[Federal Register: June 16, 2008 (Volume 73, Number 116)]
[Proposed Rules]
[Page 33931-33940]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jn08-13]
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FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052-AC42
Funding and Fiscal Affairs, Loan Policies and Operations, and
Funding Operations; Mission-Related Investments, Rural Community
Investments
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA) proposes a new rule that
would authorize each Farm Credit System (Farm Credit, System, or FCS)
bank, association, and service corporation (institution) to invest in
rural communities across America under certain conditions. The proposed
rule would allow each System institution to make investments in rural
communities that are outside of an urbanized area only for specific
purposes. Several provisions in the proposed rule would ensure that
System investments in rural America are safe and sound and comply with
the Farm Credit Act of 1971, as amended (Act), and other applicable
statutes.
DATES: Comments should be received on or before August 15, 2008.
ADDRESSES: We offer a variety of methods for you to submit your
comments. For accuracy and efficiency reasons, commenters are
encouraged to submit comments by e-mail or through the FCA's Web site
or the Federal eRulemaking Portal. As faxes are difficult for us to
process and achieve compliance with section 508 of the Rehabilitation
Act, please consider another means to submit your comment if possible.
Regardless of the method you use, please do not submit your comment
multiple times via different methods. You may submit comments by any of
the following methods:
E-mail: Send us an e-mail at reg-comm@fca.gov.
FCA Web Site: http://www.fca.gov. Select ``Public
Commenters,'' then ``Public Comments,'' and follow the directions for
``Submitting a Comment.''
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Gary K. Van Meter, Deputy Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
Fax: (703) 883-4477. Posting and processing of faxes may
be delayed. Please consider another means to comment, if possible.
You may review copies of comments we receive at our office in
McLean,
[[Page 33932]]
Virginia, or from our Web site at http://www.fca.gov. Once you are in
the Web site, select ``Public Commenters,'' then ``Public Comments,''
and follow the directions for ``Reading Submitted 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 that you provide, such as phone numbers and addresses, will
be publicly available. However, we will attempt to remove e-mail
addresses to help reduce Internet spam.
FOR FURTHER INFORMATION CONTACT:
Laurie Rea, Associate Director, Office of Regulatory Policy, Farm
Credit Administration, 1501 Farm Credit Drive, McLean, VA, (703) 883-
4414, TTY (703) 883-4434; or
Dawn Johnson, Policy Analyst, Office of Regulatory Policy, Farm Credit
Administration, Denver, CO, (303) 696-9737, TTY (303) 696-9259; or
Richard A. Katz, Senior Counsel, Office of General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.
SUPPLEMENTARY INFORMATION:
I. Background
The FCA proposes a new rule, Sec. 615.5176, which would enable
System institutions to more effectively serve the needs of rural
communities by exercising investment powers under the Act. The proposed
rule focuses on specific needs in rural communities. Essentially, the
proposed rule would authorize two separate types of investments that
System institutions could make in America's rural communities. First,
System institutions could invest in debt securities that would involve
projects or programs that benefit the public in rural communities.
Equity investments in venture capital funds are the second type of
investment that the proposed rule would authorize. Venture capital
funds create new economic opportunities and jobs in rural communities
by providing capital to small or start-up businesses.
The proposed rule would authorize each System institution to make
investments in rural areas that according to the terms of the latest
United States decennial census have fewer than 50,000 residents and are
outside of an urbanized area. The proposed rule would allow System
institutions to invest in: (1) Essential community facilities; (2)
basic transportation infrastructure; (3) rural communities recovering
from disasters; (4) debt securities for rural development projects that
the United States, its agencies, any state, Puerto Rico, or a local
municipal government sponsors or guarantees; (5) debt securities that
support the rural development activities of non-System financial
institutions; (6) rural business investment companies; and (7) venture
capital funds that invest in rural businesses that create jobs and
economic growth under specific conditions. The proposed rule also would
allow System institutions to make other investments that are not
expressly covered by this regulation with FCA approval. Under the
proposed rule, an institution may hold rural community investments in
an amount that does not exceed 150 percent of its total surplus. As
discussed in greater detail below, other provisions of the proposed
rule address safety and soundness and compliance with the Act.
A. The Statutory Basis for the Proposed Rule
System institutions derive their investment authorities from
several provisions of the Act. Sections 1.5(15) and 3.1(13)(A) of the
Act \1\ authorize System banks to invest in securities of the United
States and its agencies, and make ``other investments as may be
authorized under regulations issued by the Farm Credit
Administration.'' Sections 2.2(10) and 2.12(18) of the Act \2\
authorize System associations to invest their funds as approved by
their district banks in accordance with FCA regulations. A System
service corporation is authorized by section 4.25 of the Act \3\ to
engage in investment activities to the same extent as its System
parents.\4\
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\1\ 12 U.S.C. 2013 (15) and 2122 (13)(A).
\2\ 12 U.S.C. 2073 (10) and 2093 (18).
\3\ 12 U.S.C. 2211. Section 4.25 authorizes System banks to
organize service corporations. Section 4.28A of the Act, 12 U.S.C.
2214a, confers this authority on System associations.
\4\ Section 4.25 of the Act prohibits service corporations from
extending credit or providing insurance services to System
borrowers. Otherwise, the Act authorizes service corporations to
perform any other function or service that its FCS parents may
perform. Service corporations currently have authority to purchase
and hold other investments under FCA regulations in subpart E of
part 615.
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Investments in rural communities are compatible with the System's
statutory mandate. The preamble to the Act clearly states that Congress
enacted the law ``to provide for an adequate and flexible flow of money
into rural areas, and to modernize * * * existing farm credit law to
meet current and future rural credit needs, and for other purposes.''
The preamble and investment provisions of the Act form a broad
statutory framework that confers considerable discretion on the FCA to
decide the purposes, conditions, and limits for all investment
activities at System institutions. In exercising this discretion, the
FCA has authorized System institutions to invest their funds in
obligations that are suitable for liquidity, risk management, and
activities that are closely related to the System's statutory mandate.
