[Federal Register Volume 67, Number 67 (Monday, April 8, 2002)]
[Rules and Regulations]
[Pages 16627-16634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8212]



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  Federal Register / Vol. 67, No. 67 / Monday, April 8, 2002 / Rules 
and Regulations  

[[Page 16627]]



FARM CREDIT ADMINISTRATION

12 CFR Parts 609 and 620

RIN 3052-AC02


Electronic Commerce; Disclosure to Shareholders

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

SUMMARY: The Farm Credit Administration (FCA or Agency) issues a final 
rule creating a new part on Electronic Commerce (E-commerce) and 
amending another part to specifically allow electronic disclosures. 
These changes reflect emerging business approaches to E-commerce. The 
final rule removes regulatory barriers to E-commerce and creates a 
flexible regulatory environment that facilitates the safe and sound use 
of new technologies by Farm Credit System (System) institutions and 
their customers.

EFFECTIVE DATE: This regulation 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.

FOR FURTHER INFORMATION CONTACT:

Dale Aultman, Policy Analyst, Office of Policy and Analysis, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TTY (703) 
883-4434,
        or
Jane Virga, Senior Attorney, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
2020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    Our objectives for the final rule are to:
     Remove regulatory barriers to E-commerce;
     Create a flexible regulatory framework that facilitates 
the safe and sound use of new technologies by System institutions and 
their customers; and
     Provide a brief outline of Federal laws and regulations 
that facilitate E-commerce.
    The rule will help to achieve these objectives by:
     Creating new part 609 on E-commerce; and
     Amending part 620 on Disclosure to Shareholders to 
specifically allow electronic disclosures.

II. Background

A. Applicable Law

    A law entitled ``Electronic Signatures in Global and National 
Commerce Act'' (E-SIGN) (Pub. L. 106-229) became effective October 1, 
2000. E-SIGN governs transactions relating to the conduct of business, 
consumer, or commercial affairs between two or more persons. It 
legitimatizes electronic contracts, signatures, and recordkeeping in 
many situations. E-SIGN makes it easier for System institutions to use 
E-commerce and potentially realize cost savings. FCA Bookletter BL-041, 
dated September 21, 2000, on Electronic Signatures in Global and 
National Commerce, which will be cancelled when this final rule becomes 
effective, reported E-SIGN's enactment and how its principal terms 
applied to the System. You can currently review this bookletter on our 
home page at www.fca.gov.
    E-SIGN preempts (with some exceptions) provisions in most State or 
Federal statutes or regulations, including the Farm Credit Act of 1971, 
as amended (Act), and its implementing regulations, that require 
contracts or other records to be written, signed, or in nonelectronic 
form. With the parties' agreement, you can now engage in E-commerce in 
many situations. E-SIGN does not, however, allow electronic 
communications for a notice of default, acceleration, repossession, 
foreclosure, eviction, or the right to cure when an individual's 
primary residence secures the loan. E-SIGN also does not apply to 
writing or signature requirements under the Uniform Commercial Code, 
other than sections 1-107 and 1-206 and Articles 2 and 2A. E-SIGN 
preempts only those statutes and regulations that relate to business, 
consumer, or commercial transactions.
    E-SIGN sets up different standards for E-commerce with businesses 
and with consumers. Although both businesses and consumers must agree 
to E-commerce, E-SIGN provides certain protections and compulsory 
procedures for consumer transactions. Under E-SIGN, ``consumer'' means 
an individual who obtains, through a transaction, products or services 
used primarily for personal, family, or household purposes. Under E-
SIGN, some System loans qualify as consumer transactions, while others 
are business transactions. System institutions will need to distinguish 
between the two types of transactions to comply with E-SIGN.
    E-SIGN also:
     Allows parties to a transaction to decide document 
integrity and signature authentication technologies.
     Requires electronically stored documents to accurately 
reflect the information in the original, whether in paper or electronic 
form, and be accessible to all people entitled to review the original 
in a form capable of accurate reproduction.
     Sets up special technological and business process 
standards for electronic promissory notes secured by real estate.
    System institutions should read E-SIGN in its entirety to see how 
it applies and affects E-commerce. System institutions should consult 
legal counsel before engaging in E-commerce.

B. FCA's Response to E-SIGN and System Institution Requests

    System institutions asked FCA for guidance on E-commerce. Because 
of these requests and the enactment of E-SIGN, we proposed a rule on E-
commerce at part 609 and an amendment of part 620 to specifically allow 
electronic disclosures to shareholders. See 66 FR 53348, Oct. 22, 2001.
    Proposed part 609 contains the following four subparts: (1) General 
Rules; (2) Interpretations and Definitions; (3) Standards for Boards 
and Management; and (4) General Requirements for Electronic 
Communications. We discuss those subparts and the regulation sections 
within them below in Section III.
    Our proposed amendments to part 620 did not amend any of its 
substantive requirements. Amendments to part 620

[[Page 16628]]

removed references to traditional paper documents and their delivery 
and incorporated references to electronic documents and their delivery. 
We specified that, if all parties agree, they may use electronic 
communications. System institutions may provide electronic disclosures 
and notices, including annual and quarterly reports, annual meeting 
information statements, report of condition of the Federal Agricultural 
Mortgage Corporation, and notices of significant changes in a System 
institution's permanent capital ratio. We did not receive any comments 
on our proposed amendments to part 620. However, we did make a small 
technical change that is described in Section III below.
    Finally, we remind System institutions that in adding new part 609 
and amending part 620 we do not suggest that our other regulations do 
not allow E-commerce. E-SIGN preempts most regulations requiring paper 
documentation in business, consumer, or commercial transactions. FCA 
continues to have authority to require paper documentation in 
regulations that are primarily governmental. You should read all our 
regulations in light of what E-SIGN does and does not allow.

