[Federal Register Volume 64, Number 246 (Thursday, December 23, 1999)]
[Proposed Rules]
[Pages 72041-72044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33104]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 611 and 615

RIN 3052-AB91


Organization; Funding and Fiscal Affairs, Loan Policies and 
Operations, and Funding Operations; Stock Issuances

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration is proposing to amend 
regulations to allow Farm Credit System (System) service corporations 
to sell stock to non-System entities; and System institutions to adopt 
bylaws allowing the issuance of unlimited amounts of certain classes of 
equities.
    The purpose of our proposal is to provide System institutions 
additional opportunities to fulfill their borrowers' needs through 
service corporations and more efficient issuance of equities related to 
earnings distributions and transfers of capital. We are also taking 
this opportunity to make a technical change to one of our regulations 
pertaining to disclosure requirements.

DATES: Please send your comments to us by January 24, 2000.

ADDRESSES: You may send comments by electronic mail to ``reg-
[email protected]'' 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 comments we receive in the Office of Policy 
and Analysis, Farm Credit Administration.

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

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of our proposed rule are to:
     Increase the flexibility and usefulness of service 
corporations;
     Provide adequate disclosures to investors in service 
corporations organized to exercise the authorities

[[Page 72042]]

granted by title VIII of the Farm Credit Act of 1971, as amended (Act); 
and
     Provide flexibility for the efficient distribution of a 
System institution's earnings and timely transfers of capital to a 
System association.

II. Background

A. Incorporation of Service Corporations

    On August 18, 1998, we published a notice in the Federal Register 
that invited System institutions to identify existing regulations and 
policies that impose unnecessary burdens on the FCS. (See 63 FR 44176, 
Aug. 18, 1998.) \1\ We received comments from an agricultural credit 
bank (ACB) and a Farm Credit Bank (FCB) on Sec. 611.1135, which allows 
only System banks and associations to own stock in service 
corporations. CoBank, ACB, commented that we should allow more 
flexibility in creating and operating service corporations to allow 
non-System institutions to own part of the service corporation. CoBank, 
ACB, asserted that this flexibility would foster joint endeavors and 
alliances and create more products and services for System borrowers. 
The FCB of Texas commented that the Act does not limit service 
corporation stock ownership to only banks or associations. The FCB 
further commented that limiting stock ownership may lessen the 
usefulness of these corporations to System institutions.
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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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B. Capitalization Bylaws

    Section 615.5220(a)(3) of our regulations requires that System 
institutions' bylaws specify the number of shares that will be issued 
for each class of equities.\2\ As System institutions merge, change 
their charters, or modify their bylaws, we note they experience 
difficulty in quantifying in their bylaws the amounts of certain 
equities that may be issued. Those equities include non-voting equities 
that may be issued in the event the institution requires financial 
assistance and equities issued to distribute earnings. Several 
institutions have indicated that the requirements of 
Sec. 615.5220(a)(3) often result in burden on System institutions' 
boards because they must estimate the number of these equities 
necessary in the future. They point out that since these types of 
equities do not dilute a System institution's shareholder equity, the 
bylaws should not be required to specify the number authorized.
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    \2\ There are two current exceptions to this requirement: (1) 
Stock that is required to be purchased when obtaining a loan; and 
(2) non-voting stock that is converted from voting stock after the 
repayment of a loan.
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C. Technical Change

    Currently Sec. 615.5250(c)(2) regarding disclosure statements for 
issuance of stock contains a typographical reference error. The correct 
reference is to paragraph Sec. 615.5250(c)(1) rather than 
Sec. 615.5250(d)(1).

