[Federal Register Volume 59, Number 175 (Monday, September 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22221]
[[Page Unknown]]
[Federal Register: September 12, 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: Final rule.
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SUMMARY: The Farm Credit Administration (FCA), by the FCA Board, adopts
new final regulations governing the Farm Credit System's (FCS or
System) preparation and reporting of Systemwide financial information
to investors. The final rule requires that each bank of the System, the
Federal Farm Credit Banks Funding Corporation (Funding Corporation),
and the Farm Credit System Financial Assistance Corporation (Financial
Assistance Corporation) jointly publish periodic reports to investors
and potential investors in Systemwide debt obligations and consolidated
bank debt obligations of the Farm Credit System (FCS debt obligations).
The purpose of the rule is to 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 required report to
investors must present Systemwide combined financial statements,
supplemental financial statement information, and related analyses
pertaining to System institutions on a combined basis. The final rule
covers Systemwide financial and non-financial information now regularly
disclosed by the Funding Corporation in annual and quarterly
information statements and press releases.
The final regulations generally parallel the existing Farm Credit
System Disclosure Program (System Disclosure Program) and should not
impose any significant additional burdens on System institutions.
Consistent with the System Disclosure Program, the final rule preserves
the existing reporting relationship between a System bank and its
related associations.
EFFECTIVE DATE: The regulations shall become effective upon the
expiration of 30 days after publication in the Federal Register during
which either or both Houses of Congress are in session. Notice of the
effective date will be published in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Tong-Ching Chang, Staff Accountant, Policy Development and Planning
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
Under the System Disclosure Program, the Funding Corporation, on
behalf of the System, periodically distributes to investors a
disclosure document containing Systemwide financial information. The
System institutions that participate in the System Disclosure Program
(i.e., each of the System banks, the Funding Corporation, and the
Financial Assistance Corporation\1\) jointly publish the Report to
Investors of the Farm Credit System (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, its debt
obligations, and the environment in which it operates. Except for the
quarter that coincides with the end of the fiscal year, System
institutions also jointly publish a quarterly Information Statement. In
connection with the sale of debt securities, the Funding Corporation
routinely distributes the FCS Report and quarterly Information
Statement to the investment dealers and dealer banks (selling group)
that sell FCS debt securities. The FCA currently has no regulations
that specifically govern the System's disclosure of Systemwide
financial information to investors.
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\1\Since the board of the Funding Corporation is also the board
of the Financial Assistance Corporation, the Financial Assistance
Corporation's participation in the System Disclosure Program is
implied.
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II. Statutory Authority and Proposed Rulemaking
Under section 5.17(a)(8) of the Farm Credit Act of 1971, as amended
(1971 Act), 12 U.S.C. 2252(a)(8), the FCA is authorized 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. * * *'' On February 4, 1994, the
FCA proposed regulations for a new part 630, Disclosure to Investors in
Systemwide and Consolidated Bank Debt Obligations of the Farm Credit
System, to govern the System's preparation and reporting of Systemwide
financial information to investors. (59 FR 5341) In general, the
proposed regulations reflected the current division of responsibilities
among the institutions participating in the System Disclosure Program,
and included requirements for disclosures similar to those contained in
the Information Statements currently published by the System. The
institutions participating in the System Disclosure Program were
designated as the ``disclosure entities'' in the proposed regulations,
in recognition of their shared responsibility for disclosure of
Systemwide financial information to investors and the general public.
III. Discussion of the Final Rule and Summary of Public Comments
The FCA is adopting part 630 largely as proposed. The final rule
includes changes and clarifications to address comments received on the
proposed rule. As in the proposed regulations, the final regulations
(1) Require the System to publish annual and quarterly reports to
investors; (2) delineate responsibilities relating to the preparation
of the report; (3) reinforce internal controls over 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. The final rule will
prevent any inconsistency between Systemwide disclosure to investors
and FCA regulations governing accounting and reporting standards and
individual System institution disclosure to shareholders. These new FCA
regulations will apply to the information currently contained in the
System's Information Statements and press releases that contain
Systemwide financial information. The final rule also implements
section 514 of the Farm Credit Banks and Associations Safety and
Soundness Act of 1992, Pub. L. 102-552 (1992 Act), which requires
adequate disclosure to investors of financial and conflict-of-interest
information.
The final regulations will 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. This is consistent with
the FCA Board's regulatory policy to ``Protect the public, the
investors, and the customer/shareholders of the System in an effort to
create an environment whereby customer/shareholders and investors can
take advantage of the System's strength and rely on its future
viability with confidence.'' (See FCA Board Policy Statement on
Regulatory Philosophy, 59 FR 32189, June 22, 1994)
The FCA received six comment letters on the proposed regulations
during the comment period, which expired on April 20, 1994. One letter
was submitted by the Farm Credit Council (FCC) on behalf of its
membership. The FCC comments were the product of input from a number of
sources, including System banks, the System's Accounting Standards Work
Group, and the Funding Corporation. The FCC recognized and concurred
with the FCA's efforts to ensure that timely and accurate Systemwide
financial information continues to be disclosed to investors and
potential investors in FCS debt securities. Noting the System's general
support for the proposed regulations, the FCC submitted comments on
several provisions of the proposed regulations in the body of its
letter and provided technical comments on other provisions in an
attached appendix.
The Funding Corporation, the Farm Credit Bank of Texas (FCBT), and
the Farm Credit Bank of Baltimore (FCBB) each submitted a letter
addressing specific issues. The Funding Corporation commented
concerning its access to FCA Examination Reports of System banks and
associations. The FCBT addressed the same issue in its letter. In
addition, the FCBT urged that the FCA prohibit directors of System
institutions from serving on the System Audit Committee. While
endorsing the comments submitted by the FCC, the FCBB urged that the
FCA clarify, for purposes of Systemwide disclosure, the treatment of
the FCBB's wholly-owned subsidiary, the Farm Credit Finance Corporation
of Puerto Rico.
