[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Rules and Regulations]
[Pages 57919-57922]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28587]



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FARM CREDIT ADMINISTRATION
12 CFR Parts 615 and 620

RIN 3052-AB60


Funding and Fiscal Affairs, Loan Policies and Operations, and 
Funding Operations; Disclosure to Shareholders; Director Elections

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit 
Administration Board (Board), adopts amendments to the regulations 
relating to the implementation of cooperative principles to allow 
greater flexibility in the method by which directors of Farm Credit 
System (System) associations and banks for cooperatives are elected, 
consistent with cooperative principles. The amendments permit regional 
election of directors.

EFFECTIVE DATE: The regulations shall become effective upon the 
expiration of 30 days after publication 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: John J. Hays, Policy Analyst, 
Regulation Development, Office of Examination, (703) 883-4498, TDD 
(703) 883-4444; or Rebecca S. Orlich, Senior Attorney, Regulatory 
Enforcement Division, Office of General Counsel, (703) 883-4020, TDD 
(703) 883-4444.

SUPPLEMENTARY INFORMATION: On June 9, 1995, the FCA Board published 
proposed amendments to its regulations governing the election of 
directors. See 60 FR 30470 (June 9, 1995). The FCA received 9 comment 
letters in response 

[[Page 57920]]
to this proposal. A description of the existing and proposed 
regulations, comments on major issues, and the FCA's response follow.

I. Existing Regulation and Proposed Regulation

    The existing regulation was promulgated by the FCA in 1988 to 
implement changes effected by the Agricultural Credit Act of 1987. It 
provided for the at-large election of directors of associations and 
banks for cooperatives (BCs) but permitted associations that, in 1988, 
had bylaws providing for regional elections of directors to continue to 
do so until January 1, 1993. These associations were districtwide 
associations that had been formed in the 1980s through mergers of most 
or all of the associations in a bank's district. In response to the 
desire for regional representation expressed in the comments to the 
existing regulations when they were proposed in 1988, the FCA placed no 
restrictions on the institution's ability to provide for geographic 
representation on the board by geographic designation of director 
positions; the Agency also provided for cumulative voting unless 
shareholders approved bylaws providing otherwise. However, the FCA 
decided to prohibit regional voting because of Agency concerns 
regarding director accountability and equitable voting power.
    Subsequent to implementation of that regulation, and in response to 
requests from institutions to permit regional election of directors, 
the FCA reviewed its position and determined that its concerns could be 
addressed in a less burdensome way that would permit regional 
elections, consistent with cooperative principles.
    The FCA proposed amendments to Sec. 615.5230(a)(1)(ii) to permit 
the regional election of directors of associations and BCs subject to 
the following conditions:
    1. To ensure that a director can be held accountable by all 
shareholders, institutions with bylaws providing for shareholder 
removal of directors must provide that each director may be removed by 
a majority vote of all voting shareholders and may not be removed by a 
vote of only the shareholders in his or her region; and
    2. The bylaws provide for the apportionment of the institution's 
territory into voting regions with approximately equal numbers of 
voting shareholders and ensure equitable representation from each 
voting region through an annual evaluation by the institution's board 
of directors.
    The FCA also proposed a conforming amendment to Sec. 620.21(d)(1) 
of the FCA regulations to require disclosures regarding regional voting 
in the association's annual information statement.

II. Comments on Major Issues

    Comments were received from the Farm Credit Council (FCC), 
representing the interests of its membership except for one bank; a 
Farm Credit Bank; five System associations; a law firm representing two 
pairs of jointly managed System associations (four associations); and 
one System association board member. The Farm Credit Bank stated its 
belief that it was not appropriate for a bank to express a position on 
the regulation of the internal affairs of associations. Two commenters 
fully supported the proposal, one commenter objected to the proposal, 
and others expressed varying degrees of support and/or criticism as 
described below:
    1. Shareholder approval of bylaw establishing regional elections. 
An association objected to this requirement as being burdensome and 
costly, and a responsibility for association boards. The FCC stated 
that it strongly opposed this provision as being unnecessary, a matter 
for the association board to decide, prohibitively expensive for some 
associations, and a barrier to having regional elections before 1997.
    2. ``Approximately equal number of voting shareholders'' in each 
region. This issue was commented on by the FCC and five others. The FCC 
asserted that, as a practical matter, this requirement would preclude 
the drawing of regional boundaries along state, county, or other 
political or geographic lines. The FCC asserted that it would likely 
result in the elimination or curtailment of certain ``grass roots'' 
programs, because regions based on equal numbers of shareholders would 
mean that some regions will be very large and the large size would make 
travel to the local meetings difficult, if not impossible. The FCC 
further stated that the number of shareholders per region should not be 
the controlling factor, or even necessarily of greater weight than 
other factors.
    One association supported additional flexibility on this issue and 
asked for ``board variance to the percent of stockholders located in 
each region in order to achieve clear understanding of each regions' 
boundaries.'' The law firm recommended that association boards be 
permitted to draw boundaries along county or territorial lines 
``consistent with standards provided in the bylaw to assure 
`substantial parity' of voting control among shareholders across 
regions but without requiring coupling of non-contiguous counties into 
a single region.'' The comment does not suggest what the standard for 
``substantial parity'' would or should be, other than that it must be 
provided for in the bylaws. Another association stated that ``regions 
with disproportionate numbers of stockholders can be equitably served 
by differential numbers of director positions per region, resulting in 
reasonably balanced representation of stockholders per director.'' An 
association also suggested that ``approximately equal'' be defined to 
mean a shareholder variance of 10 percent more or less than other 
regions. Another association expressly supported the ``approximately 
equal'' standard.
    3. Annual evaluation to assure that regions remain approximately 
equal. The FCC and three associations were critical of the annual 
evaluation requirement. The FCC pointed out that, since many or most 
associations elect directors on a staggered-term basis, the voting 
region electing a particular director could change while he or she is 
in office; it also said that an annual evaluation could result in 
frequent changes in regional boundaries. The law firm made a similar 
comment and stated that, ``[t]o the extent there is now any sense of 
connection between a stockholder and a director from his or her region, 
it would certainly be lost in this shuffle.'' One association stated 
its belief that evaluations should be necessary only every 3 years. Two 
associations expressly supported the proposed annual evaluation.

