as final.
D. Auditor Independence
[Sec. Sec. 621.4(b), new 621.30, new 621.31, and new 621.32]
We proposed a new subpart in part 621 to facilitate external
auditor independence within the System. We received limited comments on
certain aspects of this subpart and discuss them below.
1. Prohibited Non-Audit Services
[new Sec. 621.31(a)]
We proposed adding a new Sec. 621.31 prohibiting external auditors
of System institutions from providing certain non-audit services. We
also proposed, as a conforming change, removing the requirement that
banks and associations include a provision in their audit engagement
letters authorizing the external auditors to respond to questions from
funding banks and the Funding Corporation. We received one comment on
this section of our proposed rule. A Farm Credit bank commented that it
did not object to the list of non-audit services, but asked that we
clarify the prohibition at Sec. 621.31(a)(8) against advocating an
institution's interests in litigation, regulatory or administrative
investigations and proceedings. The commenter remarked that SEC
regulations on auditor independence place advocating an audit client's
interests in litigation, or regulatory or administrative investigations
or proceedings, under the general heading of ``expert services'' and is
not a category unto itself. The commenter also explained that the SEC's
commentary relative to this prohibition states that an accountant would
not be precluded from performing internal investigations or fact
finding at the request of the client's audit committee or legal
counsel. The commenter also said that, under SEC rules, an auditor's
work product may be used by the client and auditors may provide factual
accounts or testimony about the work performed. This commenter also
stated that our rule did not identify the basic principles of auditor
independence. We note that auditor independence principles are
contained in our proposed definition of an independent auditor at Sec.
619.9270.
We have clarified the list of non-audit services to more clearly
explain that the external auditor may not advocate an institution's
interest in any area that is not the subject of audit work. The
external auditor may not provide an expert opinion or other expert
service for activities of the institution that fall outside the
auditor's work reviewing financial statements. This prohibition does
not preclude the external auditor from performing internal
investigations or fact finding on items covered by an audit when
requested by the institution's audit committee or legal counsel. We
clarify that our rule follows the SEC regulations implementing section
201 of Sarbanes-Oxley, which explain that non-audit services may not
include an accountant providing expert opinions or other services for
the purpose of advocating an audit client's interests in litigation,
regulatory or administrative investigations and proceedings. However,
auditors may perform internal investigations or fact
[[Page 76116]]
findings that results in a report to the audit client. We clarify that,
as an extension of their audit work, external auditors are allowed to
use their work product and provide factual accounts or testimony about
the audit work performed. We adopt all other proposed provisions of
Sec. 621.31 as final.
2. Permitted Non-Audit Services
[Sec. Sec. 620.30, new 621.31 and 630.6]
We proposed requiring System institutions to obtain its audit
committee's approval prior to contracting for permissible non-audit
services from the external auditor. The proposed rule also amended the
authorities of the audit committees to specifically include approval of
non-audit services. One Farm Credit bank commented that the proposed
regulation contemplates that, under certain circumstances, an audit
committee may approve a non-audit service that is on the prohibited
list but, does not provide any guidance on what circumstances might
make a non-audit service acceptable. The commenter suggested including
in our rule the three basic principles identified in SEC's regulations,
on which the prohibited list of non-audit services is based: (1) An
auditor cannot function in the role of management, (2) an auditor
cannot audit his or her own work, and (3) an auditor cannot serve in an
advocacy role for the audit client.
The commenter appears to have misinterpreted the requirements of
proposed Sec. 621.31(b). The proposed regulation does not allow an
audit committee to approve non-audit services that are on the
prohibited list. We have clarified the rule text to reflect that the
audit committee may only approve non-audit services not specifically
listed as prohibited in Sec. 621.31(a). Further, the three basic
principles of auditor independence identified by the commenter are
already captured in new Sec. 619.9270, defining independent external
auditors. We received no other comments on Sec. 621.31(b) and adopt it
as final.
3. Auditor Conflicts of Interest and Rotation
[new Sec. 621.32]
a. ``Cooling Off'' Period [new Sec. 621.32(a)]
We received no comments on the proposed prohibition that a System
institution may not engage the audit services of a qualified public
accountant if the accountant, accounting partner (or concurring
partner), or lead audit team member was an employee, officer or
director of the System institution in the 12 months prior to
contracting for audit services. Nor did we receive comments on the
proposed prohibition that an institution may not make employment offers
to an external auditor, accounting firm partner, concurring partner, or
lead audit team member during the audit, or within 1 year of its
conclusion. We adopt these proposed provisions as final.
b. Auditor Rotation [new Sec. 621.32(b)]
We proposed prohibiting a System institution from engaging for 5
years the same lead and reviewing audit partner after 5 consecutive
years of audit services to that institution. The commenters agreed that
the lead (or concurring) audit partners for the System-wide report
should be rotated after 5 years, with a 5-year timeout period, but
asked that external auditors for banks and associations have a 7-year
rotation. We received only one comment on the ``time out'' period. This
commenter said the time out period of the lead (or concurring) audit
partners for the banks and associations should be 2 years. The
commenters explained that a 7-year rotation timeframe at the bank and
association level is more consistent with the requirements for publicly
traded companies.