The American Institute of Certified Public Accountants (AICPA) and
Price Waterhouse, the external auditor currently engaged to provide an
opinion on the Systemwide combined financial statements, also commented
on the proposed regulations. Both of these commenters suggested that
the requirements for an accountant's opinion on supplemental
information be clarified. The AICPA also commented on issues concerning
the definition of ``material,'' the due dates of the reports to
investors, and the requirement for filing a letter with the FCA
explaining the preferability of an accounting change.
After the FCA published the proposed rule, the General Accounting
Office (GAO) issued a report entitled ``Farm Credit System: Repayment
of Federal Assistance and Competitive Position'' (GAO/GGD-94-39, dated
March 10, 1994), which recommended that the FCA require the System to
exclude the Farm Credit Insurance Fund (Insurance Fund) from the
System's combined financial statements because of the GAO's view that
exclusion is the most appropriate accounting treatment. On May 10,
1994, the FCA responded to the GAO's recommendation in a letter to
Congressional committees which described the FCA's approach to
Insurance Fund reporting as reflected in this rulemaking. The final
regulations require that the System prepare the Systemwide combined
financial statements in accordance with generally accepted accounting
principles (GAAP), provide supplemental financial statement data with
and without the Insurance Fund, and give a thorough discussion and
analysis of the fund in the report to investors. The FCA believes that
these regulations, as adopted, will ensure that investors are provided
with meaningful information regarding the Insurance Fund and the effect
of the fund on the System's financial position.
Provided below are a section-by-section analysis of changes to the
proposed rule and FCA responses to the comments received.
IV. Section-by-Section Analysis of Public Comments
A. Section 630.2--Definitions
1. Section 630.2(b) and (h)--Definitions of ``Combined Financial
Statements'' and ``Systemwide Combined Financial Statements''
For preparation of the Systemwide combined financial statements,
the final rule requires that each bank provide the Funding Corporation
with bank-only financial data as well as with combined financial data
of the bank and its related associations. The FCC and the FCBB
commented that the proposed regulations should be clarified to address
how the consolidated financial data of a bank and its wholly-owned
subsidiaries should be reported in the Systemwide disclosure.
To distinguish financial data prepared on a combined basis from
that prepared on a consolidated basis, a new definition of ``combined
financial statements'' has been added in Sec. 630.2(b) of the final
rule. The definition is added to clarify that combined financial
statements are prepared by a group of affiliated entities that share
the same financial interest regardless of whether any of the entities
has the ability to exercise control over another. In contrast,
consolidated financial statements are prepared by a parent-entity to
include the financial data of subsidiaries that are under its
``control.''
To prevent this newly added definition of ``combined financial
statements'' from being confused with the definition of ``Systemwide
combined financial statements'' contained in Sec. 630.2(g) of the
proposed rule, proposed Sec. 630.2(g) has been simplified to define
``Systemwide combined financial statements'' as the combined financial
statements required by this part. Proposed Sec. 630.2(g) also is
redesignated as Sec. 630.2(h). The proposed language specifying the
purpose for which the Systemwide combined financial statements are
prepared has been moved and combined with provisions pertinent to
financial statements in Sec. 630.20(l).
2. Proposed Definition of ``Material''
Section 630.2(f) of the proposed regulations provided a definition
of ``material'' similar to that found in Securities and Exchange
Commission (SEC) Rule 405. The FCA received two comments on the
proposed definition of ``material.'' The AICPA asserted that defining
``material'' other than as established in accounting literature would
be confusing and inconsistent if audits of the Systemwide combined
financial statements are required to be performed in accordance with
generally accepted auditing standards (GAAS). The AICPA recommended
either deleting the proposed definition of ``material'' or amending it
to refer to the materiality definition in GAAS or in Financial
Accounting Standards Board Statement of Financial Accounting Concepts
No. 2, Qualitative Characteristics of Accounting Information (FAC No.
2).
The FCA notes that the definition of ``material'' in the proposed
rule was intended to govern information presented outside the basic
financial statements.2 Regardless of the proposed definition, the
Systemwide combined financial statements required by this part are
subject to materiality criteria established in GAAP. Specifically,
pursuant to Sec. 630.3(c),3 the Systemwide combined financial
statements must be prepared in accordance with the accounting and
reporting standards set forth in part 621 of this chapter. Because
Sec. 621.2(g) defines the term ``material'' in accordance with FAC No.
2, the GAAP definition of ``material'' contained in part 621 of this
chapter will govern the System's preparation of Systemwide combined
financial statements. Consequently, materiality judgments for
preparation of the Systemwide combined financial statements must be
made in accordance with GAAP.
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\2\Information presented ``outside'' the basic financial
statements refers to information that is not considered necessary
for presentation of financial position, results of operations, or
cashflows in conformity with GAAP, e.g., management's discussion and
analysis.
\3\Section 630.3(c) provides that ``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.''
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The FCC recommended that the proposed definition of ``material'' be
expanded to recognize the different levels of reporting and disclosure
responsibilities of the System banks and the Funding Corporation. The
FCC suggested two separate definitions of ``material.'' One of the
suggested definitions would apply to the Banks' reporting
responsibilities to the Funding Corporation and the second would apply
to the Funding Corporation's disclosure responsibilities on a
Systemwide basis as subject to antifraud provisions of the Federal
securities laws.
Under GAAP, individual materiality judgments are made on a case-by-
case basis and materiality is measured at each reporting level in light
of surrounding circumstances. The GAAP position is supported by FAC No.
2 and recognizes that no general standards of materiality could be
formulated to take into account all the considerations that enter into
an experienced human judgment. In line with this approach to the
concept of materiality, the FCA believes that it is unnecessary to
include, as suggested by the FCC, two separate definitions of
``material.''
