[Federal Register Volume 63, Number 226 (Tuesday, November 24, 1998)]
[Rules and Regulations]
[Pages 64841-64844]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31340]


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FARM CREDIT ADMINISTRATION

12 CFR Part 611

RIN 3052-AB71


Organization; Balloting and Stockholder Reconsideration Issues

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: This final rule will amend Farm Credit Administration (FCA or 
Agency) regulations concerning Farm Credit System (System or FCS) 
ballots and the effective dates for mergers, consolidations, or 
transfers of direct lending authority from a Farm Credit Bank (FCB) or 
agricultural credit bank (ACB) to a Federal land bank association 
(FLBA). The amendments allow the use of identity codes on ballots, as 
long as the votes are tabulated by an independent third party; limit 
the scope of the regulation to System banks and associations; and 
remove descriptions of specific balloting procedures from the 
regulations. The amendments also reduce the earliest effective date of 
a merger, consolidation, or transfer of lending authority from 50 days 
to 35 days after stockholder notification, or 15 days after submission 
of documents to the FCA for final approval, whichever occurs later. The 
effects of the amendments are to provide more flexibility to 
institutions and stockholders when stockholder votes occur, to extend 
security and confidentiality requirements to all stockholder votes of 
banks and associations, to apply such requirements only to banks and 
associations, and to accelerate the effective date of the above-
described corporate actions.

EFFECTIVE DATE: This regulation will become effective 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:

Alan Markowitz, Senior Policy Analyst, Office of Policy and Analysis, 
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4479;
    or
Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 
883-4444.

SUPPLEMENTARY INFORMATION:

I. Background

    The FCA proposed amendments to its balloting and reconsideration 
period regulations on March 20, 1998 (63 FR 13564) as a part of its 
continuing efforts to reduce regulatory burdens on the System. This 
rule was proposed in response to requests by several System 
institutions to revise the secret ballot procedures and to accelerate 
the effective date of certain corporate actions.
    As explained more fully below, we have made revisions to the 
proposed amendments to Secs. 611.330 and 611.340 and adopted 
substantially as proposed the amendments to Secs. 611.505(e) and 
611.1122(k).
    We received comment letters on the proposed regulations from the 
Farm Credit Council (Council) on behalf of its member banks and 
associations; AgriBank, FCB (AgriBank); Farm Credit Leasing Services 
Corporation (Leasing Corporation); and one individual via electronic 
mail. In addition, we received comments via telephone from the Farm 
Credit Banks Funding Corporation (Funding Corporation) and from two 
FLBAs. AgriBank made general comments supporting the proposed changes. 
Other comments addressed specific issues, as described below. All of 
the comments were carefully considered in the formulation of the final 
rule.

[[Page 64842]]

