[Federal Register Volume 59, Number 24 (Friday, February 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2242]


[[Page Unknown]]

[Federal Register: February 4, 1994]


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FARM CREDIT ADMINISTRATION

12 CFR Part 630

RIN 3052-AB23

 

Disclosure to Investors in Systemwide and Consolidated Bank Debt 
Obligations of the Farm Credit System

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA), by the FCA Board 
(Board), publishes for comment proposed regulations that would require 
each bank of the Farm Credit System (FCS or System), the Federal Farm 
Credit Banks Funding Corporation (Funding Corporation), and the Farm 
Credit System Financial Assistance Corporation (Financial Assistance 
Corporation) to jointly publish annual and quarterly reports to 
investors and potential investors in Systemwide debt obligations and 
consolidated bank debt obligations of the Farm Credit System (FCS debt 
obligations). The report to investors required by the proposed rule 
would contain Systemwide financial statements, supplemental financial 
statement information, and related analyses pertaining to System 
institutions presented on a combined basis.
    The proposed rule would ensure that timely and accurate Systemwide 
financial information continues to be disclosed to investors and the 
public to assist them in making informed decisions regarding FCS debt 
obligations and System institutions. The proposed rule would integrate 
individual System institutions' disclosure to shareholders with the 
Systemwide disclosure to investors.
    Though not required by existing FCA regulations, System 
institutions have developed the Farm Credit System Disclosure Program 
(System Disclosure Program) and currently publish a ``Report to 
Investors of the Farm Credit System'' (FCS Report). Included in the FCS 
Report are an Information Statement that contains financial data and a 
general report. The content of the report to investors that would be 
required by this proposed rule is similar to that of the Information 
Statement.
    The proposed regulations generally parallel the System Disclosure 
Program, and thus should not impose significant additional regulatory 
burdens on System institutions. Further, the proposed rule would not 
impose any new responsibilities for financial disclosure on FCS 
associations. However, it contains one provision that would affect the 
associations' engagements with external auditors; i.e., it would 
provide for direct communication between association external auditors 
and System banks regarding questions about associations' financial 
information that arise in the preparation of the report to investors.

DATES: Written comments must be received on or before April 20, 1994.

ADDRESSES: Comments must be submitted in writing (in triplicate) to 
Patricia W. DiMuzio, Division Director, Regulation Development 
Division, Office of Examination, Farm Credit Administration, McLean, 
Virginia 22102-5090. Copies of all communications received will be 
available for examination by interested parties in the Regulation 
Development Division, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Tong-Ching Chang, Staff Accountant, Technical and Operations 
Division, Office of Examination, Farm Credit Administration, McLean, 
Virginia 22102-5090, (703) 883-4483, TDD (703) 883-4444,

or

William L. Larsen, Senior Attorney, Regulatory Operations Division, 
Office of General Counsel, Farm Credit Administration, McLean, 
Virginia 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Background

    Farm Credit System institutions jointly publish the FCS Report on 
an annual basis. The FCS Report includes an Information Statement and a 
general report. The Information Statement contains combined financial 
statements and related analyses pertaining to all System institutions. 
The general report contains other information about the System, debt 
obligations issued by the System, and the external environments in 
which the System operates. Except for the quarter that coincides with 
the end of the fiscal year, System institutions also jointly publish 
quarterly Information Statements. In connection with the sale of debt 
securities, the Funding Corporation routinely distributes the FCS 
Report and quarterly Information Statements to the investment dealers 
and dealer banks (selling group) that sell FCS debt securities.
    The FCA currently has no regulations that specifically govern 
disclosure of the System financial information contained in the 
Information Statement. To prevent any inconsistency with the FCA 
regulations regarding System institutions' disclosure to shareholders 
and accounting and reporting requirements and to delineate the 
disclosure responsibilities of System institutions in this area, the 
FCA proposes regulations for a new part 630, Disclosure to Investors in 
Systemwide and Consolidated Bank Debt Obligations of the Farm Credit 
System. The proposed rule would govern the System's preparation and 
reporting of financial information to investors. The authority for the 
proposed regulations is section 5.17(a)(8) of the Farm Credit Act of 
1971, as amended (1971 Act), 12 U.S.C. 2252(a)(8), which authorizes the 
FCA to ``Regulate the preparation by System institutions and the 
dissemination to stockholders and investors of information on the 
financial condition and operations of such institutions.''
    The proposed regulations generally parallel the System Disclosure 
Program. They reflect the division of responsibilities among the 
institutions participating in the System Disclosure Program, and the 
disclosures that would be required are similar to those contained in 
the Information Statements currently published by the System.
    Under the proposed regulations, the institutions participating in 
the System Disclosure Program, including each of the System banks, the 
Funding Corporation, and the Financial Assistance Corporation,1 
would continue to share the responsibility for disclosure of Systemwide 
financial information to investors and the public. These institutions 
would be designated as the ``disclosure entities'' under the proposed 
regulations. In addition, the Funding Corporation would be responsible 
for filing the report to investors with the FCA. Although associations' 
financial statements are required by 12 CFR part 620, Disclosure to 
Shareholders, to be combined with their related banks' financial 
statements and such combined statements are included in the Information 
Statement, associations have no direct role in the System Disclosure 
Program. Consistent with the existing System Disclosure Program, the 
proposed regulations do not affect the current reporting relationship 
between a bank and its related associations, and imposes no additional 
reporting responsibilities on associations.
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    \1\Since the board of the Funding Corporation is also the board 
of the Farm Credit System Financial Assistance Corporation (FAC), 
FAC's participation in the System Disclosure Program is implied.
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    The FCA has added requirements designed to improve the disclosure 
entities' internal controls over Systemwide financial reporting. 
Because these proposed requirements are generally compatible with the 
System Disclosure Program, the FCA does not believe they will result in 
significant additional regulatory burden.
    In general, the proposed regulations would (1) require the System 
to publish a report to investors; (2) delineate the responsibilities 
relating to the preparation of the report; (3) reinforce internal 
controls over the Systemwide financial disclosure; and (4) establish 
reporting standards for the report to ensure that relevant information 
concerning the combined financial condition and results of operations 
of the System is disclosed to investors and potential investors.
    Under the proposed regulations, the Funding Corporation would be 
required to maintain a Farm Credit System Audit Committee (System Audit 
Committee) to oversee the Systemwide financial disclosure to investors. 
Each bank would also be required to establish or utilize any existing 
bank audit committee to oversee the bank's financial reporting to 
shareholders and the Funding Corporation for disclosure to investors.
    The proposed rule also would implement section 514 of the Farm 
Credit Banks and Associations Safety and Soundness Act of 1992 (1992 
Act) regarding disclosures to investors. Section 514(c)(2) and (d) of 
the 1992 Act requires the FCA to review and, if necessary, amend its 
financial disclosure regulations to ensure that the disclosure of 
financial and conflict-of-interest information by System personnel 
provides investors and potential investors with information necessary 
to assist them in making investment decisions regarding FCS debt 
obligations or System institutions.
    Below is a section-by-section explanation of significant provisions 
of the proposed regulations.

II. Subpart A--General

A. Purpose and Definitions

    Proposed Sec. 630.1 articulates the purpose of the regulations--to 
require the System to publish annual and quarterly reports that will 
provide combined financial information on a Systemwide basis to 
investors and potential investors in Systemwide and consolidated bank 
debt obligations of the System, as well as to other users of the 
reports. The reports would contain combined financial statements, 
supplemental financial statement information, and related information 
pertaining to all System institutions as a whole.
    Section 630.2 defines significant terms used in the proposed 
regulations. The term ``disclosure entities,'' as defined in proposed 
Sec. 630.2(b), means all banks, the Funding Corporation, and the 
Financial Assistance Corporation. Because the Federal Agricultural 
Mortgage Corporation (Farmer Mac) is not liable for any debt or 
obligation of any other institutions of the System, for purposes of the 
proposed regulations, the term ``Farm Credit System'' defined in 
proposed Sec. 630.2(d) does not include Farmer Mac.
    Each bank may individually issue notes, bonds, debentures, or other 
similar obligations under authority of section 4.2(a), (b), and (e) of 
the 1971 Act. Also, each bank may join with other banks of the System 
to issue consolidated bank debt obligations under section 4.2(c) of the 
1971 Act or Systemwide debt obligations under section 4.2(d) of the 
1971 Act. Under section 4.4 of the 1971 Act, all banks are jointly and 
severally liable for debt obligations issued under section 4.2(c) or 
(d) of the 1971 Act. The proposed regulations use the term ``FCS debt 
obligations'' (defined in Sec. 630.2(e)) to encompass both consolidated 
bank debt obligations and Systemwide debt obligations.

