[Federal Register Volume 75, Number 222 (Thursday, November 18, 2010)]
[Proposed Rules]
[Pages 70619-70623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29025]
=======================================================================
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Parts 612, 620, and 630
RIN 3052-AC41
Standards of Conduct and Referral of Known or Suspected Criminal
Violations; Disclosure to Shareholders; and Disclosure to Investors in
System-Wide and Consolidated Bank Debt Obligations of the Farm Credit
System; Compensation, Retirement Programs, and Related Benefits
AGENCY: Farm Credit Administration.
ACTION: Advance notice of proposed rulemaking (ANPRM).
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, we, or our) is requesting
comments on ways to clarify or otherwise enhance our regulations
related to Farm Credit System (System) institutions' disclosures to
shareholders and investors on compensation, retirement programs and
related benefits for senior officers, highly compensated individuals,
and certain individual employees or other groups of employees. We are
also seeking comments on whether we should issue new regulations in
related areas. In keeping with today's financial and economic
environment, we believe it prudent and timely to undertake a review of
our regulatory guidance on the identified areas. We intend to consider
the information and suggestions we receive in response to this ANPRM
when developing a rulemaking on compensation disclosures and related
areas.
DATES: You may send comments on or before March 18, 2011.
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.
As facsimiles (fax) are difficult for us to process and achieve
compliance with section 508 of the Rehabilitation Act, we are no longer
accepting comments submitted by fax. Regardless of the method you use,
please do not submit your comments multiple times via different
methods. You may submit comments by any of the following methods:
E-mail: Send us an e-mail at [email protected].
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.
You may review copies of all comments we receive at our office in
McLean, Virginia or on 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, including any
supporting data provided, 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:
Deborah A. Wilson, Senior Accountant, Office of Regulatory Policy,
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4414, TTY
(703) 883-4434, or
Laura McFarland, Senior Counsel, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703)
883-4020.
SUPPLEMENTARY INFORMATION:
I. Objective
The objective of this ANPRM is to gather information for the
development of a rulemaking that could result in:
Enhancing the transparency and consistency of disclosures
related to System institution compensation policies and practices \1\
for senior officers,\2\ highly compensated individuals,\3\ and/or
certain other groups of employees whose activities, either individually
or in the aggregate, are reasonably likely to materially impact an
institution's financial performance and risk profile;
---------------------------------------------------------------------------
\1\ 12 CFR 620.5(i).
\2\ All references to senior officer(s) in this ANPRM refer to a
senior officer as defined in 12 CFR 619.9310.
\3\ All references to highly compensated individuals in this
ANPRM refer to those officers described in 12 CFR 620.5(i)(2)(i)(B).
---------------------------------------------------------------------------
Clarifying and enhancing the authorities and
responsibilities of System institution compensation committees \4\ in
furtherance of their oversight activities;
---------------------------------------------------------------------------
\4\ All references to compensation committees in this ANPRM
refer to compensation committees as set forth in 12 CFR 620.31 and
12 CFR 630.6(b).
---------------------------------------------------------------------------
Increasing user-control in System institutions'
compensation policies and practices by providing for a non-binding
shareholder vote on senior officer compensation;
Requiring timely notice to interested parties of
significant events, facts or circumstances occurring at a System
institution between required reporting periods;
Addressing the appropriateness of, and enhancing the
disclosure of, certain payments to System institution directors; and
Providing audit committees greater authority to access
external resources when needed.
II. Background
The Farm Credit Act of 1971, as amended (Act),\5\ authorizes the
FCA to issue regulations implementing the provisions of the Act,
including those provisions that address System institution disclosures
to shareholders and investors. Our regulations are intended to ensure
the safe and sound operations of System institutions and govern the
disclosure of financial information to shareholders of, and investors
in, the Farm Credit System.\6\ Congress explained in section 514 of the
Farm Credit Banks and Associations Safety and Soundness Act of 1992
(1992 Act) \7\ that disclosure of financial information and the
reporting of potential conflicts of interest by institution directors,
officers, and employees help ensure the financial viability of the
System. In the 1992 Act, Congress required that we review our
regulations to ensure that System institutions provide adequate
disclosures to shareholders and other interested parties. We completed
this initial review in 1993 making appropriate amendments to our
[[Page 70620]]
``Standards of Conduct'' regulations (59 FR 24889, May 13, 1994), our
``Disclosure to Shareholders'' regulations (59 FR 37406, July 22,
1994), and our ``Disclosure to Investors in System-wide and
Consolidated Bank Debt Obligations of the Farm Credit System''
regulations (59 FR 46742, September 12, 1994). We continue to
periodically review and update our disclosure regulations to ensure
they are appropriate for current business practices, that they ensure
System institutions provide their shareholders with information to
assist them in making informed decisions regarding the operations of
the institutions, and that the disclosures provide investors with
information necessary to assist them in making investment decisions.
