[Federal Register Volume 71, Number 150 (Friday, August 4, 2006)]
[Rules and Regulations]
[Pages 44410-44430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-6648]



[[Page 44409]]

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

Part III





Federal Credit Administration





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



12 CFR Part 611



Organization; Termination of System Institution Status; Final Rule

  Federal Register / Vol. 71, No. 150 / Friday, August 4, 2006 / Rules 
and Regulations  

[[Page 44410]]


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

FARM CREDIT ADMINISTRATION

12 CFR Part 611

RIN 3052-AC29


Organization; Termination of System Institution Status

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

SUMMARY: The Farm Credit Administration (FCA, Agency, we or our) issues 
this final rule amending our regulations that allow a Farm Credit 
System (FCS, Farm Credit, or System) bank or association to terminate 
its FCS charter and become a financial institution under another 
Federal or State chartering authority. The final rule updates the 
termination procedures for System banks and associations under sections 
7.9, 7.10 and 7.11 of the Farm Credit Act of 1971, as amended, ensures 
that interested parties have sufficient time and opportunities to be 
fully informed about a termination proposal, and ensures that a 
significant proportion of equity holders are engaged in the termination 
process.

DATES: 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 a notice of the effective 
date in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Thomas Dalton, Senior Staff 
Accountant, Office of Regulatory Policy, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4414; TTY (703) 883-4434; or Rebecca 
S. Orlich, Senior Counsel, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    Through this rulemaking it is our objective to:
     Update the termination procedure for FCS banks and 
associations under sections 7.9, 7.10 and 7.11 of the Farm Credit Act 
of 1971, as amended (Act);
     Ensure that the FCA, an institution's board of directors, 
and the institution's equity holders have sufficient time and 
opportunities to be fully informed about a termination proposal before 
deciding whether to approve the termination;
     Provide that we may require a terminating institution to 
obtain independent analyses and rulings regarding a proposed 
termination;
     Ensure that a significant proportion of stockholders are 
engaged in the termination process; and
     Clarify existing requirements and ensure that stockholder 
disclosure materials are informative and easy to understand.

II. Background

    The Agricultural Credit Act of 1987,\1\ among other things, amended 
the Act expressly to permit System institutions to terminate their Farm 
Credit status and become another type of financial institution. We 
first issued regulations governing terminations in 1991. At that time, 
the regulations covered only ``small'' FCS associations. Our current 
termination rule, published on April 12, 2002, covers all associations 
and banks.\2\ Since 1991, no FCS bank or association has terminated its 
charter under FCA regulations. However, in 2004 one System association 
adopted a commencement resolution to terminate its Farm Credit charter 
and subsequently be acquired by the subsidiary of a non-System bank. 
Ultimately, the association decided not to be acquired and not to 
terminate Farm Credit status. Although the association never submitted 
a termination application to us, the experience presented us with an 
actual event to evaluate the effectiveness and efficiency of our 
existing termination regulations. We found that, while the existing 
regulations provide the basic requirements to comply with the Act and 
effect a termination, certain revisions to the regulations would ensure 
a more orderly process for a FCS bank or association to terminate its 
charter.
---------------------------------------------------------------------------

    \1\ Public Law 100-233, 101 Stat. 1568 (January 6, 1988).
    \2\ See 67 FR 17907.
---------------------------------------------------------------------------

    On January 11, 2006, we published a proposed termination regulation 
\3\ to update the existing termination regulations to clarify our 
requirements. Our proposals included: (1) Separating our review of a 
terminating institution's disclosure information, as required by 
section 7.11 of the Act (12 U.S.C. 2279e), from our approval of the 
termination itself, as set forth in section 7.10 of the Act (12 U.S.C. 
2279d), (2) giving a terminating institution more flexibility in 
communicating with stockholders and the public during the termination 
process, (3) providing that we may require a terminating institution to 
obtain independent analyses of and rulings on matters related to the 
proposed termination, as well as to hold convenient informational 
meetings for stockholders, (4) strengthening protections for directors 
to obtain independent legal and financial advice and allow public or 
private expressions of their opinions about the termination, and (5) 
ensuring sufficient equity holder representation in voting processes by 
imposing a quorum requirement of 30 percent of voting stockholders that 
must be present in person or by proxy at the stockholder meetings for 
the termination and reconsideration votes.
---------------------------------------------------------------------------

    \3\ See 71 FR 1704.
---------------------------------------------------------------------------

III. Comments

    We received 51 comment letters on the proposed rule. Eight comment 
letters were from the Farm Credit Council (FCC) and seven System 
institutions (U.S. AgBank, CoBank, AgriBank, and four FCS associations) 
(collectively, System commenters). We also received 43 comment letters 
from non-System entities including Rabobank International (Rabobank), a 
cooperatively owned bank and financial services provider based in the 
Netherlands; the Independent Community Bankers of America (ICBA); the 
Independent Community Bankers of North Dakota; the American Bankers 
Association (ABA) and from 39 commercial bankers. In its letter, 
Rabobank identified itself as the bank that attempted unsuccessfully to 
acquire a System institution in 2004 and stated that its comments were 
based on that experience. In general, System commenters supported the 
rule, whereas non-System commenters expressed opposition to portions of 
the rule that they believed would create barriers to the termination 
process and would be burdensome and costly.

A. General Comments

    System commenters stated that:
     They support revising the termination regulation to more 
properly reflect the conditions and circumstances that exist when an 
institution's board votes to terminate. The facts and circumstances of 
any particular termination request must be carefully evaluated, and an 
independent analysis of various issues raised by the request may be 
appropriate. They encouraged FCA to require those studies as needed.
     They are concerned about the impact of any proposed 
termination on the System while the matter is pending and encouraged 
timely action by the Agency. They encouraged FCA to begin substantive 
review of a proposed termination as soon as possible after receipt of a 
plan of termination.
     They support the elimination of the termination authority 
from the Act.
    Non-System commenters stated that:

[[Page 44411]]

     The proposal creates obstacles and impediments that make 
termination difficult to achieve.
     They support giving the terminating institution permission 
to communicate with equity holders and the public during the 
termination process.
     The proposal restricts the institutions' right to 
terminate which leads to diminished performance, weak or entrenched 
management, and inefficient operations.
     The proposed amendments are complicated due to the fact 
that there are multiple requirements that are either redundant and/or 
unnecessary.
     The proposal demonstrates a bias toward protecting the 
overall System by proposing unnecessary and unjustifiable burdens for 
an institution seeking to leave the System, to the detriment of its 
members-owners.
     It is the right of the shareholders of a terminating 
institution to make this decision, not other institutions within the 
FCS or the FCA itself.
     There is a contradiction between making termination nearly 
impossible and maintaining the status quo, and expanding System 
authorities to serve a broader market, as System institutions are 
currently promoting through their Horizons Project.
     The proposal should be withdrawn because it is anti-
termination, overwhelmingly complicated, and has provisions that are 
redundant, unnecessary, and arbitrary.

B. Our Consideration of the Comments Received

    Upon consideration of all comments, the FCA Board has decided to 
make a number of changes to the regulations. We note that some of the 
comments are beyond the scope of this regulatory project.
    It is not our intention to put up barriers or create undue burden 
for an institution wanting to exit the System. The proposed changes are 
meant only to ensure that all important interests, including the 
interests of borrower/stockholders, are protected and to ensure that 
the Agency has all the information needed to make a decision about 
whether or not to approve the termination request.
    One commenter suggested that restricting the right of an 
institution to exit the System and ``compete in the private sector'' 
could lead to a weakened financial condition, entrenched management and 
inefficient operations in that institution. We do not believe that the 
rule restricts an institution from exiting the System. Rather, it 
provides for a deliberative process to achieve a termination of System 
status by taking into consideration the interests of the institution, 
its stockholders, and the System. After careful consideration, we do 
not find that our regulatory framework for termination of System status 
has been detrimental to the financial well-being of the System and its 
member institutions. We note that System institutions continue to 
operate in a safe and sound manner under the authorities provided by 
the Act and FCA Regulations.
    In addition to the specific comments received on the proposed 
termination regulation, some non-System entities provided comments on 
areas outside of the proposed rule, including the objectives of the 
Horizons Project, the mission of the System, and certain FCS 
institutions' patronage practices. Although these comments will be 
considered by the Agency generally, we will not respond to them in this 
final rule because they are beyond the scope of this rulemaking 
project.

IV. Section-by-Section Analysis

Section 611.1200--Applicability of This Subpart

    We did not propose any changes to this section and we received no 
comments. We adopt this section as final without changes.

Section 611.1205--Definitions That Apply in This Subpart

    We proposed to define ``days'' to mean calendar days and ``business 
days'' to mean days on which the FCA is open for business. We also 
proposed to define ``equity holders'' to mean holders of stock, 
participation certificates, or other equities such as allocated 
equities.
    We did not receive any comments on this section and adopt Sec.  
611.1205 as final without changes.

