[Federal Register Volume 64, Number 152 (Monday, August 9, 1999)]
[Rules and Regulations]
[Pages 43046-43049]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20323]



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FARM CREDIT ADMINISTRATION

12 CFR Parts 612, 614 and 618

RIN 3052-AB85


Standards of Conduct; Loan Policies and Operations; General 
Provisions; Regulatory Burden

AGENCY: Farm Credit Administration (FCA).

ACTION: Direct final rule with opportunity to comment.

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SUMMARY: This direct final rule reduces regulatory burden on the Farm 
Credit System (FCS or System) by repealing or amending 16 regulations. 
These revisions provide System banks and associations with greater 
flexibility concerning loan sales, agricultural secondary market 
activities, loans to insiders, letters of credit, information programs, 
travel expenses, and disclosing borrower information during litigation.

DATES: Unless we receive significant adverse comment by September 8, 
1999, these regulations will be effective 30 days after publication in 
the Federal Register during which either or both Houses of Congress are 
in session. We will publish notice of the effective date in the Federal 
Register. If we receive significant adverse comment on an amendment, 
paragraph, or section of this rule, and that provision may be addressed 
separately from the remainder of the rule, we will withdrawal that 
amendment, paragraph, or section and adopt as final those provisions of 
the rule that are not the subject of a significant adverse comment. In 
such a case, we would then tell you how we expect to continue with 
further rulemaking on the provisions that were the subject of 
significant adverse comment.

ADDDRESSES: You may send comments by electronic mail to ``reg-
[email protected]'' or through the Pending Regulations section of our 
website at ``www.fca.gov.'' You may also mail or deliver written 
comments to Patricia W. DiMuzio, Director, Regulation and Policy 
Division, Office of Policy and Analysis, Farm Credit Administration, 
1501 Farm Credit Drive, McLean, Virginia 22102-5090 or fax them to 
(703) 734-5784. You may review copies of all communications that we 
receive in the Office of Policy and Analysis, Farm Credit 
Administration.

FOR FURTHER INFORMATION CONTACT:
Eric Howard, Senior Policy Analyst, or Dale Aultman, Policy Analyst, 
Office of Policy and Analysis, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4498, TDD (703) 883-4444,
    or
Richard A. Katz, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 
883-4444.

SUPPLEMENTARY INFORMATION:

I. Background

    On August 18, 1998, we published a notice in the Federal Register 
that invited you to identify existing regulations and policies that 
impose unnecessary burdens on the FCS. See 63 FR 44176 (Aug. 18, 
1998).\1\ We specifically asked you to focus on those regulations and 
policies that are ineffective, duplicate other governmental 
requirements, or impose burdens that are greater than the benefits 
received. We took this action in our continuing effort to improve the 
regulatory environment so the System can better serve farmers and 
ranchers.
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    \1\ On November 18, 1998, we extended the comment period to 
January 19, 1999. See 63 FR 64013 (Nov. 18, 1998).
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    We received 30 responses. Of this total, 20 comment letters came 
from Farm Credit associations. Six Farm Credit banks sent us seven 
comment letters. The Farm Credit Council (FCC) commented on behalf of 
its membership. We also received responses from the Federal Farm Credit 
Banks Funding Corporation and the Federal Agricultural Mortgage 
Corporation (Farmer Mac).
    In this first phase of our effort to reduce regulatory burden on 
the FCS, we are repealing or revising 16 regulations. These regulations 
govern:
     Loan sales by agricultural credit banks (ACBs);
     Subordinated participation interests in Farmer Mac loan 
pools;
     Loans to institution-affiliated parties;
     Letters of credit that finance international trade;
     Informational programs at FCS institutions;
     Purchases and sales of personal property;
     Travel and subsistence expenses for directors, officers, 
and employees; and
     Disclosure of confidential information in litigation.
    We plan to respond to your other concerns in future phases of this 
project, and currently, we are analyzing all the issues that you 
raised.

II. Analysis of Changes and Comments by Section

A. Sale of Interests in Loans by ACBs

    We are correcting Sec. 614.4010(f)(1) so it accurately reflects the 
statutory authority of ACBs to sell interests in loans. The amended 
regulations confirm that ACBs may sell interests in the type of long-
term real estate mortgages that they can make under section 1.7(a) of 
the Farm Credit Act of 1971, as amended (Act), to:
     System banks and associations that have authority to 
purchase such interests;
     Non-System lenders; and
     Certified agricultural mortgage marketing facilities for 
Farmer Mac.
    We emphasize that revised Sec. 614.4010(f)(1) also permits ACBs to 
sell interests in long-term mortgages that they purchase from other 
System lenders. Section 3.1(13)(B) of the Act and amended 
Sec. 614.4010(f)(1) allow ACBs to sell interests in cooperative, rural 
utility, and international loans only to other Farm Credit banks and 
associations that have authority to purchase such loan interests.