In implementing the investment provisions of the Act, the FCA has
taken a cautious and incremental approach in approving System
investments for mission-related purposes. Since Congress enacted the
Act in 1971, the FCA has approved new regulations and programs that
authorize the System to make specified investments in agriculture and
rural communities, subject to certain conditions and limits. The
factors that the FCA considers whenever it decides to approve new
mission-related investments are: (1) The financial needs of agriculture
and rural communities; (2) new investment products offered in the
marketplace; (3) the System's status as a Government-sponsored
enterprise (GSE); and (4) compliance with the Act and other applicable
statutes. Under FCA regulations and programs, System investments in
agriculture and rural communities have remained small because lending
to farmers, ranchers, cooperatives, and other eligible borrowers is the
primary activity of System institutions under the Act. Additionally,
most mission-related investments that the FCA has approved are related
to the System's expertise in financing agriculture, rural housing, and
infrastructure in rural areas.
Historically, the FCA has authorized System institutions to invest
in debt securities, but not in equity securities of non-System
entities. In 2002, Congress granted System institutions express
authority to invest in rural business investment companies (RBICs),
which are venture capital funds that the United States Department of
Agriculture (USDA) funds and oversees. The FCA believes that allowing
the System to invest in venture capital funds that hold small equity
positions in start-up rural enterprises is consistent with
congressional intent. As discussed in greater detail below, the
proposed rule would implement the provisions of title VI of the Farm
Security and Rural Investment Act of the 2002 \5\ and the Act by
allowing System institutions to invest in RBICs and other venture
[[Page 33933]]
capital funds that provide start-up money to rural entrepreneurs.
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\5\ Pub. L. No. 107-171, Sec. 384J, 116 Stat. 134, 397 (May 13,
2002).
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In accordance with the Act, the FCA has enacted several regulations
since 1971 that authorize System investments in agriculture and
America's rural communities. The first mission-related investments that
the FCA approved were farmers' notes.\6\ Since 1972, FCA regulations
have authorized System banks and associations to invest in obligations
of States, municipalities, and local governments. In 1993, a new
regulation authorized System institutions to purchase and hold mortgage
securities issued or guaranteed by the Federal Agricultural Mortgage
Corporation (Farmer Mac). In 1999, the FCA amended another regulation
to permit investment in asset securities backed by agricultural
equipment. An existing regulation, Sec. 615.5140(e), allows Farm
Credit institutions to hold other investments that the FCA approves on
a case-by-case basis. This regulatory framework guides investment
practices at Farm Credit institutions and ensures that System
investments comply with law and are safe and sound.
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\6\ The farmers' note program authorizes production credit
associations and agricultural credit associations to invest in
notes, contracts, and other obligations farmers and ranchers enter
into with cooperatives and dealers that sell farm equipment, inputs,
and supplies. Farmers' notes are investments that provide liquidity
to small rural agribusinesses.
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Since 2005, the FCA has approved requests by System banks and
associations, on a case-by-case basis, to initiate pilot programs for
investing in America's rural communities under specified conditions.
Under these FCA-approved pilot programs, System institutions acquired
expertise and became active in making investments that provided funding
for essential projects in rural communities.
Based on the positive experience of these pilot programs, the FCA
is proposing a rule that will allow all System banks, associations, and
service corporations to make certain investments in rural communities
under prescribed conditions without prior FCA approval. This proposed
rule would permit the rural-based System to use its expertise and a
portion of its financial resources to support rural economic growth and
development by investing in those projects and programs in America's
rural communities that often have difficulty attracting financing at
affordable rates.
The proposed rule implements the investment provisions of the Act
by ensuring that: (1) System institutions invest in rural communities
only for specific purposes; and (2) all instruments purchased and held
by Farm Credit institutions are investment securities in accordance
with market practices and securities laws. Investments in rural
communities also would be subject to a portfolio limit and other
controls to ensure that FCS rural community investment activities
comply with the Act and are safe and sound.
The FCA emphasizes that lending to farmers, ranchers, aquatic
producers and harvesters, farm-related businesses, rural homeowners,
cooperatives, and rural utilities remains the primary purpose of the
System. However, within the parameters prescribed by the proposed rule,
System investments, which help strengthen the economic viability of
rural communities, are compatible with the preamble and several
provisions of the Act. Investing in rural communities enables Farm
Credit to fulfill its mission by helping sustain rural communities on
which the System's borrowers and owners are dependent for their
livelihoods.
B. Why Investments in Rural Communities Are Important
The FCA proposes this rule to allow the System to make investments
in rural communities and to support and supplement investments by
government, commercial banks, investment banks, and venture capital
funds. The FCA believes that this new rule will enable the System to
more fully assist rural communities in financing projects that are
designed to provide essential facilities, infrastructure, and services
to residents. As discussed in greater detail below, System institutions
made investments under FCA authorized pilot programs, which
demonstrated that the FCS is both locally and regionally positioned to
effectively participate and assist rural development networks that
strive to address rural needs. The proposed rule is designed to enable
FCS institutions to collaborate and partner in rural development
initiatives that advance the System's mission and its capacity to serve
as a financial intermediary promoting the flow of money into rural
areas.
Many rural communities are struggling to retain economic viability
and vitality that can provide economic opportunities and a better
quality of life for their residents. Rural communities face numerous
demographic, social, and economic challenges in meeting the needs of
their residents. As a result, rural communities often find it difficult
to provide the essential facilities, infrastructure, and services that
their residents need. For example, an aging population in rural areas
requires medical and assisted health care facilities. However, rural
communities often have fewer health care providers and facilities to
meet the increasing medical needs of its growing elderly population.\7\
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\7\ Carol A. Jones, et al., ``Population Dynamics Are Changing
the Profile of Rural Areas,'' Amber Waves, Economic Research
Service, United States Department of Agriculture, April 2007, p. 5.
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Also, a large gap persists between rural and metropolitan residents
who have earned college degrees. This gap is reinforced by a lower
demand for workers with post-secondary degrees in rural areas, which in
turn, contributes to the out-migration of skilled workers.\8\ These
factors place rural communities at a disadvantage in attracting
businesses that offer higher wages and better job benefits to
employees. Essential facilities, infrastructure, and services in rural
areas often lag behind those in metropolitan areas. This is another
factor that limits the ability of rural communities to attract and
retain businesses that provide employment and economic opportunities.
These obstacles to rural economic development and revitalization are
further compounded by funding challenges for projects that are designed
to assist rural communities in resolving these problems.