---------------------------------------------------------------------------
\5\ Public Law 92-181, 85 Stat. 583, 12 U.S.C. 2001 et seq.
\6\ Section 5.17(a)(8), (9) and (10) of the Act. 12 U.S.C.
2252(a)(8)(9) and (10).
\7\ Public Law 102-552, 106 Stat. 4131.
---------------------------------------------------------------------------
In keeping with today's economic and business environments and in
accordance with the findings of Congress under the 1992 Act, we believe
it is prudent and timely to undertake a review of our regulatory
guidance related to senior officer compensation. The recent turmoil
within the financial industry and the ensuing decline in the economy
highlight the need to ensure that shareholders and investors are
informed of compensation policies and practices. Shareholders and
investors need information that allows them to assess which policies
and practices encourage excessive risk-taking at the expense of the
institution's safety and soundness. With appropriate information,
shareholders and investors can evaluate whether the institution's
compensation policies and practices create an environment in which
employees take imprudent risks in order to maximize their expected
income at the expense of the institution's earnings performance and
shareholder return. Similar efforts are in process at other regulatory
agencies. For example, the Securities and Exchange Commission (SEC)
recently revised its regulations to require that issuers disclose their
compensation policies and practices as they relate to the company's
risk management.\8\ Likewise, the Board of Governors of the Federal
Reserve System (FRB) has undertaken two supervisory initiatives
involving a review of incentive compensation practices at certain
banking organizations. The FRB has issued supervisory guidance designed
to ensure that incentive compensation policies at banking organizations
supervised by the FRB do not encourage imprudent risk-taking and are
consistent with the safety and soundness of the organization.\9\ Also,
the recently enacted Dodd-Frank Wall Street Reform and Consumer
Protection Act (Wall Street Reform Act) \10\ includes amendments to the
Securities Exchange Act of 1934 requiring, among other things, a
separate resolution subject to a non-binding shareholder vote on the
compensation of executive officers of a SEC issuer.\11\ In addition,
under the Wall Street Reform Act, each SEC issuer is required to
disclose information that shows the relationship between executive
compensation actually paid and the financial performance of the
reporting entity.\12\
---------------------------------------------------------------------------
\8\ See SEC Release No. 33-9089, ``Proxy Disclosure and
Enhancements,'' issued February 28, 2010.
\9\ Board of Governors of the Federal Reserve System, Docket No.
OP-1374, ``Guidance on Sound Incentive Compensation Policies,'' June
21, 2010.
\10\ Public Law 111-203, 124 Stat. 1376.
\11\ See section 951 of Subtitle E of Title IX, ``Investor
Protections and Improvements to the Regulation of Securities,'' of
the Wall Street Reform Act.
\12\ See section 953 of Subtitle E of Title IX, ``Investor
Protections and Improvements to the Regulation of Securities,'' of
the Wall Street Reform Act.
---------------------------------------------------------------------------
Active, effective oversight of senior officer compensation policies
and practices will help align those policies and practices with safe
and sound operations. Providing transparent, timely and accurate
disclosures of senior officer compensation policies and practices will
help ensure an institution adequately fulfills its obligation to its
shareholders and investors.
III. Areas of Consideration
We are reviewing our regulations in order to identify where our
disclosure regulations might be amended to enhance the transparency of
an institution's compensation policies and practices and if those
practices affect the safety, soundness and financial performance of the
institution. Also, we are reviewing our regulations to determine if
they should be amended to facilitate qualified, objective and active
compensation committees that are tasked to oversee an institution's
compensation programs. We are interested in public response to the
questions contained in this ANPRM, including ways in which our
regulations might further enhance disclosures of senior officer
compensation policies and practices. We are also interested in the ways
in which an institution's compensation committee might further engage
in active and effective oversight of those policies and practices.
A. Enhanced Disclosures of Senior Officer Compensation
Our existing disclosure regulations at Sec. Sec. 620.5(i) and
630.20(i) require that certain disclosures of compensation paid to, or
earned by, senior officers and other highly compensated employees
(hereinafter collectively referred to as ``senior officers'') be
included in an institution's annual report to shareholders (or an
association's annual meeting information statement). Our regulations
also require disclosure of certain benefits paid to senior officers
pursuant to a plan or arrangement in connection with resignation,
retirement, or termination. However, depending on when an officer
retires (or otherwise terminates employment with the institution), the
payment may not be disclosed or it may not be disclosed in a timely
manner due to the timing of the actual payment to the officer. As a
result, shareholders and investors may not have all the information
they need to make informed decisions on an institution's compensation
policies and practices for senior officers.