The commenters contend a 7-year engagement at the bank and
association level is justified because a partner must invest
considerable time to develop an understanding of the System and
requiring this learning process every 5 years would be inefficient. One
Farm Credit bank commented that the System's relationship with the
external auditor is managed at both a System-wide level and an
individual institution level. The commenter stated this ``two-tiered''
relationship warrants a two-tiered rotation schedule where the lead and
concurring auditor partners engaged for the System-wide report would
have a 5-year rotation, but the lead and concurring auditor partners
engaged by each bank and association would have a 7-year rotation and
2-year time out, similar to the SEC's rules for corporations and their
subsidiaries. This commenter, and one other association commenter,
explained that the SEC treatment of auditor rotation for subsidiaries,
which may allow for a longer rotation period in certain circumstances,
is more appropriate for the System.
After careful review, we concluded that the SEC's treatment of
auditor rotation for subsidiaries is not an appropriate approach given
the cooperative structure of the System. Unlike a subsidiary structure,
associations are the borrowers, members, and shareholders of the bank,
consistent with the cooperative structure of the System. We also
concluded that auditor engagements are appropriately handled using a
uniform approach that recognizes the interdependency of System
institutions, but preserves the independent authority of each
institution to determine the engagement of its own external auditor.
Basing an auditor rotation on a two-tier method modeled after the SEC's
approach might be in conflict with this authority because a two-tiered
rotation is designed to reflect a traditional subsidiary structure
rather than the cooperative structure of the Farm Credit System.
We also do not agree that a longer engagement period at the bank
and association level is necessary. A 5-year audit partner rotation and
5-year cooling off period for the lead and concurring audit partners is
consistent with industry best practices and section 203 of Sarbanes-
Oxley. While commenters are correct that the SEC allows for a 7-year
audit partner engagement, this time period is restricted to other
significant members of the audit team who are not the lead, concurring
or reviewing partner. The SEC rule applies a 7-year rotation schedule
to those partners who are not the lead, concurring, or reviewing
partner but who are responsible for decisionmaking on significant
auditing, accounting, and reporting matters affecting financial
statements or who maintain regular contact with the audit client
management and audit committee. The SEC imposes a 5-year ``time-out''
for the lead and concurring accounting partners and a 2-year ``time-
out'' for other rotated partners before returning to a client.
While we used industry practice, as well as the SEC rule and
Sarbanes-Oxley, as guides we also considered the time a lead partner
must invest to acquire an understanding of the System. That
consideration resulted in our limiting the rotation from the audited
institution only, instead of requiring a rotation out of the entire
System. Our final rule does not prohibit or otherwise limit lead and
concurring partners from moving from one System institution to another,
whether it is a bank or association. We adopt this proposed provision
as final.
We make a technical change to correctly identify the location of
the audit independence provisions as subpart E, not subpart F as stated
in the proposed rule.
[[Page 76117]]
E. Contents of Periodic Reports
[Sec. Sec. 620.5 and 630.20]
1. Description of Property
[Sec. 620.5(b)]
We received no comments on our proposal to remove the requirement
at Sec. 620.5(b) that Farm Credit banks and associations describe, in
their annual reports, the terms and condition of agreements involving
institution property subject to major encumbrances. We adopt this
proposed provision as final.
2. Legal Proceedings and Enforcement
[Sec. 620.5(c)(1)]
We received no comments on our proposal to remove that portion of
Sec. 620.5(c)(1) requiring banks and associations to provide filing
information on court proceedings, including a description of factual
allegations, in annual reports. We adopt this proposed provision as
final.
3. Selected Financial Data and Management Discussion and Analysis
(MD&A)
[Sec. Sec. 620.5(f) and 620.5(g)]
We received no comments on our proposed clarification in Sec.
620.5(f)(1), (g)(l)(iii)(A) and (g)(l)(iv)(E) that disclosure of
selected financial data, loan purchases and sales involving the Federal
Agricultural Mortgage Corporation, and risk exposure need only be
reported if they are material. Nor did we receive any comments on
removing the reference in Sec. 620.5(g)(1)(iv)(E) to section 8.7 of
the Act or on revising the requirement for a discussion of the adequacy
of loan loss allowances in Sec. 620.5(g)(l)(iv)(B). We adopt these
proposed provisions as final.
4. Fees to Qualified Public Accountants
[Sec. 620.5(l)(2)]
We received no comments on requiring System institutions to
disclose the fees paid to their qualified public accountants. We adopt
this proposed provision as final.
5. Selected Financial Data
[Sec. 630.20(f)]
We received no comments on our proposed clarification to Sec.
630.20(f) that this section requires only material combined financial
data for 5 years, not all financial data. We adopt this proposed
provision as final.