II. Maintaining Secrecy of Ballots

    We amend Sec. 611.330 to (1) apply the regulation only to banks and 
associations, (2) give affected institutions more flexibility than in 
the existing or the proposed regulation to choose how to comply with 
confidentiality requirements, (3) clarify that institutions may allow a 
stockholder to give voting discretion to the proxy of the stockholder's 
choice, and (4) apply the provisions to all bank and association 
stockholder votes, not just director elections. The form of 
Sec. 611.330 has been significantly revised, as described more fully 
below. We also adopt amendments to Sec. 611.340 to (1) limit its scope 
to banks and associations, (2) apply its provisions to all bank and 
association stockholder votes, and (3) add a 3-year retention period 
for records in votes other than director elections. The remainder of 
Sec. 611.340 is adopted substantially as proposed.
    The application of the final regulations to only banks and 
associations is a change from both the existing and the proposed 
regulations and is made in response to comments from the Leasing 
Corporation, the Funding Corporation, and the Council. Those commenters 
observed that the confidentiality requirements of section 4.20 of the 
Act expressly apply only to ``lending institutions'' of the System; 
therefore, they suggested amendments to conform the scope of the 
regulation to the statute. System institutions made similar comments 
when these regulations were originally promulgated in 1988, but we 
opted at that time for a broader application. See 53 FR 50384 (December 
15, 1988). We have now reconsidered our position and determined that 
the purpose of section 4.20 of the Act is met if the regulation applies 
only to banks and associations. We believe that the Act's secret ballot 
requirement is intended to assure borrowers that their voting decisions 
on institutional matters will not adversely affect their loan 
relationships. This principle is equally applicable to borrowers of 
FLBAs, even though these institutions are agents for the lending banks 
and are not direct lenders. Therefore, in the final rule, Secs. 611.330 
and 611.340 apply only to System banks and associations.
    Section 611.330(a) of the final rule continues to require each bank 
and association to adopt policies and procedures ensuring 
confidentiality. It also continues to prohibit signed ballots in any 
bank or association stockholder vote, even when an independent third 
party tabulates the votes. The only persons that may have access to 
information regarding how or whether a stockholder has voted are an 
independent third party and the FCA.
    Paragraph (b) of Sec. 611.330 allows banks and associations to use 
identity codes on ballots or other types of identification procedures 
in all stockholder votes, provided that individual stockholder votes 
can be identified only by an independent third party that tabulates the 
votes. In weighted voting, an independent third party is still required 
to tabulate the votes. Unlike the existing regulation, the final rule 
does not contain descriptions of permissible procedures, because we 
believe that some institutions may have incorrectly viewed the specific 
descriptions as limiting the range of permissible procedures.
    Paragraph (c) of Sec. 611.330 has no substantive changes from the 
existing regulation. It has been restated to clarify that, in proxy 
voting, a stockholder's vote is not considered to be final until 
balloting begins. Until balloting begins, a stockholder may withdraw 
the proxy and vote the ballot himself or herself. This means that an 
institution must retain all proxy ballots unopened until the 
stockholders who attend the stockholders' meeting have had an 
opportunity to withdraw any proxy ballots that have been mailed.
    Subsequent to the publication of the proposed rule, an FLBA 
informed us that it had discarded approximately 40 percent of the proxy 
ballots cast in a recent stockholder vote because some stockholders had 
failed to mail back a proxy authorization form along with their ballot. 
The FLBA asked us to amend the regulations to allow proxy 
authorizations either to be a part of the proxy ballot, which is a 
format typically used by corporations, or to be printed on the back of 
the return envelope.
    The inclusion of a signed proxy authorization form on the ballot 
itself would violate the Act's prohibition against signed ballots. 
However, printing the proxy authorization form on the back of the 
return envelope would not violate either the existing or the final 
rule, as long as the ballot is in a separate sealed envelope inside of 
the return envelope.\1\ We believe that the broader language of the 
final rule will help associations, especially those that previously had 
stockholder votes with significant numbers of spoiled ballots, to craft 
more user-friendly secret ballot procedures.
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    \1\ Only one envelope would be needed if an independent third 
party opens the envelope and tabulates the votes.
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    We reviewed the proxy voting practices used by the System and 
observed that some practices differ from those used by publicly held 
corporations. Although some FCS institutions permit stockholders to 
choose a proxy other than the one designated by the institution, 
stockholders do not usually receive the right to give voting discretion 
to their proxy. In order to provide stockholders greater voting 
flexibility, we add a new paragraph (d) to Sec. 611.330 clarifying that 
institutions are permitted to give stockholders the opportunity to give 
voting discretion to their proxies. An institution granting this 
discretion to its stockholders does not violate the secret ballot 
requirements in the Act.
    The Council asked us to confirm the System's understanding that, 
notwithstanding the provision that an independent third party that 
tabulates the votes may not make disclosures about how or whether an 
individual stockholder voted, the third party could disclose the total 
numerical results of a stockholder vote. The Council stated that such 
disclosure helps ``to preserve confidence in the integrity'' of the 
stockholder vote. The final rule does not prohibit the disclosure of 
total numerical results, but we encourage institutions with weighted 
voting to consult with their stockholders on this issue. In weighted 
voting, as the Council pointed out, it is theoretically possible to 
determine from the total results how individual stockholders have 
voted, particularly when the institution has a relatively small number 
of stockholders.
    We received two additional comments regarding the proposed 
amendments to Sec. 611.330. AgriBank stated that the provisions 
regarding confidentiality in a stockholder vote appeared to ``fairly 
balance a stockholder's right to a confidential ballot with the rather 
minimal burden imposed on System institutions.'' An individual 
commenter expressed concern regarding the proposal to allow the use of 
identity codes on ballots. This commenter stated that the codes would 
defeat the secrecy of voting and provide an opportunity for misuse by 
those who had access to the marked ballots. We understand the 
commenter's concern but believe that the final rule's requirement of an 
independent third party to open the ballots and tabulate votes is an 
adequate means of preventing misuse of ballot information. We will, of 
course, continue to evaluate compliance as a part of our corporate 
approvals and examinations.
    An FLBA commented on the proposed addition to Sec. 611.340(c) that 
provided a 5-year minimum retention