Section 611.1210--Advance Notices--Commencement Resolution and Notice 
to Equity Holders

    We proposed requiring a terminating institution to send us a draft 
of its notice to equity holders before the notice is sent. If we do not 
request modifications to the draft notice within 2 business days of 
receiving it, the terminating institution may mail the notice to its 
equity holders. We also proposed requiring the terminating institution 
to place the advance notice to equity holders on its Web site and to 
send us copies of all contracts and agreements related to the 
termination. The proposed rule also requires the board of the 
terminating institution to vote on the termination at three separate 
times during the termination process.
    We received comments from Rabobank, the ICBA, the ABA, and two 
groups of commercial bankers on the three votes required of the 
terminating institution's board of directors during the termination 
process. The first two votes are already required by the existing 
regulations. The first vote is the commencement resolution required by 
existing Sec.  611.1210(a), when the termination process begins. The 
second vote, required by existing Sec.  611.1220, specifies that the 
board must adopt a termination resolution before mailing the disclosure 
and termination plan to the FCA. The third (the new vote) is required 
by new Sec.  611.1235(a), which specifies that the board must adopt a 
reaffirmation resolution no more than 14 days before mailing the plan 
of termination, including the disclosure information, to its equity 
holders. All comments received on the three board resolutions are 
summarized here.
    Rabobank commented that the three-vote requirement does not support 
the stated purposes of the proposed rule, is burdensome, is not 
explained, and discourages a FCS institution from initiating a request. 
Rabobank asserted that the requirement is a ``de facto prohibition'' on 
exiting the System. The ICBA believed that the three-vote requirement 
is unreasonable and proves FCA's intent to prevent any entity from 
leaving the System. The ICBA noted that other procedures will ensure 
that the terminating institution's board will thoroughly ``vet'' its 
decision. The ICBA also pointed out that the regulation is arbitrary 
and capricious, and contrary to the clear statutory language, as well 
as unnecessary and inappropriate. The ABA stated that a third vote by 
the board, after FCA approves the plan, is needless and a potentially 
costly additional step that is meant to slow or derail the process. The 
ICBA and two groups of commercial bankers stated that a termination is 
not such an ``extraordinary event'' that the board has to vote three 
times and that our purpose is to create obstacles. Another group of 
commercial bankers believed that the requirement creates hurdles on 
voting procedures not found in other businesses, diluting the principle 
of local control. One group of commercial bankers suggested that a more 
honest approach would be for FCA to withdraw the proposal and ask 
Congress to pass legislation preventing terminations from the System, 
even though it acknowledged it would not support such legislation. It 
also observed that a burdensome policy does not serve the public 
interest and reflects efforts on

[[Page 44412]]

behalf of the FCC, the System's lobbying organization.
    We stated in the preamble to the proposed rule that our objectives 
were to update the termination procedure and to ensure that an 
institution's board of directors, as well as FCA and the equity 
holders, have sufficient time to be fully informed about a termination 
proposal before deciding whether to approve the termination. The timing 
of each board resolution in the termination process is to ensure the 
directors are fully informed before taking the next significant step. A 
significant amount of time may elapse between adoption of the 
commencement resolution and submission of the termination plan to FCA 
for approval and distribution of the plan to stockholders prior to the 
stockholder vote. We believe that it is important and essential for the 
terminating board to validate its decision at these critical junctures 
and demonstrate continued support for the termination. The FCA and the 
terminating institution's equity holders need reassurance that the 
board of directors remains fully supportive of and committed to the 
termination throughout the process because we believe that a 
termination is an ``extraordinary event'' in the context of the 
System's congressionally mandated mission. The concept of local control 
is reinforced each time the board resolves to proceed with the 
termination process. The board can easily include its reaffirmation 
resolution with the disclosure and plan of termination at the time of 
mailing to its equity holders with a certified copy provided to FCA. 
For these reasons, we make no changes to the rule and adopt the 
provisions of Sec. Sec.  611.1210, 611.1220, and 611.1235(a) as 
proposed.
    A System bank (AgriBank) commented on the advance notice provision 
in Sec.  611.1210(e) that allows a terminating bank to continue to 
participate in the issuance of consolidated and System-wide obligations 
through the termination date. The bank stated that once a System bank 
announces its intent to exit, the remaining banks should no longer be 
required to assume the joint and several liability for the debts of 
that exiting bank and that to do otherwise requires all remaining banks 
to ignore the reality of the transaction for the sole benefit of the 
exiting bank. The commenter added that, at a minimum, the exiting bank 
should be prohibited from issuing joint debt for any purpose other than 
the refinancing of joint debt that matures during the period prior to 
the exit.
    The FCA did not propose any change to the provision in Sec.  
611.1210(e). We believe we must continue to allow funding for a 
terminating bank because, from a practical standpoint, a System bank 
does not have other available alternative funding sources until it 
terminates its System status.

Section 611.1211--Special Requirements

    We proposed a new section providing that we may require a 
terminating institution to obtain independent analyses or studies of 
and rulings on matters related to the proposed termination. We proposed 
that if expert analyses, studies, or rulings are needed, we will 
require a terminating institution to engage experts acceptable to us to 
perform such work. We further proposed that we may require such 
analyses, studies, or rulings, or summaries of them, be provided to 
equity holders as part of the plan of termination, or separately. We 
also proposed that we may require a terminating institution to hold 
regional or local informational meetings for equity holders during the 
time period after they receive notice of the proposed termination and 
before the stockholder vote on termination. Any meetings would be 
subject to the plain language requirements of proposed Sec.  
611.1217(b) regarding balanced statements of anticipated benefits and 
potential disadvantages.
    System commenters supported the FCA's proposal and encouraged FCA 
to require studies as needed. They asserted that the facts and 
circumstances of any particular termination request must be carefully 
evaluated and that an independent analysis of various issues raised by 
the request may be appropriate, including the impact on System-wide 
debt holders, the cost and credit rating of System-wide debt 
securities, tax aspects of the transaction, the valuation of 
dissenters' rights, the impact on other System institutions, and all 
the costs associated with either chartering a new institution to serve 
the applicable territory or amending the charters of other System 
institutions to serve it.
    A non-System commenter (ICBA) stated that the broad scope of issues 
the FCA suggests studying are unwarranted and not reflective of the 
Act's intent. They asserted that the impact of a departure upon the 
System would be minimal because the System is adequately capitalized, 
any exit fee would remain with the System, and because the FCA has the 
necessary authorities to re-charter territory vacated by the 
terminating institution. Other non-System commenters suggested that the 
FCA should not be able to impose special requirements, assessments, 
analyses, rulings or studies before approving a termination plan of a 
System institution without also having some time limit or limitation on 
the number of requests that FCA might make of an institution.
    Under section 7.10 of the Act, the FCA Board has broad regulatory 
authority to impose other conditions, as it considers appropriate, upon 
an institution seeking to terminate its System status. As discussed in 
the proposed rule, a termination raises issues for the FCA that are 
both significant and non-routine. Therefore, the FCA believes certain 
types of additional analysis or studies may be necessary or useful in 
evaluating a specific termination proposal. However, we believe that 
any requirements for special studies and analysis can be determined 
only on a case-by-case basis after considering the nature of the 
termination request and the extent of any studies already conducted by 
the terminating institution. The FCA agrees with the commenter's 
assessment that the System is currently strongly capitalized, as well 
as the statement that the FCA would act to address any territorial void 
that may occur as the result of an approved termination. We disagree, 
however, with the assertion that the System and the terminating 
institution's stockholders would not be impacted by a termination. 
While these capitalization and territorial issues are clearly factors 
that would be considered in any termination request, they are not the 
only factors that need to be considered or issues that may require 
additional study in evaluating the impact of a termination on the 
institution's stockholders, the System and other parties. The FCA will 
act prudently in determining the nature and extent of any required 
studies or analyses but believes it is inappropriate to limit, by 
number or amount, the requirements that we may impose in this area.
    Another non-System commenter (Rabobank) objected to this proposal 
asserting that the additional requirements for studies and analyses and 
for holding informational meetings for stockholders could delay the 
termination process for a significant period of time and the 
requirements would impose substantial costs on the terminating 
institution. They assert that the FCA has not balanced the costs and 
benefits of these proposed new requirements or shown that the existing 
informational requirements are insufficient. The commenter suggested 
that, to the extent these required studies examine the System and 
parties other

[[Page 44413]]

than the terminating institution, these costs should be borne by the 
FCA, not by the institution.
    It is not the FCA's intention to delay the termination process, nor 
do we believe that any delays resulting from these requirements would 
unduly extend the process. To the extent that special studies and 
analyses and informational stockholder meetings serve to extend the 
termination process, the FCA believes that this additional time is 
necessary to ensure that the stockholders of the terminating 
institution are fully informed as to the impact of the termination on 
their interests and that the FCA has the information it needs to 
deliberate appropriately on the issues and make a reasoned decision on 
the termination request.
    The FCA is mindful of the costs of performing certain studies and 
analyses contemplated by this provision. The FCA concludes that the 
costs of studies and analyses related specifically to the impact of the 
termination on the institution and its stockholders are legitimate 
termination expenses that should be paid for by the institution and 
should not be deducted from the exit fee. However, there is merit to 
the commenter's suggestion that costs of studies that address issues 
regarding the impact of the termination on the System in general should 
be handled differently than studies that address the impact of the 
termination on the terminating institution and its stockholders. In 
response to this comment, in the final rule at Sec. Sec.  611.1250 and 
611.1255, we provide that a terminating institution required by the FCA 
to engage independent experts to conduct any assessments, analyses, or 
studies, or to request rulings that examine the impact of the 
termination on the System and parties other than the terminating 
institution and its stockholders may exclude such related expenses from 
the other termination expenses added back to assets under the 
requirements of existing Sec. Sec.  611.1250(a)(4)(i) and 
611.1255(a)(4)(i) pertaining to associations, and Sec. Sec.  
611.1250(b)(5)(i)(A) and 611.1255(b)(5)(i)(A) pertaining to banks, when 
calculating the terminating institution's preliminary and final exit 
fees. This means that the exit fee would be reduced by an amount 
approximately equal to the cost of such excluded expenses. We believe 
this change balances the responsibilities of termination expenses for 
the terminating institution (and the successor institution) with 
benefits that would be obtained from studies that examine System issues 
related to the termination request.

Section 611.1215--Communications With the Public and Equity Holders

    We proposed a new section on communications. This section would 
permit a terminating institution to communicate with the public and 
with its equity holders during the termination process, provided that 
the written communications contain a legend urging equity holders to 
read the information statement and are filed with the FCA on the date 
of first use. If we believed any communications are inaccurate or 
misleading, we would require corrections to be made. We could also 
require a terminating institution to file written communications made 
by other participants in the termination and related transactions, such 
as a merger partner. The regulation contained a safe harbor for 
unintentional failures to make timely filings with the FCA and provided 
that communications that contain no new information from previously 
filed communications do not need to be filed.
    We received comments on this proposed section from Rabobank, the 
ICBA, and a number of commercial bankers. Both Rabobank and ICBA 
supported allowing a terminating institution to communicate more freely 
with the public and equity holders during the termination process. All 
the commenters on this section recommended that we extend our 
monitoring of communications to additional parties. Rabobank 
recommended that the FCA monitor public communications about the 
termination made by other System institutions. ICBA recommended that we 
review for accuracy any information sent to the terminating 
institution's equity holders by parties opposed to the termination. The 
commercial bankers recommended that other System parties that oppose a 
termination should not be exempt from a requirement to disseminate 
accurate information. The FCA considered these recommendations but did 
not adopt them. While we do not support the dissemination of inaccurate 
information by any party, we believe that communications by the 
terminating institution require a higher level of scrutiny because of 
the disclosure requirements in section 7.11 of the Act, the fiduciary 
duties owed by the institution's management and directors to the 
institution's equity holders, and the institution's access to most all 
of the relevant facts surrounding a proposed termination. If a 
terminating institution believes other parties are making false and 
misleading statements, it will now be able to respond to such 
statements by means of public communications and direct correspondence 
with its equity holders. In addition, it is unlikely that parties other 
than the terminating institution's own equity holders would communicate 
directly with other equity holders. Under section 4.12A of the Act (12 
U.S.C. 2184) and Sec.  618.8310(b) of our regulations, the 
institution's equity holders are the only parties entitled to obtain a 
stockholder list for communications about the termination. Furthermore, 
we do not believe it is necessary or practical to monitor 
communications between equity holders.
    The FCA adopts this section as proposed.