Materiality judgments regarding information presented outside the
financial statements, while not covered by the GAAP definition, are
governed by current standards of materiality under the securities
laws.\4\ The FCA believes that the case law standard of materiality
provides sufficient guidance to the System in preparing information to
be presented outside the financial statements. To avoid any confusion
between the GAAP materiality standard which governs preparation of the
financial statements, and the standard of materiality enunciated in the
case law, which governs information presented outside of the financial
statements, the proposed definition of ``material'' has been eliminated
from the final rule.
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\4\See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976) and cases following.
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3. Section 630.2(g)--Definition of ``Report to Investors''
The FCC commented that, although the preamble clarifies that the
term ``report to investors'' used throughout the proposed rule is
intended to mean the Information Statement currently published by the
Funding Corporation, confusion exists as to whether the term refers to
the FCS Report or the Information Statement. Because the FCS Report
currently prepared by the Funding Corporation contains certain
information that is not part of the System Disclosure Program, and for
which System banks are not responsible, the FCC suggested that all
references to the ``report to investors'' in the regulation be replaced
with the term ``Information Statement.''
The FCA does not intend to regulate the name of the report required
by this part. The term ``report to investors'' used in the proposed
rule is merely a general reference to the disclosure document required
by this part. However, in response to the FCC's comment, a new
definition of ``report to investors'' has been added as Sec. 630.2(g)
of the final rule to clarify that the term ``report to investors''
referred to in the regulations means ``a report that presents the
Systemwide combined financial statements, supplemental financial
statement information, and related financial and nonfinancial
information pertaining to the System required by this part.'' Under
this provision, a document containing only information that is not
required by this part and that is clearly identified as separate from
the required report will not be subject to this final rule.
B. Section 630.3--Publishing and Filing the Report to Investors
1. Section 630.3(a)
The FCA received two comments on Sec. 630.3(a), which establishes
the due dates for publishing the annual and quarterly reports to
investors. The FCC opined that the word ``publish'' in Sec. 630.3(a) is
subject to interpretation, and could mean printed, mailed, or received
by the investors. The commenter suggested that the word ``publish'' be
replaced with the phrase ``make available.''
Section 630.3(a) requires not only that the System ``make
available'' the report to investors by the dates specified in
Sec. 630.3(a)(1) and (a)(2) but that the System take affirmative steps
to distribute the report to investors. One such step, as noted in the
rule proposal, is distribution of sufficient copies of the report to
the selling group dealers for subsequent distribution to interested
investors. The FCA believes that the suggested substitution of the
phrase ``make available'' may discourage exploration of other report
distribution techniques and, accordingly, has retained the word
``publish'' in Sec. 630.3(a).
The AICPA also commented on Sec. 630.3(a), suggesting that the FCA
reconsider whether the due dates prescribed in Sec. 630.3(a) provide
sufficient time for preparation of the combined information from
various entities within the System. The FCA believes that the due dates
established in Sec. 630.3(a) for publishing and filing an annual report
within 90 days after the end of each fiscal year and a quarterly report
within 60 days after the end of each reporting quarter are adequate.
The 90-day requirement for publishing the annual report to investors is
consistent with industry practice. The 60-day requirement for
publishing the quarterly report permits the Funding Corporation to
publish the report 15 days after the constituent System banks and
associations have filed their quarterly reports with the FCA pursuant
to part 620 of this chapter. In addition, in the event the Funding
Corporation is unable to prepare and publish the report to investors
because one or more banks fail to fulfill their responsibilities for
providing information to the Funding Corporation in accordance with
Sec. 630.4(c), Sec. 630.4(a)(7) authorizes the Funding Corporation to
request the FCA to extend the due date for publishing the report to
investors. Accordingly, the FCA has adopted the due dates established
in Sec. 630.3(a) as proposed.
2. Section 630.3(f)--Banks' Joint and Several Liability for
Consolidated Bank Debt Obligations
Section 630.3(f) requires that each report to investors include a
statement that Systemwide debt securities and consolidated bank debt
obligations are joint and several liabilities of individual banks. The
FCC questioned the statutory basis for this required statement as
regards individual bank joint and several liability for consolidated
bank debt obligations. The FCC requested that the FCA provide a legal
analysis of the statutory basis and extend the comment period for this
provision.
The FCA believes that no extensive analysis is required to justify
the position that consolidated bank debt obligations are joint and
several liabilities of individual banks. The basis for this disclosure
is found in section 4.4 of the 1971 Act, which clearly establishes
joint and several liability of all banks for consolidated and
Systemwide debt regardless of the title of the 1971 Act under which the
bank operates. The FCA notes that the 75-day comment period on these
regulations included a 30-day extension of the original comment period
and believes that another extension of the comment period is
unnecessary. The FCA has adopted Sec. 630.3(f) as proposed.
C. Section 630.4--Responsibilities for Preparing the Report to
Investors
1. Section 630.4(a)(2)(ii), (a)(3), and (a)(9)--Report of Examination
Proposed Sec. 630.4(a)(9) authorizes the Funding Corporation to
make a request to the FCA regarding the content of the latest Reports
of Examination of any banks and related associations if the information
is necessary for preparation of the report to investors. Two System
institutions--the Funding Corporation and the FCBT--commented on the
proposed provision.
The Funding Corporation suggested that the regulation be expanded
so that, upon its request, each bank would be required to provide the
Funding Corporation with the Reports of Examination and related
information for the bank and related associations. The Funding
Corporation is concerned that the regulation as proposed may be
interpreted to implicitly absolve a bank of its responsibility to
report to the Funding Corporation any significant regulatory conditions
imposed or actions taken by the FCA against the bank or its related
associations.
Conversely, the FCBT supported proposed Sec. 630.4(a)(9) as written
on the basis that it maintains an appropriate balance between the
confidentiality of examination reports required by Sec. 602.205 of this
chapter and the need to provide complete and accurate disclosure to
investors required by the proposed rule. Section 630.4(c) sets forth
the responsibilities of each bank for preparation of the report to
investors. Based on Sec. 630.4(c)(5)(i), which requires that each bank
certify to the Funding Corporation that the bank has submitted all
information needed for preparation of the report to investors in
accordance with the instruction of the Funding Corporation, the FCBT
concluded that protection of the confidentiality of examination reports
will not encourage banks to avoid their primary disclosure
responsibilities with respect to material matters that may be discussed
in the examination report.