III. Analysis of Proposed Changes by Section

A. Section 611.1135

    We are proposing to amend Sec. 611.1135 to allow service 
corporations formed by System banks or associations to issue equity to 
persons or entities who are not System institutions. We propose that 
non-voting stock may be issued in unlimited amounts as long as the 
issuance is consistent with the service corporation's bylaws. We are 
proposing a limit, however, on the amount of voting stock that can be 
issued to non-System persons.
    We believe that as federally chartered instrumentalities, System 
institutions should control their service corporations because they are 
also federally chartered instrumentalities. Therefore, we are proposing 
that System institutions hold at least 80 percent of the voting stock 
of their service corporations at all times. We considered various other 
percentages in deciding what voting stock control percentage to 
propose. However, we arrived at this proposed percentage for the 
following reasons:
     An 80 percent voting stock requirement, rather than a 
simple majority, provides more assurance of System control even when 
not all System stockholders vote in the same manner.
     It is consistent with voting stock control requirements in 
Sec. 611.1137, which pertain to service corporations that act as 
agricultural mortgage marketing facilities.
     Control of a service corporation or subsidiary is also 
consistent with other banking laws governing non-System service 
corporations and operating subsidiaries.\3\
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    \3\ Under the Bank Services Company Act, all of the stock of a 
bank service company must be owned by one or more insured banks. 12 
U.S.C. 1861(b). Federal savings associations may also invest in 
service corporations only if 100 percent of the corporation's stock 
is held by other savings associations having offices in the same 
state. 12 U.S.C. 1464(b)(4)(B). A national bank may establish or 
acquire an operating subsidiary as long as the parent bank owns more 
than 50 percent of the voting stock or the parent bank controls the 
subsidiary and no other party owns more than 50 percent of the 
voting stock. 12 CFR 5.34. A Federal savings association can have an 
operating subsidiary as long as the association owns more than 50 
percent of the voting shares and no other person exercises effective 
operating control. 12 CFR 559.2. In addition, pursuant to 12 U.S.C. 
1841, which defines terms in connection with bank holding companies, 
a company has control over a bank or other entity if the company has 
power to vote 25 percent or more of any class of voting stock.
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    We seek your comments on the voting stock control requirement and 
the appropriate amount of System control that also provides adequate 
flexibility and usefulness of service corporations.
    Congress originally provided authority for formation of corporate 
subsidiaries in 1980. Congress wanted System institutions to be able to 
develop the most efficient and effective means for delivery of services 
to borrowers and other System entities.\4\ We have noted that in recent 
years there has been an increase in System institutions forming 
alliances to offer a variety of services to their borrowers. This 
proposed rule will allow System institutions, for example, to purchase 
an existing service entity and charter it as a service corporation 
under the Act as a means of offering a new service. This rule would 
permit the existing service provider to retain an ownership interest.
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    \4\ See H.R. Rep. No. 1287, 96th Cong., 2nd Sess., 23 (1980).
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    We are further proposing that service corporations must provide 
adequate disclosure when issuing stock to persons other than System 
institutions. The proposed regulations would apply the requirements of 
Sec. 615.5250(c) and (d) to such stock issuances.

B. Section 611.1137

    We are proposing to amend Sec. 611.1137, which allows service 
corporations to be organized to act as agricultural mortgage marketing 
facilities by selling loans in the secondary market. We are proposing 
that these service corporations that issue stock to non-System persons 
provide adequate disclosures pursuant to the disclosure requirements in 
Sec. 615.5250(c) and (d).
    Section 611.1137 requires that System institutions hold at least 80 
percent of the voting stock of their title VIII service corporations at 
all times. We seek your comments on the voting stock control 
requirement and the appropriate System control amount that also 
provides adequate flexibility and usefulness of title VIII service 
corporations.
    While amending Secs. 611.1135 and 611.1137, we are taking the 
opportunity to write them in plain language using a question and answer 
format. Additionally, we are writing Sec. 611.1136 in plain language. 
That section pertains to our regulation and examination of

[[Page 72043]]

incorporated service corporations and unincorporated service 
organizations.

