[Federal Register Volume 70, Number 80 (Wednesday, April 27, 2005)]
[Proposed Rules]
[Pages 21685-21688]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-8237]


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FARM CREDIT ADMINISTRATION

12 CFR Part 627

RIN 3052-AC26


Title IV Conservators, Receivers, and Voluntary Liquidations; 
Receivership Repudiation Authorities

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA) is proposing a rule on 
how the Farm Credit System Insurance Corporation (FCSIC), as receiver 
or conservator of a Farm Credit System (System) institution, will treat 
financial assets transferred by the institution in connection with a 
securitization or in the form of a participation. The rule would 
resolve issues raised by Financial Accounting Standards Board (FASB) 
Statement No. 140, Accounting for Transfers and Servicing of Financial 
Assets and Extinguishment of Liabilities (SFAS 140). Under conditions 
described in the rule, the FCSIC will not seek to recover or reclaim 
certain financial assets in exercising its authority to repudiate or 
disaffirm contracts pursuant to 12 CFR 627.2725(b)(2), (b)(14) and 
627.2780(b) and (d). The proposed rule also provides that the FCSIC 
will not seek to enforce the ``contemporaneous'' requirement of section 
5.61(d) of the Farm Credit Act of 1971, as amended (Act) (12 U.S.C. 
2277a-10(d)). The proposed rule is substantially identical to 
receivership rules issued by the Federal Deposit Insurance Corporation 
(FDIC) and the National Credit Union Administration (NCUA).

DATES: Please send your comments to us by June 27, 2005.

ADDRESSES: You may send comments by electronic mail to ``[email protected],'' through the Pending Regulations section of FCA's Web 
site, ``http://www.fca.gov,'' or through the Governmentwide ``http://www.regulations.gov'' Web site. You may also send comments to S. Robert 
Coleman, Director, Regulation and Policy Division, Office of Policy and 
Analysis, Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
VA 22102-5090 or by fax to (703) 734-5784. You may review copies of 
comments we receive at our office in McLean, Virginia, or from our Web 
site at http://www.fca.gov. Once you are in the Web site, select 
``Legal Info,'' and then select ``Public Comments.'' We will show your 
comments as submitted, but for technical reasons we may omit items such 
as logos and special characters. Identifying information you provide, 
such as phone numbers and addresses, will be publicly available. 
However, we will attempt to remove electronic-mail addresses to help 
reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: Robert E. Donnelly, Senior Accountant, 
Office of Policy and Analysis, Farm Credit Administration, McLean, VA 
22102-5090, 703-883-4498, TTY (703) 883-4434, or Rebecca S. Orlich, 
Senior Attorney, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, 703-883-4020, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION:

I. Objective

    Our objective in proposing this rule is to give certainty to System 
institutions regarding how participations and securitizations engaged 
in by a System institution will be treated by the FCSIC if the 
institution is subsequently placed

[[Page 21686]]

in conservatorship or receivership. The rule will achieve this by 
ensuring that the FCSIC will not attempt to ``pull back'' the subject 
assets into the conservatorship or receivership estate if the 
transaction meets specified conditions.