[[Page 64843]]

period for records in votes other than director elections. The FLBA 
requested that, in any case where an independent third party tabulates 
votes and maintains the voting records, the independent third party be 
required to hold the voting materials for only 3 years. With respect to 
votes other than director elections, we agree with the FLBA that a 3-
year retention period is adequate and have reduced the retention period 
in the final rule for all voting records that do not pertain to 
director elections. The minimum retention period applies to such 
records held by either the institution or an independent third party. 
However, for director elections, the existing retention period of the 
term of the director is unchanged. In most cases, director terms are 
for 3 years or less, and there is no compelling reason to retain the 
voting records for a period longer than the term of the director.

III. Change of Effective Date for Merger, Consolidation, or 
Transfer of Lending Authority

    We amend Sec. Sec. 611.505(e) and 611.1122(k) to provide that, in 
the case of a transfer of direct lending authority or an association 
merger, the effective date of the transfer or merger may be as early as 
35 days after stockholder notification of the results of the 
stockholder vote on the transaction, or 15 days after submission of 
final documents to the FCA, whichever occurs later. The effect of these 
changes is to accelerate by 15 days the earliest possible date when the 
merger or transfer of lending authority may occur. In addition, 
language is added to the same paragraphs to restate the requirement in 
section 7.9(b)(3)(A) of the Act that, if a valid petition for 
reconsideration is filed in a timely manner with the FCA, the merger or 
transfer of lending authority cannot take effect until the expiration 
of 60 days after the date on which stockholders were notified of the 
final result of the first vote. These provisions are adopted 
substantially as proposed.
    We received two comments on the proposed effective date amendments. 
AgriBank stated that it fully supported the proposal, especially in 
merger transactions where the merging institutions will be able to 
implement the wishes of their stockholders more quickly. An individual 
commenter was opposed to the proposed amendment, maintaining that 
stockholders should have the full amount of time required by statute to 
reconsider the merger or transfer of lending authority, because of the 
importance of the matters involved. We agree with the commenter that 
the decision is an important one and point out that the amendments we 
have adopted do not shorten the statutory time period during which 
stockholders may petition the FCA for a reconsideration vote. 
Stockholders will still be able to petition the Agency up to 35 days 
after results of the original vote are mailed: the 30-day period 
required by section 7.9(b)(3)(A) of the Act, and 5 days for delivery of 
the notice to the stockholders. The amendment merely shortens the time 
for the FCA to process final approval documents.

List of Subjects in 12 CFR Part 611

    Agriculture, Banks, banking, Rural areas.

    For the reasons stated in the preamble, part 611 of chapter VI, 
title 12 of the Code of Federal Regulations is amended to read as 
follows:

PART 611--ORGANIZATION

    1. The authority citation for part 611 is revised to read as 
follows:

    Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15, 
4.20, 4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act 
(12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2208, 
2209, 2243, 2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 
412 of Pub. L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 of 
Pub. L. 100-399, 102 Stat. 989, 1003, and 1004.

    2. Subpart C is amended by revising the heading to read as follows:

Subpart C--Election of Directors and Other Voting Procedures

    3. Section 611.330 is revised to read as follows:


Sec. 611.330  Confidentiality in voting.