Section 611.1216--Public Availability of Documents Related to the 
Termination

    Proposed Sec.  611.1216 provides that we may post on our Web site, 
or require a terminating institution to post on its Web site, documents 
related to the termination. Disclosure of the documents will, at an 
early stage in the termination process, enable equity holders and 
others to understand the structure and ramifications of the plan of 
termination. We indicated in the preamble to the proposed rule that we 
expect the institution to post the board of directors' resolution on 
its Web site to commence the termination process, in addition to the 
notice to equity holders. We could require the posting of other 
documents such as charter documents of the successor institution or 
contracts entered into with a merger or acquisition partner. In 
addition, we could require the posting of the results of any special 
assessments, analyses, studies, and rulings. We stated that it was not 
our intention to require the posting of confidential information, and 
the terminating institution could request us to keep specific documents 
confidential.
    The ICBA asserted that our proposal is designed to intimidate 
institutions from attempting to terminate and that the FCA does not 
have authority to deny a terminating institution's request to keep 
documents confidential. A number of commercial bankers also stated they 
disagreed with publishing sensitive information on the internet at the 
discretion of the Agency. A System commenter (AgriBank) stated its 
belief that the FCA, rather than the terminating institution, should 
determine whether information is confidential, and also that the 
information should be published on the FCA Web site.
    After carefully considering the suggestions of the commenters, the 
FCA

[[Page 44414]]

has decided to adopt the final regulation without changes from the 
proposed rule. The purpose of this provision is to ensure a broad 
dissemination of the significant termination documents to equity 
holders and the public. We intend generally to accord confidential 
treatment to termination documents to the same extent we accord 
confidentiality to other documents we receive from System institutions. 
As for whether the information is on the FCA's Web site or the 
terminating institution's Web site, our intention is to ensure the 
availability of termination-related information. We will make the 
determination of which Web site is most appropriate for stockholders to 
obtain all relevant information on a case-by-case basis.

Section 611.1217--Plain Language Requirements

    We proposed to move the plain language requirements in existing 
Sec.  611.1223(a) to new Sec.  611.1217 and to apply them to all 
communications with equity holders required by these regulations, not 
just to the information statement. To help ensure a balanced 
presentation of the information, we also provided that communications 
describing the anticipated benefits of the proposed termination should 
also give similar prominence to the potential disadvantages of the 
termination.
    We did not receive any comments on this section and adopt it as 
proposed.

Section 611.1218--Role of Directors

    In this proposed new section, we intended to emphasize the 
importance of directors in the termination process, not only when they 
take action on behalf of the terminating institution, but also when 
they act individually. First, we provided that directors could not be 
prohibited by confidentiality agreements or otherwise from publicly or 
privately commenting on a termination proposal and related 
transactions. In our view, such prohibitions would not be in the best 
interests of the equity holders because they prevent directors from 
consulting with the persons they represent and prevent equity holders 
from learning the opinions of those who should have the most detailed 
knowledge of the proposal. We noted that this provision would not 
permit directors to reveal trade secrets or confidential financial 
information that they would be prohibited from revealing in the absence 
of a confidentiality agreement or similar document.
    We further proposed to provide that one or more directors have the 
right to obtain legal and financial advice on the proposed termination, 
and that the institution must pay reasonable expenses for such advice. 
This was intended to ensure that each director has the opportunity to 
obtain independent advice on the proposed transaction.
    We received a number of comments on this proposal. AgriBank 
supported the provision on confidentiality agreements and suggested 
expanding it to prohibit curbs on communications by employees of the 
terminating institution, as well as to prohibit the terminating 
institution from requiring employees to express support for the 
termination as a condition of employment. AgriBank also stated that 
directors who obtain independent financial and legal advice should not 
be required to prove the reasonableness of their cost. Rabobank opposed 
permitting individual directors to seek independent legal and financial 
advice on a proposed termination and asserted that, if directors 
consulted outside parties for all board decisions, boards could no 
longer function. The ICBA found ``particularly objectionable'' our 
proposal to permit directors to obtain independent counsel and to 
permit directors to express their opinions about the termination 
publicly; the association also asserted that the Act does not authorize 
the FCA to override a legally binding confidentiality agreement. A 
number of commercial bankers expressed the view that our proposals in 
this section regarding directors' rights and in Sec.  611.1216 
regarding the public availability of information about the termination 
have the sole purpose of placing hurdles in an institution's way in 
order to prevent it from leaving the System.
    In response to these comments, the FCA has revised its proposal in 
Sec.  611.1218(b). In the final rule, we continue to provide that one 
or more directors of a terminating institution may seek independent 
advice on the termination, but we clarify when the board may deny 
payment of expenses for such advice. The board, by at least a two-
thirds vote of the full board (the total number of current directors), 
may deny payment of such expenses if it determines that the expenses 
are unreasonable. If payment is denied, the board must specify why the 
expenses are unreasonable, notify the FCA within 1 business day of the 
denial, and explain the reasons for its determination in the disclosure 
information submitted to equity holders. We believe that this revised 
procedure more appropriately balances the rights of directors to obtain 
independent advice with the rights of the institution to avoid using 
the institution's assets for unreasonable expenses.
    We adopt the other provisions of this section as proposed. We 
disagree with the assertion that the Act does not authorize the FCA to 
override a ``legally binding'' confidentiality agreement. On the 
contrary, section 7.10(a)(7) specifically authorizes FCA to promulgate 
rules to govern the termination process. In addition, we do not support 
requiring employees, against their will or as a condition of 
employment, to express support for a termination to customers (who are 
also current or prospective equity holders of the institution). 
However, we are not persuaded that employees are likely to be coerced 
in that manner, and we note that employees are prohibited under Sec.  
611.1219(a) from making misstatements or omissions of a material fact 
to equity holders. While we agree in principle that boards could not 
function, or would have difficulty functioning, if directors consulted 
outside parties for ``all board decisions,'' that is not what we 
proposed. Terminating status as a System institution is an 
extraordinary event, and it is likely to be equally extraordinary for 
the institution's directors, who by and large are farmers and ranchers. 
In this circumstance, we believe that providing for reimbursement of 
reasonable expenses for independent advice will help ensure that the 
board members act with full knowledge and understanding of the 
termination and its consequences. Similarly, we believe that enabling 
directors who oppose termination to express their opinions to equity 
holders and the public is consistent with the directors' duties to 
stockholders and will contribute to stockholders' more complete 
understanding of the proposed transaction.

Section 611.1219--Prohibited Acts

    We proposed to move existing Sec.  611.1215 to this new Sec.  
611.1219. In Sec.  611.1219, we proposed to delete the reference to our 
preliminary approval of the termination, because we proposed to 
eliminate the preliminary approval provision. We also proposed to 
prohibit the institution and any director, officer, employee, and agent 
from making any untrue or misleading statement of a material fact, or 
failing to disclose any material fact to the FCA about the proposed 
termination and any related transactions. This prohibition already 
applied to statements made to or withheld from current or prospective 
equity holders.
    Rabobank asserted that the FCA should also expressly prohibit 
untrue or

[[Page 44415]]

misleading statements or omissions of a material fact by any System 
institution and should sanction institutions that violate the 
prohibition, stating that ``anything less would allow an opponent of a 
termination to galvanize opposition based on falsehoods and 
deception.'' Although the FCA strongly opposes the dissemination of 
misleading and deceptive information by any party, we have decided not 
to incorporate Rabobank's recommendation in the regulation. The 
terminating institution's directors, officers, employees and agents 
have specific legal duties to the terminating institution and, 
indirectly or directly, to its equity holders; other System 
institutions do not. Consequently, we will not extend the regulation's 
prohibition to them. We note that, under the communications provisions, 
the terminating institution will be free to respond publicly, or in 
correspondence with equity holders, to statements made by other 
parties.
    We adopt this section in the final rule without any changes from 
the proposal.

Section 611.1220--Termination Resolution

    Proposed Sec.  611.1220 was an expansion of the requirement in 
existing Sec.  611.1220(a) for the board to adopt a termination 
resolution. We proposed that the board must adopt a resolution no more 
than 1 week before submitting the plan of termination to us. The 
resolution must: Indicate the board's continuing support for 
termination; authorize submission of the plan of termination to us; and 
(if we approve or take no action) authorize submission of the plan of 
termination to voting stockholders.
    Except for comments on the three required board resolutions, we did 
not receive any comments on this specific provision and adopt Sec.  
611.1220 as final without changes.

Section 611.1221--Submission to FCA of Plan of Termination and 
Disclosure Information; Other Required Submissions

    Proposed Sec.  611.1221 revised the existing regulation to provide 
that a terminating institution may not file a plan of termination until 
at least 30 days after the institution has sent the notice to equity 
holders under Sec.  611.1210(b). We also proposed to remove references 
to the Financial Assistance Corporation (FAC) because all outstanding 
FAC debt has been repaid.
    We received one comment from the ICBA on the requirement that the 
terminating institution may not file its termination plan with FCA 
until at least 30 days after it mails the advance notice to its equity 
holders. The ICBA objected to FCA's applying an additional 30-day 
waiting period and stated this requirement is unnecessary because FCA 
will determine when the 60-day clock will begin and end for FCA's 
review and approval of the termination plan for submission to 
stockholders. The ICBA contended that the additional 30 days shifts the 
approval process from 60 to 90 days.
    We disagree that the 30-day time period is unnecessary. In our 
experience, it is likely that an institution will take longer than 30 
days to assemble a complete plan of termination after a decision is 
made to terminate. The 30-day waiting period will also encourage an 
institution to promptly inform us of its intention to terminate. The 
30-day time period gives FCA time to prepare for receipt and review of 
the request. FCA will still be obligated to review and take action on 
the proposed termination plan and disclosure for submission to 
stockholders within 60 days of the filing of a complete plan of 
termination or, if we take no action within 60 days, the institution 
can submit the plan of termination to its voting stockholders. We adopt 
Sec.  611.1221 as final without changes from the proposal.

