[Federal Register Volume 59, Number 140 (Friday, July 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17906]
[[Page Unknown]]
[Federal Register: July 22, 1994]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 618, and 620
RIN 3052-AB42
Organization; General Provisions; Disclosure to Shareholders
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit
Administration Board (Board), adopts a final rule concerning director
and senior officer compensation. The regulation amends the director
compensation regulations to reflect changes to the Farm Credit Act of
1971 (Act) made by the Farm Credit Banks and Associations Safety and
Soundness Act of 1992 (1992 Amendments),1 and amends the annual
report disclosure rules for director reimbursable expenses to address
concerns raised by Farm Credit banks regarding the equity and
regulatory burden of the existing rule. Additionally, the rule amends
the disclosure requirements for senior officer compensation to make the
disclosures more informative and useful to shareholders.
\1\Pub. L. 102-552, 106 Stat. 4102
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EFFECTIVE DATE: The regulation shall become effective upon expiration
of 30 days after publication in the Federal Register during which
either or both Houses of Congress are in session. Notice of effective
date will be published in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Laurie A. Rea, Policy Analyst, Regulation Development, Office of
Examination, Farm Credit Administration, McLean, VA 22102-5090, (703)
883-4498, TDD (703) 883-4444, or
Joy E. Strickland, Senior Attorney, Regulatory Operations Division,
Office of General Counsel, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION:
1. Overview
The FCA published a proposed rule concerning director and senior
officer compensation and reimbursable expense disclosures on December
23, 1993 (58 FR 68069). The comment period closed January 24, 1994.
Section 611.400, concerning bank director compensation, is adopted
substantially as proposed with the exception that the cap on the amount
by which the FCA Board would consider waiving the statutory limitation
on bank director compensation for exceptional circumstances has been
increased from 25 to 30 percent. Section 618.8270, regarding the
reimbursement of travel, subsistence, and related expenses, has been
modified by reducing several of the policy and procedure requirements
originally proposed. The final rule retains the requirement that each
Farm Credit System (FCS or System) institution develop a written policy
regarding the reimbursement of travel, subsistence, and other related
expenses to its directors, officers, and employees and provide
stockholders with a brief description of the policy. Substantial
changes have been made to the proposed senior officer compensation
disclosure requirements in Sec. 620.5(i)(2). The final rule requires
FCS institutions to disclose: (1) Individual compensation information
of chief executive officers (CEOs) whose annualized salary and bonus
exceed $150,000, adjusted annually to reflect changes in the Consumer
Price Index (CPI); and (2) aggregate compensation information of all
senior officers as a group. Both the CEO and aggregate senior officer
compensation information is required to be reported for each of the
last 3 fiscal years and presented in a Summary Compensation Table. The
final rule retains the requirement that the institutions provide a
discussion of compensation plans. Finally, a provision was added to
allow associations the option of disclosing senior officer compensation
information in either the Association Annual Meeting Information
Statement or the annual report.
II. Response to Comments
The FCA received 140 comment letters from the Farm Credit Council
(FCC) on behalf of its membership, 7 Farm Credit Banks, 3 Banks for
Cooperatives, 122 associations, and 7 shareholders. Commenters
expressed strong opposition to the proposed disclosure of individual
compensation information for each of the five most highly paid senior
officers. The following discussion focuses on the FCA response to
commenters' concerns regarding the proposed senior officer disclosures
as this was the predominant issue raised in their letters. The section-
by-section discussion also addresses other comments received on the
proposed rule.
A. Basis for Senior Officer Compensation Disclosures
Commenters stated that FCS institutions are not parallel to
commercial banks or thrifts, or analogous to other Government-sponsored
enterprises (GSEs). Therefore, commenters adamantly believe that FCS
institutions should not be required to make similar executive
compensation disclosures. Commenters stressed four main points in
support of their position. First, the compensation disclosure
requirements for commercial banks, national banks, thrift institutions,
and state member banks are applicable only to financial institutions
subject to the registration requirements of section 12(b) or (g) of the
Securities Exchange Act of 1934 (1934 Act).2 Second, equity
securities in FCS institutions are owned only by borrowing members of
the institutions, not purchased primarily for investment, and not
publicly traded. Thus, the investor concerns addressed by the 1934 Act
are not present in the case of FCS institutions. Third, although
formally exempt from the registration requirements of the 1934 Act,
other GSEs report as if they were subject to Securities and Exchange
Commission (SEC) statutes, in part, because their securities are
subject to the listing requirements of the New York Stock Exchange.
Fourth, the disclosures provide limited benefits to investors in FCS
debt obligations because the banks are jointly and severally liable on
these obligations. Consequently, investors generally rely on the
strength of the System as a whole. Rather, commenters contend it would
be more appropriate, in their judgment, for the FCA to compare the
treatment of FCS institutions under the proposed rule to Federal Home
Loan Banks (FHLBs) and credit unions, as the ownership structures of
those entities more closely parallel those of the FCS banks and direct
lender associations. Unlike commercial banks and thrifts, credit unions
and FHLBs are not subject to executive compensation disclosures.
