[Federal Register Volume 66, Number 48 (Monday, March 12, 2001)]
[Rules and Regulations]
[Pages 14299-14301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5976]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
 
 The Code of Federal Regulations is sold by the Superintendent of Documents. 
 Prices of new books are listed in the first FEDERAL REGISTER issue of each 
 week.
 
 ========================================================================
 

  Federal Register / Vol. 66, No. 48 / Monday, March 12, 2001 / Rules 
and Regulations  

[[Page 14299]]



FARM CREDIT ADMINISTRATION

12 CFR Part 620

RIN 3052-AB94


Disclosure to Shareholders; Annual Report

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

SUMMARY: The Farm Credit Administration (FCA) issues a final rule 
amending the disclosure requirements in part 620 of its regulations. 
The final rule provides that a bank need not distribute its annual 
report to the shareholders of its related associations unless it 
experiences a ``significant event.'' The final rule also requires all 
associations to disclose, in a separate section of their annual report, 
specified information about their financial and supervisory 
relationship with their funding bank. This final rule benefits banks, 
associations, and their shareholders because it allows the banks and 
associations to share necessary information with shareholders at a 
reduced cost.

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: Tong-Ching Chang, Policy Analyst, 
Office of Policy and Analysis, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4461, TDD (703) 883-4444; or Alison C. Samarias, 
Attorney Advisor, 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 final rule are to:
     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; 
and
     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.

II. Background

    This final rule is part of the FCA's continuing efforts to reduce 
unnecessary regulatory burden on the Farm Credit System (FCS or 
System). On August 18, 1998, we published a notice in the Federal 
Register that invited the public to identify existing regulations that 
impose unnecessary burden on the System.\1\ Two FCS institutions asked 
us to repeal Sec. 620.4(b)(1), which requires any Farm Credit bank that 
presents its financial statements on a combined basis with its related 
associations to distribute its annual report separately to the 
associations' shareholders.
---------------------------------------------------------------------------

    \1\ See 63 FR 44176.
---------------------------------------------------------------------------

    On March 17, 2000, the FCA proposed amendments to the disclosure 
requirements in part 620 of its regulations (65 FR 14494). The proposed 
rule provided, in general, that a bank need not distribute its annual 
report to the shareholders of any related association that disclosed, 
in a separate section of its annual report, specified information about 
its financial and supervisory relationship with the bank. The proposed 
rule, however, required any System bank that experienced a 
``significant event'' to distribute its annual report to the 
shareholders of its related associations.
    The rule that we proposed had two objectives. First, the proposed 
rule ensured association shareholders would continue to receive 
information about the associations' relationship with its funding bank 
and how that relationship may affect the shareholders' investments in 
the association. Second, the proposed rule relaxed the requirement that 
System banks must routinely distribute their annual reports to the 
shareholders of their related associations. Relaxing this requirement 
allows banks to save significant printing and mailing costs. The banks, 
in turn, can pass these cost savings on to their related associations, 
which can pass the savings on to their shareholders.
    The FCA received four comment letters on the proposed rule; one 
each from: the Accounting Standards Work Group (ASWG), the Farm Credit 
Council (FCC), a Farm Credit bank, and a System association. All 
commenters supported the proposed rule. However, the commenters asked 
us to clarify certain provisions of the proposed rule and offered 
suggestions to improve the regulations. We have responded to the 
commenters' requests in the final rule.

A. Disclosure of FCS Banks' Annual Reports

    Existing Sec. 620.4(b) requires FCS banks that present their 
financial statements on a combined basis with their related 
associations to distribute their annual reports to association 
shareholders. However, the regulation permits FCS banks that present 
their financial statements on a bank-only basis to distribute their 
annual reports to the shareholders of their related associations only 
when the bank experiences a significant event that has a material 
effect on its associations.
    The proposed rule would no longer have required an FCS bank to 
routinely distribute its annual report to the shareholders of a related 
association that disclosed, in a separate section of its annual report, 
specified information about its financial and supervisory relationship 
with the bank. Distribution of the report by the bank would have been 
required, however, whenever an FCS bank experienced a ``significant 
event,'' as defined in existing Sec. 620.1(r).\2\
---------------------------------------------------------------------------

    \2\ Section 620.1(r) provides that ``Significant event means any 
event that is likely to have a material impact on the reporting 
institution's financial condition, results of operations, cost of 
funds, or reliability of sources of funds. The term `significant 
event' includes, but is not limited to, actual or probable 
noncompliance with the regulatory minimum permanent capital 
standards or capital adequacy requirements, stock impairment, the 
imposition of or entering into enforcement actions, execution of 
financial assistance agreements with other institutions, collateral 
deficiencies that impact a bank's ability to obtain loan funds, or 
defaults on debt obligations.''
---------------------------------------------------------------------------

    The ``separate section'' would not have required any ``new'' 
disclosure. Currently, Secs. 620.5 and 620.2(h)(2) specify the 
information that associations must include in this separate section.