III. Comments and FCA's Response in Final Rule

A. Comments

    We received comment letters from the United States Small Business 
Administration (SBA); the Farm Credit Council (Council) on behalf of 
its member System banks and associations; and AgCredit Financial, ACA 
(AgCredit), a System Agricultural Credit Association.
    The SBA's comment letter stated that we did not comply with the 
Regulatory Flexibility Act (RFA) and requested that we repropose the 
rule. As discussed below, we believe the RFA does not apply to this 
rule because System institutions are not ``small entities'' as defined 
in the RFA and we certify to this below.
    Generally, the Council and AgCredit supported the proposed rule. 
However, both comment letters expressed some concerns, ranging from 
questioning FCA's need to interpret E-SIGN to the language of part 609.
    After carefully considering the comments received, we are adopting 
the proposed rule without substantive change.

B. FCA's Response in Final Rule

    Below we discuss each section of our proposed rule, including 
comments we received on the preamble. We include any changes in our 
final rule.
1. Background for General Rules on E-commerce
    Proposed Sec. 609.905 states that FCA wants to create a flexible 
regulatory environment that facilitates E-commerce and allows System 
institutions and their customers to use new technologies. The section 
also states that System institutions may use E-commerce, but must 
establish good business practices that ensure safety and soundness 
while doing so. The Council and AgCredit stated we should move those 
provisions to the preamble and delete them from the regulation because 
they impose no further legal obligations.
    FCA wants to facilitate E-commerce and other new technologies and 
innovations to enhance the efficient conduct of business and the 
delivery of sound, adequate, and constructive credit and closely 
related services to farmers, their cooperatives, and farm-related 
businesses. In addition to introducing the concept of E-commerce, this 
section sets a standard for System institutions engaging in E-commerce. 
We think no change is necessary and adopt the proposed section as 
final.
2. Compliance With E-SIGN
    The Council and AgCredit had two comments on proposed Sec. 609.910 
and our preamble. That section and the preamble summarize pertinent 
provisions of E-SIGN.
    First, they questioned the need to summarize E-SIGN and stated that 
System institutions do not need FCA's interpretation of E-SIGN to 
comply with its requirements. They also noted that we did not summarize 
other Federal laws that System institutions must comply with, such as 
the Truth in Lending Act and the Equal Credit Opportunity Act.
    E-SIGN is important to E-commerce. Some System institutions have 
little exposure to E-SIGN or using E-commerce. System institutions need 
to know about E-SIGN, which we summarize in the regulation and the 
preamble, when they think about using or use E-commerce. Before issuing 
the proposed rule, many System institutions requested our guidance and 
we issued a bookletter on E-SIGN, BL-041. Other Federal laws noted by 
the commenters are not new, and we have provided supplemental guidance 
on them. We believe it useful to notify System institutions of 
applicable requirements in this area. Therefore, our summary of E-SIGN 
remains in the final rule.
    Second, the commenters stated proposed regulation Sec. 609.910(a) 
does not comply with E-SIGN because E-SIGN requires ``consent'' only in 
consumer transactions. Proposed Sec. 609.910(a) states, in part, that 
all parties to a transaction must ``consent'' before using E-commerce. 
This statement accurately reflects the law. Section 101(b)(2) of E-SIGN 
provides that E-SIGN does not require any person to agree to use or 
accept E-commerce. Thus, E-SIGN recognizes that parties, freely 
interacting with one another, may or may not prefer alternatives to 
paper-based transactions. E-SIGN merely recognizes that under basic 
contract law the parties must agree.
    We realize, nonetheless, that the term ``consent'' in this context 
may be confusing. The ``agreement'' needed to engage in E-commerce is 
different from the ``consent'' that E-SIGN's provisions require. Thus, 
in the final rule we are changing the term ``consent'' in 
Sec. 609.910(a) and Sec. 609.950(a) to ``agree'' or ``agreement'' as 
appropriate. Also in the final rule we are making the same change in 
Sec. 620.2(d) for Disclosure to Shareholders. This conforms to E-SIGN's 
language and should remove any confusion between the requirement that 
parties to E-commerce agree to conduct business in that manner and the 
consumer consent provisions.
    We have modified subsections (a) and (e) of Sec. 609.910 to make 
clear E-SIGN's focus on business, consumer, or commercial transactions 
rather than governmental transactions. We made similar changes in 
Secs. 609.920 and 609.950.
3. Compliance With Other Federal Regulations
    Proposed Sec. 609.915 states that System institutions must comply 
with the Federal Reserve Board (FRB) consumer protection regulations B 
(Equal Credit Opportunity), M (Consumer Leasing), and Z (Truth in 
Lending). The Council and AgCredit stated that FCA should delete 
Sec. 609.915 because it duplicates the FRB regulations.\1\
---------------------------------------------------------------------------

    \1\ The FRB issued interim regulations containing guidance on 
the timing and delivery of electronic disclosures to ensure 
consumers an adequate opportunity to access and retain required 
information. See 66 FR 17779, Apr. 4, 2001; 66 FR 17329, Mar. 30, 
2001; and 66 FR 17322, Mar. 30, 2001. These interim rules provide 
guidance for delivering disclosures electronically if a consumer 
consents under E-SIGN. The FRB adopted these rules as interim rules 
to allow for added public comment. Since publication of the FRB 
interim rules, the FRB lifted its October 1, 2001, mandatory 
compliance date to consider the comments received. See 66 FR 41439, 
Aug. 8, 2001.
---------------------------------------------------------------------------

    We disagree with the suggestion to delete the section. Section 
609.915 merely reminds System institutions to comply with the FRB 
regulations. Section 609.915 does not impose