While the FCBT supports Sec. 630.4(a)(9) as proposed, it commented
that the phrase ``if necessary'' leaves doubt as to whether the Funding
Corporation should request the FCA to provide information contained in
the examination reports in all cases or simply in those cases where a
bank does not provide information contained in the examination report
to the Funding Corporation. The FCBT requested that the FCA provide a
definitive and unambiguous rule regarding the obligation to furnish
copies of these reports.
In response to the comments received, the FCA has revised
paragraphs (a)(2)(ii), (a)(3), and (a)(9) of Sec. 630.4 to clarify that
the Funding Corporation is responsible for collecting from each
disclosure entity information needed for preparation of the report to
investors, including any information that is material to a single
disclosure entity. Likewise, in accordance with the Funding
Corporation's instructions, each bank is responsible for providing the
Funding Corporation with information that is material either to the
bank or, on a combined basis, to the bank and its related associations.
If information necessary for preparation of a report to investors that
is meaningful and not misleading is not forthcoming from a bank in
accordance with the provisions of Sec. 630.4(c), the Funding
Corporation may request the FCA to provide information regarding the
content of the latest Reports of Examination of any banks or related
associations necessary to ensure that the information presented in the
report to investors is meaningful and not misleading. The FCA will then
make a determination whether to provide the Funding Corporation with
relevant information contained in the Report of Examination or, if
appropriate, the entire report.
The FCA is cognizant of both the Funding Corporation's desire to
have direct access to Reports of Examination and the FCBT's concern
with protection of the confidentiality of the Reports of Examination.
The FCA does not believe that Sec. 630.4(a)(9) would relieve a bank of
its responsibility to report any significant regulatory conditions that
would have a material impact on the information being presented in the
report to investors. It remains the primary responsibility of each bank
to provide accurate and complete information to the Funding Corporation
for preparing disclosure to investors. Each bank is required to certify
to this effect to the Funding Corporation.
Section 630.4(a)(9) is established to provide the Funding
Corporation with a contingency source for obtaining information needed
to prepare accurate and comprehensive annual and quarterly reports to
investors, while maintaining the confidentiality of the Reports of
Examination. However, such requests from the Funding Corporation to the
FCA are expected to be rare. Also, as the FCBT noted in its comment
letter, Sec. 630.5 prohibits banks from making incomplete, inaccurate,
or misleading disclosures. Failure to disclose material information
would violate these regulations and subject a bank and its officers and
directors to possible FCA enforcement action.
2. Sections 630.4(c)(1) and 630.20(m)(3)--Bank-Only Financial Data
Section 630.4(c)(1) requires that each bank provide the Funding
Corporation with information needed for preparation of the report to
investors. The FCC suggested that proposed Sec. 630.4(c)(1) be revised
to clarify that, for Systemwide disclosure, information to be provided
by each bank to the Funding Corporation includes not only financial
information, but nonfinancial information as well, including
information covering structural changes and regulatory enforcement
activity. Proposed Sec. 630.4(c)(1) has been clarified to refer to
other nonfinancial information.
The FCC also suggested that proposed Secs. 630.4(c)(1) and
630.20(m)(3)(i) be revised to clarify that it is appropriate to include
any wholly-owned subsidiary of a bank in the bank-only information. The
FCBB submitted a separate comment in which it urged the FCA to include
the FCC's suggestion in the final rule to address the treatment of the
Farm Credit Finance Corporation of Puerto Rico, a wholly-owned
subsidiary of the FCBB.
To address the concerns raised by the commenters regarding a bank's
reporting of consolidated financial data in Systemwide disclosure, the
FCA has removed the wording ``bank-only'' from Sec. 630.4(c)(1) and
clarified that, if a bank is required to prepare consolidated financial
statements in accordance with GAAP, it is appropriate that the bank
provide consolidated financial data of the bank and its consolidated
subsidiaries to the Funding Corporation. Conforming changes were also
made to Sec. 630.20(m)(3) and Appendix A of the final rule.
3. Section 630.4(d)--Responsibilities of Associations
Proposed Sec. 630.4(d) provides the banks with access to their
related associations' auditors for preparation of the report to
investors. The FCC commented that the banks sometimes may need to have
access to others, such as legal counsel. To ensure that the banks have
the ability to obtain any information necessary to accurately prepare
their submission to the Funding Corporation, the FCC suggested that the
regulation include a general statement that the banks may have access
to any material association information. Under sections 2.2 and 2.12 of
the 1971 Act, each association is subject to supervision by its related
bank. Each Farm Credit Bank is responsible for preparing the combined
financial statements of the bank and related associations for
disclosure to shareholders pursuant to part 620 of this chapter. Part
620 of this chapter does not, however, specify how the disclosure
responsibilities between banks and related associations are shared. To
clarify this issue for purposes of part 630, the FCA has expanded
proposed Sec. 630.4(d) by adding a general statement in
Sec. 630.4(d)(1) of the final rule to require that each association
provide its related bank with the information necessary to allow the
bank to provide accurate and complete information to the Funding
Corporation for preparation of the report to investors. The original
text of proposed Sec. 630.4(d) has been redesignated as
Sec. 630.4(d)(2).
D. Section 630.5--Prohibition Against Incomplete, Inaccurate, or
Misleading Disclosure
The FCC suggested that the FCA clarify that Sec. 630.5 concerning
prohibition against incomplete, inaccurate, or misleading disclosure
would apply only when the defective disclosure is material. Since
compliance with the disclosure standards of this part is generally
subject to a materiality test in any event, the FCA finds it
unnecessary to add the suggested materiality language to Sec. 630.5 and
has adopted this section as proposed.