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\8\ ``Rural Education At A Glance,'' Rural Development Research
Report Number 98, Economic Research Service, United States
Department of Agriculture, November 2003, p. 4.
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Funding for economic growth and development projects in rural
communities is available from a variety of sources, most notably the
Federal and State governments, and private-sector financiers, including
commercial and investment banks. Each of these entities faces
challenges in providing rural communities with the funding needed for
these projects. Efforts by Federal or State governments to help rural
communities are often curtailed by budget constraints. Also, many rural
community banks are willing to provide short-term funding, but find it
difficult to provide the additional long-term capital investment needed
for facilities in rural areas.\9\ Essential facilities and large
capital improvements, such as critical care access hospitals, require a
large capital investment that is repaid over an extended period of
time. In many cases, no single investor is willing and able to supply
all of the capital necessary for such projects, and rural
[[Page 33934]]
communities must depend on a combination of government and private-
sector financial sources and local donations.\10\ Another obstacle is
that rural development projects in remote rural locations typically
involve higher costs and greater risks, which deter investors. For
these reasons, government and private-sector financial resources often
are insufficient to fully fund many necessary and worthwhile projects
that rural residents need.
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\9\ Walter Gregg, The Availability and Use of Capital by
Critical Access Hospitals, Flex Monitoring Team Briefing Paper No.
4, Flex Monitoring Team--University of Minnesota, University of
North Carolina at Chapel Hill, and the University of Southern Maine,
March 2005, p. 10.
\10\ Ibid., p. 25 and 26.
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System institutions are an integral part of rural America. The
farmers and ranchers who borrow from and own the FCS live and work in
rural communities. These System stockholders and their families depend
on local rural communities for essential services, employment, and
other economic opportunities. Today, the majority of farm household
income is derived from off-farm sources.\11\ As a result, farm families
depend on local rural communities for employment that supplements farm
income. Further, agricultural production is one of the most hazardous
industrial sectors.\12\ Farmers and ranchers confront the same problems
as other residents of America's rural communities in obtaining access
to quality hospitals, medical facilities, schools and essential
services.
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\11\ Ted Covey, et al., ``Agricultural Income and Finance
Outlook,'' Outlook, AIS-85, Economic Research Service, United States
Department of Agriculture, December 2007, p. 49.
\12\ ``Chapter 3-Focus on Agriculture,'' Worker Health Chartbook
2004, National Institute for Occupational Safety and Health, NIOSH
Publication No. 2004-146, p. 1.
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System institutions are active in financial markets that serve
regional and local rural areas across the United States. For this
reason, the System is familiar with the challenges that rural
communities face in meeting the needs of both farm and nonfarm rural
residents. The System has the financial capacity to invest in rural
development, and this proposed rule would advance the System's
contributions to rural development efforts.
C. Investments in Rural Communities Made Under Pilot Programs
Over the past 3 years, a number of System institutions have
developed programs to make investments in rural communities through
FCA-approved pilot programs. As a result of the investments made under
these pilot programs, rural communities were able to address specific
regional needs because these investments provided greater access to
capital for community facilities, revitalization projects, and other
economic development initiatives. These investments also provided
additional liquidity into rural financial markets. In several cases,
these investments helped provide capital at more affordable terms and
rates, which in turn made these projects more feasible.
The pilot programs have demonstrated that Farm Credit institutions
have the capacity and willingness to work collaboratively with rural
communities and financial institutions to address local and regional
rural economic development needs. As previously discussed, many rural
development projects are reliant on multiple partners for success. In
making rural community investments under the pilot programs, System
institutions partnered with: Federal, State, and regional rural
development authorities; non-System financial institutions including
rural community banks; nonprofit organizations; and venture capital
funds. For example, System investments under the pilot programs have
provided capital for rural hospitals designated as critical access
facilities, which were sponsored, in part, by the USDA's Rural
Development Community Facilities Program. Other examples of specific
System investments that have made a positive difference in rural
communities include investments in: Medical and mental clinics;
treatment facilities for adolescents and adults; living and nursing
centers for the elderly; schools; and community facilities. Several
projects, which were sponsored by regional or State development
authorities, modernized obsolete facilities for value-added
agricultural products, or created new facilities to promote local
economic growth. These projects were designed to promote economic
growth in rural areas by attracting and promoting businesses that
create or retain jobs in these rural communities.
Non-System financial institutions and venture capital funds have
also benefited from investments that System institutions made under the
pilot programs. For example, System institutions have helped to
increase liquidity at several rural community banks by buying bonds
that support the rural development efforts of these banks. These
investments enabled these banks to reduce the long-term financing costs
for specific rural development projects. Additionally, investments in
regional investment networks provided venture capital to rural
entrepreneurs for start-up businesses that contributed to the vitality
of rural communities. System institutions were prudent in undertaking
investment activities in rural communities and assumed reasonable risks
within pilot program conditions.
In addition to the pilot programs, grant programs and charitable
contributions at many System institutions complement their commitments
to the citizens of local rural communities. Although the proposed rule
does not specifically address grants, System institutions have
authority under the incidental power provisions of the Act to make
charitable grants and donations.\13\ The FCA continues to encourage FCS
institutions to consider making charitable donations and contributions
to worthwhile causes in the communities they serve. System institutions
have contributed to a wide variety of community organizations and
entities, including emergency and medical services, agricultural and
rural community development educational programs, and value-added
agricultural product initiatives. Charitable grants by System
institutions complement rural community investment programs and are an
additional way for Farm Credit institutions to further the System's
mission and help enhance the quality of life for residents in rural
communities.
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\13\ Sections 1.5 (21), 2.2 (20), 2.12 (20) and 3.1 (16) of the
Farm Credit Act (12 U.S.C. 2013 (21), 2073 (20), 2093 (20), 2122
(16)).
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II. Section-by-Section Analysis
A. Rural Communities
Proposed Sec. 615.5176(a) would authorize Farm Credit banks,
associations, and service corporations to make rural community
investments. Proposed Sec. 615.5176(a) also provides that FCS
institutions may make these investments only in areas outside of an
``urbanized area'' \14\ as defined by the latest decennial census of
the United States. For the purposes of this proposed rule, areas
outside of an urbanized area are ``rural.'' The proposed rule would
authorize the FCS to make rural community investments in areas that the
United States Census Bureau determined in the latest decennial census
to have a population of less than 50,000 residents. For the purposes
under this proposed rule, the geographic area includes any State within
the United States and the Commonwealth of Puerto Rico.