[[Page 16629]]

additional legal requirements for System institutions. We intend this 
section to remind System institutions of the role of these regulations 
in E-commerce.
    The FRB regulations identified by the commenters have long been in 
existence. FCA provides guidance on these regulations in Informational 
Memoranda to the System and in our Examination Manual, which you can 
access through our home page. For further information on any of these 
regulations, System institutions should feel free to consult our 
Informational Memoranda,\2\ the Examination Manual, or the source 
documents for the FRB regulations.
---------------------------------------------------------------------------

    \2\ Information Memoranda dated September 7, 2001 (Subject: 
Amendments to Federal Reserve Regulations B, M, and Z Regarding 
Electronic Delivery of Required Disclosures), and September 25, 2001 
(Subject: Mandatory Compliance Date Lifted for Interim Rules 
Governing the Electronic Delivery of Certain Consumer Disclosures).
---------------------------------------------------------------------------

    We adopt the proposed rule section as final.
4. Preemption of State and Federal Law and Regulations
    Proposed Sec. 609.920(a) provides that E-SIGN ``supercedes'' 
existing laws and regulations, including the Act and its implementing 
regulations, that require paper copies and handwritten signatures. The 
Council and AgCredit asked that we note in the preamble and in 
Sec. 609.920(a) that E-SIGN allows State law to ``preempt'' E-SIGN in 
those States that enact the Uniform Electronic Transactions Act (UETA), 
a uniform law developed by the American Law Institute and the National 
Conference of Commissioners on Uniform State Laws.
    UETA preceded E-SIGN's enactment. UETA was intended to provide some 
uniformity, given the patchwork of differing legal protections, 
commercial standards, and levels of security that different States 
required for E-commerce. Adoption of UETA is voluntary. Some States 
have adopted it in its entirety, some have adopted variations, and some 
have not adopted it.
    Congress enacted E-SIGN to respond to the need for uniform 
protections for E-commerce. E-SIGN resolves the problem of the States' 
various approaches to UETA by generally preempting State law and 
setting up a nationwide standard of acceptance.
    E-SIGN preempts State laws as follows. If a State enacts an 
unamended version of UETA, that version rather than E-SIGN will govern 
with respect to State law. If a State changes UETA in any way, the 
divergent provisions supersede E-SIGN only if they are consistent with 
E-SIGN and do not ``require, or accord greater legal status or effect 
to, the implementation or application of a specific technology or 
technical specification.''
    The discussion in this preamble should provide the guidance 
requested. Further discussion of UETA and preemption in this regulation 
is beyond the scope of our regulation. System institutions should 
consult legal counsel to determine whether their States have enacted 
UETA in its entirety or a version of it and whether E-SIGN has been 
superseded.
    Clearly E-SIGN is intended to preempt State law generally. However, 
we recognize that E-SIGN does not preempt UETA in States that have 
adopted it in its entirety. State law supersedes E-SIGN only if the 
State adopts a ``pure'' version of UETA or if the divergent provisions 
do not require or accord greater legal status or effect to the 
implementation or application of a specific technology or technical 
specification.
    In the final rule we amend Sec. 609.920(a) to state that E-SIGN 
``preempts most'' statutes and regulations. E-SIGN does not, however, 
preempt those statutes and regulations that are primarily governmental 
and do not relate to business, consumer, or commercial transactions. 
This revised provision is a more accurate description of E-SIGN.
5. Definitions
    Proposed Sec. 609.925 contains five definitions. The Council and 
AgCredit stated that FCA's five definitions in Sec. 609.925 could be 
confusing and suggested we adopt all the definitions found in E-SIGN.
    We adopted two definitions, ``electronic'' and ``electronic 
signature'' from E-SIGN. However, with the definition of ``electronic 
signature'' we included an explanatory sentence. E-SIGN does not 
contain our other three definitions: ``electronic communication,'' 
``electronic business,'' and ``electronic mail.''
    We see no need to adopt all of E-SIGN's definitions. We included in 
the regulation only those definitions necessary to understand the new 
part 609 and the Farm Credit Act of 1971, as amended, and its 
implementing regulations. Including all of E-SIGN's definitions would 
be unnecessary as we did not include all of E-SIGN's terms. Additional 
definitions would be potentially confusing. Therefore, the definitions 
in our proposed rule become final without amendment. However, we are 
deleting ``to this part'' in the first sentence of this section and 
substituting ``to the Act and its implementing regulations.'' We intend 
the definitions to apply to the Farm Credit Act of 1971, as amended, 
and its implementing regulations, not just part 609.
6. Policies and Procedures
    Proposed Sec. 609.930 states FCA's support of E-commerce and 
identifies the benefits and challenges for System institutions. It 
requires System institutions to adopt policies and procedures for E-
commerce and lists items to be addressed. The Council and AgCredit had 
three comments on proposed Sec. 609.930.
    First, the commenters asked that we delete from the regulation our 
statement that we support E-commerce and want to facilitate it. They 
stated such language has no regulatory effect and FCA should delete it 
or move it to the preamble.
    As we stated previously, we believe E-commerce is important. We 
believe we must notify System institutions of our expectations and 
requirements in this area, as well include relevant background material 
on E-SIGN. Accordingly, we keep the language in the final rule section.
    Second, the commenters identified an ambiguity in the proposed 
rule's preamble and proposed Sec. 609.930. The preamble states that we 
have identified subjects that a System institution's policies and 
procedures ``should'' address. The regulation identifies subjects that 
the policies and procedures ``must'' address.
    We agree with the observation that the language of the preamble and 
the regulation should be consistent. The language of the regulation 
correctly expressed our intentions. The policies and procedures 
``must'' address the items listed in the regulation, as stated in our 
final regulation.
    Third, the commenters stated that the list of items a System 
institution must address in its policies and procedures does not apply 
to a System bank that does not make retail loans and offered suggested 
language. FCA believes that the items listed in paragraphs (a) through 
(i) are basic requirements for a System institution engaging in E-
commerce. However, as noted, the items specified may not be relevant to 
a System bank or association that does not make retail loans.
    We are changing the final rule to reflect this possible limitation 
by inserting ``, when applicable:'' after ``the policies and procedures 
must address.'' This change addresses the commenters' concern.