E. Section 630.6--System Audit Committee and Bank Audit Committees
1. Section 630.6(a)(2)
Under Sec. 630.6(a)(2), officers or employees of a System
institution are prohibited from serving on the System Audit Committee
(SAC) because they are not independent of management. The FCBT urged
the FCA to prohibit System directors from serving on the SAC due to
potential conflicts of interest based on competition between System
institutions.
The FCA believes that the suggested prohibition would be disruptive
to the existing SAC and force the Funding Corporation to recruit SAC
members from outside the System. In addition, the FCA views the FCBT's
argument as relating less to conflict of interest than to concern
regarding preservation of the confidentiality of information reviewed
by the SAC. Under section 4.9 of the 1971 Act, directors and management
of System institutions are eligible to serve on the board of the
Funding Corporation. As a practical matter, any information available
to SAC members is equally available to the members of the board of the
Funding Corporation. Thus, precluding System directors from serving on
the SAC would not necessarily prevent confidential information from
being exposed to directors of other System banks. In light of these
considerations, the FCA is adopting the rule as proposed but will
monitor SAC activities for apparent inappropriate use of information.
Finally, the FCA notes that Sec. 630.6(a) does not prevent the Funding
Corporation board from adopting a policy to disqualify System directors
from serving on the SAC.
2. Section 630.6(a)(4)(iii)
The FCC commented that the word ``approve'' contained in
Sec. 630.6(a)(4)(iii) of the proposed rule implies that the SAC has the
authority to dictate individual bank accounting policies or that the
Funding Corporation has the authority to require banks to uniformly and
consistently adopt or change accounting policies. This was not the
intent of the proposed rule. The primary duty of the SAC is to ensure
the integrity of the report to investors jointly prepared by the
Funding Corporation and System banks. The SAC is responsible for
overseeing the reporting process and internal controls implemented by
the Funding Corporation for preparation of the System's report to
investors. To clarify that neither the SAC nor the Funding Corporation
is charged with the responsibility for dictating individual banks'
accounting polices, the FCA has substituted the word ``review'' for the
word ``approve'' as suggested.
3. Section 630.6(a)(4)(iv)
Under proposed Sec. 630.6(a)(4)(iv), the SAC is required to review
each disclosure document containing Systemwide information prescribed
in this part, including annual reports, quarterly reports, and press
releases, prior to its release. The FCC commented that the SAC's
responsibility should pertain only to financial information and
disclosures contained in the annual information statements because the
SAC generally would not have the expertise to review and evaluate
nonfinancial information, such as is found in the description of
business and description of debt securities. The FCC also suggested
that, to facilitate timely issuance of quarterly information, the
requirement for a review of each quarterly report or press release by
the SAC prior to its release be eliminated.
To ensure the quality of the report to investors, the FCA believes
that each annual or quarterly report should be reviewed by the SAC in
its entirety. Under Sec. 630.6(a)(2), which provides that ``members
shall be knowledgeable in public and corporate finance and financial
reporting and disclosure,'' members selected to serve on the SAC should
have the expertise to review the entire report to investors, including
both financial and nonfinancial information. However, the FCA agrees
that the essence of press releases is to provide timely release of
interim information and has deleted the requirement for a review of
press releases by the SAC from Sec. 630.6(a)(4)(iv).
4. Section 630.6(a)(4)(v) and (b)(3)(ii)
The FCC suggested that the word ``oversee'' contained in proposed
Sec. 630.6(a)(4)(v) and (b)(3)(ii) regarding the responsibility of the
SAC and the bank audit committee be replaced with the word ``review''
because the proposed wording implies that the audit committee would
perform a management function in the System or the bank. The FCC also
suggested other changes to proposed Sec. 630.6(a)(4)(v) to avoid this
implication.
The audit committee is commonly recognized as an entity established
to perform an oversight function in the areas of financial reporting,
internal control, and corporate governance. The word ``oversee''
contained in the proposed rule is consistent with the customary role of
audit committees. The FCA has retained the word ``oversee'' in
Sec. 630.6(a)(4)(v) and (b)(3)(ii). The FCA notes that it is the
responsibility of the board of each System institution to determine the
steps the audit committee should perform to fulfill its oversight
responsibilities. Thus, the boards of individual System institutions
could charter their audit committee to review and direct management to
take necessary corrective actions or merely to review and make
corrective recommendations to the board.
F. Subpart B--Annual Report to Investors
1. Section 630.20(c)(2)--Description of Legal Proceedings and
Enforcement Actions
The FCC suggested that the proposed Sec. 630.20(c)(2) disclosure
requirement for a summary of FCA enforcement actions against individual
institutions be clarified and that any required discussion of the
impact of the enforcement actions on the System's operations be linked
to materiality. The FCA agrees with this suggestion and has revised the
language of Sec. 630.20(c)(2) of the final rule accordingly.
2. Section 630.20(d)--Description of Liabilities
The FCC expressed the view that the information called for by
Sec. 630.20(d)(1) regarding System debt obligations is too detailed
and, thus, impractical. Section 630.20(d)(1)(ii) is, in large part,
based upon the disclosure currently furnished by the System in its
Information Statements. Unless otherwise needed to provide readers of
the report to investors with information needed to understand the
characteristics of System debt, the FCA does not expect extensive
detail regarding the characteristics of specific debt offerings. To
clarify this position, the FCA has deleted the words ``terms and
conditions'' and added prefatory language to Sec. 630.20(d)(1)(ii)
requiring a description of debt obligations statutorily authorized to
be issued and currently issued by the System, as well as other
pertinent information.
The FCC also requested that the regulation clearly set forth the
option of incorporating by reference the annual and quarterly reports
to investors into specific offering documents. The FCA notes that the
focus of this regulation is on periodic reports of the System to
investors. It does not govern offering circulars or specific offering
documents. Nothing in this regulation precludes the System from
incorporating by reference information contained in the annual or
quarterly reports to investors into specific offering documents if
otherwise appropriate.