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\2\Public companies with at least 500 shareholders of record and
assets of at least $5,000,000 must register with the SEC pursuant to
SEC regulations implementing the Securities Exchange Act of 1934.
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The FCA agrees with commenters that a comparison of ownership
structures between FCS institutions and credit unions and FHLBs has
some validity, and that FCS institutions are notably different from
commercial banks, thrifts and other GSEs. Nevertheless, the FCA did not
intend to imply or draw a direct parallel between FCS institutions and
any other type of financial institution or to use a comparison between
the institutions as the sole basis for establishing or modifying the
senior officer compensation disclosure requirements. The primary
comparison being made was that the FCA's proposed compensation
disclosure requirements were similar in many respects to those imposed
on commercial banks and thrifts by other regulators. As stated in the
proposed rule, the FCA believes that more detailed compensation
disclosures, such as those imposed by the SEC, would satisfy the
objectives of section 514 of the Act,\3\ and the proposed disclosures
would benefit FCS shareholders by providing them with senior officer
compensation information that was comparable to that available to
shareholders of other financial institutions. The proposed disclosure
requirements were still, however, markedly less extensive than those
established by the SEC, partly due to the many differences between
commercial banks and FCS institutions. The final regulations deviate
further from the SEC's compensation disclosure requirements in
consideration of the uniqueness of the FCS institutions. For example,
the $100,000 compensation threshold established by the SEC for
individual senior officer compensation disclosure was one area where
the FCA chose to differ. Instead, the FCA decided to adopt a $150,000
compensation disclosure threshold that applies only to FCS institution
CEOs.
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\3\The stated objective of section 514 is ``to ensure that
information reported by directors, officers, and employees of Farm
Credit System institutions under regulations of the Farm Credit
Administration requiring the disclosure of financial information and
reporting of potential conflicts of interests--(1) provides the
stockholders of all Farm Credit System institutions with information
to assist the stockholders in making informed decisions regarding
the operations of the institutions; (2) provides investors and
potential investors with information necessary to make investment
decisions regarding Farm Credit System obligations or institutions;
and (3) provides the Farm Credit Administration with information
necessary to allow the Farm Credit Administration to effectively and
efficiently examine and regulate all Farm Credit System institutions
and thus enhance the safety and soundness of the System.''
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The FCA's rationale for requiring director and senior officer
compensation disclosures stems primarily from the ``at-risk'' nature of
the stock and the significant number and wide distribution of
shareholders, which are similar attributes to those of financial
institutions with publicly traded stock. In terms of assets, the size
of many FCS institutions is comparable to, and sometimes greater than,
financial institutions whose equity and debt securities are widely held
by the public. In addition, even if commenters are correct in their
assertion that investors of FCS debt obligations are more concerned
with the System as a whole, the FCA believes that the investor concerns
addressed by the 1934 Act are not completely absent as suggested by
commenters. Regardless of their motivation for purchasing the stock,
borrowers make a financial investment in FCS institutions and obtain
the right to participate in the affairs of those institutions.
Shareholders can potentially benefit from their investment in terms of
dividends and patronage refunds. Thus, shareholders need sufficient
information to make intelligent decisions about the management and
operation of the institutions in which they have invested and to hold
directors and management accountable for their actions.
The FCA stated in the preamble to the shareholder disclosure
regulations published on June 12, 1986 (51 FR 21337) that while not all
FCS institutions would meet the test for public companies, many of them
have in excess of 500 shareholders, and the number of institutions with
fewer than 500 shareholders continues to decline in conjunction with
the trend toward mergers. Further, the FCA stated that while the stock
is not publicly traded on the secondary market, it is held by over
900,000 individuals and business entities that have a common interest
in the financial and operating information of the institutions. The FCA
Board continues to believe that the distinction between holding stock
for investment and holding stock for doing business with an institution
does not have a material bearing on the right of shareholders to have
access to information in order to make informed decisions. Therefore,
the final compensation disclosure requirements continue to place CEOs
of FCS institutions with a significant amount of assets and number of
shareholders under the same scrutiny as CEOs of financial institutions
with publicly traded stock subject to the registration requirements of
the 1934 Act.
B. Section 514 of the 1992 Amendments
The FCA agrees with the commenters that section 514 is quite broad
and its interpretation, as it applies to compensation disclosures, is a
matter of the FCA's discretion. Commenters stated that nothing in
section 514 of the 1992 Amendments compels the disclosure of
individualized senior officer compensation or concludes that the
current disclosure requirements are inadequate in any respect. They
felt strongly that the existing disclosure of senior officer
compensation in the aggregate, coupled with the requirement that
shareholders may request the individual compensation of any senior
officer, or any other individual included in the aggregate whose
compensation exceeds $50,000, was adequate.