Section 611.1223--Plan of Termination--Contents

    We proposed numerous changes to this section including renaming 
this section ``Plan of termination--contents.'' We proposed a 
requirement at Sec.  611.1223(b)(7) for a terminating institution to 
explain in the summary to the plan of termination whether the successor 
institution expects to engage in a corporate restructuring in the 18 
months following termination.
    We received comment letters from Rabobank and the ICBA on this 
section. Rabobank stated that the proposal does not explain why we 
would need this information or how we would use it, and that the 
requirement would inappropriately assert FCA oversight of a non-System 
entity. Rabobank further noted that if the terminating institution did 
not disclose a possible future restructuring, the successor institution 
may be discouraged from such a restructuring, despite potential 
benefits to equity holders, due to fear of interference from the FCA. 
Rabobank recommended that this requirement be eliminated. Rabobank 
stated that once an FCS institution has terminated its System charter 
and becomes a different type of financial institution, the institution 
is no longer regulated by FCA. The ICBA believed that this provision 
was without merit and should be deleted from the rule. The ICBA noted 
that an appropriate Federal or State authority charters the successor 
institution as a bank, savings and loan association, or other financial 
institution, so it is likely that this information will already be 
disclosed to voters. The commenters further stated that FCA is adding 
another legal roadblock, suggesting the successor institution could be 
sued after termination if an additional charter conversion was to 
occur.
    We believe that this requirement benefits the equity holders who 
are entitled to know what the future plans of the terminating 
institution could include. If the terminating institution's conversion 
to another financial institution involves its acquisition by another 
financial services company or corporation, stockholders need to be 
fully informed before voting on the termination proposal. In addition, 
FCA could not interfere with the actions of the successor institution 
because the successor institution will not be subject to FCA oversight 
and regulation. Our principal concern is the right of stockholders to 
know if the successor institution, within the space of 18 months or 
less, will undergo further reorganization based on business planning 
underway at the time the termination application is filed with FCA. If 
the terminating institution has no such plans or is unaware of any 
future events that might result in its subsequent reorganization within 
the 18-month period following termination, no such disclosure will be 
required. Consequently, we are not changing this provision of the rule 
and adopt it as proposed.
    We also proposed in paragraph (c)(7) to require a terminating 
institution to include summaries or copies of termination-related 
contracts and agreements, including copies of contracts and agreements 
in connection with the termination and operations of the successor 
institution; in paragraph (c)(13) to require the institution to 
disclose employment, retirement, and severance agreements; in paragraph 
(c)(26) that we may require a terminating institution to disclose 
assessments, analyses, studies, or rulings that we require the 
institution to obtain under proposed Sec.  611.1211; in paragraph 
(c)(29) that we will require the terminating institution to include 
statements by directors that desire to make individual or group 
statements regarding the proposed termination and related transactions; 
and in paragraph (c)(3) that we would require the terminating 
institution to include a copy

[[Page 44416]]

of the reaffirmation resolution, a proposed new requirement set forth 
in proposed Sec.  611.1235.
    We did not receive any comments on these other provisions and adopt 
them, except for paragraph (c)(30), as final without changes. We have 
deleted paragraph (c)(30) in the final rule because the institution 
must send us the disclosure information before the board votes on the 
reaffirmation resolution.

Section 611.1230--FCA Review and Approval--Plan of Termination

    Proposed new Sec.  611.1230 separated our approval of the plan of 
termination and the related disclosure to stockholders, as required by 
section 7.11(a)(1) of the Act, from our decision on the termination as 
required by section 7.10(a)(2) of the Act. We proposed to retain 
provisions on our section 7.11 approval in this section and to move the 
section 7.10 approval to proposed Sec.  611.1247. Our review of the 
disclosure information will precede the submission of the information 
to equity holders, as in the existing regulation, and we will begin the 
statutory review period on the date the disclosure information is 
complete, as determined by us. We proposed to review and approve or 
disapprove the termination itself after the equity holders have voted 
to approve the termination.
    We received comments on this provision from all commenters. The 
FCC, three System banks, and four System associations stated they 
recognized the need for FCA to separate the approval of the termination 
plan, for purposes of distribution for a stockholder vote, from 
approval of the termination itself. At the same time, System commenters 
urged us to begin our substantive review as soon as possible after the 
application is received and to retain flexibility to make a decision as 
early as possible in the process so that the matter is not pending for 
a lengthy period. One bank noted that while improved information, 
analysis, and transparency are important objectives, FCA must be 
prepared to act when circumstances warrant, because failure to act 
could affect the System's investors and customers. One non-System 
commenter, the ABA, agreed that separating the review of the disclosure 
information from the review of the termination itself is appropriate. 
However, it expressed concern about FCA's ability to delay the process 
by requiring an unending level of information before the plan is deemed 
complete and argued that we should impose a reasonable cut-off point so 
that the institution can move forward. Rabobank stated that FCA's two 
approvals of the termination reduce clarity and impose costs and 
administrative burdens that outweigh the benefits. Rabobank believed 
that FCA burdens and encumbers the process to a degree that Congress 
explicitly did not intend and that we lack the authority to give 
ourselves intermediate approval steps. Rabobank also stated that 
requiring preliminary FCA review of the disclosure would delay the 
termination process without contributing a significant benefit to that 
process or to the stakeholders. One group of commercial bankers 
objected to this provision because it specifies no time limit for the 
conclusion of the process. Another group of commercial bankers argued 
that we create unnecessary barriers, legal impediments, time delays, 
and other obstacles for any FCS institution that may want to exit the 
System and that these obstacles are unparalleled in the financial 
services industry.
    We agree with commenters that we should make a decision on the 
termination itself as early in the process as possible. Our separation 
of approval of the termination plan and disclosure for submission to 
stockholders from our approval (or disapproval) on the termination is 
not meant to delay unnecessarily the termination decision. We 
acknowledge that failure to act promptly and decisively may affect 
stockholders and investors' confidence. We will begin our substantive 
review as soon as possible and make a decision as early as possible. We 
disagree with other commenters that we are creating time delays and 
other obstacles by our process. We have always had the discretion, in 
our review and approval of other corporate applications (such as 
mergers and consolidations), to determine whether the application is 
complete before beginning the 60-day review. We have used our 
discretion by communicating promptly with institutions whose 
applications were incomplete and working closely with them to ensure 
completion. We will follow this approach as well for a termination 
request in determining whether it is complete and in notifying the 
terminating institution when the 60-day review period begins. In the 
alternative, FCA could reject a plan because it was incomplete, but the 
institution would need to begin the process anew. The proposal permits 
a more streamlined process. Once FCA notifies the institution that the 
termination plan and disclosure is complete, we are bound by the 
statutory requirement of section 7.11(a)(1) to act on the plan within 
60 days. Should the FCA Board fail to act within the 60-day period, the 
institution may submit the plan and related disclosure to its 
stockholders for a vote. Accordingly, we adopt this provision as 
proposed.

Section 611.1235--Plan of Termination--Distribution

    We proposed requiring the terminating institution's board of 
directors to adopt a reaffirmation resolution approving the termination 
not more than 14 days before mailing the plan to stockholders in order 
to ensure the continuing support of the board for the termination. 
Comments received on this provision and our response are included with 
the discussions of required board resolutions under Sec.  611.1210.
    We also proposed to require the terminating institution to provide 
the plan of termination to equity holders at least 45 days (instead of 
the existing regulation's 30 days) before the stockholder vote will 
occur.
    One non-System commenter, the ABA, disagreed with our extension for 
the stockholder review period from 30 days in the current rule to 45 
days, arguing that it is a needless delay and that 30 days is 
sufficient for stockholders to review and question any termination 
plan.
    On the contrary, stockholders will need to thoroughly review an 
expected extensive disclosure and may have a number of questions to ask 
the institution's board and management. The additional 15 days will 
permit informational meetings to be held throughout the institution's 
territory, as proposed in Sec.  611.1211(b), so that stockholders can 
have their questions answered and can discuss the pros and cons with 
other member-borrowers and with institution directors. These meetings 
will also give management an opportunity to explain the termination 
plan and procedures. We are finalizing this provision as proposed, 
except that we have made a non-substantive change to paragraph (a) to 
remove redundant language.