III. FCA's Response to Comments

    On the issue of shareholder approval to determine the method of 
electing their directors, the Board strongly believes that the right of 
shareholders to vote for all of the directors who owe them fiduciary 
duties should not be limited in any way without their consent. A 
regional voting bylaw, if adopted with the approval of only directors 
of the institution, could be viewed as serving primarily the interest 
of furthering director position and influence and disenfranchising 
shareholders. Shareholder ratification will serve to negate any such 
inference and assure concurrence by the owners of the association as to 
the benefits to be derived from the bylaw provision. The Board 
recognizes that there are costs associated with any shareholder vote 
but does not believe that the cost would be prohibitively expensive for 
any institution, as was asserted by a commenter. Therefore, after 
weighing 

[[Page 57921]]
the costs and benefits, the Board adopts the shareholder approval 
requirement as proposed.
    In response to comments regarding the requirement to have an 
``approximately equal'' number of voting shareholders per region, the 
Board has carefully considered the arguments against such standard. The 
Board has concluded that the equalization of the number of voters per 
region ensures democratic control of an association. The Board is not 
persuaded that ``approximately equal'' voting would reduce or curtail 
grass-roots participation in institution business, particularly since 
at present the directors are elected on an at-large basis.
    However, in response to some of the comments received asserting 
that precise equalization would be overly burdensome, the Board has 
made several changes to this provision of the proposed regulations. 
First, the final regulation retains the ``approximately equal'' 
standard but specifies that the standard is met if no region contains 
more than 25 percent more voting shareholders than in any other region. 
After implementation, the institution must periodically count the 
number of voting shareholders in each region and, if the 
``approximately equal'' standard is no longer being met, must adjust 
the boundaries or adjust the ratio of borrowers to directors in order 
to meet the standard. Second, the final regulation provides that the 
evaluation of the number of voting shareholders and any resulting 
adjustments must take place at least once every 3 years. This is a 
relaxation of the proposed regulation's requirement for an evaluation 
every year.
    The Board is aware, as some commenters noted, that revisions of the 
regional boundaries, in cases where board members serve staggered 
terms, could be viewed as depriving some shareholders of representation 
who may, after a boundary change, be in the region of a board member 
for whom they did not have the opportunity to vote. Such a result would 
appear to be unacceptable in a situation where a board member is 
obligated to represent only the interests of shareholders from his or 
her region. However, that is not the case here. Institution board 
members have a fiduciary duty to represent the interests of all of the 
shareholders in the institution's territory, even when they are elected 
on a regional basis.1 An institution may, of course, choose to 
elect all of its directors annually, or may decide not to have regional 
voting.

    \1\  Moreover, the combination of yearly boundary revisions and 
directors with staggered terms may not be uncommon among 
cooperatives. See, e.g., the model bylaw provision set forth in 
Legal Phases of Farmer Cooperatives, Information 100, Farmer 
Cooperative Service, U.S. Dept. of Agriculture (1976), at 572-73.
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    The Board has also made several clarifications to the proposed 
regulations. Proposed Sec. 615.5230(a)(3)(ii) stated that, if there is 
a bylaw providing for shareholder removal of directors, it must give 
all voting shareholders the right to vote to remove a director and not 
limit the right to the shareholders in the director's region. In the 
Board's view, this language implied that the bylaws could deprive 
shareholders of the right to remove directors. It was not the intention 
of the Board to imply this, since stockholders have a common law right 
to remove directors for cause.2 Therefore, to avoid any confusion 
on this issue, the Board has revised the proposal to provide, in the 
final regulations, that bylaws establishing regional voting must give 
all voting shareholders the right to vote in any shareholder vote to 
remove a director.

