[Federal Register Volume 69, Number 89 (Friday, May 7, 2004)]
[Notices]
[Pages 25578-25580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10408]


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FARM CREDIT ADMINISTRATION


Farm Management and Agricultural Trust

AGENCY: Farm Credit Administration.

ACTION: Notice.

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SUMMARY: The Farm Credit Administration (FCA or we) publishes this 
notice to inform the public of its decision to deny a request by a Farm 
Credit System (System or FCS) institution for approval to offer farm 
management and agricultural trust services as authorized related 
services.

[[Page 25579]]

The proposed services were published for public comment on August 19, 
2003.

EFFECTIVE DATE: April 22, 2004.

FOR FURTHER INFORMATION CONTACT:
Lori Markowitz, Policy Analyst, Office of Policy and Analysis, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TTY (703) 
883-4434;
     or
Joy Strickland, Senior Counsel, Regulatory Enforcement Division, Office 
of the General Counsel, Farm Credit Administration, McLean, VA 22102-
5090, (703) 883-4020, TTY (703) 883-2020.

SUPPLEMENTARY INFORMATION:

I. Objective

    Consistent with law and safety and soundness principles, the 
objective of this notice is to inform the public of the FCA's decision 
on a request from an FCS institution to offer farm management and 
agricultural trust services as authorized related services.

II. Background

    FCA published a notice and request for public comment on the 
institution's related services request in the Federal Register on 
August 19, 2003, and provided a 60-day comment period. (See 68 FR 
49773) On October 23, 2003, FCA reopened the comment period until 
December 22, 2003. (See 68 FR 60689) In this notice, we are providing a 
summary of the comments we received and informing the public of FCA's 
decision on the related services request.
    Related service, as defined in 12 CFR 618.8000(b), means ``any 
service or type of activity provided by a System bank or association 
that is appropriate to the recipient's on-farm, aquatic, or cooperative 
operations, including control of related financial matters.'' Any new 
service not previously authorized and placed on the Related Services 
List in 12 CFR part 618 requires a prior determination that the service 
is legally authorized. The FCA also must evaluate whether the service 
presents excessive risk to the requesting institution or the System as 
a whole, including whether the service could result in significant 
conflicts of interest or expose the institution or the System as a 
whole to significant liability.
    In its evaluation of a proposed service, the FCA must focus on its 
application System-wide rather than on institution-specific factors. If 
we authorize a new related service, any System bank or association may 
develop a program and subsequently offer the same related service(s) to 
eligible recipients, subject to any special conditions or limitations 
imposed by the FCA. We may, at the time of approval, impose such 
special conditions or limitations on any approved service to ensure 
safety and soundness or compliance with law or regulation. These 
programs would be subject to review during the examination process.

III. Proposed Related Services

    The following services were proposed as services that an individual 
institution would offer to its customers:
     Farm Management Services--Professionals familiar with the 
market would provide management of agricultural properties for real 
estate owners in the service area. Farm management includes defining 
ownership goals, identifying problems, analyzing alternatives, and 
making recommendations for achieving business goals. Farm managers 
would present the customer with a full spectrum of lease or custom 
farming alternatives and help the owner decide how to ultimately get 
the best return on assets. Key factors of the service would include 
developing a comprehensive farm operating plan, securing operators and 
negotiating leases, providing property reporting, including annual 
budgets and projections, analyzing government programs, formulating and 
implementing capital improvements and repairs, and handling commodity 
sales.
     Agricultural Trust Services--The institution would assist 
customers in creating a trust and managing the assets of the trust. As 
the trustee, the institution would handle the responsibilities involved 
in settling the estate, including recordkeeping, asset management, 
asset disposition, tax filings, and income distributions.

IV. Comments

    Because of the complex nature of these proposed services, the FCA 
solicited public comment, in accordance with 12 CFR 618.8010(b)(3). We 
believe that evaluation of the proposal has been aided by the public 
comments we received. FCA received 390 comments, four of which asked 
for an extension of the original comment period or clarification of 
FCA's process. Commenters included FCS institutions, the Farm Credit 
Council, the American Bankers Association, the Independent Community 
Bankers Association, state banking associations, the National 
Association of Realtors, realtors, property managers, appraisers, and 
members of the public.
    We received 19 comments in support of the proposal. Supporters 
commented that farm management and agricultural trust services would 
allow FCS institutions to become more comprehensive providers of 
financial services. Also, the proposed services would greatly benefit 
and parallel FCA's Young, Beginning and Small (YBS) farmer initiative 
by allowing YBS farmers to have highly regarded expert advice about 
specialized services available. Commenters stated that these services 
could provide retiring farmers with the alternatives and valuable 
business tools that would allow the transfer of assets from one 
generation to another, thus allowing for the continuation of the family 
farm business. The services could also benefit absentee and non-active 
farmland owners who do not want to actively farm the land, but want to 
continue land ownership and need assistance in farm management. 
Supporters also commented that the proposed services would meet the 
growing market demand in areas where the private sector providers are 
underserving the public or not offering such services at all.
    Supporters also commented that a System institution offering the 
proposed services should demonstrate that appropriate risk management 
practices are in place and that safeguards are specifically identified 
in the agreement with the customer. Commenters asserted that risks 
could be adequately addressed by written programs establishing detailed 
operating procedures, staff qualifications, training, licensing, and 
insurance requirements, contractual provisions with clients, and 
``firewalls'' between other institution operations. An organizational 
structure that provides for a separation of duties from the credit 
function would minimize potential conflicts associated with borrowers 
with distressed loans. Commenters further noted that an institution's 
board and management could implement internal controls through the 
development of policies and procedures, which would be monitored 
through internal and FCA regulatory examinations.
    FCA received 367 comments in opposition to this proposal, many of 
which were identical in content. Commenters stated that the proposal 
would create an unfair competitive advantage because the proposed farm 
management and trust services are widely available to farmers 
throughout the country from existing service providers, and an FCS 
institution would be able to charge less for these services because of 
its Government-sponsored enterprise status. Many commented that farm 
management is a low margin business with high start-up costs due to the 
training and expertise requirements.