6. Reporting on Young, Beginning and Small Farmers
[Sec. Sec. 614.4165(c), 620.5(n) and 630.20(p)]
In the proposed rule we addressed comments on our existing
regulations received before developing the proposed and final rule.
These comments included a request to reduce regulatory burden by
restricting the young, beginning and small farmers (YBS) reporting
requirement to association annual reports and delete the specificity
required by Sec. 614.4165(c). We declined in our proposed rule to make
these changes. Commenters renewed this request in response to our
proposed rule.
We are making no changes to Sec. Sec. 620.5(n) and 630.20(p),
which require annual reports to shareholders and investors include
information on YBS lending activities. As we discussed in the proposed
rule, section 4.19 of the Act requires Farm Credit banks to submit an
annual report to FCA summarizing the YBS operations and achievements of
their affiliated associations. We continue to believe reporting to
shareholders and the public on the YBS mission underscores the
importance of the System's public purpose mission and the YBS mission,
resulting in greater transparency to the public on the System's
accomplishments in this area.
7. Financial Assistance Corporation (FAC)
[Sec. Sec. 630.2, 630.4, and 630.20(b)]
We proposed removing references to the FAC from the definition of
``disclosure entity'' in Sec. 630.2(c) and removing Sec. Sec.
630.4(b) and 630.20(b)(3) outlining the responsibilities of the FAC. We
received comments from the FCC and five associations requesting that we
also remove Sec. 630.20(a)(3) and (m)(2)(iii) where the FAC is
mentioned. Commenters stated that these sections serve no useful
purpose since there is no activity at the FAC and the FAC will be
dissolved no later than June 2007. The FAC has discharged all of its
responsibilities with respect to the repayment of FAC obligations and
has no reportable financial data as of September 30, 2005. There is no
existing Sec. 630.20(a)(3) as referenced by the commenters, but we
presume they meant Sec. 630.20(b)(3). We proposed removing this
reference and take this comment as agreement with our proposal.
However, we did not propose removing Sec. 630.20(m)(2)(iii) but agree
with commenters that the reference to the FAC should be removed from
Sec. 630.20(m)(2)(iii) for the same reasons we used when proposing
removal of other FAC references in our rule. Accordingly, we remove
this provision in the final rule and consider this additional change to
be a conforming technical correction.
F. Other Issues
1. Regulatory Accounting Practices
[Part 624]
We received no comments on removing part 624, which authorized
System institutions to use Regulatory Accounting Practices to defer
certain interest costs and portions of the provision for loan losses.
We adopt this proposed provision as final.
2. Report to Investor Cross Reference
[Sec. Sec. 630.20(h), 630.20(i), and 630.4(a)(4)]
We proposed changing the cross-reference in Sec. 630.20(h)(1) and
(i) on how certain information would be available from Sec. 630.3(f)
to Sec. 630.4(a)(5) and (a)(6). One commenter was unclear as to the
basis for this change while another questioned the accuracy of the
proposed cite. The existing rule contains an incorrect cross-reference
that came about from prior revisions to the rule. We are correcting the
reference at Sec. 630.20(i) to reflect the correct cite of Sec.
630.3(g), rather than the proposed cite of Sec. 630.4(a)(5) and
(a)(6). We are removing the cross reference from Sec. 630.20(h)(1)
entirely as it is not required.
3. Distribution of Annual Report to Shareholder
[Sec. Sec. 620.1(q) and 620.4(a)]
a. Method of Distribution
We received comments from the FCC, a Farm Credit bank and six
associations asking that the requirement in Sec. 620.4(a) for each
System institution to provide its shareholders an annual report be
altered. In an effort to reduce regulatory burden and make annual
report distribution more cost effective, the commenters asked that we
allow annual reports to be issued in other than a printed ``hard
copy.'' Commenters also suggested that shareholders be allowed to ``opt
out'' of automatically receiving a printed copy of the annual report.
For those shareholders who elected not to receive a printed copy of the
annual report, a copy would be available on the institution's Web site.
We proposed no changes to these sections. Because the comments are
outside the scope of the proposed rule, we are not making any changes
in response to the comments. We point out that, under our current
regulations on E-Commerce, shareholders and their institutions already
have a choice to
[[Page 76118]]
receive electronic copies of reports. Our rules provide that if all
participants agree, electronic communication may be used. Therefore, if
an individual shareholder and his or her institution agree, the
shareholder may be given electronic reports. We caution that an
institution, under our current E-Commerce rules, may not require a
shareholder to use electronic commerce. This issue was also addressed
in our July 26, 2002, Informational Memorandum entitled ``Specific
Guidance on Electronic Disclosures and Notices'' in which we stated
that System institutions may do business electronically if all parties
agree. Comments received as part of any future rulemaking that
addresses this area will be considered at that time.
b. Definition of ``Shareholder''
We received comments from the FCC, a Farm Credit bank and six
associations asking that we change our definition of ``shareholders''
contained in Sec. 620.1(q). We define shareholder in Sec. 620.1(q) as
all equity holders in an institution. Commenters asked us to exclude
Non-qualified Surplus Allocated--Retained shareholders from the
definition, which would remove those equity holders from those required
to receive annual reports. Commenters also asked to exclude from this
group shareholders who have paid-off loans and retired stock. Because
there are no plans to redeem this surplus, commenters argue that this
group of shareholders has no vested interest in the institution and
therefore no need for the annual report. The commenters also asserted
that significant cost savings would result from only providing reports
to ``current common and preferred'' shareholders.