II. Background

    Under generally accepted accounting principles (GAAP), a transfer 
of financial assets is accounted for as a sale if the transferor 
surrenders control over the assets. This principle is set forth in the 
SFAS No. 140, Accounting for Transfers and Servicing of Financial 
Assets and Extinguishment of Liabilities, issued by the FASB.\1\ One of 
the conditions for determining that the transferor has surrendered 
control is that the assets have been isolated from the transferor, 
i.e., put presumptively beyond the reach of the transferor, its 
creditors, a trustee in bankruptcy, or a receiver. This is known as the 
``legal isolation'' condition.
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    \1\ SFAS 140 replaced SFAS 125 (which had covered the same 
issues and was identically titled) in September 2000. SFAS 140 
revised the standards for accounting for securitizations and other 
transfers of financial assets and collateral and required certain 
disclosures, but it carried over most of the provisions of SFAS 125 
without reconsideration. The FDIC receivership issues and its 
related rule 12 CFR 360.6, which are discussed later in this 
preamble, are described in paragraphs 157-160 of SFAS 140.
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    Whether the legal isolation condition has been met is determined 
primarily from a legal perspective. This determination involves 
considerations of the kind of receivership into which the transferor 
may be placed and the powers of the receiver to reach assets that were 
transferred prior to its appointment. If the available evidence 
provides reasonable assurance that the transferred assets would be 
beyond the reach of the powers of a bankruptcy trustee or receiver for 
the transferor, then a determination that the transferred assets have 
been legally isolated is appropriate.
    Where the transferor is a System institution for which the FCSIC 
may be appointed conservator or receiver, the issue arises whether 
financial assets transferred in connection with a securitization or in 
the form of a participation would be put beyond the reach of the FCSIC 
as conservator or receiver. This issue arises because of the FCSIC's 
authority to repudiate burdensome contracts under Sec. Sec.  
627.2725(b)(2), (b)(14) and 627.2780(b) and (d) of FCA regulations; and 
because of section 5.61(d) of the Act.\2\ Under Sec. Sec.  
627.2725(b)(2) and 627.2780(d), the FCSIC may take any action it 
considers appropriate or expedient to carry on the business of the 
institution during the process of liquidation or during the 
conservatorship. Under Sec.  627.2725(b)(14), the FCSIC, when acting as 
conservator or receiver of a System institution, has the power to 
disaffirm or repudiate any contract or lease to which the institution 
is a party, the performance of which the FCSIC determines to be 
burdensome. Repudiation of a contract relieves the FCSIC from 
performing any unperformed obligations remaining under the contract. 
Section 5.61(d) of the Act provides that no agreement that tends to 
diminish or defeat the FCSIC's interest in an asset acquired by the 
FCSIC as conservator or receiver is enforceable against the FCSIC 
unless the agreement meets certain requirements. One of those 
requirements is that the agreement must be executed, by the institution 
and by any person claiming an adverse interest under it, 
contemporaneously with the acquisition of the asset by the institution. 
This is referred to as the ``contemporaneous'' requirement.
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    \2\ See 12 CFR 627.2725(b)(2), (b)(14) and 627.2780(b) and (d), 
and 12 U.S.C. 2277a-10(d).
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    The FDIC and the NCUA each adopted a rule in 2000 \3\ to resolve 
the issues discussed above in SFAS 140.\4\ Specifically, the two 
agencies addressed whether their authorities to repudiate contracts 
would prevent a transfer of financial assets by an insured depository 
institution or a credit union in connection with a securitization or in 
the form of a participation from satisfying the ``legal isolation'' 
condition of SFAS 140. The Act and FCA regulations contain 
substantially similar provisions that apply when the FCSIC is appointed 
conservator or receiver for a System institution, and we are proposing 
to resolve the issues in the same way.\5\ As such, this preamble and 
proposed rule track the language of the FDIC's and NCUA's rules. We 
note that nothing in this proposed rule is intended to provide any 
System institutions with the authority to engage in any transaction 
that is not otherwise authorized.
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    \3\ See 12 CFR 360.6 (65 FR 49189 (Aug. 11, 2000)) and 12 CFR 
709.10 (65 FR 55439 (Sept. 14, 2000)).
    \4\ These issues were originally raised in SFAS 125, which was 
replaced by SFAS 140 as described in footnote 1 above. The issues 
continue to be discussed SFAS 140.
    \5\ See 12 U.S.C. 1821(e) for the law pertaining to the FDIC, 
and 12 U.S.C. 1787(b)(9) and 1788(a)(3) for the laws pertaining to 
the NCUA.
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III. Description of the Proposed Rule