[[Page 25580]]

Several commenters asserted that the proposed services are 
contradictory to Congressional intent and legislative history. 
Commenters in opposition also believe that FCS institutions cannot 
legally offer trust services because state law governs who can be 
deemed a corporate trustee, and most laws only include banks, savings 
and loan institutions, and trust companies. Further, the commenters 
noted that farm management, like any property management, is a 
commercial activity that most nationally chartered banks and savings 
and loan institutions are prohibited from offering.
    The majority of comments in opposition to this proposal noted that 
there are significant conflicts of interest, particularly when the 
institution serves as farm manager, lender, and trustee of the same 
property. Financing farm operators and absentee landowners, while 
having a fiduciary position of negotiating leases and selecting farm 
operators, has built-in conflicts of interest. It would be difficult to 
negotiate lease terms as a farm manager if the farm operator were also 
a borrower. Commenters suggested that conflicts would also develop if 
potential farm management clients needed to borrow money. In addition, 
commenters stated that institutions offering farm management and trust 
services could expect to be involved in frequent litigation. As a 
result, some commenters felt that the services pose too great a 
financial risk to the System.

V. FCA's Action on the Proposal

    After thoroughly considering the proposal and the comments 
received, the FCA concluded that farm management and agricultural trust 
services could come within the definition of related services as 
authorized in 12 CFR 618.8000 and the Farm Credit Act of 1971, as 
amended. The services are related to on-farm operations, which FCA has 
defined to include control of related financial matters. The proposed 
services are also similar to several other services that have been 
approved by the FCA, provided by FCS institutions for a number of 
years, and ratified through a notice and comment rulemaking process. 
Those services include appraisal services, estate planning services, 
farm recordkeeping services, and farm business consulting services.
    Although the proposed services come within the statutory and 
regulatory parameters of a related service, farm management and 
agricultural trust services as proposed introduce significant risks and 
potential conflicts of interest for System institutions. An institution 
participating in farm management and agricultural trust services could 
face legal liability to its customers for certain management decisions, 
as well as third-party liability, including environmental liability. 
The financial risks associated with liability could significantly 
affect an institution's capital and financial condition. In addition, 
these services would likely involve substantial start-up and 
maintenance costs. If many institutions began offering these services, 
the risks and conflicts involved could adversely impact the System's 
viability.
    Performing farm management and agricultural trust services for 
customers who are also borrowers of the offering institution poses 
potentially significant conflicts of interest. The conflicts would be 
magnified if a borrower's loan became distressed. Foreclosing on a 
loan, including providing distressed loan restructuring rights, would 
be difficult if the institution foreclosing on the loan were also 
managing the farm. Significant potential for conflicts would also exist 
in management and trust situations where owners and lessees were also 
borrowers of the institution. The potential conflicts of interests 
would increase the financial risk of offering these services because 
they are likely to give rise to frequent litigation, including creating 
defenses to foreclosures of managed properties and properties in trust. 
FCA believes that the conflicts of interest that this proposal presents 
are too great and cannot be satisfactorily resolved.
    FCA recognizes that farm management and agricultural trust services 
can be beneficial to farmers and ranchers, particularly YBS farmers and 
ranchers. In some areas, these services may be provided through 
existing entities, while other areas may be underserved by existing 
entities. Notwithstanding the potential need for and benefits of these 
services, FCA believes that the conflicts and financial risks when one 
institution serves as both lender and manager/trustee outweigh the 
benefits that could be derived. FCA also notes that many of the 
benefits of these services, particularly the benefits to YBS farmers 
and ranchers, could be gained by System institutions more fully 
utilizing farm business consulting, which is an authorized related 
service on the Related Services List in 12 CFR part 618. Through farm 
business consulting, FCS institutions can provide critical advice to 
young and beginning farmers and advice on alternatives available to 
retiring farmers. Because FCS institutions that offer farm business 
consulting are not authorized to make management decisions for a 
customer, conflicts of interest and liability concerns are alleviated. 
For the foregoing reasons, the FCA Board has decided that farm 
management and agricultural trust services, as proposed, should not be 
authorized as related services.

    Dated: May 3, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-10408 Filed 5-6-04; 8:45 am]
BILLING CODE 6705-01-P