There was no intention in the proposed rule to suggest that section
514 mandates individual disclosure of senior officer compensation. In
section 514, Congress stressed the importance of disclosure of
compensation paid to, loans made to, and transactions made with FCS
institutions by directors and senior officers of the institution.
Congress also directed the FCA to review its regulations to ensure that
they meet the purpose of the section and applicable laws, but did not
prescribe any specific regulation amendments. After reviewing its
regulations, the FCA concluded that more detailed senior officer
compensation disclosures satisfied the spirit and intent of section
514.
C. Board Accountability
Commenters expressed concern that providing individual compensation
information would undermine the board's authority and its ability to
effectively administer the institution's salary administration program.
Further, commenters asserted that the disclosure rule would dilute the
board's responsibility and shift the oversight responsibility from the
board of directors to the shareholders as a whole.
The FCA Board disagrees that disclosure of information undermines
board accountability and responsibility. In fact, disclosure of senior
officer compensation is intended to promote board accountability to
shareholders rather than shift board responsibility to shareholders.
The objective of this type of disclosure is to provide shareholders
with information to assess whether senior officer compensation is
appropriate in view of the institution's financial condition and
performance and to hold the board accountable for maintaining a
reasonable rationale for the level of compensation paid to its senior
officers.
D. Invasion of Privacy
Although numerous reasons were cited in opposition to
individualized compensation disclosure, no other issue generated the
intense reaction created by concerns of ``invasion of privacy.''
Respondents were highly concerned that the disclosure of potentially
sensitive information in a public format, such as the annual report,
would cause considerable staff dissension and would render management
unable to effectively administer the institutions' salary programs. One
commenter stated that disclosure of the individual salaries of the five
highest paid senior officers will, more than likely, cause salaries to
gravitate to the highest paid levels in order to maintain morale rather
than ``limit'' compensation paid to senior officers. Several commenters
expressed concern that the disclosures may cause employee flight.
Additionally, some FCS associations were concerned that the individual
compensation disclosures may inadvertently reach the branch officer
level.
The FCA recognizes that internal conflict may be generated when the
information presented is used by parties for purposes for which they
were not intended, such as a means for co-workers to compare salaries
or to use as a bargaining tool for salary negotiations. The FCA also
believes, however, that management is ultimately responsible for
maintaining employee morale and retaining competent staff through fair
and reasonable compensation, and for communicating to staff how this is
accomplished through the salary administration program. A primary
aspect of the disclosures is to provide shareholders insight regarding
the methodology and basis the boards use to determine what they
consider to be ``fair and reasonable'' compensation, rather than to
``limit'' senior officer compensation as suggested by a commenter.
Further, the FCA believes stockholders have valid reasons to have this
type of information readily available to them and they should not be
penalized because of the potential for internal conflicts.
Many commenters were opposed to the proposed disclosures because
FCS institution annual reports are used as marketing tools, among other
things, and made available to a wide spectrum of interested parties.
Some commenters believed that the broad distribution of the reports
could promote animosity among shareholders and employees throughout the
FCS and possibly other members of rural communities. Several commenters
also stated that in order to evaluate the reasonableness of individual
senior officer compensation, shareholders would need to understand
several key aspects of the employer/employee relationship, such as the
experience and knowledge an employee brings to his/her job,
geographical cost-of-living data, market compensation for similar
positions, job responsibilities, and the competitive and regulatory
environment in which the employee operates. Commenters also asserted
that providing just a dollar amount of compensation, without any other
relevant data, would be interpreted by the readers of the annual report
in terms of their own frame of reference. This could easily lead to
confusion and ill feelings among employees and shareholders because
they are not provided with all the facts involved in determining an
individual's compensation.
The FCA disagrees that shareholders would be unable to understand
and assess the senior officer compensation disclosures. In addition to
reporting ``dollar amounts'' of compensation paid, institutions are
required to provide a discussion of the compensation plans to aid the
reader's understanding of the disclosures. Moreover, nothing in the
regulations prevents an institution from providing explanations of the
market or any other factors used in the determination of compensation.
Management always has the discretion to provide such explanations if
they feel they are needed to fairly portray the amounts being paid to
senior officers.
The FCA Board recognizes that it should, to the extent possible,
balance shareholders' needs to receive meaningful information
concerning their institutions and individual privacy concerns. As
expressed in the FCA Board's Policy Statement on Regulatory Philosophy,
``The FCA Board is mindful that most regulatory activities will involve
competing considerations and is committed to considering and weighing
those competing considerations and arriving at thoughtful regulatory
judgments''. (Published June 22, 1994 at 59 FR 32189) Therefore, in
reaching a balance between the competing considerations regarding the
proposed regulation, substantial modifications were made to the senior
officer disclosure requirements and are more fully explained in the
section-by-section discussion.