Section 611.1240--Voting Record Date and Stockholder Approval

    Except for existing Sec.  611.1240(c), which we proposed to move to 
Sec.  611.1235, we proposed to retain the remainder of existing Sec.  
611.1240 with the following revisions. In paragraph (a), we proposed to 
require the stockholder vote to take place at least 60 days after we 
have approved the plan of termination (or 60 days after the end of our 
review period) instead of no more than 60 days after. We proposed this 
change to ensure that voters have

[[Page 44417]]

enough time to review and evaluate the proposal. In paragraph (c), we 
proposed a quorum requirement of 30 percent of voting stockholders that 
must be present (in person or by proxy) at the meeting. This would not 
require 30 percent of voting stockholders to cast a vote but would 
require their presence (in person or by proxy) at the meeting. We made 
this proposal because we believe an issue of such importance to all 
equity holders should be deliberated upon by a significant number of 
the voting stockholders, regardless of the number who ultimately vote. 
In paragraph (d), we restated the requirement in section 7.10(a)(6) of 
the Act that a majority vote by voting stockholders present and voting 
in person or by proxy at a duly authorized meeting is needed to approve 
the termination.
    We also proposed to add a reference in new paragraph (e) to Sec.  
611.340, to clarify that the voting security regulation applies to this 
stockholder vote as well as Sec.  611.330, which covers confidentiality 
in voting.
    We received comments on the proposed 30-percent quorum requirement 
from a number of commenters. The System commenters supported the quorum 
requirement in this section for the first vote but not for the 
reconsideration vote in Sec.  611.1245, as discussed below. About half 
of the commercial bankers recommended a simpler, more convenient voting 
process, stating that, ``in the day of emails and the internet,'' we 
should not require 30 percent of stockholders to be physically present 
for the meeting. The ICBA, ICB of ND, and ABA also objected to 
requiring 30 percent of stockholders to be physically present during a 
termination vote because of the difficulty and cost to the 
stockholders, some of whom live in remote rural areas. In addition, the 
ABA asserted that requiring at least 60 days between FCA approval of 
the plan of termination and the stockholder vote caused an unnecessary 
delay in the termination process.
    The proposed rule does not require voting stockholders to be 
physically present at the stockholders' meeting in order to meet the 
quorum. As the rule says, voting stockholders must be present ``in 
person or by proxy.'' Voting stockholders have the option of attending 
the meeting in person, giving their proxies to another voting 
stockholder of their choice who will attend the meeting in person, or 
sending their proxies to the institution with (or without) instructions 
as to how to vote. Moreover, a voting process that permits voting via 
the Internet is not prohibited, provided the institution complies with 
the voting security and confidentiality requirements of the Act and FCA 
regulations.
    As for the 60-day minimum period between FCA approval and the 
stockholder vote, we disagree that this will cause unnecessary delay in 
the termination process. We believe that at least 2 months are 
necessary for scheduling any pre-vote or ``information'' meetings for 
stockholders that we require or that the terminating institution wishes 
to hold, and for printing and distributing the disclosure information 
for stockholders.
    We adopt this section in the final rule without any changes from 
the proposal.

Section 611.1245--Stockholder Reconsideration

    In paragraph (b) of this section, we proposed adding a quorum 
requirement of at least 30 percent of voting stockholders for the same 
reasons we proposed a quorum requirement for the first stockholder 
vote. The stockholder reconsideration vote is provided for in section 
7.9 of the Act (12 U.S.C. 2279c-2), which gives stockholders opposing 
an intra-System merger, transfer of lending authority, or termination 
the right to petition their institution for a re-vote (reconsideration 
vote) following any approval of the transaction. The petition must be 
signed by at least 15 percent of the voting stockholders and must be 
delivered to the FCA within 35 days after the mailing of the notice to 
stockholders of the results of the first vote. If a majority of the 
voting stockholders votes against the transaction in the 
reconsideration vote, the transaction cannot take place.
    All of the System commenters objected to having a 30-percent quorum 
requirement for the reconsideration vote, even though they supported 
the 30-percent quorum requirement for the first vote. They asserted 
that it was unduly burdensome and contrary to the Act. They did not 
specify how they believed it was contrary to the Act, but they said 
that the quorum requirement could create an incentive for stockholders 
supporting termination to boycott the reconsideration vote meeting. 
Non-System commenters opposed what they believed was a requirement that 
stockholders be physically present to count towards the quorum for the 
reconsideration vote; as we explain above, this interpretation is 
incorrect, and there is no requirement for stockholders to be 
physically present to make up the quorum for either vote.
    We have considered the recommendation to eliminate the quorum 
requirement for the reconsideration vote and have decided to retain it. 
The quorum requirements for the reconsideration vote, as well as for 
the first stockholder vote, are consistent with our authorities under 
the Act to regulate the termination process. If we were to incorporate 
the System commenters' recommendation, it would be more difficult for 
the terminating institution to obtain the first vote than for 
stockholders to obtain a reconsideration vote. Furthermore, without the 
same quorum requirement for the reconsideration vote, there would be a 
possibility that a termination could be blocked by a significantly 
smaller number of stockholders in a reconsideration vote than the 
number of stockholders who originally voted in favor of it. We believe 
this result would be unfair. Under our proposal, it will be no more 
difficult to achieve a quorum for the reconsideration vote than for the 
first vote.
    We adopt this section in the final rule without any changes from 
the proposal.

Section 611.1246--Filing of Termination Application and Its Contents

    Proposed new Sec.  611.1246 provides that, within 90 days of 
notifying us that voting stockholders have approved the plan of 
termination, a terminating institution may submit a termination 
application containing the information that is required by the 
termination regulations and any additional information that we request 
or that the terminating institution's board wishes to submit.
    We received no comments that directly relate to the filing of the 
termination application with FCA following the stockholder vote. We 
adopt the provision as proposed.

Section 611.1247--FCA Review and Approval--Termination

    We proposed new Sec.  611.1247 that would provide for a separate 
approval of the termination application. As we noted above in the 
preamble discussion of Sec.  611.1230, we proposed to review the 
termination application after our review of the plan of termination 
required by section 7.11(a)(1) of the Act and after a stockholder vote 
approving the termination. In this proposed new section, paragraph (a) 
stated that, after we receive the termination application, we will 
review it and either approve or disapprove the termination. Paragraph 
(b) stated that we will disapprove the termination if we determine that 
there are one or more appropriate reasons for disapproval, consistent 
with our statutory and regulatory authorities. We proposed to delete 
existing Sec.  611.1230(b), which provides that we

[[Page 44418]]

may disapprove a termination if we determine it would have a ``material 
adverse effect on the ability of the remaining System institutions to 
fulfill their statutory purpose.'' While we did not rule out 
disapproval of a termination based on its ``material adverse effect'' 
on the remaining System institutions, we stated that we may disapprove 
a termination for any appropriate reason.
    Proposed paragraph (c) set forth conditions required for our 
approval of the termination. In proposed paragraph (d), we provided 
that, when we approve a termination, we will also determine an 
effective date for the termination. Such date could be no earlier than 
the last to occur of the following events: (1) Fulfillment of the 
conditions in paragraph (c) of this section; (2) the terminating 
institution's proposed termination date; (3) 90 days after we received 
the termination application; or (4) 15 days after any reconsideration 
vote.
    We received 33 comment letters on this provision of the proposed 
rule. In their comments on proposed Sec.  611.1230, eight System 
commenters urged FCA to begin our substantive review as soon as 
possible after the application is received and to retain flexibility to 
make a decision as early as possible in the process so the matter is 
not pending for a lengthy period. One System bank noted that while 
improved information, analysis, and transparency are important 
objectives, FCA must be prepared to act when circumstances warrant, 
because failure to act could affect the System's investors and 
customers. In our response above to the comments on Sec.  611.1230, we 
agreed on the importance of decisive action as early as possible. One 
System bank commented that we should approve a termination only if the 
institution's exit further fulfills the congressionally mandated 
mission and, at a minimum, any approval of a request should not be 
detrimental to the remaining institutions' ability to fulfill the 
mission. Rabobank stated that FCA's second vote, which would follow 
stockholder approval and three votes by the board of directors, is 
unfair to stockholders because it would veto the equity holders' 
mandate and undercut the democratic principles that give the 
stockholder-owners the right to make decisions governing their 
institution. Rabobank commented that our failure to impose a timeframe 
for FCA's vote could delay the process indefinitely. Rabobank also 
objected to our removal of all references to criteria that we may use 
or reasons we may give for disapproval, giving System institutions no 
way to ascertain whether a termination will be approved until an 
extraordinary amount of time and money has been expended. In 
particular, Rabobank objected to our removal of the criterion of 
``material adverse effect'' from the regulation that governs our 
review, and argued that it is the only reason for disapproving a 
termination request, assuming all regulations were satisfied. It asked 
that this criterion be preserved from the current rule and that FCA 
clarify that we will disapprove a termination only based on a 
determination that the termination would have a material adverse 
effect. In the alternative, Rabobank asked FCA to identify additional 
criteria for disapproval and then republish its proposed rule with 
criteria for public comment. Rabobank stated that FCA owes System 
institutions greater transparency in how it will evaluate termination 
requests and recommended that we articulate clear standards for how we 
would review the request and make the decision after board and 
stockholder approval. The ICBA commented that the ``material adverse 
effect'' criterion should stay in the regulation as it is the one that 
makes the most sense in directing our approval process, and that all 
other issues, such as impact on stockholders, would have already been 
thoroughly vetted during the disclosure review process. The ICBA 
further noted that the payment of the exit fee and debt obligations 
will already ensure there is not an adverse effect on System 
institutions. The ABA noted that FCA retains the right to deny a 
termination if it has a materially adverse impact on the rest of the 
System even though the proposed rule eliminated this as a specified 
reason for denial. Also, the ABA expressed concern that ``materially 
adverse effect'' is not quantified in the proposed rule and suggested 
that FCA set forth a rule for public comment on the level of impact 
that we would consider material. In addition, the ABA criticized us for 
setting no time limit for approval or disapproval and establishing no 
criteria by which we would make the decision, noting that the grounds 
for rejection, if already approved by the stockholder owners, should be 
extremely restricted because we have numerous options for maintaining 
FCS services in the territory. The ABA recommended that FCA set out its 
potential reasons for rejection of a termination for notice and public 
comment. One group of commercial bankers commented that FCA may reject 
any termination plan even after the local institution has followed all 
procedures. It noted that FCA, as the System's regulator and surety of 
stockholder rights, should clearly spell out in advance the basis and 
timeframes for any such determination (of approval or disapproval). A 
second group of commercial bankers stated that the proposal should set 
clear deadlines for various stages of the approval process but that the 
proposal leaves many of the decision deadlines open-ended.
    We believe that the System bank's suggestion that we should approve 
a termination only if the exit furthers fulfillment of the System's 
mission or, at minimum, approve a termination only if it is not 
detrimental to the remaining System institutions' ability to fulfill 
the mission is too narrow a reading of our statutory authority. The Act 
provides FCA with discretion to approve or disapprove a termination 
application and does not restrict our reasons for disapproving a 
proposed termination. With respect to our decision on the termination, 
FCA has statutory authority to approve or disapprove the termination, 
whether before or after a stockholder vote. Therefore, FCA disapproval 
would not be a ``veto'' of a stockholders' ``mandate,'' but would be an 
exercise of FCA's approval authority. In making our decision, we will 
consider all relevant factors, including stockholder actions on the 
termination proposal.
    As explained in the preamble to the proposed rule, we have 
determined that a clear separation of the two approvals will ensure the 
proper level of scrutiny as to the merits of the proposal apart from 
the adequacy of the disclosure materials. Termination of System status 
raises numerous issues for the terminating institution's stockholders, 
the affiliated funding bank or remaining affiliated associations (as 
applicable), investors, and the public, all of whom must be considered. 
Three non-System commenters (Rabobank, ICBA, ABA) stated their belief 
that the only basis for our denial is if the termination has a material 
adverse effect on the ability of the remaining System institutions to 
fulfill their statutory purpose. Their intense focus on this one 
criterion supports our rationale for deleting this language from the 
rule because it diverts attention from any other reason(s) that we may 
need to consider. We may still decide that a termination should be 
denied based on the material adverse effect that it has on the 
remaining System institutions; however, it may not be the only reason 
or the principal reason. There are many factors that we will consider, 
including, but not limited to, the results of any stockholder vote on 
the termination. Under the law, we are

[[Page 44419]]

obligated to provide reasons for any disapproval, and our reasons 
cannot be arbitrary or capricious. Enumerating specific reasons for 
disapproval before we know the details of a termination application 
would not be appropriate and would unnecessarily limit our reasons for 
disapproval. Thus, we adopt this section as proposed.