We proposed no changes to this section. Because the comments are
outside the scope of this rulemaking, we are not making any changes in
response to the comments. We will, however, address any such future
comments when applicable to other rulemaking.
4. Disclosures in the Quarterly and Annual Report to Shareholders
[Sec. Sec. 620.5 and 620.11]
We received comments from the FCC and six other commenters asking
that we remove or revise certain disclosures made in the annual report
to shareholders. Specifically, the commenters asked that we remove the
requirements in Sec. 620.5(i) to disclose the number of days served by
a director and travel expense reimbursements in annual reports.
Commenters also asked that we replace requirements in Sec. 620.11(b)
to account for business combinations with ones that follow GAAP,
arguing that pooling of interests is no longer permitted under GAAP.
They also asked that we change the language of Sec. 620.11(b)(6) to
clarify whose statement, the accountant or management, is to be
included as an exhibit. We proposed no changes to these sections.
Because the comments are outside the scope of this rulemaking, we are
not making any changes in response to them. We will, however, address
any such future comments when applicable to other rulemaking.
5. Accounting for Loan Losses
[Sec. 621.5(a)]
We received comments from the FCC and six other commenters asking
that we revise the requirement in Sec. 621.5(a) on the allowance for
loan losses. The commenters asked us to revise the regulation to
specifically require that the institutions' allowance for loan losses
shall be maintained in accordance with GAAP. We proposed no changes to
this section. Because the comments are outside the scope of this
rulemaking, we are not making any changes in response to the comments.
We also direct the commenters to existing Sec. 621.3 instructing
institutions to follow GAAP. This is further elaborated on in our April
26, 2004 Bookletter, ``Adequacy of Farm Credit System Institutions''
Allowance for Loan Losses and Risk Funds'' (BL-049), where we explain
that Sec. 621.5(a) provides broad guidance in this area. Throughout
BL-049, we reinforce the position that a System institution's allowance
for loan losses should be maintained in accordance with GAAP.
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 final 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 619
Agriculture, Banks, banking, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 621
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 624
Accounting, Agriculture, Banks, banking, Rural areas.
12 CFR Part 627
Agriculture, Banks, banking, Claims, Rural areas.
12 CFR Part 630
Accounting, Agriculture, Banks, banking, Organization and functions
(Government agencies), Reporting and recordkeeping requirements, Rural
areas.
0
For the reasons stated in the preamble, parts 611, 619, 620, 621, 624,
627 and 630 of chapter VI, title 12 of the Code of Federal Regulations
are amended as follows:
PART 611--ORGANIZATION
0
1. The authority citation for part 611 continues 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, 4.12A, 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, 2012, 2021,
2071, 2072, 2091, 2092, 2121, 2123, 2142, 2183, 2184, 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.
Subpart P--Termination of System Institution Status
Sec. 611.1250 [Amended]
0
2. Amend paragraphs (a)(3) and (b)(4) of Sec. 611.1250 by removing the
words ``, as defined in Sec. 621.2(i) of this chapter'' from the end
of the second sentence.
Sec. 611.1255 [Amended]
0
3. Amend paragraphs (a)(3) and (b)(4) of Sec. 611.1255 by removing the
words ``, as defined in Sec. 621.2(i) of this chapter'' from the end
of the second sentence.
PART 619--DEFINITIONS
0
4. 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, 5.19, 6.22, 7.0,
[[Page 76119]]
7.1, 7.6, 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, 2254,
2278b-2, 2279a, 2279a-1, 2279b, 2279b-2, 2279f).
0
5. Amend part 619 by adding a new Sec. 619.9270 to read as follows:
Sec. 619.9270 Qualified Public Accountant or External Auditor.
A qualified public accountant or external auditor is a person who:
(a) Holds a valid and unrevoked certificate, issued to such person
by a legally constituted State authority, identifying such person as a
certified public accountant;
(b) Is licensed to practice as a public accountant by an
appropriate regulatory authority of a State or other political
subdivision of the United States;
(c) Is in good standing as a certified and licensed public
accountant under the laws of the State or other political subdivision
of the United States in which is located the home office or corporate
office of the institution that is to be audited;
(d) Is not suspended or otherwise barred from practice as an
accountant or public accountant before the Securities and Exchange
Commission (SEC) or any other appropriate Federal or State regulatory
authority; and
(e) Is independent of the institution that is to be audited. For
the purposes of this definition the term ``independent'' has the same
meaning as under the rules and interpretations of the American
Institute of Certified Public Accountants (AICPA). At a minimum, an
accountant hired to audit a System institution is not independent if he
or she functions in the role of management, audits his or her own work,
or serves in an advocacy role for the institution.