[[Page 14300]]

The proposed rule, however, would have provided banks with relief from 
the distribution requirement only if each related association presented 
this information in a separate section of its annual report. The 
separate section about the association's financial and supervisory 
relationship with the bank could have incorporated ``by reference'' 
information from other sections of the annual report. This separate 
section of the association's annual report would have included the 
following information, which is already required by Sec. 620.5, when 
applicable:
     The association's obligation to borrow only from the bank 
(unless the bank gives the association approval to borrow elsewhere);
     The major terms of any capital preservation, loss sharing, 
or financial assistance agreements between the association and the 
bank;
     Any statutory or bank bylaw provisions authorizing bank 
access to the capital of the association;
     The extent the bank assumed the association's exposure to 
interest rate risk; and
     Any other material operational and financial conditions 
contributing to an interdependent relationship between the association 
and the bank.
    The commenters supported the FCA's proposal to apply the same 
regulatory standards to all FCS banks, regardless of whether they 
prepare their financial statements on a bank-only basis or a combined 
basis with their affiliated associations. In addition, the commenters 
were not opposed to association disclosure of information about the 
financial and supervisory relationship with their funding banks in a 
separate section of their annual reports.
    Three commenters, however, expressed concern that a bank's 
obligation to distribute its annual report to association shareholders 
hinged on a related association's decision to disclose relevant 
information about its relationship with its funding bank in a separate 
section of its annual reports. The FCS bank commented that it does not 
control the annual financial statements of its associations, which are 
audited by independent certified public accountants and, therefore, 
``the bank is fundamentally dependent on the actions of the 
associations to determine whether a distribution of annual reports is 
required.'' In addition, the commenter stated that the proposed rule 
places ``the onus on the bank for distributing bank annual reports for 
failure of its related association(s) to comply with FCA regulations.''
    As an alternative, the ASWG, which is made up of staff from both 
banks and associations, suggested that the final rule require each 
association to disclose in a separate section of its annual report 
adequate information about its relationship with its funding bank. The 
ASWG also stated that a bank should be responsible for distribution of 
its annual report to its associations' shareholders only when the 
requirement to distribute is triggered by a ``significant event.''
    The FCA responds to the commenters' concerns by adopting a final 
rule that requires all FCS associations to disclose in a separate 
section of their annual reports specified information about their 
financial and supervisory relationship with their funding bank. The 
final rule, like the proposed rule, does not create any new disclosure 
requirements for banks or associations. In fact, the final rule only 
requires that associations reorganize information in their annual 
reports they have always disclosed. Final Sec. 620.5(a)(10) now 
requires associations to address their relationship with their funding 
bank in a separate section of their annual report. As a result, the 
final rule does not impose any additional burdens on FCS associations.
    The new separate section requirement replaces the existing 
provision on FCS banks' annual report distribution. Final Sec. 620.4(b) 
no longer requires any FCS bank to distribute its annual report to 
association shareholders unless it ``experiences a significant event 
that has a material effect on the associations.'' Under the final rule, 
the same shareholder disclosure standards apply to all FCS banks. FCS 
banks that prepare their financial statements on a combined basis with 
their related associations are subject to the same requirement for 
distributing annual reports to association shareholders as FCS banks 
that prepare their financial statements on a bank-only basis.
    The final rule addresses the commenters' concerns about the 
disclosure obligations of both FCS banks and associations. The final 
rule clarifies that System banks are not responsible for ensuring that 
each related association disclose in a separate section of its annual 
report information about its relationship with the funding bank. Under 
the final rule, a System bank must distribute its annual report 
directly to association shareholders only when it experiences a 
significant event that has a material effect on its related 
associations. As a result, the final rule saves banks the significant 
costs of routinely distributing its annual report to association 
shareholders. Additionally, FCS banks will not need to oversee the 
preparation of annual reports by their related associations because 
final Sec. 620.5 specifies the information that associations must 
disclose in their annual reports.
    Two commenters expressed concern that FCS banks could not 
distribute their annual report within the 90-day time frame established 
by proposed Sec. 620.4(b)(2) if an association's annual report failed 
to disclose information about its financial and supervisory 
relationship with the bank. The final rule addresses the concerns by 
removing the proposed bank disclosure requirement that was based on an 
association's failure to disclose.
    Our approach in the final rule also simplifies disclosure by FCS 
associations without sacrificing safety and soundness. By requiring a 
separate section of each association's annual report to disclose 
information already contained in the annual report about its 
relationship with the bank, the association's shareholders will have 
easy access to information that could affect their own investments in 
the FCS. In addition, we made two clarifying changes in 
Sec. 620.5(a)(10)(iii) and (v) to explain the existing requirements. 
These changes are not substantive and they impose no new or additional 
burden on associations.

