[Federal Register Volume 65, Number 53 (Friday, March 17, 2000)]
[Proposed Rules]
[Pages 14494-14497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6569]


-----------------------------------------------------------------------

FARM CREDIT ADMINISTRATION

12 CFR Part 620

RIN 3052-AB94


Disclosure to Shareholders; Annual Report

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: Our regulations require Farm Credit Banks (FCBs) and 
agricultural credit banks (collectively referred to as banks) that 
present their financial statements on a combined basis to distribute 
their annual reports to the shareholders of their related associations. 
We propose to revise this requirement to provide that a bank generally 
need not distribute its annual report to the shareholders of any 
related association that discloses, in a separate section of its annual 
report, specified information about its financial and supervisory 
relationship with the bank. The proposed amendment would, however, 
require any bank that experiences a ``significant event'' to distribute 
its annual report to the shareholders of its related associations. We 
also propose to amend our regulation to provide that shareholders of 
Farm Credit System (System) institutions may obtain copies of an 
institution's financial reports by electronic mail or on its Web site, 
as well as by traditional mail or telephone. This revision would 
benefit banks, associations and their shareholders because it would 
allow them to share necessary information at a reduced cost.

DATES: Please send your comments to us by April 17, 2000.

ADDRESSES: You may send comments by electronic mail to ``[email protected]'' or through the Pending Regulations section of our Web 
site at ``www.fca.gov.'' You may also send 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 by fax 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:
Robert E. Donnelly, Senior Accountant, Office of Policy and Analysis, 
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4450, TDD 
(703) 883-4444;
        or
Jennifer A. Cohn, 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 amendment are to:
     Allow banks (and indirectly their related associations and 
their shareholders) to save significant printing and mailing costs by 
relaxing the requirement that they must routinely distribute their 
annual reports to the shareholders of their related associations; and
     Ensure that association shareholders continue to receive 
the information they need about how their associations' relationships 
with related banks affect their own investments in the associations.

II. Background

A. Reducing Regulatory Burden

    On August 18, 1998, we published a notice in the Federal Register 
that invited commenters to identify existing regulations and policies 
that impose unnecessary burdens on the System. See 63 FR 44176 (Aug. 
18, 1998).\1\ We specifically requested commenters to focus on those 
regulations and policies that are ineffective, duplicate other 
requirements, or impose burdens that are greater than the benefits 
received. We took this action as part of our continuing effort to 
improve the regulatory environment so the System can better serve 
farmers and ranchers.
---------------------------------------------------------------------------

    \1\ On November 18, 1998, we extended the comment period to 
January 19, 1999. See 63 FR 64013 (Nov. 18, 1998).
---------------------------------------------------------------------------

    Among the comment letters we received, two asked us to repeal the 
requirement imposed by Sec. 620.4(b)(1). This regulation requires any 
bank that presents its financial statements on a combined basis with 
its related associations to distribute its annual report to the 
shareholders of the related associations. One comment letter was from 
the Farm Credit System Accounting Standards Work Group (ASWG), on 
behalf of banks that present their financial statements on a combined 
basis. The other comment letter was from the Farm Credit Bank of Texas 
(which also has a representative on the ASWG). Both commenters 
contended the requirement that banks distribute their annual report to 
an association's shareholders is of minimal benefit to those 
shareholders. The commenters pointed out that we already require 
associations to include in their own annual reports information about 
their financial and supervisory relationships with their related banks. 
The commenters stated that because of the high costs of printing and 
mailing annual reports to the associations' shareholders (costs that 
are reflected in the costs of funds of the associations and interest 
rates to their shareholders), the regulation imposes an undue burden. 
We considered these comments in drafting this proposed rule.