PART 620--DISCLOSURE TO SHAREHOLDERS
0
6. The authority citation for part 620 is revised to read as follows:
Authority: Secs. 4.19, 5.9, 5.17, 5.19, 8.11 of the Farm Credit
Act (12 U.S.C. 2207, 2243, 2252, 2254, 2279aa-11); sec. 424 of Pub.
L. 100-233, 100 Stat. 1568, 1656.
Subpart A--General
0
7. Amend Sec. 620.2 as follows:
0
a. Remove paragraphs (b) and (c);
0
b. Add new paragraph (b);
0
c. Redesignate paragraphs (d) through (j) as paragraphs (c) through
(i), consecutively; and
0
d. Revise paragraphs (a) and newly redesignated paragraph (c).
Sec. 620.2 Preparing and filing the reports.
For the purposes of this part, the following shall apply:
(a) Copies of each report required by this part, including
financial statements and related schedules, exhibits, and all other
papers and documents that are a part of the report, must be sent to the
Farm Credit Administration according to our instructions. Submissions
must comply with the requirements of Sec. 620.3 of this part. The Farm
Credit Administration must receive the report within the period
prescribed under applicable subpart sections.
(b) The reports must be available for public inspection at the
issuing institution and the Farm Credit Administration office with
which the reports are filed. Farm Credit bank reports must also be
available for public inspection at each related association's
office(s).
(c) The reports sent to shareholders must comply with the
requirements of Sec. 620.3 of this part. Shareholders must agree to
electronic disclosures of reports required by this part.
* * * * *
0
8. Revise Sec. 620.3 to read as follows:
Sec. 620.3 Accuracy of reports and assessment of internal control
over financial reporting.
(a) Prohibition against incomplete, inaccurate, or misleading
disclosures. No institution and no employee, officer, director, or
nominee for director of the institution shall make any disclosure to
shareholders or the general public concerning any matter required to be
disclosed by this part that is incomplete, inaccurate, or misleading.
When any such person makes disclosure that, in the judgment of the Farm
Credit Administration, is incomplete, inaccurate, or misleading,
whether or not such disclosure is made in disclosure statements
required by this part, such institution or person shall make such
additional or corrective disclosure as is necessary to provide
shareholders and the general public with a full and fair disclosure.
(b) Signatures. The name and position title of each person signing
the report must be printed beneath his or her signature. If any person
required to sign the report has not signed the report, the name and
position title of the individual and the reason(s) such individual is
unable or refuses to sign must be disclosed in the report. All reports
must be dated and signed on behalf of the institution by:
(1) The chief executive officer (CEO);
(2) The chief financial officer (CFO), or if the institution has no
CFO, the officer responsible for preparing financial reports; and
(3) A board member formally designated by action of the board to
certify reports of condition and performance on behalf of individual
board members.
(c) Certification of financial accuracy. The report must be
certified as financially accurate by the signatories to the report. If
any signatory is unable to, or refuses to, certify the report, the
institution must disclose the individual's name and position title and
the reason(s) such individual is unable or refuses to certify the
report. At a minimum, the certification must include a statement that:
(1) The signatories have reviewed the report,
(2) The report has been prepared in accordance with all applicable
statutory or regulatory requirements, and
(3) The information is true, accurate, and complete to the best of
signatories' knowledge and belief.
(d) Management assessment of internal control over financial
reporting. Annual reports of those institutions with over $1 billion in
total assets (as of the end of the prior fiscal year) must include a
report by management assessing the effectiveness of the institution's
internal control over financial reporting. The assessment must be
conducted during the reporting period and be reported to the
institution's board of directors. Quarterly and annual reports for
those institutions with over $1 billion in total assets (as of the end
of the prior fiscal year) must disclose any material change(s) in the
internal control over financial reporting occurring during the
reporting period.
Subpart B--Annual Report to Shareholders
Sec. 620.4 [Amended]
0
9. Amend Sec. 620.4(a) by removing the word ``shall'' and adding in
its place the word ``must''; and by removing the reference ``90'' and
adding in its place the reference ``75 calendar''.
0
10. Amend Sec. 620.5 as follows:
0
a. Remove the word ``shall'' and add in its place, the word ``must'' in
the introductory text to Sec. 620.5 and in paragraph (a) introductory
text;
0
b. Remove the last sentence in paragraphs (b) and (c)(1);
0
c. Add the words ``, if material'' at the end of paragraph (f)
introductory text;
0
d. Add the word ``material'' before the word ``participation'' in
paragraph (g)(1)(iii)(A);
0
e. Remove the words ``to absorb the risk inherent in the institution's
loan
[[Page 76120]]
portfolio'' at the end of paragraph (g)(1)(iv)(B);
0
f. Add the word ``material'' before the word ``obligations'' and before
the word ``contributions'' in the first sentence of paragraph
(g)(1)(iv)(E) and remove the words ``pursuant to section 8.7 of the
Act'' at the end of the first sentence;
0
g. Revise paragraph (l); and
0
h. Remove the words ``, as defined in Sec. 621.2(i) of this chapter,''
in paragraph (m)(1); remove existing paragraph (m)(2) and redesignate
paragraph (m)(3) as new paragraph (m)(2).