[[Page 16630]]

7. Business Planning
    Proposed Sec. 609.935(b) states, in part, that when applicable, 
business plans must contain an analysis of potential and existing 
customers that can use E-commerce. The Council and AgCredit stated that 
this requirement may be costly and of questionable value, noting that 
customers are not compelled to use E-commerce. They also asked that we 
move the business plan requirements for E-commerce to Sec. 618.8440, 
which pertains to business planning.
    We want System institutions to exercise good business judgment and 
assess costs and benefits before engaging in E-commerce. To address the 
commenters' concerns and to reflect our intent, we are deleting the 
language of the entire Sec. 609.935 and substituting the following:

    When engaging in E-commerce, the business plan required under 
part 618, subpart J, must describe the E-commerce initiative, 
including intended objectives, business risks, security issues, 
relevant markets, and legal compliance.

    We believe the language in final Sec. 609.935 is in keeping with 
the general requirements and intent of part 618, subpart J. However, as 
E-commerce is relatively new, we do outline our expectations in some 
detail. The final regulation does not require System institutions to 
incur unreasonable costs in developing a business plan. Moreover, a 
thoughtful business plan should pay for itself by helping to avoid 
costly mistakes.
    As to the commenters' concern on moving the requirements in 
Sec. 609.935 to Sec. 618.8440, we think the reference to part 618, 
subpart J, in the new language should eliminate any confusion. At this 
time, we believe System institutions will benefit from having all the 
new provisions on E-commerce, including business planning, in one part. 
Thus, the business planning requirements for E-commerce will remain in 
Sec. 609.935.
8. Internal Systems and Controls
    Proposed Sec. 609.940(a) states that when applicable, internal 
systems and controls must provide reasonable assurances that System 
institutions will follow and achieve business plan objectives and 
policies and procedures requirements regarding E-commerce. The Council 
and AgCredit asked that we clarify our intent and regulatory interest 
in a System institution following and achieving business plan 
objectives.
    We want internal systems and controls to provide reasonable 
assurances that System institutions will make a concerted effort to 
achieve business plan objectives and policies and procedures 
requirements. We do not expect that System institutions will routinely 
meet all business plan objectives. This language is consistent with 
prior guidance found in the Examination Manual. Therefore, we adopt the 
proposed section as final.
9. Records Retention
    Proposed Sec. 609.945 states records stored electronically must be 
accurate, accessible, and reproducible for later reference. The Council 
and AgCredit had three comments on this section.
    First, the commenters recommended using E-SIGN's language on 
records retention. E-SIGN states that a record must be ``retrievable in 
perceivable form.'' The commenters stated that E-SIGN's language would 
avoid confusion over whether we require that a record be available in 
paper form.
    We believe ``reproducible for later reference'' in Sec. 609.945 is 
a reasonable interpretation of E-SIGN's language and easier for the 
public and our examiners to understand and implement. Therefore, we 
leave it in the final rule.
    Second, the commenters asked whether a paper-based retention 
schedule would suffice for electronic records. Electronically stored 
documents must accurately reflect the information in the original, 
whether in paper or electronic form, and be accessible to all persons 
entitled to review the original in a form capable of accurate 
reproduction. System institutions must be able to produce, and FCA 
examiners must be able to review, a System institution's records, 
regardless of form, during an examination. For example, a System 
institution must have the necessary software and hardware to allow 
examiners to review an electronic record.
    System institution records are retained according to retention 
schedules established by the institution. A retention schedule mandates 
the period of time that a record, regardless of form, must be 
maintained. We believe that System institutions have the discretion to 
dispose of any records not required for research, legal, audit, or 
examination purposes. In accordance with good business practices, 
records retention policies should be set forth in written procedures 
approved by an institution's board.
    A retention schedule must be the same for the same type of record, 
regardless of form. Thus, a loan file in paper form and a similar loan 
file in electronic form must be maintained for the same time period. A 
retention schedule originally established for paper records would 
suffice for electronic records. We do not require paper records, 
subject to the exceptions of E-SIGN. However, as this section makes 
clear, we must be able to examine a System institution.
    Finally, the commenters asked that we change the heading of this 
section from ``Records Retention'' to ``Record Retrieval.'' We believe 
that ``Records Retention'' covers a broader range of records issues 
than ``Record Retrieval.'' Also, the heading is consistent with E-
SIGN's language. We adopt the proposed section heading as final.
10. Electronic Communications
    Proposed Sec. 609.950(c) states, in part, that System institutions 
must ensure that their communications with parties other than consumers 
demonstrate good business practices in the delivery of credit and 
closely related services and in obtaining goods and services. The 
Council and AgCredit stated that the section could be interpreted to 
mean that FCA will regulate how an institution electronically purchases 
goods and services.
    This section is intended to focus System institutions' attention on 
the need to exercise good business judgment in this new environment. 
All facets of an institution's dealings, whether with a consumer or a 
party other than a consumer, must be designed to provide for the safety 
and soundness of the institution. We adopt the proposed section as 
final.
11. Preamble Question--E-mails to Customers and Additional Guidance
    Our proposed rule asked if proposed part 609 adequately addressed 
E-commerce and electronic communications. The Council and AgCredit 
stated that FCA could interpret part 609 broadly to apply to System e-
mails to customers that contains general or marketing information, as 
well as to e-mails containing consumer disclosures.
    We do not intend part 609 to apply to System e-mails to customers 
that contain general or marketing information.
    The Council and AgCredit requested that we provide guidance on: (1) 
When a permitted disclosure is deemed to have been received by a 
customer; (2) the lender's responsibility for redelivery; and (3) how a 
customer withdraws consent after having given it.
    As the commenters noted, we did not address these issues in the 
proposed regulation. We intend to provide this type of guidance in an 
Informational Memorandum or similar communication. The E-commerce 
regulation provides broad guidance on