C. Section 615.5220

    We are proposing to amend Sec. 615.5220(a)(3) to allow System 
institutions to adopt bylaws that provide for issuance of certain 
equities in unlimited amounts. Current law requires that bylaws, 
approved by voting shareholders, set forth the number of each class of 
equities that can be issued, with two exceptions. Those equities that 
can be issued in unlimited amounts are:
     Equities required to be purchased as a condition of 
obtaining a loan; and
     Non-voting stock that results when voting stock is 
converted after the repayment of a loan.
    We are proposing to also allow bylaws to provide for the issuance 
of unlimited amounts of:
     Non-voting stock that an association issues to its funding 
bank in exchange for the bank transferring capital pursuant to 
Sec. 615.5171; and
     Equities that institutions provide to borrowers for the 
sole purpose of distributing that institution's earnings.
    We are proposing this change to assure timely transfers of capital 
to an association as well as the flexibility for the efficient 
distribution of an institution's earnings. This proposal will not 
dilute a shareholder's voting rights in an institution or affect a 
shareholder's preference in the event of an institution liquidation. 
Any issuance of preferred stock would still require that all 
shareholders affected by the preference vote on the issuance as 
described in Sec. 615.5230(b)(1). We note that this proposal does not 
prevent System institutions' boards and shareholders from stipulating 
in their institutions' bylaws the amount of capital that may be 
transferred and earnings distribution equities authorized to be issued.

List of Subjects in 12 CFR Parts 611 and 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.
    For the reasons stated in the preamble, we propose to amend parts 
611 and 615 of chapter VI, title 12 of the Code of Federal Regulations 
as follows:

PART 611--ORGANIZATION

    1. The authority citation for part 611 continues 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. Revise subpart I to read as follows:

Subpart I--Service Organizations

Sec.
611.1135  Incorporation of service corporations.
611.1136  Regulation and examination of service organizations.
611.1137  Title VIII service corporations.

Subpart I--Service Organizations


Sec. 611.1135  Incorporation of service corporations.

    (a) What is the process for chartering a service corporation? A 
Farm Credit bank or association (you or your) may organize a 
corporation with other Farm Credit banks or associations to perform, 
for you or on your behalf, any function or service that you are 
authorized to perform under the Act and Farm Credit Administration (we, 
us, or our) regulations, with two exceptions. Those exceptions are that 
your corporation may not extend credit or sell insurance services. To 
organize a service corporation, you must submit an application to us 
following the applicable requirements of paragraph (c) of this section. 
If what you propose in your application meets the requirements of the 
Act, our regulations, and any other conditions we may impose, we may 
issue a charter for your service corporation making it a federally 
chartered instrumentality of the United States. Your service 
corporation will be subject to examination, supervision, and regulation 
by us.
    (b) Who may own equities in your service corporation? All Farm 
Credit banks and associations are eligible to become stockholders in 
your service corporation. Your service corporation may also issue non-
voting and voting stock to persons that are not Farm Credit 
institutions, provided that at least 80 percent of the voting stock is 
at all times held by Farm Credit institutions. For the purposes of this 
subpart, we define persons as individuals or legal entities organized 
under the laws of the United States or any State or territory thereof.
    (c) What must be included in your application to form a service 
corporation? Your application for a corporate charter must include:
    (1) The certified resolution of the board of each organizing bank 
or association authorizing the incorporation;
    (2) A request signed by the president(s) of the organizing bank(s) 
or association(s) to us to issue a charter, supported by a detailed 
statement demonstrating the need and the justification for the proposed 
entity; and
    (3) The proposed articles of incorporation addressing, at a 
minimum, the following:
    (i) The name of your corporation;
    (ii) The city and State where the principal offices of your 
corporation are to be located;
    (iii) The general purposes for the formation of your corporation;
    (iv) The general powers of your corporation;
    (v) The procedures for a Farm Credit bank or association or persons 
that are not Farm Credit institutions to become a stockholder;
    (vi) The procedures to adopt and amend your corporation's bylaws;
    (vii) The title, par value, voting and other rights, and authorized 
amount of each class of stock that your corporation will issue and the 
procedures to retire each class;
    (viii) The notice and quorum requirement for a meeting of 
shareholders, and the vote required for shareholder action on various 
matters;
    (ix) The procedures and shareholder voting requirements for the 
merger, voluntary liquidation, or dissolution of your corporation or 
the distribution of corporate assets;
    (x) The standards and procedures for the application and 
distribution of your corporation's earnings; and
    (xi) The length of time your corporation will exist.
    (4) The proposed bylaws, which must include the provisions required 
by Sec. 615.5220(b) of this chapter;
    (5) A statement of the proposed amounts and sources of 
capitalization and operating funds;
    (6) Any agreements between the organizing banks and associations 
relating to the organization or the operation of the corporation; and
    (7) Any other supporting documentation that we may request.
    (d) What will we do with your application? If we approve your 
completed application, we will issue a charter for your service 
corporation as a corporate body and a federally chartered 
instrumentality. We may condition the issuance of a charter, including 
imposing minimum capital requirements, as we deem appropriate. For good 
cause, we may deny your application.
    (e) Once your service corporation is formed, how are its articles 
of incorporation amended? Your service corporation's articles of 
incorporation may be amended in either of two ways:
    (1) The board of directors of the corporation may request that we 
amend