We are considering whether current required disclosures should be
changed to include quantitative and qualitative information on the
obligations that have accrued to an institution from senior officers'
supplemental retirement and deferred compensation plans. Also, we want
to identify how the disclosures could provide greater clarity to the
variable components of senior officers' compensation packages. We
believe disclosures should provide information that assists
shareholders and investors in understanding the impact of compensation
programs on an institution's operations. Shareholders and investors
require sufficient information to assess whether senior officers'
compensation is appropriate in view of the institution's financial
condition, risk profile, and business activities. This information
enables shareholders to understand how an institution's board or
compensation committee exercises its oversight responsibilities of
ensuring a comprehensive and balanced compensation program that holds
management accountable for an institution's financial performance.
Questions (1) through (8) of Section IV of this ANPRM address this
topic.
B. Compensation Committees
Our existing rules at Sec. Sec. 620.31 and 630.6(b) require that
System institutions have compensation committees and that these
committees be responsible for reviewing the compensation policies and
plans for senior officers and employees, as well as approving the
overall compensation program for senior officers. Compensation
committee oversight is critical in ensuring compensation policies and
practices do not jeopardize an institution's safety
[[Page 70621]]
and soundness. In FCA bookletter, ``Compensation Committees'' (BL-060),
dated July 9, 2009, we issued guidance on how compensation committees
could fulfill these duties. We are considering incorporating this
guidance into our existing rules. We are also considering additional
ways to enhance the authorities and responsibilities of System
institution compensation committees to continue to achieve active and
effective oversight of senior officers' compensation policies and
practices. For example, in order for compensation committees to
effectively fulfill their role, they must be specifically tasked with
ensuring that compensation policies and practices do not jeopardize the
safety and soundness of the institution. We are considering ways to re-
emphasize that oversight responsibility. Understanding the financial
commitment and total cost to the institution of the compensation
programs and verifying that the institution is providing accurate and
transparent disclosures on compensation are appropriate tasks for a
compensation committee.
We are aware that some System institutions engage compensation
consultants to make recommendations on compensation programs, plans,
policies and practices. Compensation consultants can provide
significant expertise to the board or compensation committee on
compensation matters. These same consultants may also provide
additional services, such as administration of compensation and benefit
programs or actuarial services, on behalf of an institution's
management. The degree of reliance placed on the consultant's expertise
by the compensation committee may be a function of the consultant's
independence from management influence. Therefore, we are considering
requiring disclosure of the additional services provided to management
by the consultant and requiring that the related fees paid to the
consultant be disclosed. We are also considering if the significance of
these additional services should impact whether they are included in
the compensation disclosures.
Questions (9) through (13) of Section IV of this ANPRM address this
topic.
C. Shareholder Approval of Senior Officers' Compensation
Recent initiatives, such as the Wall Street Reform Act, require
entities that are SEC issuers to include a separate resolution in their
proxy solicitations subject to shareholder vote on the compensation of
the entities' executives. We are considering whether the FCA should
issue regulations requiring a separate, non-binding, advisory
shareholder vote on senior officer compensation and, if so, what those
regulations should require. By providing for a non-binding advisory
vote, shareholders would have a process through which they could
express their approval or disapproval of an institution's compensation
policies and practices. Board oversight and governance of compensation
policies and practices may be more effective and enhanced if the board
is explicitly informed of shareholder approval or disapproval. A non-
binding, advisory shareholder vote would not bind the board of
directors or compensation committee to any particular course of action
and would not overrule any board or committee decisions related to
senior officers' compensation.
Submitting senior officer compensation to a non-binding, advisory
shareholder vote may be a practice that is appropriate for institutions
that are cooperatively structured. One of the core cooperative
principles is that those who use the cooperative should also control
it. Submitting senior officer compensation to an advisory vote by
System institution shareholders may promote member participation in
their institution.
Question (14) of Section IV of this ANPRM addresses this topic.
D. Notice of Significant or Material Events
The FCA promotes sound governance practices. In doing so, we
believe interested parties deserve timely notice and disclosure of any
event, fact or circumstance that boards and management consider
material or significant to the operations or financial condition of
their institution. The SEC requires its registrants to file, in a
timely manner, a current report to announce major events that occur
between reporting periods (i.e., the Form 8-K, Current Report). We are
considering requiring System institutions to provide similar current
reporting on intervening events that occur between annual and quarterly
reporting periods. The intervening events we are considering include
enforcement actions taken by or supervisory agreements with the FCA,
departure of an institution's director or an officer, results of
matters an institution may submit to a vote by its shareholders, and
other similar events.