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(l) Relationship with qualified public accountant.
(1) If a change or changes in qualified public accountants have
taken place since the last annual report to shareholders or if a
disagreement with a qualified public accountant has occurred that the
institution would be required to report to the Farm Credit
Administration under part 621 of this chapter, the information required
by Sec. 621.4(c) and (d) of this chapter must be disclosed.
(2) Disclose the total fees, by the category of services provided,
paid during the reporting period to the qualified public accountant. At
a minimum, identify fees paid for audit services, tax services, and
non-audit related services. The types of non-audit services must be
identified and indicate audit committee approval of the services.
* * * * *
Subpart C--Quarterly Report
Sec. 620.10 [Amended]
0
11. Amend Sec. 620.10(a) by removing the word ``shall'' and adding in
its place the word ``must'' and by removing the reference ``45'' and
adding in its place the reference ``40 calendar''.
Subpart F--Bank and Association Audit and Compensation Committees
0
12. Amend Sec. 620.30 by revising paragraph (d)(2) to read as follows:
Sec. 620.30 Audit committees.
(d) * * *
(2) External auditors. The external auditor must report directly to
the audit committee. Each audit committee must:
(i) Determine the appointment, compensation, and retention of
external auditors issuing audit reports of the institution;
(ii) Review the external auditor's work;
(iii) Give prior approval for any non-audit services performed by
the external auditor, except the audit committee may not approve those
non-audit services specifically prohibited by FCA regulation; and
(iv) Comply with the auditor independence provisions of part 621 of
this chapter.
* * * * *
PART 621--ACCOUNTING AND REPORTING REQUIREMENTS
0
13. The authority citation for part 621 is revised to read as follows:
Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C.
2252, 2279aa-11); sec. 514 of Pub. L. 102-552.
Subpart A--Purpose and Definitions
Sec. 621.2 [Amended]
0
14. Amend Sec. 621.2 by removing paragraph (i) and redesignating
existing paragraph (j) as newly designated paragraph (i).
Subpart B--General Rules
0
15. Amend Sec. 621.4 by revising paragraph (b) to read as follows:
Sec. 621.4 Audit by qualified public accountant.
* * * * *
(b) The qualified public accountant's opinion of each institution's
financial statements must be included as a part of each annual report
to shareholders. The accountant must comply with the auditor
independence provisions of subpart E of this part.
* * * * *
0
16. Add a new subpart E, consisting of Sec. Sec. 621.30, 621.31, and
621.32, to read as follows:
Subpart E--Auditor Independence
Sec.
621.30 General.
621.31 Non-audit services.
621.32 Conflicts of interest and rotation.
Subpart E--Auditor Independence
Sec. 621.30 General.
Each Farm Credit institution must ensure the independence of all
qualified public accountants conducting the institution's audit by
establishing and maintaining policies and procedures governing the
engagement of external auditors. The policies and procedures must
incorporate the provisions of this subpart and Sec. 612.2260 of this
chapter.
Sec. 621.31 Non-audit services.
Non-audit services are any professional services provided by a
qualified public accountant during the period of an audit engagement
which are not connected to an audit or review of an institution's
financial statements.
(a) A qualified public accountant engaged to conduct a Farm Credit
institution's audit may not perform the following non-audit services
for that institution:
(1) Bookkeeping,
(2) Financial information systems design,
(3) Appraisal and valuation services,
(4) Actuarial services,
(5) Internal audit outsourcing services,
(6) Management or human resources functions,
(7) Legal and expert services unrelated to the audit, and
(8) Advocating an institution's interests in litigation, regulatory
or administrative investigations and proceedings unrelated to external
audit work.
(b) A qualified public accountant engaged to conduct a Farm Credit
institution's audit may only perform non-audit services, not otherwise
prohibited in this section, if the institution's audit committee pre-
approves the services and the services are fully disclosed in the
annual report.
Sec. 621.32 Conflicts of interest and rotation.
(a) Conflicts of interest. (1) A Farm Credit institution may not
engage a qualified public accountant to conduct the institution's audit
if the accountant uses a partner, concurring partner, or lead member in
the audit engagement team who was a director, officer or employee of
the Farm Credit institution within the past year.
(2) A Farm Credit institution may not make an employment offer to a
partner, concurring partner, or lead member serving on the
institution's audit engagement team during the audit or within 1 year
of the conclusion of the audit engagement.
(b) Rotation. Each institution may engage the same lead and
reviewing audit partners of a qualified public accountant to conduct
the institution's audit for no more than 5 consecutive years. The
institution must then require the lead and reviewing audit partners
assigned to the institution's audit team to rotate out of the audit
team for 5 years. At the end of 5 years, the institution may again
engage the audit services of those lead and reviewing audit partners.