3. Section 630.20(g)(1)--Loan Portfolio
Proposed Sec. 630.20(g)(1)(ii) required disclosure of the amount of
loans outstanding that were used to finance the purchases of stock or
other equities of System institutions.
The FCC expressed concern regarding the System's ability to comply
with this requirement and questioned its relevance to investors. The
FCC opined that disclosures currently provided by the System in its
annual Information Statement are sufficient. The System's 1993 annual
Information Statement states that association borrowers do not
typically purchase capital stock for cash, but instead add the
aggregate par value of stock to the principal amount of the related
loan obligation. The 1993 report also provided the amount of capital
stock and participation certificates outstanding at December 31, 1993.
The FCC indicated that System compliance with the proposed requirement
could only be on a prospective basis because System banks do not have a
system in place to track needed information. Further, the FCC argued
that the costs involved in complying with this proposed requirement
would outweigh the benefits derived from the disclosure.
The FCA supports the commenter's view that the cost involved in
providing meaningful information to investors should not outweigh the
benefits derived. The FCA also notes that Sec. 630.20(e)(2), which
requires the System to ``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,'' will ensure that investors continue to receive
information that describes the nature of borrower stock of the System.
As a result, proposed Sec. 630.20(g)(1)(ii) has been deleted from the
final rule and proposed Sec. 630.20(g)(1)(iii) and (iv) have been
redesignated.
4. Section 630.20(g)(1)(ii)--Risk Exposure
Proposed Sec. 630.20(g)(1)(iii) requires discussion and analysis of
the risk exposure of the loan portfolio. The FCC suggested that the
term ``nonperforming loans'' replace the term ``high-risk assets'' in
this section of the regulation because it is more widely used in the
commercial banking industry. Use of the term ``high-risk assets'' in
proposed Sec. 630.20(g)(1)(iii) is consistent with the recent amendment
of the FCA's accounting and reporting guidelines in part 621 of this
chapter. See 58 FR 48780 (September 20, 1993). In the FCA's
regulations, the term ``high-risk assets'' is a generic reference to
loans and loan-related assets that are to be categorized for loan
performance and valuation assessment purposes according to the criteria
set forth in Sec. 621.6 of this chapter. Collectively, the
classifications identified in Sec. 621.6 of this chapter are consistent
with the terminology used in the commercial banking industry for
nonperforming loans. There is no regulatory requirement to categorize
the classification as ``high-risk assets'' in the report to investors.
Rather, proposed Sec. 630.20(g)(1)(iii) requires discussion of any
risks that could adversely affect the loan portfolio and loan-related
assets. Accordingly, the FCA has retained the term ``high-risk assets''
and adopted Sec. 630.20(g)(1)(iii) essentially as proposed. Proposed
Sec. 630.20(g)(1)(iii) is redesignated as Sec. 630.20(g)(1)(ii). The
FCA further notes that it expects to revisit the issue of accounting
for impaired loans in the future to assess the impact of the
implementation of Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan, issued by the
Financial and Accounting Standards Board.
5. Section 630.20(g)(1)(iii)--Secondary Market Activities
The FCC commented that secondary market activities have never been
and currently are not anticipated to be material to the System's
financial condition. The FCC suggested that proposed
Sec. 630.20(g)(1)(iv) be modified to require these activities to be
described when they become material to the System's financial
condition. The FCA agrees with the commenter that the System's
involvement in the secondary markets should be disclosed to investors
when the effect of such activities on the financial condition of the
System is material and has revised proposed Sec. 630.20(g)(1)(iv) to
add materiality tests. This provision is redesignated as
Sec. 630.20(g)(1)(iii) of the final rule.
The FCA believes that the System's statutory authority to
participate in secondary markets should be disclosed to investors in
any event. A new paragraph has thus been added in Sec. 630.20(a)(1)(vi)
of the final rule to require, without regard to materiality, a
description of the authority of System institutions to purchase and
sell interests in loans in secondary markets and the risk involved.
6. Section 630.20(g)(3)(ii) and (iii)--Liquidity and Investment
Section Sec. 630.20(g)(3)(ii) and (iii) require that the System
provide a brief description of the System's policies regarding
liquidity and investment. The FCC pointed out that each System bank
adopts its own liquidity and investment policies according to its
business objectives. In the absence of universal policies regarding
investment and liquidity among System institutions, the commenter
suggested that the proposed regulations be revised to require only a
general description of System banks' policies. The suggested change is
consistent with the intent of the proposed regulations. The FCA has
clarified the proposed regulations by revising Sec. 630.20(g)(3)(ii)(A)
and (g)(3)(iii) to require a brief overview of liquidity and investment
matters.
7. Section 630.20(g)(3)(iv)--Interest Rate Sensitivity
Section 630.20(g)(3)(iv) requires a general description of the
System's risk management practices, including a brief discussion of
derivative transactions. Due to the heightened interest of the public,
financial institution regulators, and Congress in this area, the FCA
solicited comments on whether disclosure requirements regarding
derivative activities should be more detailed. The FCC suggested that,
given the changing GAAP environment for derivative transactions, the
FCA consider the approach to derivatives activity regulation used by
other bank regulators. This approach requires regulated institutions to
adopt policies in accordance with GAAP. The regulator provides any
clarification of GAAP or additional guidance through Call Report
instructions or other mechanisms.
The FCA adopts Sec. 630.20(g)(3)(iv) as proposed, with a
clarification to provide for a ``brief overview'' of the System's asset
and liability management practices. The FCA believes that this approach
to derivatives activities disclosure is consistent with the FCC's
suggestion. In addition, along with other financial institution
regulators, the FCA is monitoring the area of derivatives activities.
The FCA will consider requiring more extensive disclosure based on its
assessment of the level and significance of System derivatives
activities and as the need for regulatory policy in this area becomes
more clearly defined.