B. Policy Background of This Rule

    We first required banks to distribute their annual reports to their 
related associations' shareholders in March 1986. At that time, our 
regulations required banks to supervise closely the activities of their 
related associations. In addition, many associations were experiencing 
severe financial difficulties and were relying heavily on their related 
banks for financial assistance. During the mid-1980s, banks were also 
experiencing their own financial difficulties. These financial 
difficulties were caused both by rapid changes in interest rates that 
hindered the banks' debt funding strategies and by the financial stress 
from the banks providing financial assistance to their related 
associations.
    In part because banks and associations were so interdependent, in 
the mid-1980s we issued a regulation requiring banks to distribute 
their annual reports to shareholders of related associations. In this 
way, the

[[Page 14495]]

associations' shareholders had access to full information about how the 
financial condition of the related banks affected their own investments 
in their associations. In addition, we issued a regulation requiring 
banks to present their financial statements on a combined basis with 
their related associations.\2\
---------------------------------------------------------------------------

    \2\ Based on the facts and circumstances that existed in the 
1980s, this requirement conformed at that time with generally 
accepted accounting principles (GAAP).
---------------------------------------------------------------------------

    Through the intervening years, with the objective of making 
associations more accountable for their actions, we have changed or 
removed many of the regulatory provisions that caused associations to 
be financially dependent on their banks. For instance, we adopted 
regulations that have caused associations to strengthen their capital 
positions. In addition, we are using our enforcement authorities 
effectively to cause associations to operate in a more safe and sound 
manner. Because of these and other factors, all associations have 
improved their financial strength to a point that they are able to 
operate in a more independent manner.
    In 1997, recognizing that circumstances had changed and that GAAP 
may no longer require certain banks to present their financial 
statements on a combined basis, we amended our regulations to allow 
banks to present their financial statements on any basis that conforms 
to GAAP.\3\ At the same time, we amended the annual report distribution 
requirement to allow any bank that presents its financial statements on 
a bank-only basis (e.g., CoBank, ACB (CoBank)) not to distribute its 
annual reports to the shareholders of its related associations on a 
routine basis. We now require banks that prepare their financial 
statements on a bank-only basis to provide annual reports to their 
related associations' shareholders only when the banks are affected by 
a ``significant event.'' \4\ We have ensured, however, that 
shareholders continue to receive information about the financial and 
supervisory relationship between their associations and the related 
bank. In another regulation, we require all associations to disclose in 
their annual reports information about these relationships.\5\ We 
believe this set of regulations strikes the proper balance between a 
bank's desire to minimize costs and shareholders' needs to receive 
information about how the bank's condition affects the operations and 
financial condition of their associations.
---------------------------------------------------------------------------

    \3\ See Sec. 620.2(g), which reads: ``Each Farm Credit 
institution shall present its reports in accordance with generally 
accepted accounting principles and in a manner that provides the 
most meaningful disclosure to shareholders.''
    \4\ In addition, Sec. 620.2(h)(3) requires all System 
institutions to make their reports available free of charge upon 
request.
    \5\ See Sec. 620.5.
---------------------------------------------------------------------------

III. Analysis of Regulation Amendments by Section

    This revision would make several changes based on our plain 
language initiatives. In addition, it would allow shareholders to 
obtain copies of an institution's financial reports by electronic mail 
or on its Web site, as well as by mail or telephone.
    Finally, the revision would provide that a bank generally need not 
distribute its annual report to the shareholders of any related 
association that discloses, in a separate section of its annual report, 
specified information about its financial and supervisory relationship 
with the bank. The regulation would, however, require any bank that 
experiences a ``significant event'' to distribute its annual report to 
the shareholders of its related associations. We believe our proposed 
revision would provide the regulatory relief the commenters requested. 
As discussed above in section II.B., we have allowed CoBank not to 
distribute its annual reports to the shareholders of related 
associations since 1996. We believe this arrangement has been 
beneficial for the affected shareholders and associations as well as 
CoBank. This revision would extend similar relief to the FCBs.\6\
---------------------------------------------------------------------------

    \6\ In late 1999, the ASWG, on behalf of the FCBs, requested 
that we relieve the FCBs from having to distribute their annual 
reports to shareholders of related associations until any change to 
the regulation becomes effective. In January 2000, we provided a 
letter to the ASWG stating that, subject to the same conditions we 
are proposing in this regulatory amendment, we would take no action 
against any FCB that did not distribute its annual report as 
required by Sec. 620.4(b)(1). Unless we tell the FCBs otherwise, our 
letter remains in effect until this rulemaking becomes effective.
---------------------------------------------------------------------------

A. Section 620.2(h)

    Existing Sec. 620.2(h) requires institutions, in relevant part, to 
provide telephone numbers and addresses where shareholders may get 
copies of certain financial reports the institutions are required to 
make available. We propose to amend this rule to provide that 
institutions must also provide electronic mail and Web site addresses, 
if available. For institutions and shareholders that have this 
capability, we believe this extra method of receiving and responding to 
requests for financial reports would be cost-effective and convenient.
    We also propose to reorganize this section using plain language. 
Other than the change discussed in the previous paragraph, we do not 
propose to change the meaning of the section.