PART 624--[REMOVED AND RESERVED]
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17. Remove and reserve part 624.
[[Page 76121]]
PART 627--TITLE IV CONSERVATORS, RECEIVERS, AND VOLUNTARY
LIQUIDATIONS
0
18. The authority citation for part 627 continues 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 C--Conservators and Conservatorships
0
19. Amend Sec. 627.2785 by revising paragraphs (b) and (d) to read as
follows:
Sec. 627.2785 Inventory, examination, audit, and reports to
stockholders.
* * * * *
(b) The institution in conservatorship shall be examined by the
Farm Credit Administration in accordance with section 5.19 of the Act.
The institution must also be audited by a qualified public accountant
in accordance with part 621 of this chapter.
* * * * *
(d) Each institution in conservatorship must prepare and issue
published financial reports in accordance with the provisions of part
620 of this chapter, and the certifications and signatures of the board
of directors or management provided for in Sec. 620.3 of this chapter
must be provided by the conservator of the institution.
PART 630--DISCLOSURE TO INVESTORS IN SYSTEM-WIDE AND CONSOLIDATED
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM
0
20. 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
0
21. Amend Sec. 630.2 by revising paragraph (c) to read as follows:
Sec. 630.2 Definitions.
* * * * *
(c) Disclosure entity means any Farm Credit bank and the Federal
Farm Credit Banks Funding Corporation (Funding Corporation).
* * * * *
0
22. Amend Sec. 630.3 by revising paragraphs (a), (f) and (h) as
follows:
Sec. 630.3 Publishing and filing the report to investors.
(a) The disclosure entities shall jointly publish the following
reports in order to provide meaningful information pertaining to the
financial condition and results of operations of the System to
investors and potential investors in FCS debt obligations and other
users of the report:
(1) An annual report to investors within 75 calendar days after the
end of each fiscal year;
(2) A quarterly report to investors within 45 calendar days after
the end of each quarter, except for the quarter that coincides with the
end of the fiscal year.
(3) Interim reports, as required by the Funding Corporation's
written policies and procedures, disclosing significant events or
material changes in information occurring since the most recently
published report to investors.
* * * * *
(f) Information in documents prepared for investors in connection
with the offering of debt securities issued through the Funding
Corporation may be incorporated by reference in the annual and
quarterly reports in answer or partial answer to any item required in
the reports under this part. A complete description of any offering
documents incorporated by reference must be clearly identified in the
report (e.g., Federal Farm Credit Banks Consolidated System-wide Bonds
and Discount Notes--Offering Circular issued on [insert date]).
Offering documents incorporated by reference in either an annual or
quarterly report prepared under this part must be filed with the Farm
Credit Administration according to our instructions either prior to or
at the time of submission of the report under paragraph (h) of this
section. Any offering document incorporated by reference is subject to
the delivery and availability requirements set forth in Sec.
630.4(a)(5) and (a)(6).
* * * * *
(h) Complete copies of the report must be filed with the Farm
Credit Administration according to our instructions. All copies must
comply with the requirements of Sec. 630.5 of this part.
0
23. Amend Sec. 630.4 as follows:
0
a. Revise paragraph (a)(4);
0
b. Remove paragraph (b);
0
c. Redesignate paragraphs (c) and (d) as (b) and (c);
0
d. Revise newly redesignated paragraphs (b)(4), (b)(5), and (c).
Sec. 630.4 Responsibilities for preparing the report to investors.
(a) * * *
(4) File the reports with the FCA in accordance with Sec. 630.3(f)
and (h) and Sec. 630.5.
* * * * *
(b) * * *
(4) Respond to inquiries from the Funding Corporation relating to
preparation of the report.
(5) Certify to the Funding Corporation that all information needed
for preparation of the report to investors has been submitted in
accordance with the instructions of the Funding Corporation and the
information submitted complies with the signature and certification
provisions of Sec. 620.3(b) and (c), respectively.
(c) Responsibilities of associatios. Each association must:
(1) Provide its related bank with the information necessary to
allow the bank to provide accurate and complete information regarding
the bank and its related associations to the Funding Corporation for
preparation of the report. The financial information provided by the
association to its related bank must be signed and certified in the
same manner as provided in Sec. 620.3(b) and (c), respectively.
(2) Respond to inquiries of the related bank pertaining to
preparation of the combined financial data of the association and its
related bank.
0
24. Revise Sec. 630.5 to read as follows:
Sec. 630.5 Accuracy of reports and assessment of internal control
over financial reporting.