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\14\ The United States Census Bureau defines an urbanized area
as an urban area of 50,000 or more people that have core census
block groups or blocks that have a population density of at least
1,000 people per square mile and surrounding census blocks that have
an overall density of at least 500 people per square mile.
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The FCA considered numerous definitions of ``rural,'' recognizing
there is no single, universally preferred
[[Page 33935]]
definition of ``rural'' that policymakers commonly use.\15\ In fact,
more than 15 definitions of ``rural'' are currently used by different
Federal agencies for various programs.\16\ In developing the proposed
rule, the FCA relied on Census Bureau terminology to ensure that the
geographic areas in which investments are permitted are readily
identifiable and easily distinguished.
In determining which geographic areas should qualify under the
proposed rule, the FCA seeks to include those areas with sufficient
population densities to support health care and other essential
facilities serving rural residents, while prohibiting investments in
urbanized areas. For example, hospitals and other health care
facilities that primarily serve rural geographic areas are typically
located in areas that have less than 50,000 residents. Also, whenever
Congress has expressly authorized FCS institutions to lend or invest in
rural development projects, it has allowed these activities in
communities with populations of 50,000 or fewer residents.\17\
Additionally, most Federal agencies and demographic experts have
determined that densely populated areas with 50,000 or more inhabitants
are urbanized areas. For this reason, investments authorized under the
proposed rule would allow System institutions to invest in areas with
populations of less than 50,000 residents based on the latest decennial
census of the United States.
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\15\ Andrew F. Coburn et al., ``Choosing Rural Definitions:
Implications for Health Policy,'' Rural Policy Research Institute
Health Panel, March 2007, p. 1.
\16\ Ibid.
\17\ According to section 3.7(f) of the Act, 12 U.S.C. 2128(f),
banks for cooperatives and agricultural credit banks may extend
credit to water and waste disposal facilities in communities where
the population does not exceed 20,000 inhabitants based on the
latest decennial census of the United States. A provision of the
Farm Security and Rural Investment Act of 2002, 7 U.S.C. 2009cc, et
seq., authorizes System institutions to establish and invest in
rural business investment companies in communities in non-
metropolitan counties that have populations of 50,000 or less
inhabitants under the last decennial census of the Unites States.
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By allowing the System to invest in rural communities that have
fewer than 50,000 residents, the proposed rule provides ``an adequate
and flexible flow of funds into rural areas'' in accordance with the
Act, while precluding System institutions from investing in urbanized
areas. Information is publicly available on the Census Bureau's Web
site, including census population statistics and maps. As a result,
System institutions and other interested parties are able to determine
if a particular location is within a ``rural'' community for the
purposes of Sec. 615.5176(a).
B. Debt Securities
Proposed Sec. 615.5176(b) would authorize System institutions to
invest in rural communities by purchasing and holding debt securities
for purposes specified in Sec. 615.5176(b)(1) through (5). The
proposed rule defines debt securities as obligations that are commonly
recognized in capital markets as a medium for investment, including
government obligations, corporate bonds, revenue bonds, asset-backed
securities and mortgage securities. Proposed Sec. 615.5176(b)
expressly excludes commercial loans and instruments or transactions
that are more similar to commercial loans than to traditional
investment instruments in order to clarify the statutory distinction
between loans and investments. Under the proposed rule, System
institutions could not use their authority to invest in rural
communities to make loans to otherwise ineligible borrowers.
1. Essential Community Facilities
Proposed Sec. 615.5176(b)(1) would authorize System institutions
to invest in debt securities that finance essential community
facilities, such as hospitals, health care facilities, emergency
services, and schools. Many essential community facilities are owned
and operated by State, local, or municipal governments. In other cases,
quasi-governmental or highly regulated private and nonprofit entities
own and operate essential community facilities. Government obligations
and revenue bonds often fund the construction and renovation of these
facilities. Rural communities are currently facing increasing
difficulty in funding these facilities because of deteriorating
liquidity in financial markets. System institutions can help alleviate
this problem by purchasing and holding debt securities as investments
in community facilities that provide essential services to rural
residents.
2. Basic Transportation Infrastructure
Financing basic transportation infrastructure, such as roads,
bridges, and other public transportation systems, is another authorized
investment purpose under the proposed rule. The public sector owns,
maintains, and operates most basic transportation infrastructure in the
United States. Most rural transportation facilities are operated by
public agencies or nonprofit groups, with a small percentage operated
by private entities. Transportation projects are another area where the
System could significantly help rural communities build and improve
infrastructure, which would strengthen their economic viability. Rural
communities and particularly agricultural industries, depend on quality
transportation systems, which are critical in supplying inputs,
shipping and distributing outputs and products, and supporting economic
development. Proposed Sec. 615.5176(b)(2) would authorize System
institutions to purchase government obligations, revenue bonds, and
other debt obligations that support basic transportation
infrastructure.
3. Revitalization of Rural Communities After a Disaster
Proposed Sec. 615.5176(b)(3) would permit System institutions to
purchase debt securities in revitalization projects that help rebuild
rural areas devastated by disasters where an emergency has been
declared pursuant to law. These investments must support local efforts
and residents by contributing to the economic recovery of the affected
rural community.
4. Rural Development Projects With Government Sponsorship or Guarantees
Under proposed Sec. 615.5176(b)(4), System institutions could
invest in debt securities that a government issues, sponsors, or
guarantees under programs to fund rural community development projects.
Without crucial financial support from Federal, State, or local
governments, rural communities would face greater difficulty in funding
vital development projects. By investing in debt securities for rural
economic development under government programs, the System assists
rural communities across America in accordance with its statutory
mandate. By proposing Sec. 615.5176(b)(4), the FCA is encouraging
System institutions to work with Federal, State, and local governments
and their partners to invest in projects that bring jobs,
infrastructure, community facilities, and vital services to rural areas
and their residents.
Proposed Sec. 615.5176(b)(4)(i) covers debt securities that the
United States and its agencies issue, sponsor, or guarantee under
programs that have the specific purpose of directly financing economic
development in rural communities. The FCA emphasizes that the proposed
rule does not require the full faith and credit of the United States
for bonds issued or guaranteed by agencies of the United States.
