[Federal Register Volume 61, Number 199 (Friday, October 11, 1996)]
[Proposed Rules]
[Pages 53331-53337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25818]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 61, No. 199 / Friday, October 11, 1996 /
Proposed Rules
[[Page 53331]]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 620 and 630
RIN 3052-AB62
Disclosure to Shareholders; Disclosure to Investors in Systemwide
and Consolidated Bank Debt Obligations of the Farm Credit System;
Quarterly Report
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA) proposes to amend its
regulations governing the preparation, filing, and distribution of Farm
Credit System (FCS or System) bank and association reports to
shareholders and investors. The proposal would implement the recent
statutory amendment that eliminates the regulatory requirement that FCS
institutions disseminate quarterly reports to shareholders. Routine
distribution of quarterly reports to shareholders would be voluntary
rather than mandatory, but FCS institutions would be required to make
quarterly reports available to shareholders on request. Associations
would no longer be required to distribute quarterly reports along with
their information statements regardless of the date of their annual
meetings.
However, to further promote shareholder access to timely
information and full disclosure regarding adverse events affecting
their institutions, the FCA proposes that FCS institutions prepare and
distribute a notice to shareholders when an institution's permanent
capital falls below the regulatory minimum standard. The proposal would
also remove the requirement that banks present their financial
statements on a combined basis with their related associations to
ensure that the preparation of FCS institutions' financial statements
is solely guided by generally accepted accounting principles (GAAP).
Lastly, the proposal would permit FCS debt securities offering
documents to be referenced in the System's report to investors to
reduce the repetition of information in documents provided to
investors.
DATES: Comments should be received on or before November 12, 1996.
ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio,
Associate Director, Regulation Development, Office of Examination,
McLean, Virginia 22102-5090, or sent by facsimile transmission to FAX
number (703) 734-5784. Copies of all communications received will be
available for examination by interested parties in the Office of
Examination, Farm Credit Administration.
FOR FURTHER INFORMATION CONTACT:
Laurie A. Rea, Policy Analyst, Office of Examination, Farm Credit
Administration, McLean, VA 22102-5090, (703)883-4498; or
William L. Larsen, Senior Attorney, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703)883-4020, TDD
(703)883-4444.
SUPPLEMENTARY INFORMATION:
I. Change From Mandatory to Voluntary Dissemination of Quarterly
Reports to Shareholders
On February 10, 1996, the President signed the Farm Credit System
Reform Act of 1996 (1996 Act) into law.1 Section 211 of the 1996
Act provides that ``the requirements of the Farm Credit Administration
governing the dissemination to stockholders of quarterly reports of
System institutions may not be more burdensome or costly than the
requirements applicable to national banks.'' Section 211 applies only
to dissemination requirements and does not affect the requirement that
FCS institutions continue to prepare and file quarterly reports with
the FCA in accordance with the quarterly report filing and content
requirements of part 620.
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\1\ See Pub. L. 104-105, 110 Stat. 162 (Feb. 10, 1996).
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Current Sec. 620.10 requires each Farm Credit Bank (FCB),
agricultural credit bank (ACB), bank for cooperative (BC) and direct
lender association to distribute quarterly reports to shareholders,
either by mail or by publication in newspapers or periodicals in a
trade area with circulation wide enough to be reasonably assured that
all of the institution's shareholders are reached on a timely basis.
Each FCB and ACB is also required to distribute its quarterly reports
to the shareholders of related associations under certain
circumstances. These quarterly report dissemination requirements
conflict with section 211 of the 1996 Act because they exceed the
requirements applicable to national banks, which are not required to
disseminate quarterly reports to shareholders.2 Accordingly, to
conform with the 1996 Act, the FCA proposes to amend Sec. 620.10 and
several related provisions.3
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\2\ National banks that meet the reporting threshold of the
Securities Exchange Act disclosure rules that are incorporated by
reference in the Office of the Comptroller of the Currency's (OCC)
rules at 12 CFR Part 11 must file quarterly reports with the OCC.
These quarterly reports, while publicly available, are not required
to be distributed to shareholders. Further, all national banks must
file quarterly call reports with the OCC pursuant to 12 U.S.C. 161
and 12 CFR 4.11. These quarterly reports of condition are available
from the OCC, but are not required to be distributed to
shareholders.
\3\ On April 10, 1996, the Board informed FCS institutions that
they did not have to comply with the quarterly report distribution
requirements in Sec. 620.10 pending amendment of FCA quarterly
report dissemination requirements to conform with the 1996 Act.