B. Publishing and Filing the Report to Investors

    Proposed Sec. 630.3 contains general requirements and instructions 
for publishing and filing annual and quarterly reports to investors by 
the disclosure entities. For purposes of subpart A of the proposed 
regulations, the term ``report to investors'' or ``report'' refers to 
both the annual and quarterly reports required by this part unless 
otherwise specified. Under proposed Sec. 630.3(a), the disclosure 
entities would be required to jointly publish the report. Proposed 
Sec. 630.3(b) provides that each report must present combined financial 
statements and accompanying footnotes to provide investors with the 
most meaningful presentation of the combined financial condition and 
results of operations pertaining to all System institutions. The 
proposed regulations define the required combined financial statements 
in proposed Sec. 630.2(g) as the ``Systemwide combined financial 
statements.'' Pursuant to proposed Secs. 630.3(c) and 630.20(l), the 
Funding Corporation must determine the ``reporting entity''\2\ of the 
Systemwide combined financial statements in accordance with generally 
accepted accounting principles (GAAP).
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    \2\A ``reporting entity'' refers to the identity or boundaries 
of an entity for which financial statements are prepared. A 
reporting entity may comprise two or more affiliated entities and is 
not necessarily a legal entity per se.
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    Proposed Sec. 630.3(c) through (g) contains general requirements 
similar to those followed by individual institutions in preparing and 
filing disclosures to shareholders under Sec. 620.2 of this chapter. 
Pursuant to proposed Sec. 630.3(c), the disclosure entities would be 
required to prepare their Systemwide combined financial information for 
disclosure to investors in accordance with the accounting and reporting 
standards prescribed in part 621 of this chapter. This would ensure 
comparability between the report to investors prepared pursuant to this 
proposed rule and the disclosure to shareholders prepared by individual 
System institutions pursuant to part 620 of this chapter.
    Proposed Sec. 630.3(e) would permit the Funding Corporation to 
present the information required by this part in any order it deems 
suitable in the report. Under proposed Sec. 630.3(f), the Funding 
Corporation must disclose in the report that additional financial 
information regarding individual banks is contained in the banks' 
periodic reports and state where the reports can be obtained.
    Finally, the Funding Corporation would be required to file the 
report to investors with the FCA in the same manner as individual banks 
or associations file their periodic reports with the FCA. Proposed 
Sec. 630.3(g) provides that at least one of the three copies of the 
report filed with the FCA must be dated and manually signed on behalf 
of the Funding Corporation by: (1) The officer(s) designated by the 
Funding Corporation board to certify the report; (2) the chief 
executive officer of the Funding Corporation; and (3) at least one of 
the members of the Funding Corporation board. The signers of the report 
must certify that the report has been prepared in accordance with all 
applicable statutory or regulatory requirements and that the 
information it contains is true, accurate, and complete to the best of 
his or her knowledge and belief.

C. Responsibilities for Preparing the Report to Investors

    Proposed Sec. 630.4 delineates responsibilities of the disclosure 
entities and associations for preparing the report to investors. All 
disclosure entities have a role in the preparation of the report to 
investors, either by supplying essential financial information or by 
compiling and combining it into a meaningful Systemwide report. The 
disclosure entities thus bear the responsibility for the accuracy and 
completeness of the published report. The associations, which are not 
disclosure entities under this part, would be required by proposed 
Sec. 630.4(d) to provide for direct communication between disclosure 
entities and association external auditors regarding questions 
pertinent to association financial information that arise in the 
preparation of the report.
1. Responsibilities of the Funding Corporation
    Proposed Sec. 630.4(a) sets forth the responsibilities of the 
Funding Corporation. The proposed regulations formalize the Funding 
Corporation's function in the existing System Disclosure Program by 
assigning the Funding Corporation the lead role among disclosure 
entities in preparing the report to investors.
    Under proposed Sec. 630.4(a)(1), the Funding Corporation would be 
required to publish the reports required by Sec. 630.3(a). The annual 
report to investors must be published within 90 days after the end of 
each fiscal year. With the exception of the quarter coinciding with the 
fiscal yearend, the Funding Corporation would be required to publish a 
report covering each quarter within 60 days after quarterend. Within 
the same time period, pursuant to Sec. 630.4(a)(4), the Funding 
Corporation must file these reports with the FCA in accordance with 
Sec. 630.3(g).
    Proposed Sec. 630.4(a)(2) would require the Funding Corporation to 
establish a system of internal controls over Systemwide financial 
disclosure to investors. The internal control policies and procedures 
must be approved by the System Audit Committee. Under this system of 
internal controls, the Funding Corporation must: (1) Maintain written 
policies and procedures to be carried out by the disclosure entities 
for preparation of the report to investors; (2) provide instructions to 
the disclosure entities regarding the information needed for preparing 
the report to investors; (3) provide for the review and verification of 
information submitted by all other disclosure entities to the Funding 
Corporation; and (4) specify procedures for the monitoring of interim 
disclosures of System institutions and timely disclosure of any 
material changes to the most recently published report to investors.
    As defined in proposed Sec. 630.2(f), the ``materiality'' of an 
event must be determined at each reporting level in light of the 
surrounding circumstances under which the reporting is made. Therefore, 
each bank must submit to the Funding Corporation all information the 
bank believes to be material either to the financial statements of the 
bank or to the combined financial statements of the bank and its 
related associations. On receipt of information from all disclosure 
entities, the Funding Corporation must in turn make a materiality 
judgment based on the aggregate effect of all information received to 
determine the extent of discussion and analysis to be presented in the 
report to investors.
    Under proposed Sec. 630.4(a)(3), the Funding Corporation would be 
responsible for collecting the component financial data and related 
analysis needed from each disclosure entity to prepare the report to 
investors. This provision would authorize the Funding Corporation to 
collect the information and any supporting data needed from each 
disclosure entity to comply with the requirements of proposed subparts 
B and C. Under the proposed regulations, the Funding Corporation would 
obtain associations' financial information through the banks rather 
than from the associations. This proposed rule integrates the 
requirement of part 620 of this chapter that banks prepare combined 
financial statements with their related associations.
    Under proposed Sec. 630.4(a)(5) and (6), the Funding Corporation 
would be responsible for supplying copies of the report to selling 
group dealers for distribution to investors and potential investors in 
FCS debt obligations and also for making the report available for 
public inspection. The FCA does not intend to impose a complex delivery 
system for the report to investors analogous to the prospectus delivery 
requirements of the Securities Act of 1933. Rather, the proposed 
regulations recognize that the Funding Corporation and other System 
institutions currently use the Information Statement to provide 
information to the public in connection with the sale of FCS debt 
securities. The FCA believes that the information contained in the 
report is useful to investors and seeks to ensure that the report is 
reasonably available to them through selling group dealers and the 
Funding Corporation and otherwise to the public upon request.
    Under proposed Sec. 630.4(a)(7), the Funding Corporation would be 
required to notify the FCA immediately when the Funding Corporation 
believes that it will be unable to publish and file the report within 
the regulatory deadline because of the failure of one or more banks to 
comply with their responsibilities prescribed in proposed 
Sec. 630.4(c). This provision is designed to allow the FCA, if 
necessary, to enforce the requirement that the banks provide the 
information needed by the Funding Corporation to prepare the report to 
investors in a timely fashion.3
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    \3\No provision is made for notice as a result of failure of the 
Financial Assistance Corporation to comply with proposed 
Sec. 630.5(b) because the board of the Funding Corporation is 
statutorily designated as the board of the Financial Assistance 
Corporation. The board is responsible for providing information 
about the Financial Assistance Corporation needed by the Funding 
Corporation to prepare the report to investors in a timely manner.
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    Pursuant to proposed Sec. 630.4(a)(8), the Funding Corporation must 
prepare a statement to briefly explain the respective responsibilities 
of the disclosure entities in Systemwide financial reporting and state 
that the Funding Corporation has policies and procedures in place to 
ensure, to the best of the knowledge and belief of its management and 
board, that the information contained in the report is true, accurate, 
and complete. The statement must be signed by the Funding Corporation's 
chief executive officer and chairman of the board. This obligation 
acknowledges the Funding Corporation's shared accountability with the 
banks for the reports as well as its lead role among the disclosure 
entities for preparation of the report. For the purpose of preparing 
the report, if the Funding Corporation needs specific information 
contained in the Report of Examination of a bank or an association, 
proposed Sec. 630.4(a)(9) would authorize the Funding Corporation to 
request such information from the Chief Examiner of the FCA.
2. Responsibilities of the Financial Assistance Corporation
    Proposed Sec. 630.4(b) sets forth the obligation of the Financial 
Assistance Corporation to provide the Funding Corporation with the 
information it requires to prepare the Systemwide combined financial 
statements. As noted, because the board of the Funding Corporation is 
the board of the Financial Assistance Corporation and has the capacity 
to control financial reporting of both entities, it is unnecessary to 
specify the Financial Assistance Corporation's responsibilities for 
reporting to the Funding Corporation in the proposed regulations.
3. Responsibilities of Banks
    Proposed Sec. 630.4(c) sets forth the banks' responsibilities for 
furnishing and updating information to be used by the Funding 
Corporation for preparation of the report to investors and would 
require each bank to provide annual, quarterly, and other interim 
financial information to the Funding Corporation in accordance with 
Funding Corporation instructions.
    Proposed Sec. 630.4(c)(5) would require several certifications from 
bank management relating to the information submitted to the Funding 
Corporation for inclusion in the report to investors. Banks must 
certify to the Funding Corporation that all information has been 
submitted in accordance with the Funding Corporation's instructions; 
that the information submitted is prepared in accordance with all 
applicable statutory and regulatory requirements; and that the 
information is true, accurate, and complete. Certifications to the 
Funding Corporation are to be signed on behalf of the board of a bank 
by an officer(s) designated by the bank board and by the chief 
executive officer. It would be the Funding Corporation's responsibility 
to determine the form of the certification to be made by each bank for 
compliance with the requirements of proposed Sec. 630.4(c)(5).
4. Responsibilities of Associations
    Under the proposed regulations, associations have no direct 
responsibility for preparation of the report to investors. The 
associations' responsibilities for preparing combined financial 
statements with related banks are governed by part 620 of this chapter. 
However, banks must be able to follow up on issues that may arise in 
connection with association financial information that banks will be 
using to prepare their information for submission to the Funding 
Corporation. Therefore, proposed Sec. 630.4(d) would require each 
association to provide in the engagement letter with its external 
auditor that the external auditor shall notify the association and 
respond to inquiries of the related bank pertaining to the preparation 
of the combined financial data of the association and its related bank.