B. Subordinated Participation Interests in Farmer Mac Pools

    We are repealing five separate regulatory provisions 
(Secs. 614.4000(e)(4), 614.4010(f)(4), 614.4030(c)(4), 614.4040(c)(4), 
and 614.4050(d)(4)) that authorize Farm Credit banks and associations 
to purchase subordinated participation interests in pools of loans that 
are sold into the Farmer Mac secondary market. The existing regulations 
carry out provisions of title VIII of the Act that Congress repealed in 
1996.\2\ Prior to 1996, title VIII of the Act required Farm Credit 
banks and associations to pledge cash reserves or hold subordinated 
participation interests in loans that they pooled and securitized for 
Farmer Mac. As amended, title VIII of the Act now permits, but no 
longer requires, Farm Credit banks and associations to retain 
subordinated participation interests in Farmer Mac pools. With the 
removal of these regulations, we will continue to review policy as well 
as safety and soundness issues related to subordinated participation 
interests in Farmer Mac loan pools.
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    \2\ Farm Credit System Reform Act of 1996; Pub. L. No. 104-105, 
110 Stat. 162 (Feb. 10, 1996).
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C. Loan Approvals

    We received 11 comments about Secs. 614.4460 and 614.4470, which 
govern loans to insiders. Although the Agricultural Credit Technical

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Corrections Act of 1988 \3\ abolished the district boards, 
Sec. 614.4460 refers to the defunct boards. Under this regulation, 
district boards were required to approve loans that System banks make 
to:
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    \3\ Pub. L. 100-399, 102 Stat. 1003 (Aug. 17, 1988).
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     Their directors and employees; and
     FCA Board members and staff.
    Currently, Sec. 614.4470 requires Farm Credit banks to approve 
loans that their affiliated associations make to:
     The association's own directors and employees;
     Directors and employees of a jointly managed association; 
or
     Bank employees.
    System banks and associations asked us to update Sec. 614.4460 and 
repeal the bank approval requirement in Sec. 614.4470. These commenters 
believe that our regulations should only apply to large insider loans.
    We respond by replacing Secs. 614.4460 and 614.4470 with a single 
regulation. Final Sec. 614.4460 requires your board to approve all 
loans to:
     Certain FCA and Farm Credit System Insurance Corporation 
(FCSIC) employees who are permitted to borrow from your institution 
under our Supplemental Standards of Ethical Conduct regulations at 5 
CFR parts 4101 and 4001, respectively; \4\
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    \4\ The new regulation explicitly refers to the Supplemental 
Standards of Ethical Conduct regulations that the FCA and FCSIC 
Boards enacted in 1995. See 60 FR 30781 (June 12, 1995). Those 
regulations specifically prohibit most FCA and FCSIC employees from 
borrowing from System institutions. For example, FCA and FCSIC Board 
members, examiners, procurement personnel, and all employees over a 
certain civil service grade level cannot legally borrow from Farm 
Credit banks and associations.
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     Your directors and employees;
     The directors and employees of another System bank or 
association that is under a joint management agreement with your 
institution;
     The directors and employees of your association's funding 
bank; and
     A cooperative or other legal entity if any of its 
directors, partners, or employees are also members of your board of 
directors.
    Your board must also approve loans to other borrowers if any of 
these parties has a substantial beneficial interest in the proceeds or 
collateral of the loan.
    When you extend credit to insiders you must comply with the 
Standards of Conduct regulations in part 612, the Disclosure 
regulations in part 621, and your board's policies. We also require 
your institution to document all material facts about your credit 
relationships with any of these parties and make it available, on 
request, to the FCA's Office of Examination and to the appropriate 
officials of your funding bank.
    The final regulation repeals the requirement that bank boards 
approve loans that their affiliated associations make to insiders. Our 
new approach retains adequate controls on loans that Farm Credit banks 
and associations make to their directors and employees. Currently, the 
boards of Farm Credit banks approve loans to insiders. Under the new 
regulation, boards of associations are similarly responsible for 
approving loans to their insiders.
    The commenters suggested that our regulation should require System 
boards to approve only insider loans that are above a minimum amount 
established by the institution's policy. We did not adopt this approach 
because board approval of all insider loans provides the most 
independent and objective approval process for such loans at each bank 
or association. Board approval also avoids the appearance of misconduct 
and impropriety. Board approval of even small insider loans is 
appropriate and reassures customers, shareholders, and investors that 
the System boards exercise diligence and independent judgment when they 
carry out their duties and obligations. Another regulation, 
Sec. 612.2140(a), requires directors of Farm Credit banks and 
associations to recuse themselves from board deliberations on their own 
loans.
    We are repealing Sec. 614.4450 on our own initiative. This 
regulation originally carried out provisions of the Act that authorized 
the FCA to supervise and approve the lending activities of all System 
banks and associations.\5\ After the Farm Credit Act of 1985 \6\ 
repealed this authority and converted the FCA into an arms-length 
regulator, we amended Sec. 614.4450 to state that ``authority for loan 
approval is vested in the Farm Credit banks and associations.'' This 
rule is no longer needed because it neither implements the Act nor 
promotes the System's safety and soundness.
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    \5\ See 38 FR 27837 (Oct. 9, 1973).
    \6\ Pub. L. No. 99-205, 99 Stat. 1678 (Dec. 23, 1985).
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D. Letters of Credit