III. Section-by-Section Discussion
A. Section 611.400--Compensation of Bank Board Members
The commenters generally expressed support for proposed
Sec. 611.400, Bank Director Compensation. The FCC stated that the
proposed procedure for adjusting the bank directors' compensation
ceiling and the approval process for exceeding the statutory limitation
in ``exceptional circumstances'' seemed to be both fair and well-
considered.
The FCA is adopting the amendments to Sec. 611.400 as proposed with
two modifications. The proposed rule included a 25-percent cap on the
amount by which the FCA Board would approve a waiver of the statutory
limitation on bank director compensation. The FCA received two requests
for waivers of the statutory limitation since publishing the proposed
rule. Based on its operational experience in reviewing those requests,
the FCA Board determined that a 30-percent cap on the amount by which
it would approve waivers of the statutory limitation would be more
appropriate. In addition, the requirement in proposed
Sec. 611.400(c)(3) that the FCA respond to requests for waivers of the
statutory limitation within 30 days was modified by extending the
agency's self-imposed response time to 60 days. The FCA will respond to
requests for waivers as quickly as possible and anticipates replying to
the vast majority of requests in well under 60 days. Nevertheless,
there may be unusual circumstances that would necessitate a longer
period to gather and analyze pertinent information related to the
request, and the longer response period should reduce the frequency of
formal extensions of the response period.
The FCA recognizes the difficulty in predicting all the exceptional
circumstances under which a bank may desire to seek a waiver of the
statutory limitation on bank director compensation. Therefore, the FCA
would like to clarify that Sec. 611.400(d)(3), pertaining to a bank's
policy on bank director compensation, need only address exceptional
circumstances that the bank's board is able to identify. The policy
should also include a procedure for evaluating, on a case-by-case
basis, other extraordinary circumstances that may arise where the
bank's board would consider seeking a waiver of the limitation.
B. Section 618.8270--Travel, Subsistence, and Other Related Expenses
Commenters generally supported proposed Sec. 618.8270, but
challenged whether the level of detail in policy and procedure
requirements was necessary. The FCC commended the FCA Board for its
openmindedness and willingness to reconsider the existing requirement
for individual disclosure of bank director reimbursable expenses and
replace it with an aggregate disclosure requirement. The FCC and other
commenters stated that while it is quite appropriate for the FCA to
require each FCS institution's board to develop written policies
concerning the reimbursement of travel, subsistence, and other related
expenses, the details of such policies should be left to each board's
discretion. In their judgment, the degree of detail spelled out in
proposed Sec. 618.8270(a) constitutes micro-management, which they
believed the current FCA Board was seeking to remove from the
regulations. Another commenter responded that the administrative burden
created by the detailed policy requirements, documentation, reporting,
and auditing is not supported by the value, if any, that would be added
to the stockholder disclosure process.
In February 1994, subsequent to publication of the proposed
regulations, the FCA Board adopted the previously mentioned Policy
Statement on Regulatory Philosophy (59 FR 32189, June 22, 1994) that
stated ``It is the FCA Board's philosophy to promulgate regulations
that are necessary to implement the law and to promote the safety and
soundness of the Farm Credit System.'' One method cited for achieving
the FCA Board's regulatory objective was to issue regulations, to the
extent feasible, that specify performance criteria and objectives
rather than operational methods for achieving its purposes. In light of
this recently adopted position, the FCA reevaluated proposed
Sec. 618.8270 and made modifications accordingly.
The examples of guidelines and limitations that an institution may
consider addressing in their travel policy (i.e., modes of
transportation; mileage rates for use of personal vehicles and per diem
allowances, including maximum or limitations on lodging, meals and
incidental expenses; and telephone calls and any other miscellaneous
expenses) were eliminated from the final rule. The examples cited in
proposed Sec. 618.8270(a)(2)(i) through (iv) were removed because many
commenters interpreted them as mandatory regulatory requirements.
However, the FCA Board continues to believe that the management of each
FCS institution should determine to what extent the individual items
cited as sample guidelines and limitations in the proposed rule are
necessary to ensure that the reimbursement of expenses for directors,
officers, and employees is reasonable and well-justified.
Certain aspects of proposed Sec. 618.8270 that incorporated, in
part, procedures from existing Sec. 611.400(b) and (c) were eliminated
from the final rule. The FCA Board believes that such detailed
operating procedures should remain at the discretion of each FCS
institution's management rather than be formally prescribed by
regulations. Therefore, all of the procedures in proposed
Sec. 618.8270(a)(3) and (4) were removed and the basic requirement for
maintaining written records of expense reimbursements was assimilated
into final Sec. 618.8270(a).
One commenter recommended that the last sentence in
Sec. 618.8270(b) referring to ``the personnel authorized to process
reimbursements,'' be amended by substituting ``approve'' for
``process.'' The commenter asserted that the persons who normally
process reimbursements are accounting clerks, and stated that it is not
usually part of their function to attempt to determine whether expenses
are appropriate. In an effort to clarify the regulation, the last
sentence was stricken from the final rule.