B. Section 620.4(b)

    Existing Sec. 620.4(b)(2) generally allows banks that present their 
financial statements on a bank-only basis not to distribute their 
annual reports to the shareholders of their related associations. These 
banks must distribute the reports to shareholders of related 
associations only when the banks experience a ``significant event'' 
that has a ``material effect'' on the associations, as those terms are 
defined in Sec. 620.1 of our regulations. Currently, CoBank is the only 
bank that presents its financial statements on a bank-only basis. 
CoBank, therefore, is the only bank that we have not generally required 
to distribute its annual report to the shareholders of its related 
associations.\7\
---------------------------------------------------------------------------

    \7\ Based on facts and circumstances to date, GAAP has required 
the banks (other than CoBank) to present their financial statements 
on a combined basis with their related associations. As a result, 
these banks have been subject to the requirements of existing 
Sec. 620.4(b)(1), which requires them to distribute their annual 
reports to the shareholders of related associations on a routine 
basis.
---------------------------------------------------------------------------

    Our amended regulation would treat all banks (including CoBank) in 
a similar way with respect to the distribution of annual reports. Banks 
generally would not need to distribute their annual reports to the 
shareholders of any associations that disclosed, in a separate section 
of their own annual reports, specified information about their 
financial and supervisory relationship with their banks.\8\ Any bank 
that experienced a ``significant event'' that has a ``material effect'' 
on the associations, however, would have to distribute its annual 
report to the shareholders of its related associations. The information 
included in this separate section is information that other existing 
regulations already require associations to disclose in their annual 
reports.\9\ Our amendment would merely provide that if an association 
presented this information in a separate section of its annual report, 
its related bank would not be required to distribute its own annual 
report to the association's shareholders.\10\
---------------------------------------------------------------------------

    \8\ Although this amended rule would permit banks not to 
distribute their annual reports on a routine basis, GAAP may 
continue to require them to present their financial statements on a 
combined basis depending on the facts and circumstances.
    \9\ See Secs. 620.2(h), 620.5.
    \10\ This rule would not prohibit any bank from distributing its 
annual reports to the shareholders of related associations if it 
wished to do so.
---------------------------------------------------------------------------

    The separate section, which could incorporate by reference 
information from other sections of the annual report, would have to 
include:

[[Page 14496]]

    1. The statement required by Sec. 620.2(h)(2), telling 
shareholders:
     That their investment in the association may be materially 
affected by the financial condition and results of operations of the 
related bank;
     That (if not otherwise provided) a copy of the bank's 
financial reports to shareholders will be made available free of charge 
upon request; and
     The telephone numbers and addresses (including, if 
available, electronic mail and Web site addresses) where shareholders 
may obtain copies of the related bank's financial reports.
    2. If applicable, the following information required by Sec. 620.5:
     The association's obligation to borrow only from the bank 
unless the bank gives approval to the association to borrow elsewhere;
     The major terms of any capital preservation, loss sharing, 
or financial assistance agreements between the association and the 
bank;
     Any bank bylaw provisions authorizing the bank to access 
the capital of the association;
     The extent to which the bank has assumed the association's 
exposure to interest rate risk; and
     Any other material operational and financial conditions 
that may contribute to an interdependent relationship between the 
association and the bank.
    If associations chose to present this information in a separate 
section of their annual reports, we believe shareholders would be able 
to review the information they need about how their associations' 
relationships with their related banks affect their own investments 
more easily. With this information, we believe shareholders would be 
able to decide whether they should ask for a copy of the bank's annual 
report. If a particular association chose not to present this 
information in a separate section, its related bank would continue to 
be required to distribute its annual report to the shareholders of that 
association.
    We considered an alternative to our bank distribution proposal that 
would require the association, rather than its bank, to distribute the 
bank's annual report. Currently, associations reimburse their banks 
either directly or indirectly for the cost of preparing and 
distributing the banks' annual reports to the shareholders of 
associations. Allowing the banks to require their associations to 
distribute the banks' annual reports would provide added flexibility to 
the distribution process. We believe this added flexibility could lead 
to cost savings that would benefit not only the banks and their related 
associations, but also association shareholders. We note that 
regardless of whether a bank or an association makes this distribution, 
the cost to the association should remain more or less the same. We ask 
commenters to consider whether this alternative is more appropriate.
    Since 1996 we have permitted CoBank (because it presents its 
financial statements on a bank-only basis) not to distribute its annual 
reports to the shareholders of its related associations even if the 
associations have not presented the specified information in a separate 
section. We believe, however, that presenting this information in a 
separate section would impose minimal, if any, burden on CoBank's four 
related associations. In addition, we believe it is important to treat 
all System banks and associations in a consistent manner. Therefore, 
this rule would apply to CoBank as well as to the FCBs.