Question (15) of Section IV of this ANPRM addresses this topic.
E. Remuneration to Boards of Directors in Connection With Conclusion of
Services
Section 612.2130(b) of our regulations defines a conflict of
interest, or the appearance thereof. The rule states that a conflict
exists, or may appear to exist, when a person has a financial interest
in a transaction, relationship or activity that actually affects, or
has the appearance of affecting, the person's ability to perform
official duties and responsibilities in a totally impartial manner and
in the best interest of the institution. Payments to a director in
connection with a restructuring or downsizing of the board or as a
result of a merger, consolidation or other form of institutional
reorganization may result in a board member having, or appearing to
have, a conflict of interest or lack of total independence related to
the transaction or board action. Shareholders and boards have approved
such payments for economic reasons or when they wanted to recognize the
contributions of directors stepping down from the board. We are
considering regulating payments to directors under certain
circumstances and also considering how or if these payments should be
disclosed.
Question (16) of Section IV of this ANPRM addresses this issue.
F. Audit Committees
Sections 620.30(c) and 630.6(a)(3) of the FCA's regulations require
a two-thirds majority vote of the full board of directors of a bank, an
association or the Federal Farm Credit Banks Funding Corporation
(Funding Corporation) to deny its respective audit committee's request
for resources. We are considering whether we should remove the ability
of the full board to deny a request from its audit committee for
external resources.\13\ We are considering this matter based on a May
7, 2010, request from the Funding Corporation submitted on behalf of
the System Audit Committee (SAC), asking us to amend Sec. 630.6(a)(3)
of our regulations to remove the authority of the board of directors of
the Funding Corporation to deny the SAC certain resources.
---------------------------------------------------------------------------
\13\ External resources may include, but not be limited to,
outside advisors, consultants, or legal counsel.
---------------------------------------------------------------------------
Question (17) of Section IV of this ANPRM addresses this request.
IV. Request for Comments
We request and encourage any interested person(s) to submit
comments on the following questions and ask that you support your
comments with relevant data or examples. We remind
[[Page 70622]]
commenters that comments, and data submitted in support of a comment,
are available to the public through our rulemaking files.
(1) Should FCA enhance senior officer compensation disclosure
requirements to improve transparency and current practices?
Specifically, should the FCA consider enhancing disclosures on:
(a) The significant terms of senior officers' employment
arrangements, whether or not dollar amounts are paid or earned during
the reporting year, including components related to deferred
compensation plans, supplemental retirement plans, performance
agreements, and incentive or bonus compensation based on financial
information; and
(b) The position titles of officers included in the aggregated
group's compensation reported under existing Sec. 620.5(i)(2)(i)(B) of
our regulations?
(2) Should the FCA remove from Sec. 620.5(i)(2) the option that
allows associations to disclose senior officer compensation information
in annual meeting information statements instead of disclosing it in
annual reports?
(3) What additional disclosures (qualitative and quantitative) are
needed to ensure that all compensation, including deferred compensation
and supplemental retirement benefits, are fully disclosed in a timely
manner and that an institution's total compensation policies,
practices, and obligations for senior officers are effectively
communicated in a transparent and timely manner?
(4) Should FCA require the disclosure of compensation policies and
practices related to the activities of certain employees, other than
senior officers, which, either individually or in the aggregate, may
expose the institution to a material amount of adverse risk? If so,
what disclosures are needed to ensure the compensation programs,
practices, and incentives for such employees are adequately disclosed
so that shareholders and investors are informed of the potential risk
areas?
(5) To enhance transparency and a comprehensive understanding of
the link between risk, return, and compensation incentives, should a
discussion of an institution's overall risk and reward structure for
senior officer compensation and benefit policies and practices be a
required disclosure and, if so, what level of disclosure or qualitative
information should be required?
(6) To ensure that all sources of compensation are disclosed,
should institutions be required to disclose estimated payments to be
made in the future to each senior officer in connection with deferred
compensation arrangements, performance or incentive awards, and/or
supplementary retirement benefits? If so, how should the disclosures be
presented and for what periods? What other sources of senior officer
compensation should be captured in current financial disclosures to
shareholders?
(7) To ensure that shareholders and investors have an appropriate
understanding of the assumptions used by the institution to determine
estimated future payments for compensation or benefits, if disclosed,
should the assumptions used to determine the future payments also be
disclosed? If so, should the disclosure include why the assumptions
used to determine the estimated payments are different from those used
to determine the present value of dollar amounts disclosed in the
Summary Compensation Table?