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Under the FCA's proposal, a substantial portion of existing
Sec. 620.10 would be removed.4 While FCS institutions would still
be required to prepare and file quarterly reports with the FCA under
proposed Secs. 620.2(a) and 620.10(a), they would no longer be required
to distribute quarterly reports to shareholders. Banks would no longer
have to distribute quarterly reports to shareholders of related direct
lender associations under Sec. 620.10(e) for quarters in which a
significant event has occurred or which occurred during the preceding
quarters that continues to materially affect the related associations.
However, to ensure that shareholders who wish to obtain a copy of their
association's or related bank's quarterly report can continue to do so,
the FCA proposes to modify Sec. 620.2 relating to preparing and filing
reports.
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\4\ Existing paragraphs (d), (e), (f), and (g) would be removed
and paragraphs (a) and (c) would be modified and redesignated as new
paragraphs (a) and (b).
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Proposed Sec. 620.2(h)(1) would require each FCS institution to
include a statement in a prominent location within its annual report
that the
[[Page 53332]]
institution's quarterly financial information is available on request
to shareholders free of charge. In addition, the proposed regulation
would require that the statement include approximate dates of
availability of the quarterly financial information and the telephone
numbers and addresses where shareholders may obtain a copy of the
reports. Proposed Sec. 620.2(h)(2) would further require each
association to include a statement in a prominent location within each
annual and quarterly report that the shareholders' investments in the
association may be affected materially by the financial condition and
results of operations of the association's related bank and that a copy
of the bank's most recent financial report, if not otherwise provided,
will be made available on request free of charge. The statement must
also include the telephone numbers and addresses where shareholders may
obtain copies of the related bank's financial reports.
Current Sec. 620.20 requires each association to prepare and
distribute to its shareholders, at least 10 days prior to any meeting
at which directors are to be elected, an information statement that
contains information pertinent to the annual meeting and incorporates
by reference the association's annual report. Section 620.20(c) further
requires that any association that holds its annual meeting of
shareholders more than 134 days after the end of its fiscal year must
also provide shareholders with its most recent quarterly report, either
preceding or accompanying the information statement.5 Under the
proposal, Sec. 620.20(c) would be removed and associations would not be
required to provide shareholders with quarterly statements along with
or prior to the information statement, regardless of the date of the
association's annual meeting. Nevertheless, the FCA encourages
associations that hold annual meetings significantly after the end of
the fiscal year to provide shareholders with the most recent financial
information. In particular, current financial information may be
essential when the shareholders are voting on matters of significant
financial interest to the association.
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\5\ In comparison, national banks must prepare and make
available to shareholders and others an annual disclosure statement.
The annual disclosure statement must be made available by March 31
of each year, or by an earlier date as necessary to be made
available to security holders in advance of the annual meeting of
shareholders. National banks must make the annual disclosure
statement continually available until the annual disclosure
statement for the succeeding year becomes available, but there is no
requirement that the statement be updated with subsequent periodic
report information. National banks having a class of securities
registered pursuant to section 12 of the Securities Exchange Act of
1934 may satisfy the annual disclosure statement requirement using
either their annual reports to shareholders or their annual report
filed with the Comptroller. See 12 CFR Part 18.
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Section 620.20(b) would continue to require each association, in
its information statement, to incorporate by reference the annual
report to shareholders and include other information necessary to make
the information statement, in light of the circumstances under which it
is made, not misleading. Under this requirement, for example, if a
significant event (as defined by redesignated Sec. 620.1(r)) has
occurred subsequent to the annual report distribution, this provision
would require an association to include sufficient current financial
information about the significant event in the information statement so
that the annual report incorporated by reference is not misleading.
No changes are proposed to Sec. 615.5250(a)(2) of this chapter,
which requires institutions to provide prospective borrowers with a
copy of the institution's most recent quarterly report (if more recent
than the annual report) prior to loan closing when the borrower must
purchase equities as a condition for obtaining a loan. By providing
updated financial information that may be important to the prospective
shareholder's decision to purchase equity in the institution as a
condition of obtaining a loan, in this situation, the quarterly report
functions as a prospectus rather than a periodic disclosure report. FCS
institution reports to shareholders thus serve the dual purpose of
providing current financial information regarding an institution to
both existing shareholders and to prospective borrowers/
shareholders.6 Since national banks are subject to extensive
securities offering disclosure rules and prospectus delivery
requirements under 12 CFR part 16, the FCA considers the quarterly
report delivery requirement of Sec. 615.5250(a)(2) of the FCA
regulations to be compatible with the 1996 Act. Furthermore, this
requirement is unlikely to cause an undue burden because the updated
financial information can be furnished to prospective borrowers along
with other loan documents.
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\6\ See 51 FR 21336, June 12, 1986.