Section 611.1250--Preliminary Exit Fee Estimate and Sec.  611.1255--
Exit Fee Calculation

    We proposed several parallel revisions to these sections, which 
explain how to calculate the preliminary exit fee estimate that must be 
included in the plan of termination, and how to calculate the final 
exit fee. In Sec. Sec.  611.1250(a)(4)(i) and 611.1255(a)(4)(i) 
pertaining to associations, and in Sec. Sec.  611.1250(b)(5)(i)(A) and 
611.1255(b)(5)(i)(A) pertaining to banks, we added expenditures for tax 
services, studies, and equity holder meetings as examples of expenses 
an institution may incur that are related to a termination. In Sec.  
611.1250(c), which contains the 3-year look-back adjustment provision, 
we expressly include real property and servicing rights as assets that 
may be undervalued, overvalued, or not recorded on the institution's 
books. We did not receive any comments on these provisions and adopt 
the proposed as final without any changes.
    We also proposed to require a terminating institution to add to 
assets any tax benefit that arises due to the termination. The proposed 
rule noted that we already have discretionary authority under existing 
Sec.  611.1250(c)(1)(vi) to require such an adjustment, but that we 
decided to expressly apply it to all terminations. This requirement is 
intended to balance existing and continuing provisions allowing for the 
deduction of tax expenses, due to termination, from assets in the 
preliminary and final exit fee calculations. A non-System commenter 
(Rabobank) suggested that FCA was attempting to incorporate ``all 
historical tax benefits,'' however derived, into the exit fee 
calculation. In proposing this provision, it was not our intention to 
go back through all the years of the terminating institution's 
existence and attempt to assess and recapture past tax benefits. 
Rather, the intent of the provision is only to ensure that any tax 
benefit that arises as a result of the termination itself be included 
in assets and in the calculation of the exit fee. FCA believes this 
would be on par with existing regulations at Sec. Sec.  
611.1250(a)(4)(ii)(B) and 611.1255(a)(4)(ii)(B) pertaining to 
associations, and in Sec. Sec.  611.1250(b)(5)(iii)(C) and 
611.1255(b)(5)(iii)(C) pertaining to banks, that address adjustments to 
assets for tax expenses resulting from the termination. The non-System 
commenter stated that the calculation of the exit fee should be based 
on financial statements prepared in accordance with generally accepted 
accounting principles (GAAP). We agree that this should be the starting 
point for determining the exit fee. However, the FCA has long held the 
position that strict application of GAAP may not result in the fairest 
treatment of certain types of transactions. For example, the existing 
rule provides that the final exit fee must be calculated based on the 
average daily balances of assets and liabilities for the 12-month 
period preceding the termination date. In the development of the 
existing rule, we stated that using average daily balances mitigates 
the problem of widely fluctuating account balances that occur and the 
variability that would result from the timing of the exit fee 
computation date. The FCA has stated that some individual transactions 
can increase or decrease the exit fee to such a degree that average 
balances are not sufficient to offset their impact. As such, the 
existing rule also provides that the FCA may require certain 
adjustments that we deem necessary to ensure that the terminating 
institution appropriately values its assets and liabilities. The 
required adjustments are solely for the purpose of calculating the exit 
fee, and the institution would not be required to restate its financial 
statements to reflect these adjustments. The FCA believes that these 
provisions for adjustments are necessary in order to ensure that the 
terminating institution does not engage in activities that weaken its 
capital position in order to diminish or eliminate the exit fee.\4\ As 
a result, we are finalizing this provision as proposed.
    In the proposed rule, we solicited comments on whether we should 
limit the tax expense deductions from, and tax benefit additions to, 
assets in the exit fee calculation to Federal taxes. We were also 
interested in whether we should more narrowly draw the tax provision so 
that it includes only income taxes, or unavoidable tax expenses, or 
both. We received no comments on these issues. In consideration of 
this, we have opted not to limit the various types of taxes that may be 
included in the calculation of the exit fee and, as a result, make no 
changes in the final rule.
    In Sec.  611.1250(c), we proposed to replace references to ``tax 
liability'' with the term ``tax expense'' to clarify that we intend to 
refer to both current and deferred taxes. In paragraphs (a) and (b) of 
Sec. Sec.  611.1250 and 611.1255, we proposed to remove outdated 
references to the FAC. We received no comments on these provisions and 
adopt as final the proposed changes.

Section 611.1260--Payment of Debts and Assessments--Terminating 
Association

Section 611.1265--Retirement of a Terminating Association's Investment 
in Its Affiliated Bank

Section 611.1270--Repayment of Obligations--Terminating Bank
---------------------------------------------------------------------------

    \4\ See the preamble discussion of ``Section 611.1240--Exit 
Fee'' in our proposed termination rule, 55 FR 28639 (July 12, 1990).
---------------------------------------------------------------------------

Section 611.1275--Retirement of Equities Held by Other System 
Institutions

Section 611.1280--Dissenting Stockholder's Rights

    We proposed to remove outdated references to the FAC in all the 
above sections except Sec.  611.1265, to which we did not propose any 
changes. We did not receive any comments on the proposed changes and 
adopt the provisions as proposed.
    We also received comments from System commenters on provisions we 
did not propose to amend. We would not consider adopting any of the 
commenters' suggestions on these provisions without publishing them for 
public comment; however, we would like to respond to the comments here. 
A System bank recommended that, in Sec.  611.1260, we require a 
terminating association to reimburse its affiliated bank for any 
termination-related expenses incurred by the bank, so that the 
remaining associations will not be ``burdened'' with the costs of the 
termination. We note that the affiliated bank will keep any unallocated 
retained earnings attributable to the terminating association, and 
those earnings will indirectly benefit the remaining associations. The 
System bank also objected to our existing requirement in Sec.  611.1265 
that, if a terminating association's equities in its affiliated bank 
are not subject to a revolvement plan or an agreement between the 
association and the bank, those equities must be retired by the bank 
upon repayment of the direct loan. The bank asserted that the equities 
in question should be retirable only at the bank's discretion. In our 
view, such a provision could make it possible for a bank to frustrate 
the termination plan of an

[[Page 44420]]

association. Since the Act permits an association to terminate without 
its bank's approval, we do not believe it would be appropriate to give 
the bank the power to impede the termination by refusing to retire 
equities. Of course, should retirement of the association's investment 
in its bank cause the bank to fall below its minimum capital 
requirements or to be in an unsafe or unsound condition, we would 
prohibit the bank from retiring the equities at that time.
    The System bank further commented that, under Sec.  611.1270, a 
terminating bank should be required to enter into an agreement with the 
remaining System banks for payment of its primary liability on System-
wide debt, and also that the terminating bank must make a provision for 
payment of joint and several liability that is acceptable to the other 
banks. In previous rulemakings on this issue of repayment of System-
wide debt, we proposed for public comment and considered a range of 
options. We believe the existing regulation is a fair balance of the 
interests of a terminating bank and the banks remaining in the System 
and will not give the remaining banks a de facto veto over the 
terminating bank's termination. In the case of primary liability, the 
terminating bank must propose a plan after consulting with the other 
System banks, the Federal Farm Credit Banks Funding Corporation, and 
the Farm Credit System Insurance Corporation (FCSIC). The FCA must then 
decide whether the plan is acceptable. In the case of joint and several 
liability, the FCA will specify how the terminating bank will provide 
for this only in the event that the terminating bank and the remaining 
banks are unable to reach agreement.
    The FCC and several System institutions suggested that we consider 
revising Sec.  611.1280, which specifies how to calculate the value of 
the equities of a dissenting stockholder. One commenter suggested that 
a dissenting stockholder's interest be calculated without any deduction 
of the amount of the exit fee from the terminating institution's 
assets. On November 5, 1999, we published a proposed rule in the 
Federal Register that provided for such a calculation prior to 
deduction of the exit fee. (See 64 FR 60370.) However, the FCA did not 
adopt the proposal but instead reproposed the rule in 2001. (See 66 FR 
43536, August 20, 2001.) In the preamble to that reproposal, we stated 
our view that, under the Act, payment of the exit fee was a 
prerequisite to a terminating institution's exercise of its authority 
to terminate. Consequently, the exit fee must be calculated and set 
aside before the dissenting stockholders' interests are valued. We note 
that, under this formula, dissenting stockholders will receive 
approximately the same proportionate value for their equities, whether 
they dissent or choose to be stockholders of the successor institution.

Section 611.1285--Loan Refinancing by Borrowers

    We did not propose any changes to this section and we received no 
comments.

Section 611.1290--Continuation of Borrower Rights

    We did not propose any changes to this section and we received no 
comments.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies this final rule will not have 
a significant economic impact on a substantial number of small 
entities. Each of the Farm Credit banks, considered with its affiliated 
associations, has assets and annual income over the amounts that would 
qualify them as small entities. Therefore, System institutions are not 
``small entities'' as defined in the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 611

    Agriculture, Banks, Banking, Rural areas.