D. Prohibition Against Incomplete, Inaccurate, or Misleading Disclosure

    Proposed Sec. 630.5 prohibits incomplete, inaccurate, or misleading 
disclosure by any of the parties involved in the preparation of the 
report to investors. If, in the judgment of the FCA, an incomplete, 
inaccurate, or misleading disclosure has been made, the party 
responsible is obligated under this section to provide correct 
information to allow the Funding Corporation to rectify the erroneous 
disclosure. If a party discovers, prior to publication, that 
incomplete, inaccurate, or misleading disclosure has been made, the 
erroneous disclosure must be corrected before it is incorporated into 
the report. If a report containing erroneous disclosure has been 
published, the Funding Corporation would be required to take corrective 
actions as soon as possible to ensure that the reported information 
presents a fair and accurate picture of the System's results of 
operations and financial condition. Other disclosure entities would be 
required to furnish the information needed by the Funding Corporation 
to make the correction. In addition to corrective actions by System 
institutions, where appropriate, the FCA may use its enforcement powers 
under title V, part C of the 1971 Act to enforce proposed Sec. 630.5.

E. Audit Committees

    Audit committees are a key component of an institution's corporate 
governance. Section 630.6(a) is proposed to formalize the existing 
System Audit Committee function and should have minimal effect on 
current operations of the System Audit Committee.
    Proposed Sec. 630.6(a) (1) through (3) would require a System Audit 
Committee consisting of no fewer than three members. The System Audit 
Committee would report to the board of the Funding Corporation. Members 
selected to serve on the committee must be independent of management of 
any disclosure entity and association and must have financial 
management expertise sufficient to carry out their oversight role. A 
person who is an officer or employee of a disclosure entity or an 
association would not be considered independent of management. The 
committee must be given adequate resources and authorities to discharge 
its responsibilities, including the ability to consult with the Funding 
Corporation's general counsel and outside counsel to discuss legal 
matters that may have a significant impact on the Systemwide combined 
financial statements and related analyses.
    Proposed Sec. 630.6(a)(4) prescribes the minimum responsibilities 
of the System Audit Committee. These responsibilities would include: 
(1) Making recommendations on the selection of an independent auditor 
for audits of Systemwide combined financial statements; (2) overseeing 
the Funding Corporation management's preparation of the report to 
investors; (3) reviewing the impact of significant accounting and 
auditing developments and approving accounting policy changes for the 
Systemwide combined financial statements; (4) reviewing each report and 
interim disclosure to investors prior to its release; and (5) 
overseeing the internal control system over Systemwide financial 
reporting for preparation of reports to investors. Lastly, the names of 
the System Audit Committee members must be disclosed pursuant to 
proposed Sec. 630.20(n).
    To prepare the Systemwide combined financial statements and related 
discussions and analyses, the Funding Corporation relies on financial 
data and narratives furnished by the banks. To provide further 
assurance that the banks' submissions to the Funding Corporation are 
accurate and complete, proposed Sec. 630.6(b) would require that each 
bank establish and maintain a bank audit committee to oversee the 
internal controls over the bank's accounting and financial reporting. 
The proposed requirements of composition, membership qualifications, 
and responsibilities of the bank audit committee are similar to those 
of the System Audit Committee described above. A System bank whose 
audit committee is comprised of members of the entire board would meet 
the composition requirement of proposed Sec. 630.6(b)(2).
    Since most System banks have performed this oversight function 
either through a subcommittee of the board or through the full board 
acting as an audit committee, the FCA does not view proposed 
Sec. 630.6(b) as a burdensome requirement. The audit committee 
requirement is consistent with the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA), which imposes a similar 
requirement on insured depository institutions with total assets of 
$500 million or more.