8. Section 630.20(g)(5)--Insurance Fund
The FCC commented that Sec. 630.20(g)(5), which requires a
discussion of the Insurance Fund in the Discussion and Analysis (D&A)
section of the report to investors, is unnecessary and would duplicate
the disclosure contained in the notes to the System's combined
financial statements. Section 630.20(g)(5) requires a discussion of the
purposes of the Insurance Fund, a schedule itemizing Insurance Fund
assets that have been identified for specific purposes, and an
explanation of how expenditures of Insurance Fund assets affect the
assets and capital of the System.
The FCA does not believe that the requirement of Sec. 630.20(g)(5)
will result in duplication of information in the report. Section
630.3(e) provides that ``Information in any part of the report may be
incorporated by reference * * * to any other item of the report.
Information * * * may be presented in any order deemed suitable by the
Funding Corporation.'' Accordingly, the Funding Corporation has the
flexibility to determine where the D&A regarding the Insurance Fund is
to be presented. The FCA has adopted Sec. 630.20(g)(5) as proposed.
The FCA notes that the regulation does not require the D&A
regarding the Insurance Fund to be audited. Pursuant to Sec. 630.3(e),
the System could opt to include the required D&A in the notes to the
Systemwide combined financial statements and incorporate the disclosure
by reference into the D&A. In this situation, the required D&A
regarding the Insurance Fund would be covered in the independent
accountant's report on the Systemwide combined financial statements.
9. Section 630.20(g)(6)--Instructions for Discussion and Analysis
Proposed Sec. 630.20(g)(6)(ii) requires that discussions required
by proposed Sec. 630.20(g) cover the 3-year period covered by the
financial statements. The FCC suggested that the words ``3-year'' be
deleted. In recognition that the reporting period for the balance sheet
is only 2 comparative years, the FCA agrees with the commenter and has
amended Sec. 630.20(g)(6)(ii) of the final rule as suggested and
revised the introductory paragraph of Sec. 630.20(g) accordingly.
10. Section 630.20(i)--Compensation of Directors and Senior Officers
Section 630.20(i) requires the annual report to 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). The FCC commented that this
requirement provides no useful information to investors and is
redundant.
As stated in the rule proposal, the FCA is required by section 514
of the 1992 Act 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
institutions. The FCA believes that information on compensation of
System directors and senior officers presented in individual System
institutions' disclosure to shareholders pursuant to part 620 of this
chapter could provide useful information to investors in making
investment decisions. Thus, to implement the requirement of section 514
of the 1992 Act, Sec. 630.20(i) requires that the report provide a
statement informing investors of the availability of such information.
The FCA adopts Sec. 630.20(i) of the final rule as proposed.
11. Section 630.20(l) and (m)--Financial Statements and Supplemental
Information
Proposed Sec. 630.30(l) requires that the System prepare the
combined financial statements in accordance with GAAP and instructions
and other requirements of the FCA. Proposed Sec. 630.20(m) further
requires that the System provide supplemental information in addition
to the audited financial statements and that the supplemental
information be examined by a qualified public accountant for compliance
with FCA regulations and guidelines and an opinion expressed thereon.
The FCA received comments on proposed Sec. 630.20(l) from the AICPA and
the FCC and comments on proposed Sec. 630.20(m) from the AICPA and
Price Waterhouse.
With respect to proposed Sec. 630.20(l), both the FCC and the AICPA
suggested, for different reasons, that the phrase ``instructions and
other requirements of the FCA'' be deleted from the proposed rule. The
FCC was concerned that the proposed language indicates that regulatory
accounting practices (RAP) may be utilized, causing investor confusion.
On the other hand, the AICPA provided suggested language that would
require both the basic financial statement and the supplemental
information required by proposed Sec. 630.20(l) and (m) to be audited
in accordance with GAAS. The AICPA asserted that the requirements of
proposed Sec. 630.20(m) regarding supplemental information disclosure
appear to comprise the ``instructions and other requirements of the
FCA'' referred to in Sec. 630.20(l) and, further, that GAAS addresses
auditors' reporting on information presented outside financial
statements.
Price Waterhouse, the external auditor of the System, also
commented on proposed Sec. 630.20(m). Price Waterhouse asserted that
the proposed language that ``supplemental information be examined by a
qualified public accountant for compliance with FCA regulations and
guidelines'' is too broad and would be interpreted as requiring the
independent accountant to render a report on the System's compliance
with all FCA regulations and guidelines. This would require significant
work by the independent accountant. Price Waterhouse commented that the
proposed regulatory language in Sec. 630.20(m) provides insufficient
detail to enable the external auditor to determine the scope of
additional work to be performed and the type of report to be issued by
the auditor on the supplemental information.
Proposed Sec. 630.20(l) was intended to preserve the FCA's ability
to prescribe additional requirements for preparation and presentation
of the Systemwide combined financial statements. However, after
consideration of the comments received, the FCA adopts the AICPA's
suggestion in the final rule to require that both the basic financial
statements and the supplemental information required by Sec. 630.20(l)
and (m) be examined in accordance with GAAS and an opinion expressed
thereon by an independent accountant. This change will resolve the FCC
concern regarding RAP financial statements and Price Waterhouse's
concern regarding the scope of examination of supplemental information
and reporting by the independent accountant. However, to preserve the
flexibility to revise the format and content specified in Appendix A of
the final rule, the FCA retains the requirement that supplemental
information be prepared in accordance with any additional FCA guidance
or instructions.
12. Section 630.20(o)--Cross-Reference Sheet
Proposed Sec. 630.20(o) called for a cross-reference sheet giving
the location of information required by these regulations, in the order
required, and identified by item numbers and captions. The FCC did not
object to the preparation of a cross-reference sheet, but suggested
that the cross-reference sheet would only be useful to the FCA and
should only be required as an exhibit to copies of the report filed
with the FCA. The FCA believes the cross reference to the content of
the report provides useful information to readers of the report. To
make this indexing requirement more useful to investors, the FCA has
revised Sec. 630.20(o) to inform readers of the location in the report
of the information required under the major disclosure captions of this
part.