    \2\ See Harry G. Henn & John R. Alexander, Laws of Corporations 
Sec. 205 (1983). Common law also provides that the board of 
directors may not remove a director for cause unless the bylaws so 
state; it appears that the board of directors cannot remove a 
director without cause. Id.
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    The Board has also added a clarifying amendment to 
Sec. 620.21(d)(3). The existing regulation requires that, if an 
association's annual meeting is held in more than one session, the 
annual meeting information statement must contain a statement that 
nominations from the floor must be made at the first session. The 
clarifying amendment adds that, for associations that elect directors 
by region, there must be a statement that nominations from the floor 
for a director from a particular region must be made at the first 
session in that region if stockholders do not vote solely by mail 
ballot. If stockholders vote solely by mail ballot, the information 
statement must state that nominations from the floor may be made at any 
session of the annual meeting held in a region, unless the bylaws 
provide otherwise.
    No specific comments were received on regional elections for BC 
directors or on the proposed conforming amendment to Sec. 620.21(d)(1), 
the disclosure regulation. The disclosure provision is adopted as 
proposed.

List of Subjects

12 CFR Part 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.

12 CFR Part 620

    Accounting, Agriculture, Banks, banking, Reporting and recording 
requirements, Rural areas.
    For the reasons stated in the preamble, parts 615 and 620 of 
chapter VI, title 12 of the Code of Federal Regulations are amended as 
follows:

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

    1. The authority citation for part 615 continues to read as 
follows:

    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 
6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12 
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 
2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b, 
2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 
2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart I--Issuance of Equities

    2. Section 615.5230 is amended by adding a new paragraph 
(a)(1)(iii) and revising paragraphs (a)(1)(ii) and (a)(3) to read as 
follows:


Sec. 615.5230  Implementation of cooperative principles.

    (a) * * *
    (1) * * *
    (i) * * *
    (ii) Unless regional election of directors is provided for in the 
bylaws pursuant to Sec. 615.5230(a)(3), be accorded the right to vote 
in the election of each director (except for a director that is elected 
by the other directors);
    (iii) Unless regional election of directors is provided for in the 
bylaws, or unless otherwise provided in the bylaws, be allowed to 
cumulate such votes and distribute them among the candidates in the 
shareholder's discretion.
    (2) * * *
    (3) Regional election of directors is permitted under the following 
conditions:
    (i) A bylaw establishing regional elections is approved by a 
majority of voting shareholders, voting in person or by proxy, prior to 
implementation;
    (ii) The bylaw provides that all voting shareholders of the 
institution, whether or not they reside in the director's region, have 
the right to vote in any shareholder vote to remove each director;
    (iii) There are an approximately equal number of voting 
shareholders in each of the institution's voting regions. The 

[[Page 57922]]
regions shall be deemed to have an approximately equal number of voting 
shareholders if no region contains more than 25 percent more voting 
shareholders than in any other region. At least once every 3 years, the 
institution shall count the number of voting shareholders in each 
region and, if the regions do not have an approximately equal number of 
shareholders, shall adjust the regional boundaries to achieve such 
result; and
    (iv) An institution may provide for more than one director to 
represent a region. In such case, for purposes of determining whether 
the regions have an approximately equal number of voting shareholders, 
the number of voting shareholders in the region with more than one 
director shall be divided by the number of director positions 
representing that region, and the resulting quotient shall be the 
number that is compared to the number of voting shareholders in other 
regions.
* * * * *

PART 620--DISCLOSURE TO SHAREHOLDERS

    3. The authority citation for part 620 continues to read as 
follows:

    Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12 
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101 
Stat. 1568, 1656.

Subpart D--Association Annual Meeting Information Statement

    4. Section 620.21 is amended by adding the words ``or elected'' 
after the word ``nominated'' in the first sentence of paragraph (d)(1); 
and by revising paragraph (d)(3) to read as follows:


Sec. 620.21  Contents of the information statement and other 
information to be furnished in connection with the annual meeting.

* * * * *
    (d) * * *
* * * * *
    (3) State that nominations shall be accepted from the floor.
    (i) If directors are not elected by region, the following shall 
apply:
    (A) If the annual meeting is to be held in more than one session 
and mail balloting will be conducted upon the conclusion of all 
sessions, state that nominations from the floor may be made at any 
session or, if the association's bylaws so provide, state that 
nominations from the floor shall be accepted only at the first session.
    (B) If shareholders will not vote solely by mail ballot upon 
conclusion of all sessions, state that nominations from the floor may 
be made only at the first session.
    (ii) If directors are elected by region, the following shall apply:
    (A) If more than one session of an annual meeting is held in a 
region, and if mail balloting will be conducted at the end of all 
sessions in a region, state that nominations from the floor may be made 
at any session in the region or, if the association's bylaws so 
provide, state that nominations from the floor shall be accepted only 
at the first session held in the region.
    (B) If shareholders will not vote solely by mail ballot upon 
conclusion of all sessions in a region, state that nominations from the 
floor may be made only at the first session held in the region.
* * * * *
    Dated: November 17, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 95-28587 Filed 11-22-95; 8:45 am]
BILLING CODE 6705-01-P