Two commenters misinterpreted proposed Sec. 618.8270(c) to require
that an internal auditor review every expense claim and record. The FCA
has clarified that the regulation only requires an internal auditor to
determine whether the institution's policies and procedures are being
consistently followed by testing the reimbursement process through a
sampling of expense claims and records. The final rule reads that
``Each board shall require a review by the institution's internal
auditor (or person designated by the board) of at least a sampling of
records maintained * * *.'' Furthermore, the requirement for an
internal audit review of travel records is now contained in
Sec. 618.8270(b) in the final rule.
C. Section 620.5(i)--Compensation of Directors and Senior Officers
1. Director compensation
The disclosure requirements in the final regulation remain
unchanged from the proposed regulation.
2. Senior officer compensation
The senior officer compensation disclosure requirements were
substantially changed in the final regulation. As previously discussed,
the modifications were made because the FCA Board considered it
important to balance commenters' privacy concerns with the
shareholders' need for access to pertinent information regarding their
institutions, and to further reflect the unique attributes of FCS
institutions in the regulations. In addition, technical and clarifying
changes were made to improve the understanding of the requirements and
enhance the consistency of the disclosures presented to shareholders.
An alternative means for associations to disseminate senior officer
compensation information was added to the final rule. Many commenters
asserted that the disclosure of compensation information is more
appropriate for a proxy statement. To address this issue, final
Sec. 620.5(i)(2) permits associations to disclose senior officer
compensation information in either the Association Annual Meeting
Information Statement (AAMIS) or the annual report. By allowing
associations to disclose compensation information in the AAMIS, the FCA
Board aims to reduce the concern of wide distribution of potentially
sensitive information in a public format. Currently, there is no other
disclosure medium for banks that serves a similar purpose as the AAMIS.
Thus, the banks would continue to publish senior officer compensation
in the annual report.
The final rule limits the requirement for disclosure of individual
compensation information to FCS institution CEOs. Proposed
Sec. 620.5(i)(2)(i), which would have required institutions to make
individual compensation disclosure for each of the five highest
compensated senior officers, was dropped from the final rule. Final
Sec. 620.5(i)(2)(i)(A) requires FCS institutions to report the total
compensation and the amount of each component of compensation paid to
the institution's CEO for each of the last 3 completed fiscal years. If
more than one person served in the capacity of CEO during any given
fiscal year, individual compensation information must be reported for
each CEO. However, no disclosure need be provided for any CEO whose
salary and bonus (or annualized salary and bonus, if the CEO served in
that capacity less than a year) do not exceed $150,000, adjusted
annually to reflect changes in the Consumer Price Index (CPI) for all
urban consumers. The 1994 calendar year will serve as the base year for
making subsequent CPI adjustments to the $150,000 disclosure threshold.
Proposed Sec. 620.5(i)(2)(ii), which would have required FCS
institutions to report the aggregate amount of compensation and the
components of compensation paid to all officers as a group, was revised
in the final regulation. The FCA did not perceive the proposed
requirement as markedly different from the existing aggregate senior
officer compensation disclosure requirement. Yet, several commenters
interpreted the requirement to be more extensive. The FCA decided to
retain the language in the existing rule with some modifications to
reduce any ambiguity that may have been raised by the proposed
requirement. Final Sec. 620.5(i)(2)(i)(B) requires institutions to
report the aggregate amount of compensation and the components of
compensation paid during each of the last 3 completed fiscal years to
all senior officers as a group, stating the number of officers in the
group without naming them. As with the existing regulation, at a
minimum, institutions must disclose the aggregate amount of
compensation paid to the five most highly compensated officers, whether
or not designated as a senior officer by the board.
A requirement for preparation of a ``Summary Compensation Table''
(table) was added to the final regulation to enhance the comparability
of the compensation disclosures. Commenters indicated there was a need
to improve the consistency of reporting compensation information and
suggested the regulations stipulate a format for disclosure. In
response, the general definition of ``compensation'' was eliminated and
replaced by the more descriptive table and corresponding instructions.
For purposes of reporting compensation information in the table,
compensation is divided into two main categories: (1) ``Annual;'' and
(2) ``Other.'' The separation is to distinguish normal annual
compensation from compensation that is unusual, infrequent, reflects
special circumstances, or is earned during the fiscal year but is not
usually available to the senior officer until a later date.
