[Federal Register Volume 66, Number 60 (Wednesday, March 28, 2001)]
[Rules and Regulations]
[Pages 16841-16844]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-7599]


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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: Final rule.

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SUMMARY: In this final rule, we amend regulations to allow Farm Credit 
System (System) service corporations to sell stock to non-System 
entities, provide adequate disclosures to investors in service 
corporations, and allow System institutions to issue unlimited amounts 
of certain classes of equities.
    The purpose of our amendments 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.

EFFECTIVE DATE: This regulation will become effective 30 days after 
publication in the Federal Register during which either one or both 
houses of Congress are in session. We will publish a notice of the 
effective date in the Federal Register.

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 Howard Rubin, Senior 
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 the final rule are to:
     Increase the flexibility and usefulness of service 
corporations;
     Provide adequate disclosures to investors in service 
corporations organized to exercise the authorities 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.

[[Page 16842]]

I. Background

A. Incorporation of Service Corporations

    On August 18, 1998, we published a notice in the Federal Register 
that invited System institutions and the public to identify existing 
regulations and policies that impose unnecessary burdens on the FCS. 
(See 63 FR 44176, Aug. 18, 1998.) \1\ We received comment on 
Sec. 611.1135, which allows only System banks and associations to own 
stock in service corporations. Commenters requested that we allow more 
flexibility in creating and operating service corporations by allowing 
non-System institutions to own part of the service corporation.
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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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    On December 23, 1999, we published proposed amendments to our 
service corporation and capital bylaw regulations. (See 64 FR 72042, 
Dec. 23, 1999.) We proposed an amendment to 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 also 
proposed that non-voting stock may be issued in unlimited amounts as 
long as the issuance is consistent with the service corporation's 
bylaws. However, we proposed a limit on the total amount of voting 
stock that could be issued to non-System persons. We proposed that 
System institutions hold at least 80 percent of the voting stock of 
their service corporations at all times.
    We also asked for comment on Sec. 611.1137. That regulation allows 
service corporations to be organized to act as agricultural mortgage 
marketing facilities by selling loans in the secondary market. It 
requires that one or more System institutions hold at least 80 percent 
of the voting stock of their title VIII service corporations at all 
times. We asked if the 80-percent requirement provides adequate 
flexibility and usefulness of title VIII service corporations.
    The only commenter to our proposal and request for comments for 
Secs. 611.1135 and 611.1137 was the Farm Credit Council (Council), 
which represents Farm Credit System institutions. The Council supported 
our proposal to allow the issuance of unlimited amounts of non-voting 
stock. However, the Council requested that we change our proposed 
requirement that System institutions hold at least 80 percent of voting 
stock. The Council suggested that we require System institutions hold 
at least 51 percent of voting stock to improve opportunities for System 
institutions to join with non-System entities in service corporation 
ventures. The Council noted that if FCA had concerns with System 
institutions losing control, we could require that of the 49 percent of 
voting stock potentially held by non-System persons, no one person 
could hold more than 25 percent of total voting stock. Our final rule 
provides that System institutions own 80 percent or more of a service 
corporation's voting stock. We continue to believe this percentage 
requirement helps System institutions in controlling their service 
corporation yet provides flexibility to make service corporations more 
useful to Farm Credit System institutions and borrowers.
    The Council also requested that we allow a service corporation to 
generate up to 30 percent of its annual earnings from activities not 
specifically authorized by the Act. However, section 4.25 of the Act 
allows service corporations only to perform the functions or services 
that the System institution organizing the service corporation is 
authorized to perform.\2\ Therefore, if System institutions were not 
authorized to perform certain activities, their service corporation 
would also not be authorized.
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    \2\ Those exceptions are that service corporations cannot extend 
credit or provide insurance services.
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    On December 23, 1999, we also proposed that the service 
corporations described in Secs. 611.1135 and 611.1137 must provide 
adequate disclosure when issuing stock to persons other than System 
institutions. (See 64 FR 72042, Dec. 23, 1999.) We proposed to apply 
the disclosure requirements of Sec. 615.5250(c) and (d) to such stock 
issuances. Final Sec. 611.1137(b) clarifies that the disclosure 
requirements apply to title VIII service corporations. Additionally, 
System institutions must determine if disclosures are required by other 
applicable Federal or state securities laws. While amending 
Secs. 611.1135 and 611.1137, we took the opportunity to write them in 
plain language. We also rewrote Sec. 611.1136 in plain language. That 
section covers examination of incorporated service corporations and 
unincorporated service organizations. We did not receive any comments 
to our proposed disclosure requirements or plain language revisions.

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.\3\ Over the years, several institutions 
have expressed that this regulation often results in a burden on System 
institutions because the institution cannot estimate in advance the 
number of shares that will be issued to an association's funding bank 
or to borrowers for the purpose of distributing earnings. 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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    \3\ There are two current exceptions to this requirement: (1) 
Non-voting stock that is converted from voting stock after the 
repayment of a loan; and (2) stock that is required to be purchased 
when obtaining a loan. In the final rule, we clarify that stock 
required to be purchased for leases and related services are also 
exempt.
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    Our December 23, 1999, proposal contained an amendment to 
Sec. 615.5220(a)(3) to allow System institutions to adopt bylaws that 
provide for issuance of these equities in unlimited amounts. (See 64 FR 
72042, Dec. 23, 1999.) The proposal provided 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 an institution's earnings.\4\
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    \4\ Our final rule makes a technical change to clarify this 
sentence.
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    The only commenter to this proposal was the Council. The Council 
requested that we provide a definition for ``earnings.'' We decided not 
to include a definition for earnings because to do so may be 
unnecessarily restrictive and burdensome. We believe the term 
``earnings'' is sufficiently understood by financial institutions, and 
therefore the final rule can be applied without difficulty.

C. Technical Change

    Currently, Sec. 615.5250(c)(2) regarding disclosure statements for 
issuance of stock contains a typographical reference error. The final 
rule corrects the reference to Sec. 615.5250(c)(1) rather than 
Sec. 615.5250(d)(1).

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, parts 611 and 615 of 
chapter VI, title 12 of the Code of Federal Regulations are amended to 
read as follows:

[[Page 16843]]

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: 2
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 acting alone or 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 provide 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 the articles of incorporation by sending us a certified 
resolution of the board of directors of the service corporation that 
states the:
    (i) Section(s) to be amended;
    (ii) Reason(s) for the amendment;
    (iii) Language of the articles of incorporation provision, as 
amended; and
    (iv) 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? All 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 subject to the same requirements as a 
service corporation formed under Sec. 611.1135, with one exception. The 
Federal Agricultural Mortgage Corporation or its

[[Page 16844]]

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

    3. 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

    4. 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 
number or value limit for these equities:
    (i) Equities that are required to be purchased as a condition of 
obtaining a loan, lease, or related service.
    (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 resulting from the distribution of earnings.
* * * * *


Sec. 615.5250  [Amended]

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

    Dated: March 21, 2001.
Kelly Mikel Williams,
Secretary, Farm Credit Administration Board.
[FR Doc. 01-7599 Filed 3-27-01; 8:45 am]
BILLING CODE 6705-01-P