However, these investments are authorized only if the Federal agency
issues or guarantees these bonds or obligations in accordance with a
program that has the specific purpose of promoting economic development
in rural areas. For
[[Page 33936]]
example, the Tennessee Valley Authority, the Small Business
Administration, and various agencies in the USDA and the Department of
Housing and Urban Development issue and guarantee bonds under specific
programs for infrastructure, facilities, and other development projects
in rural areas, and System investment in these obligations would be
authorized by the proposed rule.
Other Federal agencies operate programs in both metropolitan and
rural areas which are not part of any specific rural development
mission. Bonds and other obligations issued or guaranteed under such
programs would not qualify as investments under the proposed rule. For
example, the proposed rule would not authorize the FCS to invest in
mortgage securities issued or guaranteed by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation
because the purpose of these securities is to enhance the liquidity of
residential home loans throughout the United States, rather than to
promote rural development. Another regulation, Sec. 615.5140, permits
System institutions to make investments for liquidity and risk-
management purposes in bonds and obligations, including residential
mortgage securities, that Federal agencies issue or guarantee under
programs that are unrelated to rural development. The proposed rule
focuses on investments in rural communities and would not authorize
System institutions to hold residential mortgage securities issued by
other GSEs, but the FCA continues to study this issue.
Proposed Sec. 615.5176(b)(4)(ii) would allow System institutions
to invest in debt securities that any State, the Commonwealth of Puerto
Rico, a local or municipal government, or other political subdivision
of a State, issues, sponsors, or guarantees that are specifically
related to development in rural communities. Many local or municipal
governments and other political subdivisions, such as special
districts, often sponsor particular rural development projects by
providing tax incentives or other benefits to private-sector obligors
who issue revenue bonds. These revenue bonds, which help finance rural
development projects, would qualify as investments that FCS
institutions could purchase and hold under proposed Sec.
615.5176(b)(4)(ii). This provision would also allow System institutions
to invest in mortgage securities that are issued or guaranteed by State
or local agencies that specialize in rural development.
5. Rural Development Projects Financed by Non-System Financial
Institutions
Proposed Sec. 615.5176(b)(5) would allow System institutions to
invest in debt securities issued by non-System financial institutions.
The proposed rule would authorize System institutions to purchase these
debt securities to increase financial assistance to rural communities
and improve the liquidity of rural financial markets. This provision
would enhance cooperation between System and non-System financial
institutions and ultimately benefit rural communities. System
institutions may purchase asset-backed securities, covered bonds, or
similar types of bonds issued by non-System financial institutions
directly or through trusts that supply funds to non-System financial
institutions for rural development. Investments made under the pilot
programs evidence that securities, including commercial bank bonds
issued by rural community banks and purchased by System institutions,
can effectively increase bank liquidity. These investments benefit
rural communities and residents, while establishing partnerships
between non-System and System institutions.
C. Equity Investments
Equity investments in venture capital funds are another type of
investment that the proposed rule would authorize FCS institutions to
purchase and hold. Under this provision of the proposed rule, System
institutions could invest in venture capital funds that provide capital
to start-up and small private-sector enterprises that bring jobs and
economic opportunities to rural communities. Venture capital funds that
operate in the United States invest only 1.6 percent of their funds in
rural community enterprises, although these enterprises represent 19.2
percent of all businesses.\18\ System institutions could make a small,
but meaningful, contribution to rural economic development by investing
in venture capital funds that provide capital into rural enterprises.
As discussed in greater detail below, System institutions would hold
only small, passive investment positions in venture capital funds
because of statutory and regulatory restrictions.
---------------------------------------------------------------------------
\18\ Kendall McDaniel, ``Venturing into Rural America,'' The
Main Street Economist, Center for the Study of Rural America--
Federal Reserve Bank of Kansas City, p. 2.
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Proposed Sec. 615.5176(c) would authorize System institutions to
make equity investments in two types of entities, RBICs and venture
capital funds, for the purpose of providing equity capital to rural
business enterprises. Rural entrepreneurs often lack sufficient equity
capital to establish and expand businesses that are the mainstay of
prosperous rural economies. Venture capital funds provide equity
capital in rural business enterprises, which promote economic
development and job opportunities in rural communities.
1. Rural Business Investment Companies
Proposed Sec. 615.5176(c)(1) would authorize System institutions
to purchase and hold equity investments in RBICs that are established
and operate in accordance with 7 U.S.C. 2009cc et seq. As discussed
earlier, the Farm Security and Rural Investment Act of 2002 created the
Rural Business Investment Program and expressly authorized any Farm
Credit System institution to establish and invest in RBICs. Congress
intended to promote economic development, create wealth, and expand job
opportunities in rural areas through RBIC equity investments. The
System's statutory authority to establish and invest in RBICs is
incorporated into proposed Sec. 615.5176(c)(1). The proposed rule
would enable System institutions to invest in RBICs to the fullest
extent allowed by 7 U.S.C. 2009cc et seq. The FCA emphasizes that
proposed Sec. 615.5176(c)(1) would authorize System institutions to
invest in both leveraged and non-leveraged RBICs.
2. Venture Capital Funds
Proposed Sec. 615.5176(c)(2) would authorize System institutions
to invest in venture capital funds which, in turn, invest in rural
businesses that provide job opportunities. Under this provision, System
institutions would be able to indirectly provide rural entrepreneurs
needed equity capital through venture capital funds, such as regional
investor networks, which have investment objectives similar to RBICs.
The Center for the Study of Rural America of the Federal Reserve
Bank of Kansas identified a significant need for equity capital for
rural entrepreneurs because entrepreneurial activity is strongly linked
to economic growth.\19\ For this reason, experts conclude that
additional focus on rural entrepreneurship can be an effective strategy
in combating the decline of traditional resource-based businesses in
[[Page 33937]]
rural areas.\20\ However, rural economies have difficulty attracting
venture capital because metropolitan areas usually offer better
profits. Policy officials and experts agree that entrepreneurship in
remote and sparsely populated rural areas can be challenging because
access to skilled labor, technology, and capital is more limited.
Investments in venture capital funds that focus on rural entrepreneurs
can effectively begin to overcome these barriers to rural businesses.