    Existing Sec. 614.4720 allows banks for cooperatives (BCs) and ACBs 
to issue and confirm letters of credit that finance international trade 
in agricultural commodities and farm supplies. The final provision of 
this regulation, Sec. 614.4720(g), requires BCs and ACBs to charge fees 
for issuing letters of credit. We repeal it because we believe that 
this should be a business decision of BCs and ACBs. We retain all other 
provisions of this regulation because we believe they continue to 
promote safe and sound international banking practices at BCs and ACBs.

E. Conducting Information Programs

    The FCC, one association, and two Farm Credit Banks asked us to 
repeal Sec. 618.8210, which requires FCS institutions to maintain 
programs that inform farmers and other members of the public about FCS 
organization, functions, and services. The commenters believe that our 
regulations should not tell System institutions to conduct 
informational programs. Instead, they suggested that each System bank 
or association address this issue in its operational program. We agree 
that business goals provide an effective incentive for System banks and 
associations to market their services to potential customers. We repeal 
Sec. 618.8210 because it is no longer needed.

F. Purchases and Sales of Personal Property

    The FCC, two System banks, and an association want us to repeal 
Sec. 618.8250. The commenters remarked that operational programs of 
System lenders, not FCA regulations, should govern the purchases and 
sales of personal property.
    We respond by adjusting the regulatory requirements that apply to 
the purchases and sales of personal property by your banks and 
associations. One provision of Sec. 618.8250 is obsolete because it 
contains a reference to the defunct district boards. Moreover, we agree 
that your policies and operational programs, rather than FCA 
regulations, should cover all purchases and most sales of personal 
property by your bank or association. However, we believe that our 
Standards of Conduct regulations in part 612 should continue to govern 
the sale of personal property to your directors, officers, or other 
employees. Our regulatory requirements in part 612 help your 
institution avoid allegations of favoritism or fraud when you sell 
personal property to insiders. We rewrote the final sentence of 
Sec. 618.8250 in plain language and transferred it to 
Sec. 612.2165(b)(7) in the Standards of Conduct section of the 
regulations. This provision requires your institution to sell surplus 
personal property above a stated value to your employees through open 
competitive bidding.

G. Travel, Subsistence, and Other Related Expenses

    Four commenters suggested that we repeal Sec. 618.8270. This 
regulation requires the boards of FCS banks and associations to develop 
written policies,

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keep records, and audit the travel, subsistence, and other related 
expenses of their directors, officers, and employees. The commenters 
assert that this regulation imposes unnecessary burdens on FCS 
institutions. They point out that System banks and associations already 
address this issue in their operational plans.
    We have decided to repeal Sec. 618.8270 because other regulations 
already cover the travel and subsistence expenses of directors, 
officers, and employees of your institutions. For example, 
Sec. 618.8430 requires your bank or association to establish effective 
internal controls over their operations. Additionally, Sec. 611.400 
implements section 4.21 of the Act, which governs compensation for the 
FCS bank directors. Our examiners will continue to review the travel, 
subsistence, and related expenses of System bank directors in the 
normal examination process.