[[Page 16631]]

E-commerce issues. We have not included detailed direction for System 
institutions on any topic, including electronic disclosures, related to 
E-commerce. We have done this, in part, so that our regulation will not 
be unduly affected by changes in technology, business practices, or the 
variety of products and services offered. For background information on 
the delivery of electronic communications, System institutions can 
refer to the FRB regulations mentioned previously, as well as 
Informational Memoranda on our home page.
12. Preamble Question--Regulations Hindering Online Borrowering
    The proposed rule asked if any of our regulations negatively affect 
the likelihood that a customer would choose to engage in online 
borrowing. The Council and AgCredit stated that Sec. 613.3005 of this 
chapter limits System institutions financing the full credit needs of 
part-time farmers and ranchers. The commenters stated that surveys show 
that part-time farmers use the Internet the most to locate credit.
    The commenters raised concern on the scope of financing of part-
time farmers and ranchers. While we appreciate the feedback, this is 
not an issue we can address in this regulation.
13. Model Consumer Consent Form
    The Council and AgCredit asked that we include a model consumer 
consent form in the final regulation. The commenters referenced the 
FRB's model consumer consent form included in the FRB's proposed 1999 
regulations.
    The FRB's model consumer consent form was published prior to E-
SIGN's enactment. It does not comply with E-SIGN. E-SIGN does not 
establish model consumer consent disclosures or a model form. The FRB 
did not include a model consumer consent form in the interim rules on 
Regulation B, M, and Z published in March and April of 2001.
    We do not believe FCA should publish a model consumer consent form 
because System institutions may need to revise consumer disclosure 
forms often to reflect changes in technology or business practices. 
Also, consumer consent disclosures will vary depending on the products 
or services a System institution offers. Thus, FCA will not include a 
model consumer consent form in the regulation.
14. Regulatory Flexibility Act
    The SBA expressed the view that FCA must republish the proposed 
rule to comply with the RFA. The RFA requires an agency to conduct an 
analysis of the impact of its regulations on small entities and 
describe steps taken to minimize significant economic impact. The 
agency must publish the analysis with the rulemaking unless the head of 
the agency certifies that the rulemaking will not have a significant 
economic impact on a substantial number of small entities.
    The RFA does not require an agency to publish the certification 
with both the proposed rule and the final rule. FCA believes that 
publication of the following certification upon adoption of the final 
rule complies with the RFA.
    Pursuant to Sec. 605(b) of the RFA (5 U.S.C. 601 et seq.), the FCA 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities. Each of the banks in 
the Farm Credit System, considered together with its affiliated 
associations, has assets in excess of $5 billion and annual income in 
excess of $400 million. Therefore, Farm Credit System institutions are 
not ``small entities'' as defined in the RFA.

C. Commenters' Support of FCA's E-Commerce Initiatives

    The Council and AgCredit provided the following positive responses 
to our questions in the preamble to the proposed rule. Their comments 
did not require action on our part in this final rule, but are valuable 
for our future rulemakings.
1. Preamble Question--Electronic Disclosures to Shareholders Benefit 
the System
    The proposed rule asked if our proposed amendments at part 620 to 
specifically allow electronic disclosures to shareholders benefited the 
System. The Council and AgCredit stated that the provisions make it 
easier to share financial information with stockholders.
2. Preamble Question--Burden on Online Technologies
    The proposed rule asked if FCA policies impose unreasonable burdens 
on an institution's online technologies. The Council and AgCredit 
stated that FCA's policies have been technologically neutral and 
encouraged FCA to continue.

IV. Withdrawal of FCA Bookletter BL-041

    When this final regulation becomes effective, we will withdraw FCA 
Bookletter BL-041 pertaining to E-SIGN.

List of Subjects

12 CFR Part 609

    Agriculture, Banks, banking, Electronic commerce, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 620

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


    For the reasons stated in the preamble, we add new part 609 and 
amend part 620 of chapter VI, title 12 of the Code of Federal 
Regulations to read as follows:
    1. Add new part 609 to subchapter B to read as follows:

PART 609--ELECTRONIC COMMERCE

Subpart A--General Rules
Sec.
609.905   Background.
609.910   Compliance with the Electronic Signatures in Global and 
National Commerce Act (Public Law 106-229) (E-SIGN).
609.915   Compliance with Federal Reserve Board Regulations B, M, 
and Z.
Subpart B--Interpretations and Definitions
609.920   Interpretations.
609.925   Definitions.
Subpart C--Standards for Boards and Management
609.930   Policies and procedures.
609.935   Business planning.
609.940   Internal systems and controls.
609.945   Records retention.
Subpart D--General Requirements for Electronic Communications
609.950   Electronic communications.

    Authority: Sec. 5.9 of the Farm Credit Act (12 U.S.C. 2243); 5 
U.S.C. 301; Pub. L. 106-229 (114 Stat. 464).

Subpart A--General Rules


Sec. 609.905  Background.

    The Farm Credit Administration (FCA) wants to create a flexible 
regulatory environment that facilitates electronic commerce (E-
commerce) and allows Farm Credit System (System) institutions and their 
customers to use new technologies. System institutions may use E-
commerce but must establish good business practices that ensure safety 
and soundness while doing so.