---------------------------------------------------------------------------
\19\ Mark Drabenstott, et al., ``Main Streets of Tomorrow:
Growing and Financing Rural Entrepreneurs--A Conference Summary,''
Economic Review, Third Quarter 2003, Federal Reserve Bank of Kansas
City, pp. 73 and 74.
\20\ Ibid.
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Proposed Sec. 615.5176(c)(2) would place specific restrictions on
System investment in venture capital funds to ensure that these
investments remain small and passive. Additionally, these controls
would minimize potential financial risk to the System institutions,
while providing the System with flexibility to invest in rural
development under the Act.
Proposed Sec. 615.5176(c)(2)(i) would control financial risk by
prohibiting any System institution from investing more than 5 percent
of its total surplus in venture capital funds and more than 2 percent
of its total surplus in any one venture capital fund. The FCA
emphasizes that this limit on venture capital funds in proposed Sec.
615.5176(c)(2)(i) is in addition to the overall limit in proposed Sec.
615.5176(e)(i), which prevents total rural community investments at any
FCS institution from exceeding 150 percent of its total surplus.
The restrictions in proposed Sec. 615.5176(c)(2)(ii) and (iii)
would prevent System institutions from controlling and managing venture
capital funds. Proposed Sec. 615.5176(c)(2)(ii) would prohibit any FCS
institution from holding more than 20 percent of the voting equity of
any venture capital fund. The purpose of this provision is to allow
System institutions to invest in venture capital funds that focus on
rural areas, while imposing a reasonable limit that prevents any System
institution from gaining a controlling interest in any fund. Proposed
Sec. 615.5176(c)(2)(iii) would prohibit any FCS institution from
participating in the routine management or operation of a venture
capital fund.
Finally, proposed Sec. 615.5176(c)(2)(iv) and (v) would establish
controls to avoid potential conflicts of interest. Proposed Sec.
615.5176(c)(2)(iv) would prohibit any director, officer, or employee of
a System institution from serving as a director, officer, employee,
principal shareholder, or trustee of any venture capital fund or of any
entity funded by, or affiliated with, the venture capital fund.
Proposed Sec. 615.5176(c)(2)(v) would prohibit any System institution
from participating in any decision or action of a venture capital fund
involving or affecting any customer of the institution. Although
proposed Sec. 615.5176(c)(2)(v) would permit a System institution to
invest in venture capital funds that hold equity in one of its
borrowers, the institution could not participate in decisions or
actions that affect such customers. Additionally, the proposed rule
does not prohibit System institution directors, officers, or employees
from serving in an investment screening or other advisory capacity to a
venture capital fund, subject to the restrictions discussed above.
System institution representatives serving in an advisory capacity to a
venture capital fund also remain subject to FCA conflict of interest
regulations and institution policies.
D. Other Investments Approved by the Farm Credit Administration
The FCA's experience with the pilot programs reveals that the types
of System investments may change as the needs of rural communities
evolve. For this reason, the FCA believes that the new regulation
should contain a mechanism for approving investments that currently do
not exist, but may emerge in the future. Currently, Sec. 615.5140(e)
provides the FCA with the authority to approve new investments that are
not specifically authorized by regulation.
Proposed Sec. 615.5176(d) establishes specific criteria for System
institutions to apply to the FCA for permission to hold investments
that are not expressly authorized by this regulation. Under this
proposal, written requests by System institutions would: (1) Describe
the proposed project or program in detail; (2) explain its risk
characteristics; and (3) demonstrate how such investments are
consistent with the System's statutory mandate to serve agriculture and
rural communities. In approving such requests, the FCA may impose
additional or more stringent conditions than the requirements of this
regulation to ensure safety and soundness or compliance with law.
E. Restrictions on Rural Community Investments
Other requirements governing System investments in rural
communities are covered by proposed Sec. 615.5176(e). These
requirements either pertain to safety and soundness or implement
statutory requirements.
1. Portfolio Limit
Proposed Sec. 615.5176(e)(1) would authorize each System bank,
association, or service corporation to make rural community investments
in an amount not to exceed 150 percent of the institution's total
surplus. The proposed portfolio limit on rural community investments
ensures that lending to farmers, ranchers, aquatic producers,
cooperatives, and other borrowers that own the FCS remains the primary
activity of System institutions. At the same time, the proposed limit
provides the FCS with the flexibility to make investments in an amount
that offers meaningful assistance to rural communities and their
residents. This limit on rural community investments is compatible with
limits that the Act and other FCA regulations impose on System
activities that are related to the System's mission.
Based on financial information reported as of December 31, 2007,
the proposed limit would authorize the System to invest up to a total
of $35.8 billion in rural community investments.\21\ For example, this
would permit an FCS association with $1.0 billion in assets and $150.0
million in total surplus to invest up to $225.0 million in rural
communities.
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\21\ This amount is comparable to the regulatory limits
established for the System's rural home lending and investments in
farmers' notes activities, which are limited to amounts totaling
$35.9 billion for each program as of year-end, although actual
amounts outstanding under these programs represented 1.3 percent and
less than 1 percent of total outstanding loans, respectively.
---------------------------------------------------------------------------
The FCA considered the following factors when it decided to propose
150 percent of total surplus as the portfolio limit: (1) The safety and
soundness of FCS institutions; (2) the significant needs of rural
communities; (3) the FCS's ability and capacity to assist rural
communities, and (4) the ability of FCS institutions to fulfill mission
objectives. Total surplus provides a basis for each institution's risk
tolerance level, and the FCA has historically used this standard to
limit System investments in unrated obligations that are less liquid.
System institutions also use limits based on similar capital measures
to ensure that asset and portfolio concentrations are safely and
soundly managed.
This proposed limit also is based on the limits established for the
pilot programs. The FCA established individual institution limits equal
to 100 percent of total surplus (or in some cases 10 percent of total
loans) for investments held under specific pilot programs, and 150
percent of total surplus for an institution's portfolio of all rural
community investments. The
[[Page 33938]]
pilot programs evidence that System institutions exercised caution when
making investments in rural communities. Institutions have not
approached the portfolio limit. Although the proposed rule establishes
an upper regulatory portfolio limit, the FCA expects that each System
institution would determine an appropriate internal portfolio limit
based on the individual institution's objectives, capital position,
risk tolerance, and other factors that it considers appropriate, in
accordance with Sec. 615.5133(c).