B. Obtaining Copies of Financial Reports

    Existing Sec. 620.2(h) requires System institutions to provide 
telephone numbers and addresses where shareholders may obtain copies of 
certain financial reports. The proposed amendments would have expanded 
this requirement by providing that annual reports must contain the 
telephone numbers and addresses (including, if available, electronic 
mail and Web site addresses) where shareholders may obtain copies of 
the reports.
    The FCC construed the proposed regulation as requiring all 
institutions to make their financial reports available on their Web 
sites. Further, the ASWG stated the regulations should not ``attempt to 
address all possible means for obtaining reports.'' Accordingly, final 
Sec. 620.2(h) permits, but does not require, System institutions to 
offer their shareholders additional means to request copies of 
financial reports, beyond the traditional telephone numbers and mailing 
addresses. If an institution has no other available means besides 
traditional telephone numbers and mailing addresses, the rule does not 
require the institution to take action to make other options available 
to its shareholders.

[[Page 14301]]

    Existing Sec. 620.4(a) requires a System institution to prepare and 
distribute to its shareholders an annual report. While the proposed 
rule did not include any suggested changes to this section, the FCC 
noted the FCA does not specify the medium to be used by System 
institutions for providing information to their shareholders. The FCC 
stated that ``delivery of information through an electronic medium 
generally could satisfy delivery or transmission obligations under the 
Farm Credit Act and Regulations.'' While the FCC did not specifically 
recommend that FCA amend Sec. 620.4(a) to allow both paper and 
electronic distribution of shareholder reports, the FCC suggested that 
we should address this issue.
    In this regard, the FCA has an internal task force that is 
reviewing electronic commerce issues. This task force will present its 
findings and make recommendations to the FCA Board that may address 
this issue. Meanwhile, existing Sec. 620.4(a) requires System 
institutions to ``distribute'' their annual reports on paper until the 
issuance of additional guidance in this area. However, our regulations 
do not prevent System institutions, if they so choose, from making 
their annual reports available on their Web sites.

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 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 institution's 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 information on 
any other distribution method the institution makes available) where 
shareholders can request or obtain copies of the quarterly 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 information on 
any other distribution method the association makes available) where 
shareholders can request or 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) A bank must distribute its annual report to the shareholders 
of all related associations if the bank experiences a significant event 
that has a material effect on those associations.
    (2) Any bank that is required by paragraph (b)(1) of this section 
to distribute its annual report must coordinate its distribution with 
its related associations.
* * * * *

    4. Add new Sec. 620.5(a)(10) to read as follows:


Sec. 620.5  Contents of the annual report to shareholders.

    (a) Description of business. * * *
* * * * *
    (10) For associations, in a separate section of the annual report, 
discuss the institution's financial and supervisory relationship with 
its funding 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)(i) and the following information required elsewhere in 
this section, if applicable:
    (i) The association's obligation to borrow only from the bank 
unless the bank gives the association approval 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 statutory or bank bylaw provisions authorizing bank 
access to the capital of the association;
    (iv) The extent the bank assumed the association's exposure to 
interest rate risk; and
    (v) Any other material operational and financial conditions that 
may affect the interdependent relationship between the association and 
the bank.
* * * * *

    Dated: March 6, 2001.
Kelly Mikel Williams,
Secretary, Farm Credit Administration Board.
[FR Doc. 01-5976 Filed 3-9-01; 8:45 am]
BILLING CODE 6705-01-P