Sec. 609.910  Compliance with the Electronic Signatures in Global and 
National Commerce Act (Public Law 106-229) (E-SIGN).

    (a) General. E-SIGN makes it easier to conduct E-commerce. With 
some exceptions, E-SIGN permits the use and establishes the legal 
validity of electronic contracts, electronic signatures, and records 
maintained in electronic rather than paper form. It governs 
transactions relating to the conduct of business, consumer, or

[[Page 16632]]

commercial affairs between two or more persons. E-commerce is optional; 
all parties to a transaction must agree before it can be used.
    (b) Consumer transactions. E-SIGN contains extensive consumer 
disclosure provisions that apply whenever another consumer protection 
law, such as the Equal Credit Opportunity Act, requires the disclosure 
of information to a consumer in writing. Consumer means an individual 
who obtains, through a transaction, products or services, including 
credit, used primarily for personal, family, or household purposes. You 
must follow E-SIGN's specific procedures to make the required consumer 
disclosures electronically. E-SIGN's special disclosure rules for 
consumer transactions do not apply to business transactions. Under E-
SIGN, some System loans qualify as consumer transactions, while others 
are business transactions. You will need to distinguish between the two 
types of transactions to comply with E-SIGN.
    (c) Specific exceptions. E-SIGN does not permit electronic 
notification for notices of default, acceleration, repossession, 
foreclosure, eviction, or the right to cure, under a credit agreement 
secured by, or a rental agreement for, a person's primary residence. 
These notices require paper notification. The law also requires paper 
notification to cancel or terminate life insurance. Thus, System 
institutions cannot use electronic notification to deliver some notices 
that must be provided under part 614, subpart L of this chapter, 
Actions on Applications; Review of Credit Decisions, and part 614, 
subpart N of this chapter, Loan Servicing Requirements; State 
Agricultural Loan Mediation Programs; Right of First Refusal. In 
addition, E-SIGN does not apply to the writing or signature 
requirements imposed under the Uniform Commercial Code, other than 
sections 1-107 and 1-206 and Articles 2 and 2A.
    (d) Promissory notes. E-SIGN establishes special technological and 
business process standards for electronic promissory notes secured by 
real estate. To treat an electronic version of such a promissory note 
as the equivalent of a paper promissory note, you must conform to E-
SIGN's detailed requirements for transferable records. A transferable 
record is an electronic record that:
    (1) Would be a note under Article 3 of the Uniform Commercial Code 
if the electronic record were in writing;
    (2) The issuer of the electronic record has expressly agreed is a 
transferable record; and
    (3) Relates to a loan secured by real property.
    (e) Effect on State and Federal law. E-SIGN preempts most State and 
Federal statutes or regulations, including the Farm Credit Act of 1971, 
as amended (Act), and its implementing regulations, that require 
contracts or other business, consumer, or commercial records to be 
written, signed, or in non-electronic form. Under E-SIGN, an electronic 
record or signature generally satisfies any provision of the Act, or 
its implementing regulations that requires such records and signatures 
to be written, signed, or in paper form. Therefore, unless an exception 
applies or a necessary condition under E-SIGN has not been met, an 
electronic record or signature satisfies any applicable provision of 
the Act or its implementing regulations.
    (f) Document integrity and signature authentication. Each System 
institution must verify the legitimacy of an E-commerce communication, 
transaction, or access request. Document integrity ensures that the 
same document is provided to all parties. Signature authentication 
proves the identities of all parties. The parties to the transaction 
may determine how to ensure document integrity and signature 
authentication.
    (g) Records retention. Each System institution may maintain all 
records electronically even if originally they were paper records. The 
stored electronic record must accurately reflect the information in the 
original record. The electronic record must be accessible and capable 
of being reproduced by all persons entitled by law or regulations to 
review the original record.


Sec. 609.915  Compliance with Federal Reserve Board Regulations B, M, 
and Z.

    The regulations in this part require fair practices and meaningful 
disclosures for certain lending and leasing activities. System 
institutions must comply with Federal Reserve Board Regulations B 
(Equal Credit Opportunity), M (Consumer Leasing), and Z (Truth in 
Lending) (12 CFR parts 202, 213, and 226).

Subpart B--Interpretations and Definitions


Sec. 609.920  Interpretations.

    (a) E-SIGN preempts most statutes and regulations, including the 
Act and its implementing regulations that require paper copies and 
handwritten signatures in business, consumer, or commercial 
transactions. E-SIGN requires that statutes and regulations be 
interpreted to allow E-commerce as long as the safeguards of E-SIGN are 
met and its exceptions recognized. Generally, an electronic record or 
signature satisfies any provision of the Act or its implementing 
regulations that require such records and signatures to be written, 
signed, or in paper form.
    (b) System institutions may interpret the Act and its implementing 
regulations broadly to allow electronic transmissions, communications, 
records, and submissions, as provided by E-SIGN. This means that the 
terms address, copy, distribute, document, file, mail, notice, notify, 
record, provide, send, signature, sent, written, writing, and similar 
words generally should be interpreted to permit electronic 
transmissions, communications, records, and submissions in business, 
consumer, or commercial transactions.


Sec. 609.925  Definitions.

    We provide the following definitions that apply to the Act and its 
implementing regulations:
    (a) Electronic means relating to technology having electrical, 
digital, magnetic, wireless, optical, electromagnetic, or similar 
capabilities.
    (b) Electronic communication means a message that can be 
transmitted electronically and displayed on equipment as visual text. 
An example is a message displayed on a personal computer monitor 
screen. This does not include audio- and voice-response telephone 
systems.
    (c) Electronic business (E-business) or electronic commerce (E-
commerce) means buying, selling, producing, or working in an electronic 
medium.
    (d) Electronic mail (E-mail) means:
    (1) To send or submit information electronically; or
    (2) A communication received electronically.
    (e) Electronic signature means an electronic sound, symbol, or 
process, attached to or logically associated with a contract or other 
record and executed or adopted by a person with the intent to sign the 
record. Electronic signature describes a category of electronic 
processes that can be substituted for a handwritten signature.