List of Subjects in 12 CFR Part 620

    Accounting, Agriculture, Banks, Banking, Reporting and 
recordkeeping requirements, Rural areas.

    For the reasons stated in the preamble, we propose to amend part 
620 of chapter VI, title 12 of the Code of Federal Regulations to read 
as follows:

PART 620--DISCLOSURE TO SHAREHOLDERS

    1. 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); secs. 424 of Pub. L. 100-233, 101 
Stat. 1568, 1656.

Subpart A--General

    2. Revise Sec. 620.2(h)(1) and (2) to read as follows:


Sec. 620.2  Preparing and filing the reports.

* * * * *
    (h)(1) Each annual report or notice must state, in a prominent 
location within the report or notice:
    (i) That the institution's quarterly reports are available free of 
charge on request;
    (ii) The approximate dates the quarterly reports will be available; 
and
    (iii) The telephone numbers and addresses (including, if available, 
electronic mail and Web site addresses) where shareholders may obtain a 
copy of the reports.
    (2) Each association must state, in a prominent location within 
each report:
    (i) That the shareholders' investment in the association may be 
materially affected by the financial condition and results of 
operations of the related bank;
    (ii) That (if not otherwise provided) a copy of the bank's 
financial reports to shareholders will be made available free of charge 
on request; and
    (iii) The telephone numbers and addresses (including, if available, 
electronic mail and Web site addresses) where shareholders may obtain 
copies of the related bank's financial reports.
* * * * *

Subpart B--Annual Report to Shareholders

    3. Revise Sec. 620.4(b) to read as follows:


Sec. 620.4  Preparing and distributing the annual report.

* * * * *
    (b)(1) Except as required by paragraph (b)(2) of this section, a 
bank need not distribute its annual report to the shareholders of any 
related association that discloses, in a separate section of its annual 
report, its financial and supervisory relationship with the bank. This 
separate section may incorporate by reference information from other 
sections of the annual report. At a minimum, the separate section must 
include the statement required by Sec. 620.2(h)(2) and the following 
information required by Sec. 620.5, if applicable:
    (i) The association's obligation to borrow only from the bank 
unless the bank gives approval to the association to borrow elsewhere;
    (ii) The major terms of any capital preservation, loss sharing, or 
financial assistance agreements between the association and the bank;
    (iii) Any bank bylaw provisions authorizing the bank to access the 
capital of the association;
    (iv) The extent to which the bank has assumed the association's 
exposure to interest rate risk; and
    (v) Any other material operational and financial conditions that 
may contribute to an interdependent relationship between the 
association and the bank.
    (2) A bank must distribute its annual report within the period 
required by paragraph (a) of this section to:
    (i) The shareholders of any related association that does not make 
the disclosure described in paragraph (b)(1) of this section; or
    (ii) The shareholders of all related associations if the bank 
experiences a significant event that has a material effect on those 
associations.
    (3) Any bank that is required by paragraph (b)(2) of this section 
to distribute its annual report must coordinate its distribution with 
its related associations.
* * * * *


[[Page 14497]]


    Dated: March 13, 2000.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 00-6569 Filed 3-16-00; 8:45 am]
BILLING CODE 6705-01-P