0
For the reasons stated in the preamble, part 611 of chapter VI, title 
12 of the Code of Federal Regulations is amended as follows:

PART 611--ORGANIZATION

0
1. The authority citation for part 611 is revised to read as follows:

    Authority: Secs. 1.3, 1.4, 1.13, 2.0, 2.1, 2.10, 2.11, 3.0, 3.2, 
3.21, 4.12, 4.12A, 4.15, 4.20, 4.21, 5.9, 5.10, 5.17, 6.9, 6.26, 
7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2011, 2012, 2021, 
2071, 2072, 2091, 2092, 2121, 2123, 2142, 2183, 2184, 2203, 2208, 
2209, 2243, 2244, 2252, 2278a-9, 2278b-6, 2279a--2279f-1, 2279aa-
5(e)); secs. 411 and 412 of Public Law 100-233, 101 Stat. 1568, 
1638; secs. 409 and 414 of Public Law 100-399, 102 Stat. 989, 1003, 
and 1004.


0
2. Revise subpart P to read as follows:

Subpart P--Termination of System Institution Status

Sec.
611.1200 Applicability of this subpart.
611.1205 Definitions that apply in this subpart.
611.1210 Advance notices--commencement resolution and notice to 
equity holders.
611.1211 Special requirements.
611.1215 Communications with the public and equity holders.
611.1216 Public availability of documents related to the 
termination.
611.1217 Plain language requirements.
611.1218 Role of directors.
611.1219 Prohibited acts.
611.1220 Termination resolution.
611.1221 Submission to FCA of plan of termination and disclosure 
information; other required submissions.
611.1223 Plan of termination--contents.
611.1230 FCA review and approval--plan of termination.
611.1235 Plan of termination--distribution.
611.1240 Voting record date and stockholder approval.
611.1245 Stockholder reconsideration.
611.1246 Filing of termination application and its contents.
611.1247 FCA review and approval--termination.
611.1250 Preliminary exit fee estimate.
611.1255 Exit fee calculation.
611.1260 Payment of debts and assessments--terminating association.
611.1265 Retirement of a terminating association's investment in its 
affiliated bank.
611.1270 Repayment of obligations--terminating bank.
611.1275 Retirement of equities held by other System institutions.
611.1280 Dissenting stockholders' rights.
611.1285 Loan refinancing by borrowers.
611.1290 Continuation of borrower rights.

Subpart P--Termination of System Institution Status


Sec.  611.1200  Applicability of this subpart.

    The regulations in this subpart apply to each bank and association 
that desires to terminate its System institution status and become 
chartered as a bank, savings association, or other financial 
institution.


Sec.  611.1205  Definitions that apply in this subpart.

    Assets means all assets determined in conformity with GAAP, except 
as otherwise required in this subpart.
    Business days means days the FCA is open for business.
    Days means calendar days.
    Equity holders means holders of stock, participation certificates, 
or other equities such as allocated equities.
    GAAP means ``generally accepted accounting principles'' as that 
term is defined in Sec.  621.2(c) of this chapter.
    OFI means an ``other financing institution'' that has a funding and 
discount agreement with a Farm Credit bank under section 1.7(b)(1) of 
the Act.
    Successor institution means the bank, savings association, or other 
financial institution that the terminating bank or association will 
become when we revoke its Farm Credit charter.

[[Page 44421]]

Sec.  611.1210  Advance notices--commencement resolution and notice to 
equity holders.

    (a) Adoption of commencement resolution. Your board of directors 
must begin the termination process by adopting a commencement 
resolution stating your intention to terminate Farm Credit status under 
section 7.10 of the Act. Immediately after you adopt the commencement 
resolution, send a certified copy by overnight mail to us and to the 
Farm Credit System Insurance Corporation (FCSIC). If your institution 
is an association, also send a copy to your affiliated bank. If your 
institution is a bank, also send a copy to your affiliated 
associations, the other Farm Credit banks, and the Federal Farm Credit 
Banks Funding Corporation (Funding Corporation).
    (b) Advance notice. Within 5 business days after adopting the 
commencement resolution, you must:
    (1) Send us copies of all contracts and agreements related to the 
termination.
    (2) Subject to paragraph (b)(2)(ii) of this section:
    (i) Send an advance notice to all equity holders stating you are 
taking steps to terminate System status. Immediately upon mailing the 
notice to equity holders, you must also place it in a prominent 
location on your Web site. The advance notice must describe the 
following:
    (A) The process of termination;
    (B) The expected effect of termination on borrowers and other 
equity holders, including the effect on borrower rights and the 
consequences of any stock retirements before termination;
    (C) The type of charter the successor institution will have; and
    (D) Any bylaw creating a special class of borrower stock and 
participation certificates under paragraph (f) of this section.
    (ii) Send us a draft of the advance notice by facsimile or 
electronic mail before mailing it to your equity holders. If we have 
not contacted you within 2 business days of our receipt of the draft 
notice regarding modifications, you may mail the notice to your equity 
holders.
    (c) Bank negotiations on joint and several liability. If your 
institution is a terminating bank, within 10 days of adopting the 
commencement resolution, your bank and the other Farm Credit banks must 
begin negotiations to provide for your satisfaction of liabilities 
(other than your primary liability) under section 4.4 of the Act. The 
Funding Corporation may, at its option, be a party to the negotiations 
to the extent necessary to fulfill its duties with respect to financing 
and disclosure. The agreement must comply with the requirements in 
Sec.  611.1270(c).
    (d) Disclosure to loan applicants and equity holders after 
commencement resolution. Between the date your board of directors 
adopts the commencement resolution and the termination date, you must 
give the following information to your loan applicants and equity 
holders:
    (1) For each loan applicant who is not a current stockholder, 
describe at the time of loan application:
    (i) The effect of the proposed termination on the prospective loan; 
and
    (ii) Whether, after the proposed termination, the borrower will 
continue to have any of the borrower rights provided under the Act and 
regulations.
    (2) For any equity holders who ask to have their equities retired, 
explain that the retirement would extinguish the holder's right to 
exchange those equities for an interest in the successor institution. 
In addition, inform holders of equities entitled to your residual 
assets in liquidation that retirement before termination would 
extinguish their right to dissent from the termination and have their 
equities retired.
    (e) Terminating bank's right to continue issuing debt. Through the 
termination date, a terminating bank may continue to participate in the 
issuance of consolidated and System-wide obligations to the same extent 
it would be able to participate if it were not terminating.
    (f) Special class of stock. Notwithstanding any requirements to the 
contrary in Sec.  615.5230(b) of this chapter, you may adopt bylaws 
providing for the issuance of a special class of stock and 
participation certificates between the date of adoption of a 
commencement resolution and the termination date. Your voting 
stockholders must approve the special class before you adopt the 
commencement resolution. The equities must comply with section 4.3A of 
the Act and be identical in all respects to existing classes of 
equities that are entitled to the residual assets of the institution in 
a liquidation, except for the value a holder will receive in a 
termination. In a termination, the holder of the special class of stock 
receives value equal to the lower of either par (or face) value, or the 
value calculated under Sec.  611.1280(c) and (d). A holder must have 
the same right to vote (if the equity is held on the voting record 
date) and to dissent as holders of similar equities issued before the 
commencement resolution. If the termination does not occur, the special 
classes of stock and participation certificates must automatically 
convert into shares of the otherwise identical equities.


Sec.  611.1211  Special requirements.

    (a) Special assessments, analyses, studies, and rulings. At any 
time after we receive your commencement resolution, and as we deem 
necessary or useful to evaluate your proposal, we may require you to 
engage independent experts, acceptable to us, to conduct assessments, 
analyses, or studies, or to request rulings, including, but not limited 
to:
    (1) Assessments of fair value;
    (2) Analyses and rulings on tax implications; and
    (3) Studies of the effect of your proposal on equity holders 
(including the effect on holders in their capacity as borrowers), the 
System, and other parties.
    (b) Informational meetings. After the advance notice, but before 
the stockholder vote, we may require you to hold regional or local 
informational meetings in convenient locations, at convenient times, 
and in a manner conducive to accommodating all equity holders that wish 
to attend, to discuss equity holder issues and answer questions. These 
meetings are subject to the plain language requirements of Sec.  
611.1217(b) regarding balanced statements.


Sec.  611.1215  Communications with the public and equity holders.

    (a) Communications after commencement resolution and before 
termination. The terminating institution may communicate with equity 
holders and the public regarding the proposed termination, as long as 
written communications (other than non-public communications among 
participants, i.e., persons or entities that are parties to a proposed 
corporate restructuring involving the successor institution, or their 
agents) made in connection with or relating to the proposed termination 
and any related transactions are filed in accordance with paragraph (c) 
of this section and the conditions in this section are satisfied.
    (b) To rely on this section, you must include the following legend 
in each communication in a prominent location:

    Equity holders should read the plan of termination that they 
have received or will receive (as appropriate) because it contains 
important information, including an enumerated statement of the 
anticipated benefits and potential disadvantages of the proposal.

    (c) All your written communications and all written communications 
by your directors, employees, and agents in

[[Page 44422]]

connection with or relating to the proposed termination or any related 
transactions must be filed with us under this section on or before the 
date of first use.
    (d) We will require you to correct communications that we deem are 
misleading or inaccurate.
    (e) In addition to the filings we require under paragraph (c) of 
this section, we may require you to file timely any written 
communications you have knowledge of that are made by any other 
participants or their agents in connection with or related to the 
proposed termination or to any transaction related to the proposed 
termination.
    (f) An immaterial or unintentional failure to file or a delay in 
filing a written communication described in this section will not 
result in a violation of this section, as long as:
    (1) A good faith and reasonable effort was made to comply with the 
filing requirement; and
    (2) The written communication is filed as soon as practicable after 
discovery of the failure to file.
    (g) Communications that exist in electronic form must be filed 
electronically with the FCA as we direct. For communications that do 
not exist in electronic form, you must timely notify us by electronic 
mail and send us a copy by regular mail.
    (h) You do not need to file a written communication that does not 
contain new or different information from that which you have 
previously publicly disclosed and filed under this section.


Sec.  611.1216  Public availability of documents related to the 
termination.