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Lastly, although the proposed amendments eliminate routine
distribution of quarterly reports to shareholders, the FCA emphasizes
that FCS institutions are not prohibited by the 1996 Act from
continuing to distribute or publish quarterly reports to their
shareholders. The FCA recognizes that the quarterly report may be used
to promote and maintain borrower/shareholder interest and participation
in the institution, and supports the continued distribution or
publication of the report for such purposes.
II. Proposed Notice to Shareholders
In conformance with the cooperative structure of the System and as
a matter of law, borrowers must become stockholders of FCS
institutions. The Farm Credit Act of 1971, as amended (Act), encourages
borrower/shareholder participation in management, control, and
ownership of FCS institutions.7 In the Farm Credit Amendments Act
of 1985,8 Congress expressly authorized the FCA to regulate
disclosure to shareholders. Unlike shareholders of companies subject to
Securities and Exchange Commission (SEC) disclosure requirements who
have access to an established marketplace for financial information
based on SEC filings,9 System shareholders rely primarily on FCS
institutions to provide them with current information regarding their
institutions. The FCA believes that it is critical that shareholders
receive timely notice of material changes in the capital position of
the institutions they own so that they are equipped to exercise their
ownership role. For these reasons, the FCA proposes to add a new
subpart D relating to the preparation and distribution of a notice to
shareholders.
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\7\ See 12 U.S.C. 2001(b).
\8\ Pub. L. 99-205, 99 Stat. 1678 (Dec. 23, 1985). See section
5.19(b)(1) of the Act.
\9\ In addition to annual and quarterly filings, under sections
13 or 15(d) of the Securities Exchange Act of 1934, registrants are
required to file with the SEC a current report within 5-15 days
(depending on the event) upon determination of the occurrence of any
of the following events: (1) Changes in control of registrant, (2)
significant acquisition or disposition of assets, (3) bankruptcy or
receivership, (4) changes in registrant's certifying accountant, (5)
other events that the registrant deems of significant importance to
security holders, and (6) resignations of registrant's directors
because of a disagreement with the registrant on any matter relating
to the registrant's operation, policies, or practices. The SEC does
not require current reports to be distributed to shareholders.
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The FCA has previously noted that one of the reasons that the FCS
institutions need sufficient capital is to protect the ownership,
investment, and rights of shareholders.10 The FCA continues to
believe shareholders have the right to timely notice that their
institution's capital is at such a critical level that it may threaten
the institution's viability, the value of its stock, or its ability to
meet the future credit needs of its borrowers. Furthermore, since 1986,
the Act has
[[Page 53333]]
required the FCA to ``cause institutions to achieve and maintain
adequate capital by establishing minimum levels of capital for such
System institutions and by using such other methods as the [FCA] deems
appropriate.'' 11 One method to promote the maintenance of
adequate capital is through informed shareholder participation in
System institutions. While the FCA has the statutory authority to
establish regulatory minimum capital standards, shareholders and their
elected directors play an important role in making certain that
institutions achieve and maintain adequate capital.
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\10\ See proposed capital regulations at 60 FR 38521, July, 27,
1995. Amendments to the capital regulations were reproposed in June
1996. See 61 FR 42092, August 13, 1996.
\11\ See 12 U.S.C. 2154.
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Accordingly, the FCA proposes that notice be provided to
shareholders when an institution's capital falls below the regulatory
minimum permanent capital standard. Proposed Sec. 620.15(a) would
require each FCS bank and direct lender association to prepare, file
with the FCA, and distribute to shareholders, a notice within 20 days
following the month-end that the institution initially determines that
it is not in compliance with the minimum permanent capital standards
established in part 615 of the FCA regulations.
Under certain circumstances, reporting institutions would be
required to prepare and distribute a subsequent notice to shareholders.
If the reporting institution's permanent capital ratio decreases by
one-half of 1 percent or more from the level reported in a notice, the
reporting institution would be required to distribute to shareholders
another notice within 20 days of the end of the current month. The FCA
believes that such subsequent notices are necessary in circumstances
when an institution's capital position continues to deteriorate.
Proposed Sec. 620.15(c) would stipulate that each FCS institution
required to prepare a notice under Sec. 620.15(a) or (b) must
distribute the notice to shareholders by mail or otherwise furnish the
information required in the notice by publishing it in any publication
with circulation wide enough to be reasonably assured that all of the
institution's shareholders have access to the information in a timely
manner.
The contents of notices need not be extensive, but must provide
sufficient information to apprise shareholders of the institution's
permanent capital position. Proposed Sec. 620.17(a) requires reporting
institutions to present the required information in any format that is
conspicuous, easily understandable, and not misleading.