III. Subpart B--Annual Report to Investors

    Proposed Sec. 630.20 prescribes the contents of the annual report 
to investors. Each disclosure entity would be required to provide the 
information called for by this subpart, along with any supporting 
information, to the Funding Corporation. Information required by the 
proposed regulation is generally consistent with the information 
currently presented in the Information Statement, which should minimize 
any burden that may be imposed.
    The proposed content requirements resemble those of the annual 
report to shareholders under Sec. 620.5 of this chapter. Under proposed 
Sec. 630.20(a), the report would be required to provide a description 
of: (1) The System's business, including the System's organizational 
structure, geographical area, and customers; (2) the types of lending 
activities engaged in and financial activities offered by System 
institutions; (3) significant developments affecting the System's 
organizational structure and the manner of conducting business; (4) 
acquisition or disposition of material assets; and (5) concentrations 
of total assets (10 percent or more) in particular types of 
agricultural activity or business. The report must also include the 
address of the headquarters of each disclosure entity and service 
organization of the System.
    Proposed Sec. 630.20(b) would require that the report provide a 
description of the regulatory and enforcement authority of the FCA, and 
the role and authority of the Farm Credit System Insurance Corporation 
(FCSIC) and the Financial Assistance Corporation. With respect to the 
FCSIC, proposed Sec. 630.20(b)(2) would require that the report provide 
a description of the FCSIC's status as a Government corporation and its 
role in ensuring the timely payment of principal and interest on FCS 
debt obligations and providing assistance to System institutions. In 
addition, a statement that System institutions have no control over the 
management of the FCSIC or expenditures from the Insurance Fund would 
be required.
    Proposed Sec. 630.20(c) would require a description of System 
institutions' material pending legal proceedings and a summary of the 
types of and reasons for enforcement actions in effect during the year. 
Similar information is currently disclosed to shareholders by banks and 
their related associations under Sec. 620.5(c) of this chapter. 
Therefore, the banks would be required to submit such information 
regarding their related associations to the Funding Corporation.
    Proposed Sec. 630.20(d) would require that the report describe the 
System's funding mechanism, including System banks' authority to issue 
debt obligations, and the types and characteristics of debt securities 
issued. Proposed Sec. 630.20(d)(1) would require that the report 
provide a disclosure regarding debt obligations that may be issued by 
each bank. Accordingly, the disclosure would include a description of 
banks' authority to issue notes, bonds, debentures, or other 
obligations individually under section 4.2 (a), (b), or (e) of the 1971 
Act and the fact that such debt obligations are not entitled to the 
benefits of insurance provided by the FCSIC.
    Proposed Sec. 630.20(d) would also require the report to contain a 
description of applicable statutory and regulatory restrictions that 
affect a bank's ability to incur debt. In addition, any agreements 
among banks and the Funding Corporation that affect a bank's ability to 
incur debt and any agreements among System institutions on matters 
relating to financial assistance or loss sharing must be disclosed 
pursuant to proposed paragraphs (d) (2) and (3) of this section.
    Proposed Sec. 630.20(e) sets forth the requirement for a 
description of the System's capital structure. With respect to 
permanent capital compliance and statutory or regulatory prohibitions 
for stock retirement or earnings distribution by System institutions, 
proposed paragraph (e) of this section would require that the report 
provide the number of institutions, categorized by banks and 
associations, that do not comply with permanent capital standards or 
are under prohibitions, as well as a summary of the causes of such 
noncompliance or prohibitions.
    The 5-year selected financial data required by proposed 
Sec. 630.20(f) generally track the current System disclosure to 
investors and are also very similar to the requirements of 
Sec. 620.5(f) of this chapter. However, the list provided under the 
caption ``selected financial data'' in proposed Sec. 630.20(f) excludes 
``protected borrower capital'' and related capital ratios. System 
institutions can no longer issue protected borrower stock. Because the 
outstanding balance of protected borrower capital is immaterial to the 
financial position of the System on a Systemwide basis and is being 
retired at a steady rate, the regulations would not require 
presentation of ``protected borrower capital'' and related capital 
ratios as an element of ``selected financial data.'' However, 
``protected borrower capital'' must be reported separately from at-risk 
capital stock in the comparative financial statements or elsewhere in 
the report.
    Proposed Sec. 630.20(g) would require a discussion and analysis 
(D&A) on material financial aspects of the System. Generally, the D&A 
must cover 3 comparative years. Overall, the D&A requirements under 
proposed Sec. 630.20(g) are less extensive than those required by the 
Securities and Exchange Commission (SEC) in its Industry Guide 3 for 
bank holding companies. To help determine the extent of the D&A needed, 
proposed Sec. 630.20(g)(6) includes general guidance for preparation of 
the D&A and clarifies that the purpose of the D&A is to provide useful 
information to investors for making business decisions.
    Proposed Sec. 630.20(g)(1) would require that the D&A include a 
description of the System loan portfolio by major category, the risk 
exposure of the loan portfolio, and secondary market activities. It 
would also require that the amount of loans outstanding that were used 
to finance the purchases of stock and other equities of System 
institutions be disclosed. With respect to discussions of results of 
operations, proposed Sec. 630.20(g)(2)(vi) would require that the 
report explain how changes to Insurance Fund assets and related 
restricted capital affected reported income. The discussion must 
describe major components of the changes on a comparative basis. All 
other requirements regarding results of operations of proposed 
Sec. 630.20(g)(2) are similar to those required by Sec. 620.5(g)(2) of 
this chapter.
    Proposed Sec. 630.20(g)(3) would require a list of outstanding debt 
securities by type and a discussion of other sources of System funding. 
Proposed paragraph (g)(3)(i) of this section specifies that insured 
obligations must be reported separately from uninsured obligations and 
prescribes the minimum reporting requirement for each type of security 
listed. The D&A must also address a number of liquidity-related 
matters, such as any FCA regulations or System policies regarding 
liquidity and liquidity reserves; material changes in liquidity and 
management thereof; any regulatory limitations or System policies or 
objectives regarding investments; System investment portfolio; and 
asset/liability management practices and related measurements of 
interest rate risk of the System, including the use of derivatives and 
other off-balance-sheet transactions. The FCA notes the heightened 
interest of other bank regulators and the Congress in the institutional 
and systemic risk of the rapidly growing and relatively unregulated 
market for derivative financial products. It is likely that derivative 
product transactions by the banking industry and others will receive 
increased regulatory scrutiny in the future. Accordingly, while 
proposed Sec. 630.20(g)(3)(iv) would require a brief discussion of 
derivative transactions, the FCA requests specific comment on whether 
disclosure requirements regarding derivative transactions should be 
more detailed.
    Proposed Sec. 630.20(g)(4) would require a discussion of capital 
resources similar to that required under Sec. 620.5(g)(4) of this 
chapter.
    Proposed Sec. 630.20(g)(5) specifies the requirements for 
disclosure regarding the Insurance Fund. It would require that the 
report provide: (1) A description of the purposes for which 
expenditures from the Insurance Fund may be made and the statutory 
requirements for making such expenditures; (2) a schedule itemizing the 
amount of Insurance Fund assets that have been specifically identified 
by the FCSIC for payment of estimated obligations of the FCSIC and the 
amount of the fund assets for which no specific use has been identified 
or designated by the FCSIC; and (3) an explanation of how FCSIC 
expenditures or designations of Insurance Fund assets for payment of 
future obligations affect the combined assets and capital of the 
System.
    Proposed Sec. 630.20(g)(6) contains general guidance for 
preparation of the D&A. Because the purpose of the D&A is to enhance a 
reader's understanding of the combined financial statements, 
information presented should be relevant to an assessment of the 
combined financial statements. The D&A should focus on material events 
and uncertainties known at the time of reporting. The information 
provided should be material to System institutions, clarify any 
ambiguities in the combined financial statements, and highlight 
significant aspects of the financial statements. As preparer, the 
Funding Corporation would be responsible for ensuring that the D&A in 
the report to investors is relevant and useful to investors and the 
public.
    Sections 630.20 (h), (i), and (j) are proposed to implement the 
requirements of section 514 of the 1992 Act regarding disclosure of 
financial and conflict-of-interest information by System personnel. The 
proposed regulations would require the report to provide information to 
investors on System institutions' related-party transactions on an 
aggregate basis.
    Under proposed Sec. 630.20(k), ``Relationship with independent 
public accountant,'' a change in the independent public accountant who 
audits the Systemwide combined financial statements or a disagreement 
with the public accountant would require disclosure if disclosure to 
the FCA is also required under Sec. 621.4 of this chapter.
    Proposed Sec. 630.20(l) would require that the report present 
Systemwide combined financial statements that have been prepared in 
accordance with GAAP for the comparative periods specified. The 
financial statements presented must be audited in accordance with 
generally accepted auditing standards (GAAS) by a qualified public 
accountant and the accountant's opinion on the statements must be 
presented in the annual report to investors.
    Proposed Sec. 630.20(m) would require that the annual report 
present supplemental information regarding the components of Systemwide 
combined financial statements. Such supplemental information must be 
presented in accordance with the requirements and instructions of the 
FCA, either as separate schedules or in accompanying notes to the 
Systemwide combined financial statements. The supplemental information 
must be examined by an independent public accountant for compliance 
with the FCA regulations and guidelines and the accountant's opinion 
must accompany the supplemental information in the report.
    Proposed Sec. 630.20 (m)(2) and (m)(3) specify that, at a minimum, 
the report must include current year supplemental balance sheet and 
income statement data for the following components: combined financial 
data of all banks (without associations); combined financial data of 
all associations; financial data of the Financial Assistance 
Corporation; financial data of the Insurance Fund; and combined 
financial data pertaining to the System with and without the Insurance 
Fund. Following recent correspondence and discussions with the Funding 
Corporation on how financial information regarding the Insurance Fund 
is to be presented in the 1993 FCS Report, the FCA has developed 
guidelines for compliance with proposed Sec. 630.20(m). The guidelines 
appear in the appendix to this proposed rule and contain two schedules 
to illustrate the format and selected financial data to be presented in 
the schedules. The supplemental disclosure must include any additional 
information and disclosure sufficient to enable readers to understand 
the basis of presentation of the supplemental information, the 
adjustments contained therein, and the effect of each component on the 
Systemwide combined financial statements.
    Finally, proposed Sec. 630.20(o) would require the report to 
include a cross-reference sheet indicating the location of the required 
information.

IV. Subpart C--Quarterly Reports to Investors

    Proposed Sec. 630.40, ``Content of the quarterly report to 
investors,'' contains provisions similar to those contained in subpart 
C of part 620 of this chapter. Supplemental financial statement 
information required to be disclosed in the annual report must also be 
presented in quarterly reports.
    The proposed regulations would require a quarterly report to be 
presented in an easily understandable format and in a manner that is 
not misleading. Quarterly reports may be prepared on the presumption 
that readers of the report have read or have access to the most 
recently published annual report. The adequacy of additional disclosure 
needed in the quarterly report may be determined in that context.
    The rules for condensation applicable to individual institutions 
for preparing their quarterly financial statements prescribed in part 
620 of this chapter have been incorporated in proposed part 630 to 
apply to the preparation of the Systemwide quarterly financial 
statements. In addition, proposed Sec. 630.40(b)(4) would require that 
quarterly reports to investors update material contingencies that exist 
at the time of the interim reporting even though a significant change 
since yearend may not have occurred.
    Proposed Sec. 630.40(d) sets forth the requirements of the interim 
financial statements of the quarterly report and the respective 
comparative periods of the interim statements presented. Proposed 
Sec. 630.40(e) specifies the reporting periods for which quarterly 
supplemental information would be required. The proposed regulations do 
not require that interim financial statements or supplemental 
information be audited. However, the FCA may require the Systemwide 
combined financial statements of an interim period to be audited should 
the need arise for supervisory actions.

List of Subjects in 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, part 630 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be added to 
read as follows:

PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED 
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

Subpart A--General

Sec.
630.1 Purpose.
630.2 Definitions.
630.3 Publishing and filing the report to investors.
630.4 Responsibilities for preparing the report to investors.
630.5 Prohibition against incomplete, inaccurate, or misleading 
disclosure.
630.6 Farm Credit System audit committee and bank audit committees.

Subpart B--Annual Report to Investors

630.20 Contents of the annual report to investors.

Subpart C--Quarterly Reports to Investors

630.40 Contents of the quarterly report to investors.

Appendix A to Part 630--Supplemental Information Disclosure Guidelines

    Authority: Secs. 5.17, 5.19 of the Farm Credit Act; 12 U.S.C. 
2252, 2254; sec. 424 of Pub. L. 100-233, 101 Stat. 1568, 1656.

Subpart A--General


Sec. 630.1  Purpose.

    This part sets forth the requirements for preparation and 
publication by the Farm Credit System (FCS or System) of annual and 
quarterly reports to investors and potential investors in Systemwide 
and consolidated bank debt obligations of the System and to other users 
of the reports in the general public. The reports shall contain 
combined financial statements, supplemental financial statement 
information, and related information pertaining to the System.


Sec. 630.2  Definitions.

    For purposes of this part, the following definitions shall apply:
    (a) Bank means any bank chartered under the Farm Credit Act of 
1971, as amended (Act).
    (b) Disclosure entity means any bank, the Farm Credit System 
Financial Assistance Corporation (Financial Assistance Corporation), 
and the Federal Farm Credit Banks Funding Corporation (Funding 
Corporation).
    (c) Engagement letter means the proposal, contract, letter, and 
other documents reflecting the understandings between the audit 
committee or board of directors of a bank or an association and its 
independent public accountant regarding the scope, terms, and nature of 
the audit services to be performed.
    (d) Farm Credit System means, collectively, the banks, 
associations, and such other institutions that are or may be made a 
part of the System under the Act, all of which are chartered by and 
subject to regulation by the Farm Credit Administration (FCA). For 
purposes of this part, the System does not include the Federal 
Agricultural Mortgage Corporation (Farmer Mac).
    (e) FCS debt obligation means, collectively, notes, bonds, 
debentures, and other debt securities issued by banks pursuant to 
section 4.2(c) (consolidated bank debt securities) and section 4.2(d) 
(Systemwide debt securities) of the Act.
    (f) Material, when used to qualify a requirement to furnish 
information as to any subject, limits the information required to those 
matters to which there is a substantial likelihood that a reasonable 
person would attach importance in determining the financial condition 
of an entity.
    (g) Systemwide combined financial statements means the combined 
financial statements required by this part that are prepared to provide 
investors and potential investors in FCS debt obligations with the most 
meaningful presentation pertaining to the financial condition and 
results of operations of the System.