The FCA also considered the System's need to establish a program of
sufficient size that could adequately deliver benefits to rural
communities while balancing operational efficiency needs. In
establishing the portfolio limit, the FCA sought to ensure that each
System institution, large or small, could effectively partner with
government agencies and non-System financial institutions in projects
that may positively affect their local rural communities.
The current credit crisis emphasizes the importance of funding for
rural development projects and enhancing the liquidity of rural credit
markets. The portfolio limit curtails the maximum risk exposure of
System institutions, and it also encourages partnerships with non-
System financial institutions and government agencies that are active
in rural development. Collaboration between System institutions and
larger, more established financial investors is a way to help rural
communities access financing for vital projects, especially during
times of economic uncertainty.
2. Obligor Limit
Proposed Sec. 615.5176(e)(2) would establish an obligor limit for
investments in rural communities. This provision would not allow any
System institution to invest more than 15 percent of its total surplus
in investments issued by a single entity, issuer, or obligor. However,
the obligor limit would not apply to obligations issued or guaranteed
on the full faith and credit of the United States, its agencies,
instrumentalities, or corporations. In the event only a portion of the
obligation is guaranteed, the non-guaranteed portion of the obligation
would remain subject to the obligor limit.
This obligor limit is designed to control undue credit risk from a
single counterparty on the capital of any System institution and
provide sufficient diversification of an institution's rural community
investment portfolio. For safety and soundness reasons, the FCA decided
that the obligor limit for rural community investments should be lower
than the 20 percent of total capital obligor limit established for
investments held by System institutions to maintain liquidity and
manage market risks in Sec. 615.5140(d). In contrast to the liquid and
marketable securities held under Sec. 615.5140, rural community
investments are often unrated and, therefore, capital markets would
consider them less liquid. The FCA anticipates that most rural
community investments would be held to maturity and would not trade.
For these reasons, the FCA proposes an obligor limit for rural
community investments that does not exceed 15 percent of the total
surplus of each System institution.
This regulatory provision would also require a System institution
to count securities that it holds through an investment company towards
this 15-percent obligor limit to prevent undue risk concentrations.
This provision provides an exception when the investment company's
holding of the security of any one issuer does not exceed 5 percent of
the investment company's total portfolio. The FCA patterned this
provision after Sec. 615.5140(d)(2), which applies to investments that
FCS institutions hold through investment companies for the purposes of
maintaining liquidity or managing market risks.
The FCA emphasizes that proposed Sec. 615.5176(e)(2) establishes a
maximum obligor limit for rural community investments. The FCA expects
every Farm Credit institution to establish internal obligor limits
based on its financial condition and the size and complexity of
securities that it contemplates buying and holding. The obligor limit
that each System institution sets should be based on both identified
risks and its own risk-bearing capacity.
3. Maturities for Debt Securities in Rural Communities
Proposed Sec. 615.5176(e)(3) would require most rural community
investments to mature in no more than 20 years. However, debt
securities may mature in not more than 40 years if the United States or
its agencies provide a guarantee or a conditional commitment of
guarantee for 50 percent or more of the total issuance or obligation.
Proposed Sec. 615.5176(e)(3) establishes terms to maturity that are
flexible enough to accommodate typical rural development projects that
this rule would authorize. This regulatory approach would enable System
institutions to participate in USDA and other State rural development
programs that provide a supplemental or partial guarantee, which
contributes to, or enhances, whole-project financing. Also, investments
that fund essential rural community facilities, such as hospitals,
police and fire stations, and other emergency service facilities,
typically require project financing over longer terms to maturity.
4. Exclusion From the Liquidity Reserve
Proposed Sec. 615.5176(e)(4) would require System banks to exclude
rural community investments from their liquidity reserve under Sec.
615.5134 of this part. System banks may purchase and hold the eligible
investments listed in Sec. 615.5140 to maintain liquidity reserves,
manage interest rate risk, and invest surplus short-term funds in
accordance with Sec. 615.5132. Only investments that can be promptly
converted into cash without significant loss are suitable for achieving
these objectives. Rural community investments are not suitable for
liquidity purposes or market risk management because these investments
do not typically carry ratings assigned by a Nationally Recognized
Statistical Rating Organization and are not actively traded in the
established secondary markets.
5. Association Investments
Proposed Sec. 615.5176(e)(5) would implement sections 2.2(10) and
2.12(18) \22\ of the Act, which require each funding bank to supervise
and approve the investment activities of its affiliated associations.
System banks may discharge their statutory and regulatory
responsibility to approve and supervise an association's rural
community investments through covenants in the general financing
agreement, policies, or other appropriate formats. System banks may
also provide advisory, analytical, and research services that help
their affiliated associations to devise strategies for investing in
rural communities and managing these assets.
---------------------------------------------------------------------------
\22\ 12 U.S.C. 2073 (10) and 2093 (18).
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6. Attribution of Service Corporation Investments
Proposed Sec. 615.5176(e)(6) would require System service
corporations to attribute all rural community investments to their
System institution parents based on the ownership percentage of each
bank or association. This provision would prevent FCS institutions from
utilizing service corporations to exceed the regulatory limits on rural
community investments.
[[Page 33939]]
F. Management of Rural Community Investments
Proposed Sec. 615.5176(f) addresses rural community investment
management practices at FCS institutions and ensures that System
institutions invest in rural communities in a safe and sound manner. If
a Farm Credit System institution chooses to invest in rural
communities, proposed Sec. 615.5176(f) would require its board of
directors to first adopt written policies for managing the
institution's investments. These investment management policies must be
appropriate for the levels, types, and complexities of each
institution's rural community investments. Proposed Sec. 615.5176(f)
would also require the board of directors ensure the institution's
implementation of procedures and internal controls that ensure
compliance with the board's policies and the regulation.
Additionally, proposed Sec. 615.5176(f) would require these
written policies to comply with Sec. 615.5133, which governs
management practices for investments held for liquidity and risk
management. Although rural community investments differ from liquid
investments, strong and disciplined investment management practices are
essential to the safety and soundness of all investment activities
within System institutions. As a result, sound investment management
practices prescribed by Sec. 615.5133 are also applicable to rural
community investments and, for this reason, the FCA is extending Sec.
615.5133 to rural community investments.