Proposed Sec. 620.17(b) establishes the following minimum
information requirements for notices:
(1) A statement that (i) briefly describes the regulatory minimum
permanent capital standard established by the FCA and the notice
requirement of proposed Sec. 620.15(a); (ii) indicates the
institution's current level of permanent capital; and (iii) notifies
shareholders that the institution's permanent capital is below the FCA
regulatory minimum standard.
(2) A statement of the effect that noncompliance has had on the
institution and its shareholders, including whether the institution is
currently prohibited by statute or regulation from retiring stock or
distributing earnings or whether the FCA has issued a capital directive
or other enforcement action to the institution.
(3) A complete description of any event(s) that may have
significantly contributed to the institution's noncompliance with the
minimum regulatory permanent capital standard.
(4) A statement that the institution is required by regulation to
distribute another notice to shareholders if the institution's
permanent capital ratio decreases by one-half of 1 percent or more from
the level reported in the notice.
In addition, pursuant to proposed Sec. 620.2(h)(1), the notice must
include a statement in a prominent location that the institution's
quarterly reports are available free of charge on request. The
statement shall include approximate dates of availability of the
quarterly reports and the telephone numbers and addresses where
shareholders may obtain a copy of the reports.
Although the proposed regulation would require a reporting
institution to distribute a notice to shareholders for noncompliance
with the permanent capital standard, the FCA is considering using
noncompliance with the total surplus to risk-adjusted assets ratio
proposed by the FCA in June, 1996,12 to trigger distribution of a
notice to shareholders. Thus, if an institution's total surplus ratio
falls below the regulatory standard, the institution would be required
to notify shareholders of the noncompliance. The FCA specifically
invites comments on the use of the total surplus to risk-adjusted
assets standard as the point at which shareholders would be informed
that their institution is experiencing financial difficulties.
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\12\ See proposed capital regulations at 60 FR 38521, July 27,
1995. Amendments to the capital regulations were reproposed in June
1996. See 61 FR 42092, August 13, 1996.
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In addition, the FCA proposes to amend Sec. 620.2(b)(3)(i) to allow
the same alternatives FCS institutions have for director certification
of quarterly reports to be applied to notices to shareholders. Thus,
each notice need only be dated and manually signed by one board member
on behalf of the individual board members, the person designated by the
board to certify reports of condition and performance, and the chief
executive officer.13
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\13\ Section 620.2(b)(3)(i) provides three certification
signature alternatives for individual board members: the chairperson
of the board, the chairperson of the audit committee; or a board
member designated by the chairperson of the board.
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In proposing these regulations, the FCA seeks to balance the
competing considerations of providing adequate notice to shareholders
concerning their investments and the potential for regulatory burden on
the FCS institutions. The FCA believes that the notice requirement will
accentuate the importance of achieving and maintaining institutional
viability through adequate capital and stress director and management
accountability to shareholders who are interested in protecting their
investment and maintaining their source of credit. The FCA recognizes
that FCS institutions required to file and distribute a notice may
incur costs associated with preparing and distributing the materials.
On balance, the notice would be required only in those extraordinary
circumstances where an institution is not in compliance with the FCA's
minimum permanent capital standard.14 Thus, the FCA does not
believe the regulations will impose an undue regulatory burden.
Moreover, given the cooperative structure of the System, the FCA
believes such notifications are essential for timely and adequate
disclosure to shareholders/members who have investments at risk and
rely on the dependable credit services of the FCS institutions.
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\14\ All FCS institutions were in compliance with the regulatory
minimum permanent capital standard as of June 30, 1996. In addition,
as noted in the proposed capital regulations, most FCS institutions
would be able to meet the total surplus ratio requirement, if the
standard was in effect today. See proposed capital regulations at 60
FR 38521, July 27, 1995.
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III. Combined Financial Statement Presentation Requirements
A. Background
Each FCS institution is required by statute to make and publish an
annual report of condition as prescribed by the FCA. The law and FCA
regulations require that such reports contain
[[Page 53334]]
financial statements prepared in accordance with GAAP, except as
otherwise directed by statute, and any additional information required
by the FCA. With regard to consolidation/combination policy, GAAP
provides that ``the aim should be to make the financial presentation
which is most meaningful in the circumstances.'' 15 Under GAAP,
readers of the financial statements should be given information that is
suitable to their needs without unnecessary detail.
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\15\ See American Institute of Certified Public Accountants
Accounting Research Bulletin 51.