Subpart C--Standards for Boards and Management


Sec. 609.930  Policies and procedures.

    The FCA supports E-commerce and wants to facilitate it and other 
new technologies and innovations to enhance the efficient conduct of 
business and the delivery of safe and sound credit and closely related 
services. Through E-commerce, System institutions can enhance customer 
service, access information, and provide

[[Page 16633]]

alternate communication systems. At the same time, E-commerce presents 
challenges and risks that your board must carefully consider in 
advance. Before engaging in E-commerce, you must weigh its business 
risks against its benefits. You must also adopt E-commerce policies and 
procedures to ensure your institution's safety and soundness and 
compliance with law and regulations. Among other concerns, the policies 
and procedures must address, when applicable:
    (a) Security and integrity of System institution and borrower data;
    (b) The privacy of your customers as well as visitors to your Web 
site;
    (c) Notices to customers or visitors to your Web site when they 
link to an affiliate or third party Web site;
    (d) Capability of vendor or application providers;
    (e) Business resumption after disruption;
    (f) Fraud and money laundering;
    (g) Intrusion detection and management;
    (h) Liability insurance; and
    (i) Prompt reporting of known or suspected criminal violations 
associated with E-commerce to law enforcement authorities and FCA under 
part 617 of this chapter.


Sec. 609.935  Business planning.

    When engaging in E-commerce, the business plan required under part 
618 of this chapter, subpart J, must describe the E-commerce 
initiative, including intended objectives, business risks, security 
issues, relevant markets, and legal compliance.


Sec. 609.940  Internal systems and controls.

    When applicable, internal systems and controls must provide 
reasonable assurances that System institutions will:
    (a) Follow and achieve business plan objectives and policies and 
procedures requirements regarding E-commerce; and
    (b) Prevent and detect material deficiencies on a timely basis.


Sec. 609.945  Records retention.

    Records stored electronically must be accurate, accessible, and 
reproducible for later reference.

Subpart D--General Requirements for Electronic Communications


Sec. 609.950  Electronic communications.

    (a) Agreement. In accordance with E-SIGN, System institutions may 
communicate electronically in business, consumer, or commercial 
transactions. E-commerce transactions require the agreement of all 
parties when you do business.
    (b) Communications with consumers. E-SIGN and Federal Reserve Board 
Regulations B, M, and Z (12 CFR parts 202, 213, and 226) outline 
specific disclosure requirements for communications with consumers.
    (c) Communications with parties other than consumers. The consumer 
disclosure requirements of E-SIGN and of Federal Reserve Board 
Regulation B (12 CFR part 202) do not apply to your communications with 
parties other than consumers. (Federal Reserve Board Regulations M and 
Z (12 CFR parts 213 and 226) apply to consumers only.) Nonetheless, you 
must ensure that your communications, including those disclosures 
required under the Act and the regulations in this part, demonstrate 
good business practices in the delivery of credit and closely related 
services and in your obtaining goods and services.

PART 620--DISCLOSURE TO SHAREHOLDERS

    2. 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

    3. Amend Sec. 620.1 as follows:
    a. Revise paragraph (o);
    b. Redesignate existing paragraph (r) as new paragraph (s); and
    c. Add a new paragraph (r).


Sec. 620.1  Definitions.

* * * * *
    (o) Report refers to the annual report, quarterly report, notice, 
or information statement, regardless of form, required by this part 
unless otherwise specified.
* * * * *
    (r) Signed, when referring to paper form, means a manual signature, 
and, when referring to electronic form, means marked in a manner that 
authenticates each signer's identity.

    4. Amend Sec. 620.2 as follows:
    a. Remove the first sentence and add three new sentences in its 
place in paragraph (a);
    b. Revise paragraph (b) introductory text;
    c. Remove the word ``filed'' and add in its place, the word 
``required'' in paragraph (b)(3)(i);
    d. Remove the words ``typed or'' from the second sentence in 
paragraph (b)(3)(ii); and
    e. Redesignate existing paragraphs (d), (e), (f), (g), (h), and (i) 
as newly designated paragraphs (e), (f), (g), (h), (i), and (j) 
consecutively;
    f. Add new paragraph (d); and
    g. Remove the words ``mail or otherwise furnish'' and add in their 
place, the word ``provide'' in newly designated paragraph (i)(3).


Sec. 620.2  Preparing and filing the reports.

* * * * *
    (a) Copies of each report required by this section, including 
financial statements and related schedules, exhibits, and all other 
papers and documents that are a part of the report must be sent to the 
Chief Examiner, or to another office designated by the Chief Examiner. 
If sending paper copies, send three copies to Chief Examiner, Farm 
Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090. 
If providing electronic copies, send according to our instructions to 
you. * * *
    (b) At least one of the reports provided to the Farm Credit 
Administration shall be dated and manually signed on behalf of the 
institution by:
* * * * *
    (d) Shareholders must agree to electronic disclosures of reports 
required by this part.
* * * * *

Subpart B--Annual Report to Shareholders


Sec. 620.4  [Amended]

    5. Amend Sec. 620.4 as follows:
    a. Remove the word ``distributing'' and add in its place, the word 
``providing'' in the heading; and
    b. Remove the word ``distribute'' and add the word ``provide'' each 
place it appears in paragraphs (a), (b)(1), and (b)(2).