    (a) No bank or association may use signed ballots in stockholder 
votes. Each bank and association must adopt policies and procedures to 
ensure that all information and materials regarding how or whether an 
individual stockholder has voted remain confidential, including with 
respect to the institution, its directors, stockholders, or employees, 
or any other person except:
    (1) An independent third party tabulating the vote; or
    (2) The Farm Credit Administration.
    (b) A bank or association may use balloting procedures, such as an 
identity code on the ballot, that can be used to identify how or 
whether an individual stockholder has voted only if the votes are 
tabulated by an independent third party. In weighted voting, the votes 
must be tabulated by an independent third party. An independent third 
party that tabulates the votes must certify in writing that such party 
will not disclose to any person (including the institution, its 
directors, stockholders, or employees) any information about how or 
whether an individual stockholder has voted, except that the 
information must be disclosed to the Farm Credit Administration if 
requested.
    (c) Once a bank or association receives a ballot, the vote of that 
stockholder is final, except that a stockholder may withdraw a proxy 
ballot before balloting begins at a stockholders' meeting.
    (d) A bank or association may give a stockholder voting by proxy an 
opportunity to give voting discretion to the proxy of the stockholder's 
choice, provided that the proxy is also a stockholder eligible to vote.
    4. Section 611.340 is amended by removing the words ``the election 
of directors'' and adding in their place, the word ``voting'' in the 
heading; by removing the words ``System institution'' and adding in 
their place, the words ``bank and association'' and by removing the 
words ``the election of board members'' and adding in their place, the 
words ``a stockholder vote'' in paragraph (a); by removing the word 
``shall'' and adding in its place, the word ``must'' each place it 
appears in paragraphs (a) and (b); and by revising paragraphs (c) and 
(d) to read as follows:


Sec. 611.340  Security in voting.

* * * * *
    (c) Ballots and proxy ballots must be safeguarded before the time 
of distribution or mailing to voting stockholders and after the time of 
receipt by the bank or association until disposal. In an election of 
directors, ballots, proxy ballots and election records must be retained 
at least until the end of the term of office of the director. In other 
stockholder votes, ballots, proxy ballots, and records must be retained 
for at least 3 years after the vote.
    (d) The voting procedures of each institution must provide for the 
establishment of a tellers committee or other designated group of 
persons which must be responsible for validating ballots and proxies 
and tabulating voting results. An institution and its officers, 
directors, and employees may not make any public announcement of the 
results of a stockholder vote before the tellers committee or other 
designated persons have validated the results of the vote.

Subpart E--Transfer of Authorities

    5. Section 611.505 is amended by revising paragraph (e) to read as 
follows:

[[Page 64844]]

Sec. 611.505  Farm Credit Administration review.

* * * * *
    (e) The effective date of a transfer may not be less than 35 days 
after mailing of the notification to stockholders of the results of the 
stockholder vote, or 15 days after the date of submission to the Farm 
Credit Administration of all required documents for the Agency's 
consideration of final approval, whichever occurs later. If a petition 
for reconsideration is filed within 35 days after the date of mailing 
of the notification of stockholder vote, the constituent institutions 
must agree on a second effective date to be used in the event the 
transfer is approved on reconsideration. The second effective date may 
not be less than 60 days after stockholder notification of the results 
of the first vote, or 15 days after the date of the reconsideration 
vote, whichever occurs later.

Subpart G--Mergers, Consolidations, and Charter Amendments of 
Associations

    6. Section 611.1122 is amended by revising paragraph (k) to read as 
follows:


Sec. 611.1122  Requirements for mergers or consolidations.

* * * * *
    (k) The effective date of a merger or consolidation may not be less 
than 35 days after the date of mailing of the notification to 
stockholders of the results of the stockholder vote, or 15 days after 
the date of submission to the Farm Credit Administration of all 
required documents for the Agency's consideration of final approval, 
whichever occurs later. If a petition for reconsideration is filed 
within 35 days after mailing of the notification to stockholders of the 
results of the stockholder vote, the constituent institutions must 
agree on a second effective date to be used in the event the merger or 
consolidation is approved on reconsideration. The second effective date 
may not be less than 60 days after stockholder notification of the 
results of the first vote, or 15 days after the date of the 
reconsideration vote, whichever occurs later.

    Dated: November 16, 1998.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 98-31340 Filed 11-23-98; 8:45 am]
BILLING CODE 6705-01-P