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In 1985, the System and its external auditor examined the issue of
combining the financial statements of the banks and their related
associations. After considering the financial and operational
interdependence of the banks and their related associations, they
concluded that presentation of combined financial statements would
provide the most meaningful information to shareholders under the
circumstances, and thus was the preferred disclosure approach under
GAAP. Subsequently, in response to a request for clarification by the
System, the FCA included a provision in its disclosure to shareholders
regulations that required banks to present their financial statements
on a combined basis with their related associations in reports to
shareholders.16
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\16\ The FCA fully supported the concept of combined bank and
related association financial statements as the principal statements
to be prepared by a district bank. The FCA believed excluding the
associations from the banks' statements would result in publication
of financial statements that did not show the true financial
condition of the district bank, and that, under the circumstances,
combined reporting was the preferred method of presentation under
GAAP. See 51 FR 21336, June 12, 1986.
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After careful consideration of the appropriate accounting guidance
in light of the structural changes that have occurred within the
System, the FCA concludes that GAAP standards pertaining to combined
financial statements do not require combined bank and association
financial statements in all cases.17 For instance, presentation of
the financial statements of an ACB and its related associations (which
represent only a minority interest in the bank) on a combined basis may
not be the most appropriate reporting format because combined financial
statements may obscure the financial strength and standing of the bank
and confuse the majority of the bank's non-System cooperative
shareholders.
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\17\ In the fall of 1995, CoBank, ACB (CoBank), petitioned the
FCA to amend its regulations to allow it to prepare its general
purpose financial statements on a bank-only basis. CoBank stated
that, due to its recent corporate restructuring, combining the bank
and association financial statements would not be the most
meaningful presentation of its financial position and results of
operations for the majority of stockholders. Among other things,
CoBank asserted that combining the financial statements of a class
of customers/stockholders to the exclusion of other customers/
stockholders would result in a confusing financial presentation for
all readers of the financial statements. In December 1995, the FCA
Board informed CoBank that, subject to specific conditions and
pending review and consideration of whether to amend existing
Sec. 620.2(g), the FCA would not criticize the bank for preparing
its financial statements on a stand-alone basis, separate from its
related associations, or for distributing its financial statements
to the stockholders of the related associations only on request.
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However, with respect to FCBs and related associations, the FCA
continues to believe that GAAP supports presentation of combined
financial statements as the most appropriate method of disclosure to
shareholders. This conclusion is based on the closer bilateral effect
of the results of operations on the banks and their respective
associations and the majority voting control of the FCB by its related
associations. Similarly, the FCA believes that GAAP supports the FCA's
conclusion that financial statements for the Report to Investors of the
Farm Credit System (Report to Investors) prepared on a combined basis
continue to provide the most meaningful disclosure under current
circumstances because of the financial and operational interdependence
of the banks and their associations, and the banks' joint and several
liability for Systemwide debt securities.
B. Proposed Amendments
The FCA proposes to amend its regulations by removing the
requirement that banks must present the financial statements of the
bank and its related associations on a combined basis. Under the
proposal, FCS institutions would be exclusively guided by GAAP in
making their determination of whether stand-alone, consolidated, or
combined financial statement presentation is the preferred method. The
FCA believes the proposed change will facilitate the presentation of
financial statements by FCS institutions in a manner that conforms with
GAAP and is the most appropriate under the institutions' prevailing
circumstances.
Proposed Sec. 620.2(g) would require each FCS institution to
present its reports in accordance with GAAP and in a manner that
provides the most meaningful disclosure to shareholders. Proposed
Sec. 620.2(g)(1) would further require that any FCS institution that
presents its annual and quarterly financial statements on a combined or
consolidated basis shall also include, in the footnotes to the primary
financial statements in the report, the statement of condition and
statement of income of the institution on a stand-alone basis. The
stand-alone statements may be in summary form and shall disclose the
basis of presentation if different from accounting policies of the
combined or consolidated statements. Conversely, proposed
Sec. 620.2(g)(2) would require banks that prepare bank-only financial
statements to provide, in the footnotes to the primary statements, a
condensed statement of condition and statement of income for its
related associations, if any, on a combined basis.
The relationship between a bank and its related associations is an
important one that warrants discussion in the financial statements to
achieve full and complete disclosure regardless of how the bank
presents its financial statements. Therefore, the FCA believes that the
condensed association statements required to be prepared by a bank
presenting bank-only statements should be accompanied by supplemental
disclosures, either as a part of the footnotes or the Management's
Discussion and Analysis section of the bank's financial statements. The
FCA believes such supplemental disclosures are consistent with existing
Sec. 620.5(a)(9), which requires reporting entities to disclose the
nature of business relationships with related FCS institutions.
Pursuant to Sec. 620.5(a)(9), the supplemental disclosures should
address the bank's statutory and regulatory authority to supervise or
take actions that may affect the operating and financial policies of
the associations, and any operational and financial interdependency of
the bank and its related associations. Under Sec. 620.5(e)(1) the
supplemental disclosures should also address the statutory limitations
on the associations' access to funds from sources other than the bank.