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the articles of incorporation by sending us a certified resolution of 
the board of directors of the service corporation and stating:
    (i) The section(s) to be amended;
    (ii) The reason(s) for the amendment;
    (iii) The language of the articles of incorporation provision, as 
amended; and
    (iv) That the requisite shareholder approval has been obtained. The 
request will be subject to our approval as stated in paragraphs (a) and 
(c) of this section.
    (2) We may at any time make any changes in the articles of 
incorporation of your service corporation that are necessary and 
appropriate for the accomplishment of the purposes of the Act.
    (f) When your service corporation issues equities, what are the 
disclosure requirements? Your service corporation must provide the 
disclosures described in Sec. 615.5250(c) and (d) of this chapter.


Sec. 611.1136  Regulation and examination of service organizations.

    (a) What regulations apply to a service organization? Because a 
service organization is formed by banks and associations, it is subject 
to applicable Farm Credit Administration (we, our) regulations.
    (b) Who examines a service organization? We examine service 
organizations.
    (c) What types of service organizations are subject to our 
regulations and examination? Incorporated service corporations and 
unincorporated service organizations formed by banks and associations 
are subject to our regulations and examination.


Sec. 611.1137  Title VIII service corporations.

    (a) What is a title VIII service corporation? A title VIII service 
corporation is a service corporation organized for the purpose of 
exercising the authorities granted under title VIII of the Act to act 
as an agricultural mortgage marketing facility.
    (b) How do I form a title VIII service corporation? A title VIII 
service corporation is formed and regulated in the same manner as a 
service corporation formed under Sec. 611.1135, with one exception. The 
Federal Agricultural Mortgage Corporation or its affiliates may not 
form or own stock in a title VIII service corporation.

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

    4. 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, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.3, 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, 2154a, 2160, 2202b, 
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 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--Issuances of Equities

    5. Amend Sec. 615.5220 by revising paragraph (a)(3) to read as 
follows:


Sec. 615.5220  Capitalization bylaws.

* * * * *
    (a) * * *
    (3) The number of shares and par value of equities authorized to be 
issued for each class of equities. However, the bylaws need not state a 
limit for these equities:
    (i) Equities that are required to be purchased as a condition of 
obtaining a loan.
    (ii) Non-voting stock resulting from the conversion of voting stock 
due to repayment of a loan.
    (iii) Non-voting equities that are issued to an association's 
funding bank in conjunction with any agreement for a transfer of 
capital between the association and the bank.
    (iv) Equities issued solely for the purpose of distributing an 
institution's earnings.
* * * * *


Sec. 615.5250  [Amended]

    6. Amend Sec. 615.5250(c)(2) by removing the reference to 
``(d)(1)'' and adding in its place, the reference ``(c)(1)''.

    Dated: December 16, 1999.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 99-33104 Filed 12-22-99; 8:45 am]
BILLING CODE 6705-01-P