    This proposal would add a new Sec.  627.2726 to the conservatorship 
and receivership provisions in part 627 of FCA's regulations. The 
proposed rule would apply only to those securitizations or 
participations in which the transfer of financial assets meets all 
conditions for sale accounting treatment under GAAP, other than the 
``legal isolation'' condition as it applies to institutions for which 
the FCSIC may be appointed as conservator or receiver, which would be 
addressed by the proposed rule. The proposed rule provides that, for 
these transfers, the FCSIC will not, by exercise of its authority to 
repudiate contracts under Sec.  627.2725(b)(2) or (b)(14), reclaim, 
recover, or recharacterize as property of the institution or the 
receivership any financial assets transferred by a System institution 
in connection with a securitization or in the form of a participation. 
Although the repudiation of a securitization or participation will not 
affect transferred financial assets, repudiation will excuse the FCSIC 
from performing any continuing obligations imposed by the 
securitization or participation. If the FCSIC, in order to terminate 
such continuing obligations or duties, seeks to repudiate an agreement 
or contract under which a System institution has transferred financial 
assets in connection with a securitization or in the form of a 
participation, the FCSIC will not seek to reclaim, recover, or 
recharacterize as property of the institution or the receivership such 
financial assets.
    The definition of ``participation'' in the proposed rule is 
specifically limited to participations that are ``without recourse'' to 
the selling or ``lead'' institution. ``Without recourse'' would mean 
that the participation must not be subject to any agreement that 
requires the selling or ``lead'' institution to repurchase the 
participant's interest or to otherwise compensate the participant upon 
the borrower's default on the underlying obligation. The term ``without 
recourse'' does not, however, preclude the lead institution from 
retaining a subordinated interest in the participated obligation, 
against which losses are initially allocated.
    The proposed rule would not apply unless the System institution 
received adequate consideration for the transfer of financial assets at 
the time of the transfer, and the documentation effecting the transfer 
of financial assets reflects the intent of the parties to treat the 
transaction as a sale, and not as a secured borrowing, for accounting 
purposes.
    The proposed rule further provides that it will not be construed as 
waiving, limiting, or otherwise affecting the rights or powers of the 
FCSIC to take

[[Page 21687]]

any action or to exercise any power not specifically limited by this 
section. Such rights or powers include, but are not limited to, any 
rights, powers or remedies of the FCSIC regarding transfers taken in 
contemplation of the institution's insolvency or with the intent to 
hinder, delay, or defraud the institution or the creditors of such 
institution, or that is a fraudulent transfer under applicable law.
    The proposed rule further provides that the FCSIC will not seek to 
avoid an otherwise legally enforceable securitization agreement or 
participation agreement executed by a System institution solely because 
such agreement does not meet the ``contemporaneous'' requirement of 
section 5.61(d) of the Act.
    The FCA intends the proposed rule to apply to securitizations and 
participations engaged in by System institutions while the rule is in 
effect, even if the rule is later amended or repealed. Section 
627.2726(g) provides that any repeal or amendment of the rule by the 
FCA will not apply to any transfer of financial assets made in 
connection with a securitization or participation that was in effect 
before such repeal or amendment. As a result of Sec.  627.2726(g), 
where a transfer of financial assets in connection with a 
securitization or in the form of a participation is made by a System 
institution and the securitization or participation was in effect 
before any repeal or amendment of the rule by the FCA, such transfer 
will continue to satisfy the legal isolation requirement 
notwithstanding the repeal or amendment.
    We also propose a conforming change to Sec.  627.2780(h) to clarify 
that the provisions of this proposed rule apply to a conservatorship as 
well as to a receivership.

IV. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the proposed 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 and annual income 
in excess of the amounts that would qualify them as small entities. 
Therefore, Farm Credit System institutions are not ``small entities'' 
as defined in the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 627

    Agriculture, Banks, Banking, Claims, Rural areas.
    For the reasons stated in the preamble, we propose to amend part 
627 of Chapter VI, title 12, of the Code of Federal Regulations as 
follows:

PART 627--CONSERVATORS, RECEIVERS, AND VOLUNTARY LIQUIDATIONS

    1. The authority citation for part 627 is revised to read as 
follows:

    Authority: Secs. 4.2, 5.9, 5.10, 5.17, 5.51, 5.58, 5.61 of the 
Farm Credit Act (12 U.S.C. 2183, 2243, 2244, 2252, 2277a, 2277a-7, 
2277a-10).

Subpart B--Receivers and Receiverships

    2. Add a new Sec.  627.2726 to read as follows:


Sec.  627.2726  Treatment by the conservator or receiver of financial 
assets transferred in connection with a securitization or 
participation.