Pursuant to Sec. 620.5(e) (2) and (3), the FCA would expect a bank
presenting financial statements on a bank-only basis to disclose the
provisions of its capital-sharing agreements with related associations,
if any, and the ability of the bank to gain access to the capital of
the associations.
The FCA also proposes to amend existing Sec. 620.4. The amendments
would continue to require any bank that presents its financial
statements on a combined basis to distribute its annual report to the
shareholders of related associations. In such circumstances, FCS
association borrowers/shareholders need the financial statements of
both the bank and association to properly
[[Page 53335]]
evaluate the operations and financial position of the association. In
contrast, however, where GAAP supports bank preparation of bank-only
financial statements, the FCA believes that the relationship between
the bank and its related associations would no longer necessitate that
the bank distribute its annual report to the shareholders of related
associations in ordinary circumstances. Proposed Sec. 620.4(b)(2)
provides, however, that for periods where the bank has experienced a
significant event that has a material effect on the associations, the
bank's annual report must be distributed to the related associations'
shareholders.
The FCA expects all reporting institutions to continue to prepare
combined financial statements in accordance with part 630 of this
chapter, which covers the Report to Investors of the Farm Credit
System.
IV. Proposed Technical Changes to Part 620
The FCA proposes technical changes to part 620 to clarify the
reporting requirements of related organizations. Proposed Sec. 620.2(i)
delineates the reporting requirements for the reporting institution
when a significant event has materially affected a related
organization. Specifically, any events that have affected one or more
related organizations of the reporting institution that are likely to
have a material effect on the financial condition, results of
operations, cost of funds, or reliability of sources of funds of the
reporting institution, would be considered significant events for the
reporting institution and would require disclosure in the annual and
quarterly reports under proposed Secs. 620.5(g)(2)(vi) and 620.10(b).
In addition, any events affecting a related organization that occurred
during the preceding fiscal quarters that continue to have a material
effect on the reporting institution would be considered significant
events of the current fiscal quarter and would require disclosure in
the annual and quarterly reports under proposed Secs. 620.5(g)(2)(vi)
and 620.10(b).
V. Report to Investors
The Farm Credit Banks Funding Corporation (Funding Corporation)
petitioned the FCA to amend its regulations to allow it to incorporate
by reference information contained in the Federal Farm Credit Banks
Consolidated Systemwide Bonds and Discount Notes Offering Circular
(Offering Circular) into the Report to Investors. Since incorporation
by reference to another document is not currently provided for in the
Report to Investors regulations (12 CFR part 630), the Funding
Corporation must provide some of the same disclosures in its annual and
quarterly information statements as it does in its Offering Circular.
The Funding Corporation asserts that allowing the use of incorporation
by reference is a prudent and practical approach to disseminating
information to investors because it improves the readability of the
offering documents made available to investors by eliminating
duplicative information.
The Report to Investors originally served as both the System's
financial report and a prospectus for investors in Systemwide debt
obligations issued by the Funding Corporation on behalf of the banks.
The FCA recognizes that the dual purpose of the report has diminished
due to the Funding Corporation's increased usage of offering circulars
as the primary method to distribute prospectus information to
investors. The FCA also recognizes that incorporation by reference is
an accepted practice and is routinely permissible in reports filed with
the SEC. Accordingly, the FCA proposes to amend its regulations by
adding a new Sec. 630.3(f),18 which would permit the Funding
Corporation to incorporate by reference information contained in
offering documents for Farm Credit debt securities into the Systemwide
financial reports to investors.
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\18\ Under the proposed rule, existing Sec. 630.3(f) and (g)
would be redesignated as new paragraphs (g) and (h), respectively.
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VI. Regulatory Impact
The FCA has determined that the proposed regulations would not have
a significant effect on the general economy and would not be a
significant regulatory action under Executive Order 12866. In addition,
the proposed regulations pertain only to FCS institutions, and,
therefore, would not present a conflict with the rules and regulations
of other financial regulatory agencies. Due to the nature of the
regulations, it is unlikely that the regulations would have any
material impact on governmental entitlements, grants, user fees, or
loan programs.
List of Subjects
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 630
Accounting, Agriculture, Banks, banking, Credit, Organization and
functions (Government agencies), Reporting and recordkeeping
requirements, Rural areas.
For the reasons stated in the preamble, parts 620 and 630 of
chapter VI, title 12 of the Code of Federal Regulations are proposed to
be amended to read as follows:
PART 620--DISCLOSURE TO SHAREHOLDERS
1. The authority citation for part 620 is revised to read as
follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11).