(a) Prohibition against incomplete, inaccurate, or misleading
disclosure. Neither the Funding Corporation, nor any institution
supplying information to the Funding Corporation under this part, nor
any employee, officer, director, or nominee for director of the Funding
Corporation or of such institutions, shall make or cause to be made any
disclosure to investors and the general public required by this part
that is incomplete, inaccurate, or misleading. When any such
institution or person makes or causes to be made disclosure under this
part that, in the judgment of the FCA, is incomplete, inaccurate, or
misleading, whether or not such disclosure is made in published
statements required by this part, such institution or person shall
promptly furnish to the Funding Corporation, and the Funding
Corporation shall promptly publish, such additional or corrective
disclosure as is necessary to provide full and fair disclosure to
investors and the general public. Nothing in this section shall prevent
the FCA from taking additional actions to enforce this section pursuant
to its authority under title V, part C of the Act.
(b) Signatures. The name and position title of each person signing
the report must be printed beneath his or her signature. If any person
required to sign
[[Page 76122]]
the report has not signed the report, the name and position title of
the individual and the reasons such individual is unable to, or refuses
to, sign must be disclosed in the report. All reports must be dated and
signed on behalf of the Funding Corporation by:
(1) The chief executive officer (CEO);
(2) The officer in charge of preparing financial statements; and
(3) A board member formally designated by action of the board to
certify reports of condition and performance on behalf of individual
board members.
(c) Certification of financial accuracy. The report must be
certified as financially accurate by the signatories to the report. If
any signatory is unable to, or refuses to, certify the report, the
institution must disclose the individual's name and position title and
the reason(s) such individual is unable or refuses to certify the
report. At a minimum, the certification must include a statement that:
(1) The signatories have reviewed the report,
(2) The report has been prepared in accordance with all applicable
statutory or regulatory requirements, and
(3) The information is true, accurate, and complete to the best of
signatories' knowledge and belief.
(d) Management assessment of internal control over financial
reporting. (1) Annual reports must include a report by the Funding
Corporation's management assessing the effectiveness of the internal
control over financial reporting for the System-wide report to
investors. The assessment must be conducted during the reporting period
and be reported to the Funding Corporation's board of directors.
Quarterly and annual reports must disclose any material change(s) in
the internal control over financial reporting occurring during the
reporting period.
(2) The Funding Corporation must require its external auditor to
review, attest, and report on management's assessment of internal
control over financial reporting. The resulting attestation report must
accompany management's assessment and be included in the annual report.
0
25. Amend Sec. 630.6 by revising paragraph (a)(4)(ii) to read as
follows:
Sec. 630.6 Funding Corporation committees.
(a) * * *
(4) * * *
(ii) External auditors. The external auditor must report directly
to the SAC. The SAC must:
(A) Determine the appointment, compensation, and retention of
external auditors issuing System-wide audit reports;
(B) Review the external auditor's work;
(C) Give prior approval for any non-audit services performed by the
external auditor, except the audit committee may not approve those non-
audit services specifically prohibited by FCA regulation; and
(D) Comply with the auditor independence provisions of part 621 of
this chapter.
* * * * *
Subpart B--Annual Report to Investors
0
26. Amend Sec. 630.20 as follows:
0
a. Remove paragraph (b)(3);
0
b. Remove paragraph (m)(2)(iii);
0
c. Redesignate paragraphs (m)(2)(iv) through (vi) as paragraphs
(m)(2)(iii) through (v); and
0
d. Revise the introductory text, paragraphs (f) introductory text,
(h)(1), (i), (k), and (l) introductory text to read as follows:
Sec. 630.20 Contents of the annual report to investors.
The annual report must contain the following:
* * * * *
(f) Selected financial data. At a minimum, furnish the following
combined financial data of the System in comparative columnar form for
each of the last 5 fiscal years, if material.
* * * * *
(h) Directors and management.
(1) Board of directors. Briefly describe the composition of boards
of directors of the disclosure entities. List the name of each director
of such entities, including the director's term of office and principal
occupation during the past 5 years, or state that such information is
available upon request.
(2) * * *
(i) Compensation of directors and senior officers. State that
information on the compensation of directors and senior officers of
Farm Credit banks is contained in each bank's annual report to
shareholders and that the annual report of each bank is available to
investors upon request pursuant to Sec. 630.3(g).
* * * * *
(k) Relationship with qualified public accountant.
(1) If a change in the qualified public accountant who has
previously examined and expressed an opinion on the System-wide
combined financial statements has taken place since the last annual
report to investors or if a disagreement with a qualified public
accountant has occurred that the Funding Corporation would be required
to report to the FCA under part 621 of this chapter, disclose the
information required by Sec. 621.4(c) and (d).
(2) Disclose the total fees paid during the reporting period to the
qualified public accountant by the category of services provided. At a
minimum, identify fees paid for audit services, tax services, and non-
audit services. The types of non-audit services must be identified and
indicate audit committee approval of the services.
(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 shall 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 System. The
System-wide combined financial statement and accompanying supplemental
information shall be audited in accordance with generally accepted
auditing standards by a qualified public accountant. The System-wide
combined financial statements shall include the following:
* * * * *
Dated: December 12, 2006.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E6-21529 Filed 12-19-06; 8:45 am]
BILLING CODE 6705-01-P