G. Subpart C--Quarterly Report to Investors
Proposed Sec. 630.40(b)(5) requires that the System file a
``preferability'' letter with the FCA disclosing any accounting changes
made during the reporting period that are not required by new
accounting pronouncements. The AICPA and the FCC commented that the
requirement for filing a separate letter with the FCA explaining the
reason for the preferable alternative accounting principle is
unnecessary. They suggested that the requirement be deleted from
Sec. 630.40(b)(5).
The preferability letter was intended as a notice to inform the FCA
of any accounting change made by the System during the interim period
that is not required by existing accounting pronouncements. Because the
quarterly report will be required to disclose such accounting changes,
upon further consideration, the FCA has deleted the requirement of
filing a preferability letter from Sec. 630.40(b)(5) of the final rule.
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 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.
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) Combined financial statements means financial statements
prepared on a combined basis by a group of affiliated entities that
share the same financial interest, regardless of whether any of the
entities has the ability to exercise control over another. For purposes
of this part, unless otherwise specified, combined financial data of a
bank and its related associations includes financial data of the bank's
consolidated subsidiaries.
(c) 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).
(d) 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.
(e) 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).
(f) 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.
(g) Report to investors or report means a report that presents the
Systemwide combined financial statements, supplemental financial
statement information, and related financial and nonfinancial
information pertaining to the System required by this part.
(h) Systemwide combined financial statements means the combined
financial statements required by this part.
Sec. 630.3 Publishing and filing the report to investors.
(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 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 referenced or
incorporated 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 the
information needed for preparation of the Systemwide combined financial
statements and disclosures required to be presented 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 and other information needed for preparation of the report to
investors, including any information that is material to the disclosure
entity.
(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 chairperson of the board of the Funding
Corporation.
(9) Request the FCA to provide information regarding the content of
the latest Reports of Examination of any banks and related
associations, if such information is necessary for preparation of a
report that is meaningful and not misleading and is not forthcoming
from a bank in accordance with paragraph (c) of this section. 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 annual, quarterly, and
interim financial and other information in accordance with instructions
of the Funding Corporation for preparation of the report to investors,
including:
(i) Financial data of the bank or, if the bank is required under
generally accepted accounting principles (GAAP) to prepare its
financial statements on a consolidated basis with its subsidiaries,
consolidated financial data of the bank and its consolidated
subsidiaries; and
(ii) Combined financial data of the bank (including any
consolidated subsidiaries of the bank) and related associations of the
bank.
(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:
(1) Provide its related bank with the information necessary to
allow the bank to provide accurate and complete information regarding
the bank and its related associations to the Funding Corporation for
preparation of the report.
(2) 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 review accounting policy changes relating to
preparation of the Systemwide combined financial statements;
(iv) Review the System's annual and quarterly reports 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
the System's compliance with applicable 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, terminations of System
institution status, and financial assistance provided by or to System
institutions 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; and
(vi) The authority of System institutions to purchase and sell
interests in loans in secondary markets and the risk involved in such
activities.
(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 Farm Credit
Insurance Fund (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 of enforcement actions in effect
during the year, and any material impact of such proceedings on the
System.
(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) A description of the types of debt obligations authorized to
be issued under the Act, the types of debt obligations currently
issued, the manner and form in which they are issued, 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; and
(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 yearend.
(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, for the
comparative years required by paragraph (g)(6)(ii) of this section 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) Categorization. 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) Risk exposure. (A) Describe and analyze all high-risk assets,
including an analysis of the nature and extent of significant current
and potential credit risks 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 for loan losses to loans
(outstanding at yearend) and net chargeoffs to average loans, and a
discussion of the adequacy of the allowance for loan losses to absorb
the risk inherent in the loan portfolio and the basis for such
determination.
(iii) Secondary market activities. (A) If material, quantify System
institutions' secondary market activities and the risk involved in such
activities.
(B) If material, provide an analysis of historical loss experience
and the amount provided for risk of loss associated with secondary
market activities.
(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 any significant increases or
decreases.
(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 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; and
(2) The average maturities and average interest rates on debt
outstanding at yearend, and the average maturities and 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) Include a brief overview of 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. Provide a brief overview of 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) Provide a brief overview of the
System's 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 on 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 Insurance Fund
assets for which no specific use has been identified or designated by
the FCSIC. Information provided shall be as of the end of the most
recent fiscal year.
(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 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 prepared in accordance with GAAP, and
accompanied by supplemental information prepared in accordance with the
requirements of Sec. 630.20(m). The Systemwide combined financial
statements shall 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. The
Systemwide combined financial statement and accompanying supplemental
information shall be audited in accordance with generally accepted
auditing standards by a qualified public accountant (as defined in
Sec. 621.2(i) of this chapter). 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. 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 any additional guidance or instructions provided
by the FCA.
(1) 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.
(2) 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 the Insurance
Fund;
(v) The Insurance Fund and related combination entries; and
(vi) Combined financial data of the System with the Insurance Fund.
(3) 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 financial data required by Sec. 630.20(m)(2)(i)
shall include the financial data required to be submitted by each bank
pursuant to the requirement of Sec. 630.4(c)(1)(i).
(4) The supplemental information 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) Include a detailed index setting forth the major disclosure
captions of this subpart and the page or pages on which the required
information appears in the report.
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 provisions of this paragraph,
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.
(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 shall also cover material
changes with respect to the most recent 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 in
paragraphs (d)(1) through (4):
(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)(2), (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:
BILLING CODE 6705-01-P
TR12SE94.000
BILLING CODE 6705-01-C
Dated: September 1, 1994.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 94-22221 Filed 9-9-94; 8:45 am]
BILLING CODE 6705-01-P