Existing Sec. 615.5133 requires a System institution's investment
management policies to address risk tolerance, delegations of
authority, internal controls, securities valuation, and reporting to
the board. Also, Sec. 615.5133 requires that investment policies be
appropriate for the size, type, and risk characteristics of the
institution's investments. The FCA expects each System institution to
fully and carefully evaluate its risk tolerance in accordance with
Sec. 615.5133(c) when it considers purchasing any rural community
investments. Finally, proposed Sec. 615.5176(f) expressly exempts
those rural community investments that System institutions classify and
account for as held-to-maturity under generally accepted accounting
principles from the securities valuation requirement in Sec.
615.5133(f). This exemption is based on the different accounting
classifications for these securities.
G. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the 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 System, considered together
with its affiliated associations, has assets and annual income in
excess of the amounts that qualify them as small entities. Therefore,
System institutions are not ``small entities'' as defined in the
Regulatory Flexibility Act.
List of Subjects in 12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
For the reasons stated in the preamble, part 615 of chapter VI,
title 12 of the Code of Federal Regulations is proposed to be amended
as follows:
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
1. The authority citation for part 615 is revised to read as
follows:
Authority: Secs. 1.1, 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. 2001, 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); 7 U.S.C 2009cc
et. seq.; sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.
Subpart F--Property, Transfers of Capital and Other Investments
2. A new Sec. 615.5176 is added to subpart F to read as follows:
Sec. 615.5176 Rural community investments.
(a) Rural communities. As authorized by this section, each Farm
Credit System (System) bank, association, or service corporation
(hereafter ``institution'') may make rural community investments. All
investments that any System institution makes under this section in
rural communities must be outside an urbanized area as determined by
the latest decennial census of the United States.
(b) Debt securities. Each institution may make investments in rural
communities by purchasing and holding debt securities. For the purposes
of this section, debt securities are obligations that are commonly
recognized in the established capital markets as a medium for
investment. Debt securities exclude commercial loans and any instrument
or transaction that is more similar to a commercial loan than to a
traditional investment instrument or transaction. Debt securities
include government obligations, corporate debt obligations, revenue
bonds, asset-backed securities, as defined by Sec. 615.5131(a), and
mortgage securities, as defined by Sec. 615.5131(h). Debt securities
that institutions purchase and hold under this section must provide
funding in rural communities for:
(1) Essential community facilities such as hospitals, clinics,
emergency services, and schools;
(2) Basic transportation infrastructure, such as roads, bridges,
and other public transportation systems;
(3) Revitalization projects that rebuild rural areas recovering
from disasters where an emergency has been declared pursuant to law;
(4) Rural development projects for which the issuer, sponsor, or
provider of a guarantee is:
(i) The United States or any of its agencies, instrumentalities, or
corporations, under programs that have the specific purpose of directly
financing economic development in rural areas; or
(ii) Any State, the Commonwealth of Puerto Rico, local or municipal
governments, or other political subdivisions.
(5) Non-System financial institutions for their activities that
support rural development.
(c) Equity investments. System institutions may also make
investments in:
(1) Rural Business Investment Companies that are established and
operate in accordance with 7 U.S.C. 2009cc et seq.; or
(2) Venture capital funds that are established to promote economic
development and job opportunities in businesses located in rural
communities, so long as an institution does not:
(i) Invest more than 5 percent of its total surplus in venture
capital funds and more than 2 percent of its total surplus in any one
venture capital fund;
(ii) Hold more than 20 percent of the voting equity of any one
venture capital fund;
(iii) Participate in the routine management or operation of any
venture capital fund;
(iv) Allow any institution director, officer, or employee to serve
as director, officer, employee, principal shareholder, or trustee of
any venture
[[Page 33940]]
capital fund, or of any entity funded by, or affiliated with any
venture capital fund; or
(v) Participate in any decision or action of any venture capital
fund involving or affecting any customer of the institution.
(d) Other investments approved by the Farm Credit Administration.
System institutions may make other investments in rural communities
that are not expressly authorized by this section if they are approved
by the Farm Credit Administration. Written requests for Farm Credit
Administration approval must describe the proposed project or program
in detail, explain its risk characteristics, and demonstrate how such
investments are consistent with the statutory mandate of the Farm
Credit System.
(e) Restrictions on rural community investments--(1) Portfolio
limit. An institution must not invest more than 150 percent of its
total surplus in rural community investments.
(2) Obligor limit. An institution must not invest more than 15
percent of its total surplus in rural community investments issued by
any single entity, issuer, or obligor. This obligor limit does not
apply to obligations of the United States or its agencies,
instrumentalities, or corporations. An institution must count
securities that it holds through an investment company towards the
obligor limit of this section unless the investment company's holding
of the securities of any one issuer does not exceed 5 percent of the
investment company's total portfolio.
(3) Maturities for debt securities. Debt securities purchased by
institutions under this section must mature in not more than 20 years,
except that debt securities may mature in not more than 40 years if the
United States or its agencies provide a guarantee or a conditional
commitment of guarantee for 50 percent or more of the total issuance or
obligation.
(4) Exclusion from the liquidity reserve. No Farm Credit bank shall
include any investment made in accordance with this section in its
liquidity reserve under Sec. 615.5134 of this part.
(5) Association investments. A System association may hold rural
community investments only with the approval of its funding bank. Each
district Farm Credit bank must annually review all rural community
investments held by its affiliated associations.
(6) Attribution of service corporation investments. All investments
in rural communities that service corporations hold under this section
must be attributed to their System institution parents based on the
ownership percentage of each bank or association.
(f) Management of rural community investments. Before a System
institution invests in rural communities, its board of directors must
first adopt written policies for managing the institution's rural
community investments. Investment management policies must be
appropriate for the levels, types, and complexities of each
institution's rural community investments. These written policies must
comply with requirements of Sec. 615.5133. Investments made under this
section that System institutions classify and account for as held-to-
maturity securities in accordance with generally accepted accounting
principles are exempt from the requirements of paragraph (f) of Sec.
615.5133. The board of directors must ensure that the institution
implements procedures and internal controls to ensure compliance with
the board's policies and the regulation.
Dated: June 10, 2008.
Roland Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E8-13382 Filed 6-13-08; 8:45 am]
BILLING CODE 6705-01-P