H. Production of Documents and Testimony

    One Farm Credit bank asked us to amend Sec. 618.8320(b)(7), and two 
Farm Credit banks and two associations wanted us to repeal 
Sec. 618.8330. These regulations govern the disclosure of documents and 
testimony in litigation. Some commenters objected to the cost of hiring 
an attorney to contest orders to produce documents or testimony. All 
commenters believe that our regulations should not limit their options 
on how best to respond to court orders.
    We continue to believe that regulations governing the production of 
confidential information during litigation are necessary. However, we 
revised our regulations to better balance your borrowers' rights to 
confidentiality with your need for greater flexibility in disclosing 
information during litigation. We combined both provisions into a 
single regulation, Sec. 618.8330, and rewrote it in plain language.
    Final Sec. 618.8330(a) allows your bank or association to disclose 
confidential information about a borrower (or a successor in interest) 
if your institution is in litigation with that borrower or his or her 
successor. Without this provision, your institution would have no 
authority to produce confidential information about a borrower who is 
in litigation with you.
    Final Sec. 618.8330(b) allows your bank or association to disclose 
confidential information under the lawful order of a court if the 
Government or your institution is not a party to the litigation. As a 
result, you do not automatically have to contest every order to produce 
documents or testimony. You may release confidential borrower 
information as defined by Sec. 618.8320(a) only if a judge issues the 
order. We believe that this requirement is important because the judge 
is impartial and can fairly decide whether the litigant needs the 
confidential information in your possession.

III. Direct Final Rule

    We are revising or repealing these regulations by a direct final 
rulemaking. The Administrative Procedure Act, 5 U.S.C. 551-59, et seq. 
(APA), supports direct final rulemaking, which is a streamlined 
technique for Federal agencies to enact noncontroversial regulations 
more quickly, without the usual notice and comment period. This process 
enables us to reduce the time and resources we need to develop, review, 
clear, and publish a final rule while still affording the public an 
opportunity to comment on or object to the rule.
    In a direct final rulemaking, we notify you the rule will become 
final on a specified future date unless we receive significant adverse 
comment during the comment period. If we receive significant adverse 
comment on an amendment, paragraph, or section of this rule, and that 
provision may be addressed from the remainder of the rule, we will 
withdraw that amendment, paragraph, or section and adopt as final those 
provisions of the rule that are not the subject of a significant 
adverse comment. In such a case, we would then tell you how we expect 
to continue with further rulemaking on the provisions that were the 
subject of significant adverse comment.
    A significant adverse comment is one where a commenter explains why 
the rule would be inappropriate (including challenges to its underlying 
premise or approach), ineffective, or unacceptable without a change. In 
general, a significant adverse comment would raise an issue serious 
enough to warrant a substantive response from the agency in a notice-
and-comment rulemaking.
    Direct final rulemaking is justified under section 553(b)(B) of the 
APA. Section 553(b)(B) is the APA's ``good cause'' exemption that 
allows an agency to omit notice and comment on a rule when it finds 
``that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.'' In direct final 
rulemaking, the agency finds the rule is straightforward and 
noncontroversial to make normal notice and comment unnecessary under 
the APA. However, rather than eliminating public comment altogether, 
which is permissible under section 553(b)(B), the agency gives the 
public an opportunity to rebut the agency's conclusion that public 
input on the rule is unnecessary.
    We believe that a direct final rulemaking is the proper method for 
repealing or revising these regulations that place unnecessary 
regulatory burden on FCS institutions. For these reasons, we do not 
anticipate significant adverse comment on this rule. If we receive no 
significant adverse comment, we will publish our regular notice of the 
effective date of the rule following the required Congressional waiting 
period under section 5.17(c)(1) of the Act.

List of Subjects

12 CFR Part 612

    Agriculture, Banks, banking, Conflict of interests, Rural areas.

12 CFR Part 614

    Agriculture, Banks, banking, Flood insurance, Foreign trade, 
Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 618

    Agriculture, Archives and records, Banks, banking, Insurance, 
Reporting and recordkeeping requirements, Rural areas, Technical 
assistance.

    For the reasons stated in the preamble, the Farm Credit 
Administration amends parts 612, 614, and 618 of chapter VI, title 12 
of the Code of Federal Regulations as follows:

PART 612--STANDARDS OF CONDUCT

    1. The authority citation for part 612 continues to read as 
follows:

    Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12 
U.S.C. 2243, 2252, 2254).

    2. Amend Sec. 612.2165 by adding the following sentence to the end 
of paragraph (b)(7):


Sec. 612.2165  Policies and procedures.