(8) Should institutions be required to disclose:
(a) The dollar amount of any tax reimbursements (such as Internal
Revenue Code Section 280G tax gross-ups) provided by the institution to
a senior officer;
(b) The business reason(s) for any material or significant change
or adjustment to compensation or benefit programs from prior periods
that increase or decrease salaries or compensation programs
(individually or in the aggregate);
(c) Quantitative and qualitative benchmarks used to determine
senior officer compensation and performance and incentive bonuses, if
and why benchmarks used in the current reporting period were different
from those used in prior periods, the business reason(s) for changing
the benchmarks used, whether the individual officer was successful in
attaining the requirements of the benchmark used, and if and how each
benchmark relates to the financial performance of the institution;
(d) Significant events, trends or other information necessary to
understand the institution's senior officer compensation policies and
practices; and
(e) The vesting periods for long-term incentive and/or performance
compensation or retirement benefits?
(9) To support the compensation committee's review and
accountability processes, should compensation committees be required to
certify compensation disclosures? If so, should the certification
include a statement to the effect that:
(a) The compensation disclosures are true, accurate, and complete,
and that the disclosures are in compliance with all applicable
regulatory requirements;
(b) Comparable compensation practices used by the institution to
develop its compensation policies support the valuation of senior
officer compensation; and
(c) The institution's compensation policies and practices are
consistent with the adverse risk-bearing capacity of the institution
(as determined by the institution's board) and do not pose a threat to
the safety and soundness of the institution?
(10) If compensation committees are required to certify
compensation disclosures, what other areas should be addressed in the
certification and what related statements should the committee certify?
(11) Would it strengthen the operation and independence of the
compensation committee if the FCA required that at least one of the
compensation committee members be an outside director (independent of
any affiliation with the institution other than serving as a director)?
What would be the benefits and/or concerns with such a requirement?
(12) If a System institution compensation committee uses the
services of a compensation consultant, would the disclosure of that
information be meaningful to shareholders and investors? What types of
disclosures should be provided?
(13) If institution management engages the services of a
compensation consultant that is also used by the compensation
committee, or vice versa, should that fact be disclosed? If so, should
the disclosure include a description of the additional services
provided by the consultant for management that:
(a) Benefits the institution as a whole, and
(b) Are provided solely for management's benefit? Should the
consultant's fees for the additional services be disclosed if those
fees are in excess of de minimis amounts?
(14) To enhance transparency and shareholder understanding of
compensation programs and practices, should FCA's regulations provide
for a separate, non-binding advisory vote by System institution voting
shareholders on senior officer compensation? If so:
(a) When and how should the vote occur;
(b) Within what timeframe should the results of the vote be
reported to shareholders;
(c) Should certain System institutions be exempt from the voting
requirement and, if so, what criteria should be used to exempt those
institutions; and
(d) If a vote is required, should institutions be required to
identify
[[Page 70623]]
senior officer compensation amounts on an individual basis to
facilitate the vote? \14\
---------------------------------------------------------------------------
\14\ 12 CFR 620.5(i)(2)(i)(B) allows aggregated disclosure in
the annual report of compensation paid to senior officers.
---------------------------------------------------------------------------
(15) Should System institutions be required to issue current
reports on events, facts, or circumstances that management considers
material or significant to the operations or financial condition of a
System institution, similar to the notice on changes in capital levels
described in Sec. 620.15? \15\ If so, what form should the report
take, what types of events should be reported, and what timeframe would
be appropriate for its issuance?
---------------------------------------------------------------------------
\15\ 12 CFR 620.15 provides for the notice to the FCA and
shareholders by System banks and associations when an institution is
not in compliance with the minimum permanent capital standards
required by the FCA.
---------------------------------------------------------------------------
(16) To ensure that certain payments to institution directors do
not create the potential for a conflict of interest, or appearance
thereof, should payments made to System institution directors in
connection with a restructuring or downsizing of the board, or as a
result of a merger, consolidation or other form of institutional
reorganization be allowed or disallowed?
(a) Under what circumstances would such payments constitute a
conflict of interest or an appearance thereof?
(b) If allowed, how and when should such payments be disclosed?
(17) Should FCA remove from Sec. Sec. 620.30(c) and 630.6(a)(3)
the ability of a board of directors to deny a request for resources
from its audit committee?
Dated: November 12, 2010.
Mary Alice Donner,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 2010-29025 Filed 11-17-10; 8:45 am]
BILLING CODE 6705-01-P