Sec. 620.5  [Amended]

    6. Amend Sec. 620.5 as follows:
    a. Remove the word ``distributed'' and add in its place, the word 
``provided'' in paragraph (a)(3); and
    b. Remove the word ``signed'' and add in its place, the words 
``manually signed, or if in electronic form, signed in a manner that 
authenticates each signer's identity'' in paragraph (m)(2).

Subpart C--Quarterly Report

    7. Amend Sec. 620.11 by revising the second sentence of paragraph 
(b)(6) to read as follows:


Sec. 620.11  Content of quarterly report to shareholders.

* * * * *
    (b) * * *
    (6) * * * In addition, a statement from the persons who verify the

[[Page 16634]]

institution's financial statements shall be included as an exhibit, 
indicating whether or not the change is to an alternative principle 
which in their judgment is preferable under the circumstances, except 
that no such statement need be filed when the change is made in 
response to a standard adopted by the Financial Accounting Standards 
Board which requires such change.
* * * * *

Subpart D--Notice to Shareholders

    8. Revise Sec. 620.15 to read as follows:


Sec. 620.15  Notice.

    (a) Each Farm Credit bank and direct lender association shall 
prepare and provide the Farm Credit Administration and shareholders a 
notice, within 30 days following the month end that the institution 
initially determines that it is not in compliance with the minimum 
permanent capital standard prescribed under Sec. 615.5205 of this 
chapter.
    (b) An institution that has given notice to shareholders pursuant 
to paragraph (a) of this section or subsequent notice pursuant to this 
paragraph shall also prepare and provide the Farm Credit Administration 
and shareholders a notice within 45 days following the end of any 
subsequent quarter at which the institution's permanent capital ratio 
decreases by one-half of 1 percent or more from the level reported in 
the most recent notice provided to shareholders.
    (c) Each institution required to prepare a notice under paragraphs 
(a) or (b) of this section shall provide the notice to shareholders or 
publish it in any publication with circulation wide enough to be 
reasonably assured that all of the institution's shareholders have 
access to the information in a timely manner.


Sec. 620.17  [Amended]

    9. Amend Sec. 620.17 by removing the words ``distribute'' and 
adding in its place, the word ``provide'' in paragraph (b)(4).

Subpart E--Association Annual Meeting Information Statement


Sec. 620.20  [Amended]

    10. Amend Sec. 620.20 as follows:
    a. Remove the word ``distributing'' and add in its place, the word 
``providing'' in the heading; and
    b. Remove the word ``distribute'' and add in its place, the word 
``provide'' in paragraph (a).

    11. Amend Sec. 620.21 as follows:
    a. Remove the words ``furnished a letter'' and add in their place, 
the words ``provided a notice'' in the first sentence of paragraph 
(c)(3);
    b. Remove the words ``contained in the letter'' at the end of the 
first sentence in paragraph (c)(3);
    c. Add the words ``paper mail or electronic'' before the word 
``mail'' in each place it appears in paragraphs (d)(3)(i)(A), 
(d)(3)(i)(B), (d)(3)(ii)(A), and (d)(3)(ii)(B);
    d. Revise paragraph (d)(5) to read as follows:


Sec. 620.21  Contents of the information statement and other 
information to be furnished in connection with the annual meeting.

* * * * *
    (d) * * *
    (5) For each nominee who is not an incumbent director, except a 
nominee from the floor, provide the information referred to in 
Sec. 620.5(j) and (k) and paragraph (d)(4) of this section. If 
shareholders will vote by paper mail or electronic mail ballot upon 
conclusion of all sessions, each floor nominee must provide the 
information referred to in Sec. 620.5(j) and (k) and paragraph (d)(4) 
of this section in paper or electronic form to the association within 
the time period prescribed by the association's bylaws. If the 
association's bylaws do not prescribe a time period, state that each 
floor nominee must provide the disclosure to the association within 5 
business days of the nomination. The association shall ensure that the 
information is provided to the voting shareholders by delivering the 
ballots for the election of directors in the same format as the 
comparable information contained in the association's annual meeting 
information statement. If shareholders will not vote by paper mail or 
electronic mail ballot upon conclusion of all sessions, each floor 
nominee must provide the information referred to in Sec. 620.5(j) and 
(k) and paragraph (d)(4) of this section in paper or electronic form at 
the first session at which voting is held.
* * * * *


Sec. 620.30  [Amended]

    12. Amend Sec. 620.30 by removing the words ``distribute or mail'' 
and adding in their place, the word ``provide'' in the second sentence.

Subpart G--Annual Report of Condition of the Federal Agricultural 
Mortgage Corporation

    13. Amend Sec. 620.40 as follows:
    a. Revise the heading and remove the words ``distribution of'' and 
add in their place, the words ``providing of the'' in the heading;
    b. Remove the word ``distribute'' and add in its place, the word 
``provide'' in paragraph (b);
    c. Remove the words ``mail or otherwise furnish to the requestor a 
copy of'' and add in their place, the words ``provide the requester'' 
in paragraph (c); and
    d. Revise paragraph (d):


Sec. 620.40  Content, timing, and providing of the Federal Agricultural 
Mortgage Corporation annual report of condition.

* * * * *
    (d) The Corporation shall provide copies of the annual report of 
condition to the Farm Credit Administration's Office of Secondary 
Market Oversight within 120 days of its fiscal year-end. If providing 
paper copies, send three copies to Office of Secondary Market 
Oversight, Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
VA 22102-5090. If providing electronic copies, send according to our 
instructions to you.

    Dated: April 1, 2002.
Kelly Mikel Williams,
Secretary, Farm Credit Administration Board.
[FR Doc. 02-8212 Filed 4-5-02; 8:45 am]
BILLING CODE 6705-01-P