* * * * *
    (b) * * *
    (7) * * * Farm Credit institutions must use open competitive 
bidding whenever they sell surplus property above a stated value (as 
established by the board) to their employees.
* * * * *

PART 614--LOAN POLICIES AND OPERATIONS

    3. The authority citation for part 614 continues to read as 
follows:

    Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs. 
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 
4.13, 4.13B, 4.14, 4.14A, 4.14C,

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4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 
5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8, 7.12, 7.13, 8.0, 8.5 of the 
Farm Credit Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2019, 
2071, 2073, 2074, 2075, 2091, 2093, 2094, 2097, 2121, 2122, 2124, 
2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201, 2202, 2202a, 
2202c, 2202d, 2202e, 2206, 2206a, 2207, 2211, 2212, 2213, 2214, 
2219a, 2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279c-1, 
2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101 
Stat. 1568, 1639.

Subpart A--Lending Authorities


Sec. 614.4000  [Amended]

    4. Remove Sec. 614.4000(e)(4).
    5. Amend Sec. 614.4010 by removing paragraph (f)(4) and revising 
paragraph (f)(1) to read as follows:


Sec. 614.4010  Agricultural credit banks.

* * * * * *
    (f) * * *
    (1) Subject to subpart H of this part, agricultural credit banks 
may sell interests in real estate mortgage loans identified in 
paragraph (a) of this section to Farm Credit System institutions 
authorized to purchase such interests, other lenders, and certified 
agricultural mortgage marketing facilities for the Federal Agricultural 
Mortgage Corporation. Agricultural credit banks may also sell interests 
in the types of loans listed in paragraph (d) of this section to other 
Farm Credit System institutions that are authorized to purchase such 
interests.
* * * * *


Sec. 614.4030  [Amended]

    6. Remove Sec. 614.4030(c)(4).


Sec. 614.4040  [Amended]

    7. Remove Sec. 614.4040(c)(4).


Sec. 614.4050  [Amended]

    8. Remove Sec. 614.4050(d)(4).
    9. Revise subpart M to read as follows:

Subpart M--Loan Approval Requirements


Sec. 614.4460  Approval of loans to affiliated parties.

    (a) With approval of your board, your bank or association may lend 
to the following parties in accordance with part 612 of this chapter 
and the policies of your board of directors:
    (1) Farm Credit Administration employees permitted to borrow from 
your institution under 5 CFR 4101.104;
    (2) Farm Credit System Insurance Corporation employees permitted to 
borrow from your institution under 5 CFR 4001.104;
    (3) Your directors and employees;
    (4) The directors or employees of another bank or association under 
a joint management agreement with your institution;
    (5) The directors or employees of your funding bank if you are an 
association;
    (6) A cooperative or other legal entity if any of its directors, 
partners, or employees are also members of your board of directors; and
    (7) Other borrowers if any of the parties identified in this 
section are:
    (i) Recipients of the loan proceeds;
    (ii) Stockholders or other equity owners of the borrower and they 
have a significant interest in the loan funds or collateral; or
    (iii) Endorsers, guarantors or comakers on the credit.
    (b) Your bank or association must document all material facts about 
the credit relationship with any of these parties and make the 
documentation available, on request, to our Office of Examination and 
to the funding bank.

Subpart Q--Banks for Cooperatives and Agricultural Credit Banks 
Financing International Trade


Sec. 614.4720  [Amended]

    10. Remove Sec. 614.4720(g).

PART 618--GENERAL PROVISIONS

    11. The authority citation for part 618 continues to read as 
follows:

    Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7, 
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12 
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183, 
2200, 2211, 2218, 2243, 2244, 2252).

Subpart F--Miscellaneous Provisions


Secs. 618.8210-618.8270  [Removed and Reserved]

    12. Remove and reserve subpart F, consisting of Secs. 618.8210 
through 618.8270.

Subpart G--Releasing Information


Sec. 618.8320  [Amended]

    13. Amend Sec. 618.8320 as follows:
    a. Remove paragraph (b)(7); and
    b. Redesignate paragraphs (b)(8), (b)(9) and (b)(10) as paragraphs 
(b)(7), (b)(8), and (b)(9).
    14. Revise Sec. 618.8330 to read as follows:


Sec. 618.8330  Production of documents and testimony during litigation.

    (a) If your bank or association is a party to litigation with a 
borrower or a successor in interest, you or your directors, officers, 
or employees may disclose confidential information about that borrower 
or the successor in interest during the litigation.
    (b) If the Government or your bank or association is not a party to 
litigation, you or your directors, officers, or employees may produce 
confidential documents or testimony only if a court of competent 
jurisdiction issues a lawful order signed by a judge.

    Dated: August 2, 1999.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 99-20323 Filed 8-6-99; 8:45 am]
BILLING CODE 6705-01-P