Sec. 630.3  Publishing and filing the report to investors.

    For purposes of this subpart, unless otherwise specified, the term 
report to investors or report refers, collectively, to the annual and 
quarterly reports to investors required by this part.
    (a) The disclosure entities shall jointly publish the following 
reports in order to provide meaningful information pertaining to the 
financial condition and results of operations of the System to 
investors and potential investors in FCS debt obligations and other 
users of the report:
    (1) An annual report to investors within 90 days after the end of 
each fiscal year.
    (2) A quarterly report to investors within 60 days after the end of 
each quarter, except for the quarter that coincides with the end of the 
fiscal year.
    (b) Each report to investors shall present the Systemwide combined 
financial statements and related footnotes deemed appropriate for the 
purpose of the report to provide investors with the most meaningful 
presentation pertaining to the financial condition and results of 
operations of the System.
    (c) All items of essentially the same character as items required 
to be reported in the reports of condition and performance pursuant to 
part 621 of this chapter shall be prepared in accordance with the rules 
set forth in part 621 of this chapter.
    (d) Each report to investors shall contain the information required 
by subparts B and C of this part, as applicable, and such other 
information as is necessary to make the required statements, in light 
of the circumstances under which they are made, not misleading.
    (e) Information in any part of the report may be incorporated by 
reference in answer or partial answer to any other item of the report. 
Information required by this part may be presented in any order deemed 
suitable by the Funding Corporation.
    (f) The report shall include a statement in a prominent location 
that Systemwide debt securities and consolidated bank debt obligations 
are joint and several liabilities of individual banks and that copies 
of each bank's recent periodic reports to shareholders are available 
upon request. The report shall also include addresses and telephone 
numbers where copies of the report to investors and the periodic 
reports of individual banks can be obtained. Copies of the report to 
investors shall be available for public inspection at the Funding 
Corporation.
    (g) Three complete copies of the report shall be filed with the 
Chief Examiner, Farm Credit Administration, McLean, Virginia 22102-
5090, within the applicable period prescribed under paragraphs (a)(1) 
and (a)(2) of this section.
    (1) At least one copy of the report filed with the FCA shall be 
dated and manually signed by the following officers and director(s) of 
the Funding Corporation on its behalf:
    (i) The officer(s) designated by the board of directors to certify 
the report;
    (ii) The chief executive officer; and
    (iii) Each member of the board or, at a minimum, one of the 
following board members formally designated by action of the board to 
certify on behalf of individual board members: the chairperson of the 
board or a board member designated by the chairperson of the board.
    (2) The name and position title of each person signing the report 
shall be typed or printed beneath his or her signature. Signers of the 
report shall attest as follows:

    The undersigned certify that this report has been prepared in 
accordance with all applicable statutory or regulatory requirements 
and that the information contained herein is true, accurate, and 
complete to the best of his or her knowledge and belief.


Sec. 630.4  Responsibilities for preparing the report to investors.

    (a) Responsibilities of the Funding Corporation. The Funding 
Corporation shall:
    (1) Prepare the reports to investors required by Sec. 630.3(a), 
including the Systemwide combined financial statements and notes 
thereto, and such other disclosures, supplemental information, and 
related analysis as are required by this part to make the reports 
meaningful and not misleading.
    (2) Establish a system of internal controls sufficient to 
reasonably ensure that any information it releases to investors and the 
general public concerning any matter required to be disclosed by this 
part is true and that there are no omissions of material information. 
The system of internal controls, at a minimum, shall require that the 
Funding Corporation:
    (i) Maintain written policies and procedures, approved by the 
System Audit Committee, to be carried out by the disclosure entities 
for preparation of the report to investors;
    (ii) Provide instructions to the disclosure entities regarding 
information required to be included in the Systemwide combined 
financial statements and the information required to be disclosed in 
the report to investors;
    (iii) Review the information submitted to it for preparation of the 
report to investors, and make reasonable inquiries to ascertain whether 
the information is reliable, accurate, and complete; and
    (iv) Specify procedures for monitoring interim disclosures of 
System institutions and disclose in a timely manner any material 
changes in information contained in the most recently published report 
to investors.
    (3) Collect from each disclosure entity financial data and related 
analyses needed for preparation of the report to investors.
    (4) File the reports with the FCA in accordance with Sec. 630.3(g).
    (5) Ensure prompt delivery of sufficient copies of each report to 
selling group dealers for distribution to investors and potential 
investors in FCS debt obligations.
    (6) Make the report available to the general public upon request.
    (7) Notify the FCA if it is unable to prepare and publish the 
report to investors in compliance with the requirements of this part 
because one or more banks have failed to comply with the requirements 
of paragraph (c) of this section. A notification, signed by the 
officer(s) designated by the board of directors of the Funding 
Corporation to certify the report to investors and by the chief 
executive officer, shall be made to the FCA as soon as the Funding 
Corporation becomes aware of its inability to comply. The Funding 
Corporation shall explain the reasons for the notification and may 
request that the FCA extend the due date for the report to investors.
    (8) Include in the report a statement that briefly explains the 
respective responsibilities of the disclosure entities and states that 
the Funding Corporation has policies and procedures in place to ensure, 
to the best of the knowledge and belief of management and the board of 
the Funding Corporation, that the information contained in the report 
is true, accurate, and complete. The statement shall be signed by the 
chief executive officer and the chairman of the board of the Funding 
Corporation.
    (9) If necessary, request the FCA to provide information regarding 
the content of the latest Reports of Examination of any banks and 
related associations. The request shall be made to the Chief Examiner, 
Farm Credit Administration, McLean, Virginia 22102-5090.
    (b) Responsibilities of the Financial Assistance Corporation. The 
Financial Assistance Corporation shall provide to the Funding 
Corporation such information as may be required by the Funding 
Corporation to prepare the report.
    (c) Responsibilities of banks. Each bank shall:
    (1) Provide to the Funding Corporation, in accordance with 
instructions of the Funding Corporation, annual, quarterly, and other 
interim financial information, including both bank-only financial data 
and combined financial data of the bank and its related associations, 
as the Funding Corporation deems necessary for preparation of the 
report to investors.
    (2) Respond to Funding Corporation inquiries and provide any 
followup information requested by the Funding Corporation in connection 
with the preparation of the report to investors in accordance with 
instructions of the Funding Corporation.
    (3) Notify the Funding Corporation promptly of any events occurring 
subsequent to publication of the report that may be material either to 
the financial condition and results of operations of the bank or to the 
combined financial condition and results of operations of the bank and 
its related associations. Furnish the Funding Corporation with any 
information necessary to provide interim Systemwide disclosure to 
investors to make the most recently published report to investors not 
misleading.
    (4) Provide in the engagement letter with its external auditor that 
the external auditor shall, after notifying the bank, respond to 
inquiries from the Funding Corporation relating to preparation of the 
report.
    (5)(i) Certify to the Funding Corporation that:
    (A) All information needed for preparation of the report to 
investors has been submitted in accordance with the instructions of the 
Funding Corporation;
    (B) The information submitted is prepared in accordance with all 
applicable statutory and regulatory requirements; and
    (C) The information submitted is true, accurate, and complete to 
the best of management's knowledge and belief.
    (ii) The certification required by paragraph (c)(5)(i) of this 
section shall be prepared as specified by the Funding Corporation and 
shall be manually signed and dated on behalf of the bank by:
    (A) The officer(s) designated by the board of directors to certify 
the information submitted to the Funding Corporation; and
    (B) The chief executive officer.
    (d) Responsibilities of associations. Each association shall 
provide in the engagement letter with its external auditor that the 
external auditor of the association shall, after notifying the 
association, respond to inquiries of the related bank pertaining to 
preparation of the combined financial data of the association and its 
related bank.


Sec. 630.5  Prohibition against incomplete, inaccurate, or misleading 
disclosure.

    Neither the Funding Corporation, nor any institution supplying 
information to the Funding Corporation under this part, nor any 
employee, officer, director, or nominee for director of the Funding 
Corporation or of such institutions, shall make or cause to be made any 
disclosure to investors and the general public required by this part 
that is incomplete, inaccurate, or misleading. When any such 
institution or person makes or causes to be made disclosure under this 
part that, in the judgment of the FCA, is incomplete, inaccurate, or 
misleading, whether or not such disclosure is made in published 
statements required by this part, such institution or person shall 
promptly furnish to the Funding Corporation, and the Funding 
Corporation shall promptly publish, such additional or corrective 
disclosure as is necessary to provide full and fair disclosure to 
investors and the general public. Nothing in this section shall prevent 
the FCA from taking additional actions to enforce this section pursuant 
to its authority under title V, part C of the Act.


Sec. 630.6  Farm Credit System audit committee and bank audit 
committees.