The components of ``Annual'' compensation include salary, bonuses,
deferred compensation and perquisites. Amounts shown as ``salary'' and
``bonus'' are to reflect the gross amounts earned during the fiscal
year before any reductions for amounts contributed during the fiscal
year to a 401(k) plan or similar plan. If, for any reason, the exact
amount of salary or bonus earned in the fiscal year is not expected to
be known in time for its inclusion in the report, the institution is to
include in the report its best estimate of the compensation amount and
provide appropriate footnote disclosure with the table. Amounts shown
as ``deferred/perquisites'' will include such items as deferred
compensation, perquisites, and any other significant personal benefits
customarily paid, earned or received on an annual basis. With respect
to deferred compensation, this amount should reflect all forms of
deferred compensation earned during the fiscal year, whether or not
paid in cash. For example, if the deferred compensation was earned
during the period but payment in cash was voluntarily deferred by the
senior officer to a later period (e.g., upon retirement) the amount
earned must still be included in the current period's compensation
amount. Consequently, cash payments under deferred compensation
arrangements where the amounts were earned in previous periods would
not be included as part of the current period's compensation.
The category depicted as ``Other'' in the table includes amounts
not appropriately characterized as components of annual compensation.
Section 620.5(i)(2)(i)(E) specifies two forms of compensation that
should be included in this category: (1) Compensation in the form of
payouts due to a senior officer's resignation, retirement, or
termination from employment; and (2) contributions by the institution
on behalf of the senior officer to a defined contribution plan for
which cash payments from the plan are typically not available to the
senior officer until a later date. Any form of compensation in this
part must be specifically identified and described in a footnote to the
table.
The FCA received a mixed response to proposed
Sec. 620.5(i)(2)(iii), which would have required FCS institutions to
provide a general discussion of compensation plans of its senior
officers. While many commenters supported the proposed requirement,
others believed that the disclosures would be too burdensome to
compile. The FCA Board continues to believe that such discussion would
be beneficial in providing explanations of compensation plans to the
readers of the report. For the most part, the final regulation retains
the requirements in proposed Sec. 620.5(i)(2)(iii) that FCS
institutions provide a description of the compensation plans of all
those senior officers covered by the regulations. Proposed
Sec. 620.5(i)(2)(iii) (F) and (G), which would have required
institutions to discuss the amounts paid under the plans, were dropped
from the final rule because the final rule requires these comments to
be disclosed in the table. The remaining compensation discussion
requirements are now contained in Sec. 620.5(i)(2)(ii) in the final
rule.
The final rule clarifies that bank senior officer compensation
information is part of the financial information that should be made
available to shareholders of both the bank and its related associations
upon request. When the disclosure regulations in part 620 of this
chapter were initially adopted, the FCA determined that, due to the
structure of the System and the impact the banks have on the financial
results of the associations, there was a need for association
shareholders to receive the financial information of the bank in
addition to the financial information of the association. Existing
Sec. 620.4(b) implements this philosophy by requiring banks to
distribute their annual reports to shareholders of related
associations. Likewise, under the proposed rule, both the shareholders
of the bank and related associations would have received the bank's
annual report containing individual compensation information on the
five most highly compensated bank senior officers. Although the
disclosure requirement for individual senior officer compensation
information was limited to CEOs in the final rule, the FCA Board
continues to believe that it is important for shareholders of related
associations to have access to individual compensation information of
bank senior officers included in the aggregate disclosure required by
Sec. 620.5(i)(2)(i)(B).
Therefore, the required disclosure statement in proposed
Sec. 620.5(i)(2)(iv) was modified to clarify its requirements and is
now contained in Sec. 620.5(i)(2)(iii) in the final rule. Final
Sec. 620.5(i)(2)(iii) requires institutions to include a statement in
the annual report or the AAMIS (if the association chooses to include
compensation information in the AAMIS) that ``information concerning
the total compensation paid during the last fiscal year to any senior
officer or to any other officer included in the aggregate whose
compensation exceeds $50,000 is available and will be disclosed to
shareholders of the institution and shareholders of related
associations (if applicable) upon request.''
3. Travel, subsistence, and other related expenses
The disclosure requirements for travel, subsistence, and other
related expenses in the final regulation remain unchanged from the
proposed regulation with one exception. Pursuant to the preceding
discussion, the final rule clarifies that the institution's policy
regarding travel, subsistence, and other related expenses should also
be made available to shareholders of related associations (if
applicable) upon request.
List of Subjects
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 618
Agriculture, Archives and records, Banks, banking, Insurance,
Reporting and recordkeeping requirements, Rural areas, Technical
assistance.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
For the reasons stated in the preamble, parts 611, 618, and 620 of
chapter VI, title 12 of the Code of Federal Regulations is amended to
read as follows:
PART 611--ORGANIZATION
1. The authority citation for part 611 is revised to read as
follows:
Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15,
4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act (12
U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2209, 2243,
2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub.
L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-
399, 102 Stat. 989, 1003, and 1004.
Subpart D--Rules for Compensation of Board Members
2. Section 611.400 is revised to read as follows:
Sec. 611.400 Compensation of bank board members.
(a) Farm Credit System banks are authorized to pay fair and
reasonable compensation to directors for services performed in an
official capacity at a rate not to exceed the level established in
section 4.21 of the Farm Credit Act of 1971, as amended, unless the FCA
determines that such a level adversely affects the safety and soundness
of the institution.