Subpart A--General
2. Section 620.1 is amended by redesignating paragraphs (o), (p),
and (q) as new paragraphs (p), (q), and (r), respectively, and adding
new paragraph (o) to read as follows:
Sec. 620.1 Definitions.
* * * * *
(o) Report refers to the annual report, quarterly report, notice,
or information statement required by this part unless otherwise
specified.
* * * * *
3. Section 620.2 is amended by revising paragraphs (a), (b)(3)(i),
and (f) through (i) to read as follows:
Sec. 620.2 Preparing and filing the reports.
* * * * *
(a) Three copies of each report required by this section, including
financial statements and related schedules, exhibits, and all other
papers and documents that are part of the report shall be filed with
the Chief Examiner, Farm Credit Administration, McLean, Virginia 22102-
5090, or with such other Farm Credit Administration offices as the
Chief Examiner designates. The Farm Credit Administration must receive
the report within the period prescribed under applicable subpart
sections. The reports shall be available for public inspection at the
issuing institution and the Farm Credit Administration office with
which the reports are filed. Bank reports shall also be available for
public inspection at each related association office.
(b) * * *
(3)(i) For each quarterly report or notice filed under this
section, each member of the board or one of the following board members
formally designated by action of the board to certify reports of
condition and performance on behalf of the individual board members:
The chairperson of the board; the chairperson of the audit committee;
or a board member
[[Page 53336]]
designated by the chairperson of the board.
* * * * *
(f) No disclosure required by subparts B and E of this part shall
be deemed to violate any regulation of the Farm Credit Administration.
(g) Each Farm Credit institution shall present its reports in
accordance with generally accepted accounting principles and in a
manner that provides the most meaningful disclosure to shareholders.
(1) Any Farm Credit institution that presents its annual and
quarterly financial statements on a combined or consolidated basis
shall also include in the report the statement of condition and
statement of income of the institution on a stand-alone basis. The
stand-alone statements may be in summary form and shall disclose the
basis of presentation if different from accounting policies of the
combined or consolidated statements.
(2) Any bank that prepares its financial statements on a stand-
alone basis shall provide supplemental information in the accompanying
footnotes containing a condensed statement of condition and statement
of income for the bank's related associations on a combined basis. The
condensed statements shall disclose the basis of presentation if
different from accounting policies of the bank-only statements.
(h)(1) Each annual report or notice shall include a statement in a
prominent location within the report or notice that the institution's
quarterly reports are available free of charge on request. The
statement shall include approximate dates of availability of the
quarterly reports and the telephone numbers and addresses where
shareholders may obtain a copy of the reports.
(2) Each association shall include a statement in a prominent
location within each report that the shareholders' investment in the
association may be materially affected by the financial condition and
results of operations of the related bank and that a copy of the bank's
financial reports to shareholders, if not otherwise provided, will be
made available free of charge on request. The statement shall also
include the telephone numbers and addresses where shareholders may
obtain copies of the related bank's financial reports.
(3) Each institution shall, after receiving a request for a report,
mail or otherwise furnish the report to the requestor. The first copy
of the requested report shall be provided to the requestor free of
charge.
(i) Any events that have affected one or more related organizations
of the reporting institution that are likely to have a material effect
on the financial condition, results of operations, cost of funds, or
reliability of sources of funds of the reporting institution shall be
considered significant events for the reporting institution and shall
be disclosed in the reports. Any significant event affecting the
reporting institution that occurred during the preceding fiscal
quarters that continues to have a material effect on the reporting
institution shall be considered significant events of the current
fiscal quarter and shall be disclosed in the reports.
Subpart B--Annual Report to Shareholders
4. Section 620.4 is amended by revising paragraph (b) to read as
follows:
Sec. 620.4 Preparing and distributing the annual report.
* * * * *
(b)(1) Any bank that presents its financial statements on a
combined basis shall distribute its annual report to the shareholders
of related associations within the period required by paragraph (a) of
this section. Each bank shall coordinate such distribution with its
related associations.
(2) Any bank that presents its financial statements on a bank-only
basis shall distribute its annual report to the shareholders of related
associations within the period required by paragraph (a) of this
section in all instances where the bank experiences a significant event
that has a material effect on the associations. Each bank shall
coordinate such distribution with its related associations.
* * * * *
5. Section 620.5 is amended by revising paragraph (g)(2)(vi) to
read as follows:
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(g) * * *
(2) * * *
(vi) Discuss any events affecting a related organization that are
likely to have a material effect on the reporting institution's
financial condition, results of operations, cost of funds, or
reliability of sources of funds.
* * * * *
Subpart C--Quarterly Report
6. The heading for subpart C is revised as set forth above.
7. Section 620.10 is revised to read as follows:
Sec. 620.10 Preparing the quarterly report.