    (a) Definitions.
    Beneficial interest means debt or equity (or mixed) interests or 
obligations of any type issued by a special purpose entity that entitle 
their holders to receive payments that depend primarily on the cash 
flow from financial assets owned by the special purpose entity.
    Financial asset means cash or a contract or instrument that conveys 
to one entity a contractual right to receive cash or another financial 
instrument from another entity.
    Participation means the transfer or assignment of an undivided 
interest in all or part of a loan or a lease from a seller, known as 
the ``lead'', to a buyer, known as the ``participant'', without 
recourse to the lead, pursuant to an agreement between the lead and the 
participant. Without recourse means that the participation is not 
subject to any agreement that requires the lead to repurchase the 
participant's interest or to otherwise compensate the participant due 
to a default on the underlying obligation.
    Securitization means the issuance by a special purpose entity of 
beneficial interests:
    (1) The most senior class of which at the time of issuance is rated 
in one of the four highest categories assigned to long-term debt or in 
an equivalent short-term category (within either of which there may be 
sub-categories or gradations indicating relative standing) by one or 
more nationally recognized statistical rating organizations, or
    (2) Which are sold in transactions by an issuer not involving any 
public offering for purposes of section 4 of the Securities Act of 1933 
(15 U.S.C. 77d), as amended, or in transactions exempt from 
registration under such Act pursuant to Regulation S thereunder (or any 
successor regulation).
    Special purpose entity means a trust, corporation, or other entity 
demonstrably distinct from the Farm Credit institution that is 
primarily engaged in acquiring and holding (or transferring to another 
special purpose entity) financial assets, and in activities related or 
incidental thereto, in connection with the issuance by such special 
purpose entity (or by another special purpose entity that acquires 
financial assets directly or indirectly from such special purpose 
entity) of beneficial interests.
    (b) The receiver shall not, by exercise of its authority to 
repudiate contracts under Sec.  627.2725(b)(2) and (b)(14), reclaim, 
recover, or recharacterize as property of the institution or the 
receivership any financial assets transferred by a Farm Credit 
institution in connection with a securitization or participation, 
provided that such transfer meets all conditions for sale accounting 
treatment under generally accepted accounting principles, other than 
the ``legal isolation'' condition as it applies to institutions for 
which the FCSIC may be appointed as receiver which is addressed by this 
section.
    (c) Paragraph (b) of this section shall not apply unless the Farm 
Credit institution received adequate consideration for the transfer of 
financial assets at the time of the transfer, and the documentation 
effecting the transfer of financial assets reflects the intent of the 
parties to treat the transaction as a sale, and not as a secured 
borrowing, for accounting purposes.
    (d) Paragraph (b) of this section shall not be construed as 
waiving, limiting, or otherwise affecting the power of the receiver to 
disaffirm or repudiate any agreement imposing continuing obligations or 
duties upon the insured depository institution in receivership.
    (e) Paragraph (b) of this section shall not be construed as 
waiving, limiting or otherwise affecting the rights or powers of the 
receiver to take any action or to exercise any power not specifically 
limited by this section, including, but not limited to, any rights, 
powers or remedies of the receiver regarding transfers taken in 
contemplation of the institution's insolvency or with the intent to 
hinder, delay, or defraud the institution or the creditors of such 
institution, or that is a fraudulent transfer under applicable law.
    (f) The receiver shall not seek to avoid an otherwise legally 
enforceable securitization agreement or participation agreement 
executed by a

[[Page 21688]]

Farm Credit institution solely because such agreement does not meet the 
``contemporaneous'' requirement of section 5.61(d) of the Act.
    (g) This section may be repealed or amended by the Farm Credit 
Administration, but any such repeal or amendment shall not apply to any 
transfers of financial assets made in connection with a securitization 
or participation that was in effect before such repeal or modification.

Subpart C--Conservators and Conservatorships

    3. Amend Sec.  627.2780(b) by adding a second sentence to read as 
follows:


Sec.  627.2780  Powers and duties of conservators.

* * * * *
    (b) * * * The provisions of Sec.  627.2726 shall also apply to the 
conservator of a Farm Credit institution.* * *
* * * * *

    Dated: April 20, 2005.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 05-8237 Filed 4-26-05; 8:45 am]
BILLING CODE 6705-01-P