    (a) Farm Credit System audit committee. (1) The board of the 
Funding Corporation shall establish and maintain a System Audit 
Committee and adopt a written charter describing the committee's 
composition, authorities, and responsibilities.
    (2) The System Audit Committee shall consist of no fewer than three 
members. Members shall be independent of management of any disclosure 
entity and association and free from any relationship that, in the 
opinion of the board of directors of the Funding Corporation, would 
interfere with the exercise of independent judgment as a committee 
member. Members shall be knowledgeable in public and corporate finance 
and financial reporting and disclosure.
    (3) The System Audit Committee shall report to the board of the 
Funding Corporation and shall be given adequate resources and 
authorities to discharge its responsibilities, including the ability to 
consult the Funding Corporation's legal counsel.
    (4) Responsibilities. At a minimum, the System Audit Committee 
shall:
    (i) Make recommendations to the board of the Funding Corporation 
regarding the selection of an independent auditor of the Systemwide 
combined financial statements;
    (ii) Oversee the Funding Corporation management's preparation of 
the report to investors;
    (iii) Review the impact of any significant accounting and auditing 
developments and approve accounting policy changes relating to 
preparation of the Systemwide combined financial statements;
    (iv) Review the System's annual and quarterly reports and other 
interim disclosures to investors prior to their release; and
    (v) Oversee the Funding Corporation's system of internal controls 
relating to preparation of the report, including controls relating to 
compliance with laws and regulations.
    (b) Farm Credit System bank audit committees. (1) Each System bank 
shall establish and maintain a bank audit committee that shall report 
to the board of the bank.
    (2) The bank audit committee shall consist of no fewer than three 
members. Members shall be independent of management and free from any 
relationship that, in the opinion of the board of directors of the 
bank, would interfere with the exercise of independent judgment as a 
committee member. Members shall be knowledgeable in public and 
corporate finance, and financial reporting and disclosure.
    (3) Responsibilities. At a minimum, the bank audit committee shall:
    (i) Review the bank's financial statements and significant 
accounting policies;
    (ii) Oversee the bank's financial reporting regarding its 
disclosure to shareholders and to the Funding Corporation for 
disclosure to investors;
    (iii) Oversee the audit activities of the external auditor; and
    (iv) Monitor internal controls, including those relating to 
compliance with laws and regulations.

Subpart B--Annual Report to Investors


Sec. 630.20  Contents of the annual report to investors.