(b) The bank director compensation level established in section
4.21 of the Act shall be adjusted to reflect changes in the Consumer
Price Index (CPI) for all urban consumers, as published by the Bureau
of Labor Statistics, in the following manner: Current year's maximum
compensation = Prior year's maximum compensation adjusted by the prior
year's annual average percent change in the CPI for all urban
consumers. Adjustments will be made to the bank director statutory
compensation limit beginning from October 28, 1992 (the date of
enactment of the Farm Credit Banks and Associations Safety and
Soundness Act of 1992). Additionally, each year the FCA will distribute
a bookletter to all FCS banks that communicates the CPI adjusted bank
director statutory compensation limit.
(c) A waiver of the compensation limitation prescribed by section
4.21 of the Act may be granted under exceptional circumstances as
approved on a case-by-case basis by the FCA. However, the FCA shall not
grant a waiver that allows a bank to pay any director in excess of 30
percent more than the statutory maximum compensation as determined in
accordance with paragraph (b) of this section. A waiver approval shall
precede any payments by the bank to its director(s) that exceed the
maximum limitation determined in paragraph (b) of this section. A bank
seeking a waiver shall provide the FCA Chairman with a written request
that:
(1) Describes and explains the exceptional circumstance(s) that the
bank believes necessitates a waiver of section 4.21 of the Act;
(2) States the amount and the terms and conditions (if any) of the
proposed compensation level for each director that would exceed the
statutory maximum determined in accordance with paragraph (b) of this
section; and
(3) Justifies the compensation level of each director that would
exceed the statutory limitation based on the extraordinary time and
service devoted to bank business.
The FCA shall respond to written requests within 60 days of receipt
of the preceding information and the receipt of any other additional
information requested by the FCA.
(d) Each bank board shall adopt a written policy regarding
compensation of bank directors. The policy shall address, at a minimum,
the following areas:
(1) The activities or functions for which attendance is necessary
and appropriate and may be compensated, except that a Farm Credit
System bank shall not compensate any director for rendering services on
behalf of any other Farm Credit System institution or a cooperative of
which the director is a member, or for performing other assignments of
a non-official nature;
(2) The methodology for determining each director's rate of
compensation; and
(3) The exceptional circumstances under which the board would seek
a waiver of the statutory limitation on bank director compensation for
any of its directors and any limitations or conditions the board wishes
to place on the availability of such waivers.
(e) Directors may also be reimbursed for reasonable travel,
subsistence, and other related expenses in accordance with the policy
adopted pursuant to Sec. 618.8270 of this chapter.
PART 618--GENERAL PROVISIONS
3. The authority citation for part 618 continues to read as
follows:
Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183,
2200, 2211, 2218, 2243, 2244, 2252).
Subpart F--Miscellaneous Provisions
4. Section 618.8270 is revised to read as follows:
Sec. 618.8270 Travel, subsistence, and other related expenses.
(a) Each Farm Credit institution board shall develop a written
policy and maintain written records regarding the reimbursement of
travel, subsistence, and other related expenses to its directors,
officers, and employees. The policy shall address, at a minimum, the
authorized purposes for which reimbursement of travel, subsistence, and
other related expenses may be made and the guidelines and limitations
on reimbursement.
(b) Each board shall require a review by the institution's internal
auditor (or person designated by the board) of at least a sampling of
the records maintained pursuant to paragraph (a) of this section to
determine if the policies are being consistently followed. This review
shall be conducted at least annually, with the results reported to the
board audit committee or the full board, if the board does not have an
audit committee.
PART 620--DISCLOSURE TO SHAREHOLDERS
5. The authority citation for part 620 continues to read as
follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101
Stat. 1568, 1656.
6. Section 620.5 is amended by revising paragraph (i) to read as
follows:
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(i) Compensation of directors and senior officers.
(1) Director compensation. Describe the arrangements under which
directors of the institution are compensated for all services as a
director (including total cash compensation and any noncash
compensation that exceeds 10 percent of total compensation) and state
the total cash compensation paid to all directors as a group during the
last fiscal year. If applicable, describe any exceptional circumstances
under which a waiver of section 4.21 of the Act was granted by the FCA.
For each director, state:
(i) The number of days served at board meetings;
(ii) The total number of days served in other official activities;
(iii) The total compensation paid to each director during the last
fiscal year.
(2) Senior officer compensation. Disclose the information on senior
officer compensation and compensation plans as required by this
paragraph. Farm Credit System associations may disclose the information
required by this paragraph in the Association Annual Meeting
Information Statement (AAMIS), but must include a reference in the
annual report stating that the senior officer compensation information
is included in the AAMIS.