(a) Each Farm Credit bank and direct lender association shall
prepare a quarterly report within 45 days after the end of each fiscal
quarter, except that no report need be prepared for the fiscal quarter
that coincides with the end of the fiscal year of the institution.
(b) The report shall contain, at a minimum, the information
specified in Sec. 620.11 and, in addition, such other material
information (including significant events) as is necessary to make the
required disclosures, in light of the circumstances under which they
are made, not misleading.
8. Part 620 is amended by redesignating subparts D, E, and F as new
subparts E, F, and G, respectively, and adding a new subpart D to read
as follows:
Subpart D--Notice to Shareholders
Sec. 620.15 Notice.
(a) Each Farm Credit bank and direct lender association shall
prepare, file with the Farm Credit Administration, and distribute a
notice to shareholders, within 20 days following the month-end that the
institution initially determines that it is not in compliance with the
minimum permanent capital standard prescribed under Sec. 615.5205 of
this chapter.
(b) An institution that has given notice to shareholders pursuant
to paragraph (a) of this section or subsequent notice pursuant to this
paragraph shall also prepare, file with the Farm Credit Administration,
and distribute to shareholders a notice within 20 days following any
subsequent month-end at which the institution's permanent capital ratio
decreases by one-half of 1 percent or more from the level reported in
the most recent notice distributed to shareholders.
(c) Each institution required to prepare a notice under Sec. 620.15
(a) or (b) shall distribute the notice to shareholders by mail or
otherwise furnish the information required in the notice by publishing
it in any publication with circulation wide enough to be reasonably
assured that all of the institution's shareholders have access to the
information in a timely manner.
Sec. 620.17 Contents of the notice.
(a) The information required to be included in a notice must be
conspicuous, easily understandable, and not misleading.
[[Page 53337]]
(b) A notice, at a minimum, shall include:
(1) A statement that:
(i) Briefly describes the regulatory minimum permanent capital
standard established by the Farm Credit Administration and the notice
requirement of Sec. 620.15(a);
(ii) Indicates the institution's current level of permanent
capital; and
(iii) Notifies shareholders that the institution's permanent
capital is below the Farm Credit Administration regulatory minimum
standard.
(2) A statement of the effect that noncompliance has had on the
institution and its shareholders, including whether the institution is
currently prohibited by statute or regulation from retiring stock or
distributing earnings or whether the Farm Credit Administration has
issued a capital directive or other enforcement action to the
institution.
(3) A complete description of any event(s) that may have
significantly contributed to the institution's noncompliance with
minimum regulatory capital standard.
(4) A statement that the institution is required by regulation to
distribute another notice to shareholders if the institution's
permanent capital ratio decreases by one half of 1 percent or more from
the level reported in the notice.
Subpart E--Association Annual Meeting Information Statement
9. Section 620.20 is amended by removing paragraph (c) and revising
paragraph (b) to read as follows:
Sec. 620.20 Preparing and distributing the information statement.
* * * * *
(b) The statement shall incorporate by reference the annual report
to shareholders required by subpart B of this part and contain the
information specified in Sec. 620.21 and such other material
information as is necessary to make the required statement, in light of
the circumstances under which it is made, not misleading.
PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM
10. The authority citation for part 630 is revised to read as
follows:
Authority: Secs. 5.17, 5.19 of the Farm Credit Act (12 U.S.C.
2252, 2254).
Subpart A--General
11. Section Sec. 630.3 is amended by redesignating existing
paragraphs (f) and (g) as new paragraphs (g) and (h), respectively, and
adding new paragraph (f) to read as follows:
Sec. 630.3 Publishing and filing the report to investors.
* * * * *
(f) Information in documents prepared for investors in connection
with the offering of debt securities issued through the Federal Farm
Credit Banks Funding Corporation may be incorporated by reference in
the annual and quarterly reports in answer or partial answer to any
item required in the reports under this part. A complete description of
any offering documents referenced must be clearly identified in the
report (e.g., Federal Farm Credit Banks Consolidated Systemwide Bonds
and Discount Notes--Offering Circular issued on [insert date]).
Offering documents referenced in either an annual or quarterly report
prepared under this part must be filed with the Chief Examiner, Farm
Credit Administration, McLean, Virginia 22102-5090, either prior to or
at the time of submission of the report under paragraph (h) of this
section. Any referenced offering document is subject to the delivery
and availability requirements set forth in Sec. 630.4(a)(5) and (6).
* * * * *
Dated: October 3, 1996.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 96-25818 Filed 10-10-96; 8:45 am]
BILLING CODE 6705-01-P