    The annual report shall contain the following:
    (a) Description of business. (1) The description shall include a 
brief discussion of the following:
    (i) The System's overall organizational structure, its lending 
institutions by type and their respective authorities, the 
relationships between different types of institutions, and the overall 
geographic area and eligible borrowers served by those institutions.
    (ii) The types of lending activities engaged in and financial 
services offered by System institutions.
    (iii) Any significant developments within the last 5 years that 
have had or could have a material impact on the System's organizational 
structure and the manner in which System institutions conduct business, 
including, but not limited to, statutory or regulatory changes, mergers 
or liquidations of System institutions, termination of System 
institution status, and financial assistance provided by or to a System 
institution through loss-sharing or capital preservation agreements or 
from any other source;
    (iv) Any acquisition or disposition of material assets during the 
last fiscal year that took place outside the ordinary course of 
business.
    (v) Any concentrations of more than 10 percent of total assets in 
particular types of agricultural activities or businesses, and any 
dependence of an institution or a group of institutions of the System 
upon a specific activity or business, a single customer, or a few 
customers, including other financing institutions (OFIs), as defined in 
Sec. 614.4540(e) of this chapter, the loss of any one of which would 
have a material effect on the System.
    (2) List the address of the headquarters of each disclosure entity 
and service organization of the System.
    (b) Federal regulation and insurance. (1) Farm Credit 
Administration. Describe the regulatory and enforcement authority of 
the FCA over System institutions under the Act.
    (2) Farm Credit System Insurance Corporation. 
    (i) Describe the role and authorities of the Farm Credit System 
Insurance Corporation (FCSIC) under part E of title V of the Act. 
Describe specifically the role of the FCSIC in insuring the timely 
payment of principal and interest on FCS debt obligations and in 
providing assistance to System institutions.
    (ii) Describe the FCSIC's status as a Government corporation and 
state that System institutions have no control over the management of 
the FCSIC or the discretionary expenditures from the Insurance Fund, 
which are the sole prerogative of the FCSIC.
    (3) Farm Credit System Financial Assistance Corporation. Describe 
the role and authorities of the Financial Assistance Corporation under 
title VI of the Act, debt obligations of the Financial Assistance 
Corporation issued to provide financial assistance to the System, and 
statutory repayment obligations of System institutions.
    (c) Description of legal proceedings and enforcement actions. (1) 
Describe any material pending legal proceedings in which one or more 
System institutions are a party, or that involve claims that a System 
institution(s) may be required by contract or operation of law to 
satisfy, and the potential impact of such proceedings, to the extent 
known, on the System.
    (2) Provide a summary of the types and reasons for enforcement 
actions in effect during the year.
    (d) Description of liabilities. (1) Describe how the System funds 
its lending operations, including:
    (i) System banks' authority to borrow and issue notes, bonds, 
debentures, and other obligations and limitations thereof under section 
4.2 of the Act;
    (ii) The types of debt obligations that may be issued, the manner 
and form in which they are issued, the terms and conditions, rights of 
securities holders, risk factors, use of proceeds, tax effects of 
holding securities, market information, and other pertinent 
information;
    (iii) For each of the types of obligations that may be issued, 
whether it is insured, and the extent of any joint and several 
liability for the obligations;
    (iv) Any applicable statutory and regulatory requirements affecting 
a bank's ability to incur debt.
    (2) Describe agreements among System banks and the Funding 
Corporation affecting a bank's ability to incur debt.
    (3) Describe agreements among System institutions regarding capital 
preservation, loss sharing, or any other forms of financial assistance.
    (e) Description of capital. (1) Describe the capitalization of the 
System, including capital structure, types of stock and participation 
certificates, and voting rights of holders of stock and participation 
certificates.
    (2) Describe the statutory requirement that a borrower purchase 
stock as a condition of obtaining a loan; how such stock is purchased, 
transferred, and retired; and how earnings are distributed.
    (3) Describe any statutory or other authority of a System 
institution to require additional capital contributions from 
stockholders.
    (4) Describe regulatory minimum permanent capital standards and 
capital adequacy requirements for banks and associations. State the 
number of institutions, if any, categorized by banks and associations, 
that are not currently in compliance with such standards and include a 
brief discussion of the reasons for the noncompliance.
    (5) Describe any statutory and regulatory restrictions on 
retirement of stock and distribution of earnings by System 
institutions. State the number of System institutions, if any, 
categorized by banks and associations, that are currently affected by 
such restrictions and provide a summary of the causes of such 
prohibitions.
    (f) Selected financial data. At a minimum, furnish the following 
combined financial data of the System in comparative columnar form for 
each of the last 5 fiscal years.
    (1) Balance sheet. (i) Loans.
    (ii) Allowance for losses.
    (iii) Net loans.
    (iv) Cash and investments.
    (v) Other property owned.
    (vi) Total assets.
    (vii) FCS debt obligations and other bonds, notes, debentures, and 
obligations, presented by type, with a descriptive title.
    (viii) Total liabilities.
    (ix) Capital stock and surplus.
    (2) Statement of income. (i) Net interest income.
    (ii) Net other expenses.
    (iii) Provision for loan losses.
    (iv) Extraordinary items.
    (v) Provision for income taxes.
    (vi) Net income (loss).
    (3) Key financial ratios. (i) Return on average assets.
    (ii) Return on average capital stock and surplus.
    (iii) Net interest income as a percentage of average earning 
assets.
    (iv) Net loan chargeoffs as a percentage of average loans.
    (v) Allowance for loan losses as a percentage of gross loans 
outstanding at year end.
    (vi) Capital stock and surplus as a percentage of total assets at 
yearend.
    (vii) Debt to capital stock and surplus at yearend.
    (g) Discussion and analysis. Fully discuss any material aspects of 
financial condition, changes in financial condition, and results of 
operations of System institutions, on a combined basis, during the last 
3 fiscal years or such other time periods specified in the following 
paragraphs of this section. Identify favorable and unfavorable trends, 
and significant events or uncertainties necessary to understand the 
financial condition and results of operations of the System. At a 
minimum, the discussion shall include the following:
    (1) Loan portfolio. (i) Describe the loan portfolio of the System 
by major loan purpose category, indicating the amount and approximate 
percentage of the total dollar portfolio represented by each major 
category.
    (ii) Disclose the amount of loans outstanding that were used to 
finance the purchases of stock or other equities of System 
institutions, if any.
    (iii) Risk exposure. (A) Describe and analyze all high risk assets 
and other property owned, including an analysis of the nature and 
extent of significant credit risks and potential credit risk within the 
loan portfolio and of other information that could adversely affect the 
loan portfolio and other property owned.
    (B) Provide an analysis of the allowance for loan losses that 
includes the ratios of the allowance to loans (outstanding at yearend) 
and net chargeoffs to average loans, and a discussion of the adequacy 
of the allowance for losses to absorb the risk inherent in the loan 
portfolio and the basis for such determination.
    (iv) Secondary market activities. (A) Describe and quantify System 
institutions' secondary market activities and the risk involved in such 
activities.
    (B) Provide an analysis of historical loss experience and the 
amount provided for risk of loss associated with secondary market 
activities, if any.
    (2) Results of operations. (i) Describe, on a comparative basis, 
changes in the major components of net interest income. Include a 
discussion of significant factors that contributed to the changes and 
quantify the amount of change(s) due to an increase or decrease in 
volume and the amount due to changes in interest rates earned and paid, 
based on averages for each period.
    (ii) Describe any unusual or infrequent events or transactions or 
any significant economic changes that materially affected reported 
income and, in each case, indicate the extent to which income was so 
affected.
    (iii) Discuss the factors underlying any material changes in the 
return on average assets and return on average capital stock and 
surplus.
    (iv) Describe, on a comparative basis, the major components of 
operating expense and any other significant components of income or 
expense, indicating the reasons for significant increases or decreases, 
if any.
    (v) Describe any known trends or uncertainties that have had, or 
that are reasonably expected to have, a material impact on net interest 
income or net income. Disclose any known events that will cause a 
material change in the relationship between costs and revenues.
    (vi) Explain the changes that have taken place, by major components 
on a comparative basis, in the Insurance Fund assets and related 
restricted capital and how such changes affected reported income.
    (3) Funding sources and liquidity.--(i) Funding sources. (A) 
Provide in tabular form the component amounts and the total amount of 
FCS debt obligations, debt obligations issued by banks individually, 
and Financial Assistance Corporation debt obligations outstanding at 
yearend for each of the past 2 fiscal years. List debt obligations 
issued by System institutions separately by type, also separating 
insured obligations from uninsured obligations. For each type of debt 
obligation listed provide the following, at a minimum, for each fiscal 
year listed:
    (1) The beginning balance, the total amount of debt issued, the 
total amount of debt retired, and the yearend balance;
    (2) The average maturities and the average interest rates on debt 
outstanding at yearend, and the average maturities and the average 
interest rates of new debt issued during the year.
    (B) Summarize any other sources of funds, including lines of credit 
with commercial lenders, and their terms.
    (ii) Liquidity. (A) Describe any FCA regulations or System policies 
with regard to liquidity and liquidity reserves.
    (B) Identify any known trends, demands, commitments, events, or 
uncertainties that will result in, or that are reasonably likely to 
result in, System liquidity increasing or decreasing in any material 
way. If a material liquidity deficiency is identified, indicate the 
course of action that has been taken or is proposed to be taken by 
management of affected System institutions to remedy the deficiency.
    (iii) Investment. Briefly describe the System's investment policies 
and objectives, any regulatory limitations thereon, and the contents of 
the System's existing investment portfolio.
    (iv) Interest rate sensitivity. (A) Briefly describe System asset 
and liability management practices, including interest rate risk 
measurement systems, and methods used to control interest rate risk, 
such as the use of investments, derivatives, and other off-balance-
sheet transactions.
    (B) Provide an analysis of the System's exposure to interest rate 
risk and its ability to control such risk.
    (4) Capital resources. (i) Describe any material commitments to 
purchase capital assets and the anticipated sources of funding.
    (ii) Describe any material trends, favorable or unfavorable, in the 
System's capital resources, including any material changes in the mix 
of capital and debt, the relative cost of capital resources, and any 
off-balance-sheet financing arrangements.
    (iii) Provide a general discussion of any trends, commitments, 
contingencies, or events that are reasonably likely to have a material 
adverse effect upon System institutions' ability to comply with 
regulatory capital standards.
    (5) Insurance Fund. (i) Describe the purposes for which 
expenditures from the Insurance Fund may be made and the statutory 
requirements for making such expenditures.
    (ii) Provide a schedule itemizing the amount of Insurance Fund 
assets that have been specifically identified by the FCSIC for payment 
of estimated obligations of the FCSIC and the amount of the fund assets 
for which no specific use has been identified or designated by the 
FCSIC.
    (iii) Explain how FCSIC expenditures or designations of Insurance 
Fund assets for payment of future obligations affect the combined 
assets and capital of the System, and quantify the effect, if any.
    (6) Instructions for discussion and analysis. (i) The purpose of 
the discussion and analysis (D&A) shall be to provide to investors and 
other users information relevant to an assessment of the combined 
financial condition and results of operations of System institutions as 
determined by evaluating the amounts and certainty of cashflows from 
operations and from outside sources. The information provided pursuant 
to this section need only include that which is available to System 
institutions and which does not clearly appear in the combined 
financial statements.
    (ii) The D&A of the financial statements and other statistical data 
shall be presented in a manner designed to enhance a reader's 
understanding of the combined financial condition, results of 
operations, cashflows, and changes in capital of System institutions. 
Unless otherwise specified in Sec. 630.20(g), the discussion shall 
cover the 3-year period covered by the financial statements and shall 
use year-to year comparisons or any other understandable format. Where 
trend information is relevant, reference to the 5-year selected 
financial data required by paragraph (f) of this section may be 
necessary.
    (iii) The D&A shall focus specifically on material events and 
uncertainties known at the time of reporting that would cause reported 
financial information not to be necessarily indicative of future 
operating results or of future financial condition. This should include 
descriptions and amounts of:
    (A) Matters that would have an impact on future operations but that 
have not had an impact in the past; and
    (B) Matters that have had an impact on reported operations but are 
not expected to have an impact on future operations.
    (h) Directors and management--(1) Board of directors. Briefly 
describe the composition of boards of directors of the disclosure 
entities. List the name of each director of such entities, including 
the director's term of office and principal occupation during the past 
5 years, or state that such information is available upon request 
pursuant to Sec. 630.3(f).
    (2) Management. List the names of chief executive officers and 
presidents of disclosure entities, including position title, length of 
service at current position, and positions held during the past 5 
years.
    (i) Compensation of directors and senior officers. State that 
information on the compensation of directors and senior officers of 
System banks is contained in each bank's annual report to shareholders 
and that the annual report of each bank is available to investors upon 
request pursuant to Sec. 630.3(f).
    (j) Related party transactions. (1) Briefly describe how System 
institutions, in the ordinary course of business and subject to 
regulation by the FCA, may enter into loan transactions with related 
parties, including their directors, officers, and employees, the 
immediate family members (as defined in Sec. 620.1(e) of this chapter) 
of such persons, and any organizations with which such persons and 
their immediate family members are affiliated.
    (2) On a comparative basis for each of the fiscal years covered by 
the balance sheet, state the aggregate amount of the following:
    (i) Loans made to related parties;
    (ii) Loans outstanding at yearend to related parties;
    (iii) Loans outstanding at yearend to related parties that are made 
on more favorable terms than those prevailing at the time for 
comparable transactions with unrelated borrowers; and
    (iv) Loans outstanding at yearend to related parties that involve 
more than a normal risk of collectibility (as defined in Sec. 620.1(i) 
of this chapter).
    (k) Relationship with independent public accountant. If a change in 
the accountant who has previously examined and expressed an opinion on 
the Systemwide combined financial statements has taken place since the 
last annual report to investors or if a disagreement with an accountant 
has occurred that the Funding Corporation would be required to report 
to the FCA under part 621 of this chapter, disclose the information 
required by Sec. 621.4(c) and (d) of this chapter.
    (l) Financial statements. Furnish Systemwide combined financial 
statements and related footnotes that have been prepared in accordance 
with generally accepted accounting principles (GAAP) and instructions 
and other requirements of the Farm Credit Administration and that have 
been audited in accordance with generally accepted auditing standards 
by a qualified public accountant (as defined in Sec. 621.2(i) of this 
chapter) and an opinion expressed thereon. The Systemwide combined 
financial statements shall include the following:
    (1) A balance sheet as of the end of each of the 2 most recent 
fiscal years; and
    (2) Statements of income, statements of changes in capital stock 
and surplus (or, if applicable, statements of changes in protected 
borrower capital and capital stock and surplus), and statements of cash 
flows for each of the 3 most recent fiscal years.
    (m) Supplemental information. (1) Furnish supplemental information 
regarding the components of the Systemwide combined financial 
statements that has been prepared in accordance with the requirements 
of this paragraph and instructions of the FCA and that has been 
examined by a qualified public accountant for compliance with FCA 
regulations and guidelines and an opinion expressed thereon.
    (2) At a minimum, the supplemental information shall include the 
following:
    (i) Supplemental balance sheet information as of the end of the 
most recent fiscal year; and
    (ii) Supplemental income statement information for the most 
recently completed fiscal year.
    (3) At a minimum, the report shall present supplemental information 
showing combined financial data for the following components, on a 
stand-alone basis:
    (i) Banks;
    (ii) Associations;
    (iii) Financial Assistance Corporation;
    (iv) Combined financial data of the System without Insurance Fund;
    (v) The Insurance Fund and related combination entries; and
    (vi) Combined financial data of the System with Insurance Fund.
    (4) The supplemental information shall be presented in a columnar 
format and include, at a minimum, the selected financial data listed in 
the schedules in Appendix A of this part. The prescribed components 
shall be designated as column headings and they may be abbreviated in 
the schedules. The schedules may be presented separately or in 
accompanying notes to the Systemwide combined financial statements and 
shall contain additional disclosures sufficient to explain the basis of 
the presentation of the supplemental information, the components, and 
any adjustments contained therein to enable readers to understand the 
effect of each component on the Systemwide combined financial 
statements.
    (n) List the names of the System Audit Committee members in the 
report to investors.
    (o) The report to investors shall include a cross-reference sheet 
setting forth the item numbers and captions in the same order as 
prescribed in this subpart and the page or pages on which the 
corresponding information appears.