(i) The institution shall disclose the total amount of compensation
paid to senior officers in substantially the same manner as the tabular
form specified in the following Summary Compensation Table (table):
Summary Compensation Table
Annual
Name of individual or No. in --------------------------------------
group Year Deferred/ Other Total
Salary Bonus perquisites
(a) (b) (c) (d) (e) (f) (g)
----------------------------------------------------------------------------------------------------------------
CEO.............................. 199X
199X
199X
Aggregate No. of Senior Officers
(X).......................... 199X
(X).......................... 199X
(X).......................... 199X
(A) Report the total amount of compensation paid and the amount of
each component of compensation paid to the institution's chief
executive officer (CEO) for each of the last 3 completed fiscal years,
naming the individual. If more than one person served in the capacity
of CEO during any given fiscal year, individual compensation
disclosures must be provided for each CEO. Except that, no disclosure
need be provided for any CEO whose salary and bonus (or annualized
salary and bonus, if the CEO served in that capacity less than a year)
do not exceed $150,000, adjusted annually to reflect changes in the
Consumer Price Index (CPI) for all urban consumers, as published by the
Bureau of Labor Statistics. The threshold for individually disclosing
CEO compensation information shall be adjusted in the following manner:
Current year's compensation disclosure threshold = Prior year's
compensation disclosure threshold adjusted by the prior year's annual
average percent change in the CPI for all urban consumers. The 1994
calendar year shall serve as the base year for making subsequent CPI
adjustments to the $150,000 compensation disclosure threshold.
(B) Report the aggregate amount of compensation paid and the
components of compensation paid during each of the last 3 completed
fiscal years to all senior officers as a group, stating the number of
officers in the group without naming them. At a minimum, disclose the
aggregate amount of compensation paid to the five most highly
compensated officers, whether or not designated as a senior officer by
the board.
(C) Amounts shown as ``Salary'' (column (c)) and ``Bonus'' (column
(d)) shall reflect the dollar value of salary and bonus earned by the
senior officer during the fiscal year. Amounts contributed during the
fiscal year by the senior officer pursuant to a plan established under
section 401(k) of the Internal Revenue Code, or similar plan, shall be
included in the salary column or bonus column, as appropriate. If the
amount of salary or bonus earned during the fiscal year is not
calculable by the time the report is prepared, the reporting
institution shall provide its best estimate of the compensation
amount(s) and disclose that fact in a footnote to the table.
(D) Amounts shown as ``deferred/perquisites'' (column (e)) shall
reflect the dollar value of other annual compensation not properly
categorized as salary or bonus, including but not limited to:
(1) Deferred compensation earned during the fiscal year, whether or
not paid in cash; or
(2) Perquisites and other personal benefits unless the aggregate
value of such compensation is the lesser of either $25,000 or 10
percent of the total of annual salary and bonus reported for the senior
officer in columns (c) and (d).
(E) Compensation amounts reported under the category ``Other''
(column (f)) shall reflect the dollar value of all other compensation
not properly reportable in any other column. Items reported in this
column shall be specifically identified and described in a footnote to
the table. Such compensation includes, but is not limited to:
(1) The amount paid to the senior officer pursuant to a plan or
arrangement in connection with the resignation, retirement, or
termination of such officer's employment with the institution; or
(2) The amount of contributions by the institution on behalf of the
senior officer to a vested or unvested defined contribution plan unless
the plan is made available to all employees on the same basis.
(F) Amounts displayed under ``Total'' (column (g)) shall reflect
the sum total of amounts reported in columns (c), (d), (e), and (f).
(ii) Provide a description of all plans pursuant to which cash or
noncash compensation was paid or distributed during the last fiscal
year, or is proposed to be paid or distributed in the future for
performance during the last fiscal year, to those individuals described
in paragraph (i)(2)(i) of this section. The description of each plan
must include, but not be limited to:
(A) A summary of how the plan operates and who is covered by the
plan;
(B) The criteria used to determine amounts payable, including any
performance formula or measure;
(C) The time periods over which the measurement of compensation
will be determined;
(D) Payment schedules; and
(E) Any material amendments to the plan during the last fiscal
year.
(iii) The annual report or AAMIS shall include a statement that
disclosure of information on the total compensation paid during the
last fiscal year to any senior officer or to any other officer included
in the aggregate whose compensation exceeds $50,000 is available and
will be disclosed to shareholders of the institution and shareholders
of related associations (if applicable) upon request.
(3) Travel, subsistence, and other related expenses.
(i) Briefly describe the policy adopted pursuant to Sec. 618.8270
of this chapter addressing reimbursements for travel, subsistence, and
other related expenses as it applies to directors and senior officers.
The report shall include a statement that a copy of the policy is
available to shareholders of the institution and shareholders of
related associations (if applicable) upon request.
(ii) For each of the last 3 fiscal years, state the aggregate
amount of reimbursement for travel, subsistence, and other related
expenses for all directors as a group.
* * * * *
Dated: July 15, 1994.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 94-17906 Filed 7-21-94; 8:45 am]
BILLING CODE 6705-01-P