Subpart C--Quarterly Reports to Investors


Sec. 630.40  Contents of the quarterly report to investors.

    (a) General. The quarterly report to investors shall contain the 
information specified in this section along with any other material 
information necessary to make the required disclosures, in light of the 
circumstances under which they are made, not misleading. The quarterly 
report must be presented in a format that is easily understandable and 
not misleading.
    (b) Rules for condensation. For purposes of this subpart, major 
captions to be provided in interim financial statements are the same as 
those provided in the financial statements contained in the annual 
report to investors, except that the financial statements included in 
the quarterly report may be condensed into major captions in accordance 
with the rules prescribed under this paragraph.
    (1) Interim balance sheets. When any major balance sheet caption is 
less than 10 percent of total assets and the amount in the caption has 
not increased or decreased by more than 25 percent since the end of the 
preceding fiscal year, the caption may be combined with others.
    (2) Interim statements of income. When any major income statement 
caption is less than 15 percent of average net income for the 3 most 
recent fiscal years and the amount in the caption has not increased or 
decreased by more than 20 percent since the corresponding interim 
period of the preceding fiscal year, the caption may be combined with 
others. In calculating average net income, loss years should be 
excluded. If losses were incurred in each of the 3 most recent fiscal 
years, the average loss shall be used for purposes of this test.
    (3) The interim financial information shall include disclosure 
either on the face of the financial statements or in accompanying 
footnotes sufficient to make the interim information presented not 
misleading. It may be presumed that users of the interim financial 
information have read or have access to the audited financial 
statements for the preceding fiscal year and the adequacy of additional 
disclosure needed for a fair presentation may be determined in that 
context. Accordingly, footnote disclosure that would substantially 
duplicate the disclosure contained in the most recent audited financial 
statements (such as a statement of significant accounting policies and 
practices) and details of accounts that have not changed significantly 
in amount or composition since the end of the most recently completed 
fiscal year may be omitted.
    (4) Interim reports shall disclose events that have occurred 
subsequent to the end of the most recently completed fiscal year that 
have a material impact on the System. Disclosures should encompass, for 
example, significant changes since the end of the most recently 
completed fiscal year in such items as accounting principles and 
practices, estimates used in the preparation of financial statements, 
status of long-term contracts, capitalization, significant new 
indebtedness or modification of existing financing agreements, 
financial assistance received, significant business combinations and 
liquidations of System institutions, and terminations of System 
institution status. Notwithstanding the above, where material 
contingencies exist, disclosure of such matters shall be provided even 
though a significant change since yearend may not have occurred.
    (5) In addition to meeting the reporting requirements specified by 
existing accounting pronouncements for accounting changes, state the 
date of any material accounting change and the reasons for making it. A 
letter from the persons who verify the System's financial statements 
shall be included as an exhibit to the reports filed with the FCA, 
indicating whether or not the change is to an alternative principle 
that in their judgment is preferable under the circumstances, except 
that no such letter need be filed when the change is made in response 
to a standard adopted by the Financial Accounting Standards Board or 
other authoritative body that requires such change.
    (6) Any material prior period adjustment made during any period 
covered by the interim financial statements shall be disclosed, 
together with its effect upon net income and upon the balance of 
surplus for any prior period included. If results of operations for any 
period presented have been adjusted retroactively by such an item 
subsequent to the initial reporting of such period, similar disclosure 
of the effect of the change shall be made.
    (7) Interim financial statements furnished shall reflect all 
adjustments that are necessary to a fair statement of the results for 
the interim periods presented. A statement to that effect shall be 
included. Furnish any material information necessary to make the 
information called for not misleading, such as a statement that the 
results for interim periods are not necessarily indicative of results 
to be expected for the year.
    (8) If any amount that would otherwise be required to be shown by 
this section with respect to any item is not material, it need not be 
separately shown. The combination of insignificant items is permitted.
    (c) Discussion and analysis of interim financial condition and 
results of operations. Discuss any material changes to the information 
disclosed to investors pursuant to Sec. 630.20(g) that have occurred 
during the periods specified in paragraphs (d)(1) and (d)(2) of this 
section. Provide any additional information needed to enable the reader 
to assess material changes in financial condition and results of 
operations between the periods specified in paragraphs (d)(1) and 
(d)(2) of this section.
    (1) Material changes in financial condition. Discuss any material 
changes in financial condition from the end of the preceding fiscal 
year to the date of the most recent interim balance sheet provided.
    (2) Material changes in results of operations. Discuss any material 
changes in the combined results of operations of the System with 
respect to the most recent fiscal year-to-date period for which an 
income statement is provided and the corresponding year-to-date period 
of the preceding fiscal year. Such discussion also shall cover material 
changes with respect to that fiscal quarter and the corresponding 
fiscal quarter in the preceding fiscal year.
    (d) Financial statements. Interim combined financial statements 
shall be provided in the quarterly report to investors as set forth 
below:
    (1) An interim balance sheet as of the end of the most recent 
fiscal quarter and a balance sheet as of the end of the preceding 
fiscal year.
    (2) Interim statements of income for the most recent fiscal 
quarter, for the period between the end of the preceding fiscal year 
and the end of the most recent fiscal quarter, and for the comparable 
periods for the previous fiscal year.
    (3) Interim statements of changes in capital stock and surplus (or, 
if applicable, interim statements of changes in protected borrower 
capital and capital stock and surplus) for the period between the end 
of the preceding fiscal year and the end of the most recent fiscal 
quarter, and for the comparable period for the preceding fiscal year.
    (4) Interim statements of cash flows for the period between the end 
of the preceding fiscal year and the end of the most recent fiscal 
quarter, and for the comparable period for the preceding fiscal year.
    (e) Supplemental information. The interim report shall present 
supplemental information in accordance with the requirements of 
Sec. 630.20 (m)(3) and (m)(4), as well as other requirements and 
instructions of the FCA, and shall include, at a minimum, the 
following:
    (1) Supplemental balance sheet information as of the end of the 
most recent quarter; and
    (2) Supplemental income statement information for the period 
between the end of the preceding fiscal year and the end of the most 
recent fiscal quarter.
    (f) Review by independent public accountant. Unless otherwise 
ordered by the FCA as a result of a supervisory action, the interim 
financial statements and supplemental information need not be audited 
or reviewed by an independent public accountant prior to filing. If, 
however, a review of the report is made in accordance with the 
established professional standards and procedures for such a review, a 
statement that the independent accountant has performed such a review 
may be included. If such a statement is made, the report of the 
independent accountant on such review shall accompany the interim 
financial information.

Appendix A to Part 630--Supplemental Information Disclosure 
Guidelines

    Supplemental information required by Secs. 630.20(m) and 
630.40(e) shall contain, at a minimum, the current year financial 
data for the components listed in the following tables and be 
presented in the columnar format illustrated in the following 
tables:

                                                    Table A.--Supplemental Balance Sheet Information                                                    
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       Insurance fund                   
                                                                    Financial                       Combined without     and related      Combined with 
                                   Banks\1\    Associations\2\     assistance       Eliminations        insurance        combination     insurance fund 
                                                                   corporation                          fund\3\            entries                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash and investments:                                                                                                                                   
  Net loans                                                                                                                                             
    Restricted assets                                                                                                                                   
Other assets...................  ...........  ................  ................  ................  ................  ................  ................
      Total assets.............  ...........  ................  ................  ................  ................  ................  ................
Total liabilities:                                                                                                                                      
  Protected borrower capital\4\                                                                                                                         
    Restricted capital                                                                                                                                  
Capital stock and surplus......  ...........  ................  ................  ................  ................  ................  ................
      Total liabilities,                                                                                                                                
       protected borrower                                                                                                                               
       capital, and capital                                                                                                                             
       stock and surplus.......  ...........  ................  ................  ................  ................  ................  ................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\Provide bank-only combined financial data of all FCS banks.                                                                                          
\2\Provide association-only combined financial data of all FCS associations.                                                                            
\3\Provide the combined financial data of all columns on the left.                                                                                      
\4\Any item that is no longer applicable, e.g., protected borrower stock, may be omitted.                                                               


                                                   Table B--Supplemental Income Statement Information                                                   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       Insurance fund                   
                                                                    Financial                       Combined without     and related      Combined with 
                                   Banks\1\    Associations\2\     assistance       Eliminations        insurance        combination     insurance fund 
                                                                   corporation                           fund\3\           entries                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net interest income:                                                                                                                                    
  Provision for loan losses:                                                                                                                            
    Other income:                                                                                                                                       
Other expenses.................  ...........  ................  ................  ................  ................  ................  ................
  Net income...................  ...........  ................  ................  ................  ................  ................  ................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\Provide bank-only combined financial data of all FCS banks.                                                                                          
\2\Provide association-only combined financial data of all FCS associations.                                                                            
\3\Provide the combined financial data of all columns on the left.                                                                                      

    Dated: January 27, 1994.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 94-2242 Filed 2-3-94; 8:45 am]
BILLING CODE 6705-01-P