    (a) We may post on our Web site, or require you to post on your Web 
site:
    (1) Results of any special assessments, analyses, studies, and 
rulings required under Sec.  611.1211;
    (2) Documents you submit to us or file with us under Sec.  
611.1215; and
    (3) Documents you submit to us under section 7.11 of the Act that 
are related directly or indirectly to the proposed termination, 
including but not limited to contracts entered into in connection with 
or relating to the proposed termination and any related transactions.
    (b) We will not post confidential information on our Web site and 
will not require you to post it on your Web site.
    (c) You may request that we treat specific information as 
confidential under the Freedom of Information Act, 5 U.S.C. 552 (see 12 
CFR part, 602 subpart B). You should draft your request for 
confidential treatment narrowly to extend only to those portions of a 
document you consider to be confidential. If you request confidential 
treatment for information that we do not consider to be confidential, 
we may post that information on our Web site after providing notice to 
you. On our own initiative, we may determine that certain information 
should be treated as confidential and, if so, we will not make that 
information public.


Sec.  611.1217  Plain language requirements.

    (a) Plain language presentation. All communications to equity 
holders required under Sec. Sec.  611.1210, 611.1223, 611.1240, and 
611.1280 must be clear, concise, and understandable. You must:
    (1) Use short, explanatory sentences, bullet lists or charts where 
helpful, and descriptive headings and subheadings;
    (2) Minimize the use of glossaries or defined terms;
    (3) Write in the active voice when possible; and
    (4) Avoid legal and highly technical business terminology.
    (b) Balanced statements. Communications to equity holders that 
describe or enumerate anticipated benefits of the proposed termination 
should also describe or enumerate the potential disadvantages to the 
same degree of detail.


Sec.  611.1218  Role of directors.

    (a) Statements by directors. Directors may not be prohibited by 
confidentiality agreements or otherwise from publicly or privately 
commenting orally or in writing on the termination proposal and related 
matters.
    (b) Directors' right to obtain independent advice. One or more 
directors of a terminating institution or an institution that is 
considering terminating have the right to obtain independent legal and 
financial advice regarding the proposed termination and related 
transactions. The institution must pay for such advice and related 
expenses as are reasonable in light of the circumstances. A request by 
a director or directors for the institution to pay such expenses cannot 
be denied unless the board of directors, by at least a two-thirds vote 
of the full board (the total number of current directors), denies the 
request. The institution must act on any request in a timely manner. 
For any denial of payment, the board must provide notice to the FCA 
within 1 business day of the denial, fully document the reasons for 
such a denial, and ensure that the institution discloses the nature of 
the request and the reasons for any denial to the terminating 
institution's equity holders in the plan of termination.


Sec.  611.1219  Prohibited acts.

    (a) Statements about termination. Neither the institution nor any 
director, officer, employee, or agent may make any untrue or misleading 
statement of a material fact, or fail to disclose any material fact, to 
the FCA or a current or prospective equity holder about the proposed 
termination and any related transactions.
    (b) Representations regarding FCA approval. Neither the institution 
nor any director, officer, employee, or agent may make an oral or 
written representation to anyone that our approval of the plan of 
termination or the termination is, directly or indirectly, either a 
recommendation on the merits of the proposal or an assurance that the 
information you give to your equity holders is adequate or accurate.


Sec.  611.1220  Termination resolution.

    No more than 1 week before you submit your plan of termination to 
us, your board of directors must adopt a termination resolution stating 
its support for terminating your status as a System institution and 
authorizing:
    (a) Submission to us of a plan of termination and other required 
submissions that comply with Sec.  611.1223; and
    (b) Submission of the plan of termination to the voting 
stockholders if we approve the plan of termination under Sec.  611.1230 
or, if we take no action, after the end of our approval period.


Sec.  611.1221  Submission to FCA of plan of termination and disclosure 
information; other required submissions.

    (a) Filing. Send us an original and five copies of the plan of 
termination, including the disclosure information, and other required 
submissions. You may not file the plan of termination until at least 30 
days after you mail the equity holder notice under Sec.  611.1210(b). 
If you send us the plan of termination in electronic form, you must 
send us at least one hard copy with original signatures.
    (b) Plan contents. The plan of termination must include your equity 
holder disclosure information that complies with Sec.  611.1223.
    (c) Other submissions. You must also submit the following:
    (1) A statement of how you will transfer assets to, and have your 
liabilities assumed by, the successor institution;
    (2) A copy of the charter application for the successor 
institution, with any

[[Page 44423]]

exhibits or other supporting information; and
    (3) A statement, if applicable, whether the successor institution 
will continue to borrow from a Farm Credit bank and how such a 
relationship will affect your provision for payment of debts. You must 
also provide evidence of any agreement and plan for satisfaction of 
outstanding debts.


Sec.  611.1223  Plan of termination--contents.

    (a) Disclaimer. Place the following statement in boldface type in 
the material to be sent to equity holders, either on the notice of 
meeting or the first page of the plan of termination:

    The Farm Credit Administration has not determined if this 
information is accurate or complete. You should not rely on any 
statement to the contrary.

    (b) Summary. The first part of the plan of termination must be a 
summary that concisely explains:
    (1) Which stockholders have a right to vote on the termination and 
related transactions;
    (2) The material changes the termination will cause to the rights 
of borrowers and other equity holders;
    (3) The effect of those changes;
    (4) The anticipated benefits and potential disadvantages of the 
termination;
    (5) The right of certain equity holders to dissent and receive 
payment for their existing equities; and
    (6) The estimated termination date.
    (7) If applicable, an explanation of any corporate restructuring 
that the successor institution expects to engage in within 18 months 
after the date of termination.
    (c) Remaining requirements. You must also disclose the following 
information to equity holders:
    (1) Termination resolution. Provide a certified copy of the 
termination resolution required under Sec.  611.1220.
    (2) Plan of termination. Summarize the plan of termination.
    (3) Benefits and disadvantages. Provide an enumerated statement of 
the anticipated benefits and potential disadvantages of the 
termination.
    (4) Recommendation. Explain the board's basis for recommending the 
termination.
    (5) Exit fee. Explain the preliminary exit fee estimate, with any 
adjustments we require, and estimated expenses of termination and 
organization of the successor institution.
    (6) Initial board of directors. List the initial board of directors 
and senior officers for the successor institution, with a brief 
description of the business experience of each person, including 
principal occupation and employment during the past 5 years.
    (7) Relevant contracts and agreements. Include copies of all 
contracts and agreements related to the termination, including any 
proposed contracts in connection with the termination and subsequent 
operations of the successor institution. The FCA may, in its 
discretion, permit or require you to provide a summary or summaries of 
the documents in the disclosure information to be submitted to equity 
holders instead of copies of the documents.
    (8) Bylaws and charter. Summarize the provisions of the bylaws and 
charter of the successor institution that differ materially from your 
bylaws and charter. The summary must state:
    (i) Whether the successor institution will require a borrower to 
hold an equity interest as a condition for having a loan; and
    (ii) Whether the successor institution will require equity holders 
to do business with the institution.
    (9) Changes to equity. Explain any changes in the nature of equity 
investments in the successor institution, such as changes in dividends, 
patronage, voting rights, preferences, retirement of equities, and 
liquidation priority. If equities protected under section 4.9A of the 
Act are outstanding, the plan of termination must state that the Act's 
protections will be extinguished on termination.
    (10) Effect of termination on statutory and regulatory rights. 
Explain the effect of termination on rights granted to equity holders 
by the Act and FCA regulations. You must explain the effect termination 
will have on borrower rights granted in the Act and part 617 of this 
chapter.
    (11) Loan refinancing by borrowers.
    (i) State, as applicable, that borrowers may seek to refinance 
their loans with the System institutions that already serve, or will be 
permitted to serve, your territory. State that no System institution is 
obligated to refinance your loans.
    (ii) If we have assigned the chartered territory you serve to 
another System institution before the plan of termination is mailed to 
equity holders, or if another System institution is already chartered 
to make the same type of loans you make in the chartered territory, 
identify such institution(s) and provide the following information:
    (A) The name, address, and telephone number of the institution; and
    (B) An explanation of the institution's procedures for borrowers to 
apply for refinancing.
    (iii) If we have not assigned the territory before you mail the 
plan of termination, give the name, address, and telephone number of 
the System institution specified by us and state that borrowers may 
contact the institution for information about loan refinancing.
    (12) Equity exchanges. Explain the formula and procedure to 
exchange equity in your institution for equity in the successor 
institution.
    (13) Employment, retirement, and severance agreements. Describe any 
employment agreement or arrangement between the successor institution 
and any of your senior officers or directors. Describe any severance 
and retirement plans that cover your employees or directors and state 
the costs you expect to incur under the plans in connection with the 
termination.
    (14) Final exit fee and its calculation. Explain how the final exit 
fee will be calculated under Sec.  611.1255 and how it will be paid.
    (15) New charter. Describe the nature and type of financial 
institution the successor institution will be and any conditions of 
approval of the new chartering authority or regulator.
    (16) Differences in successor institution's programs and policies. 
Summarize any differences between you and the successor institution on:
    (i) Interest rates and fees;
    (ii) Collection policies;
    (iii) Services provided; and
    (iv) Any other item that would affect a borrower's lending 
relationship with the successor institution, including whether a 
stockholder's ability to borrow from the institution will be 
restricted.
    (17) Capitalization. Discuss expected capital requirements of the 
successor institution, and the amount and method of capitalization.
    (18) Sources of funding. Explain the sources and manner of funding 
for the successor institution's operations.
    (19) Contingent liabilities. Describe how the successor institution 
will address any contingent liability it will assume from you.
    (20) Tax status. Summarize the differences in tax status between 
your institution and the successor institution, and explain how the 
differences may affect equity holders.
    (21) Regulatory environment. Describe briefly how the regulatory 
environment for the successor institution will differ from your current 
regulatory environment, and any effect on the cost of doing business or 
the value of stockholders' equity.
    (22) Dissenters' rights. Explain which equity holders are entitled 
to dissenters' rights and what those rights are. The

[[Page 44424]]

explanation must include the estimated liquidation value of the stock, 
procedures for exercising dissenters' rights, and a statement of when 
the rights may be exercised.
    (23) Financial information.
    (i) Present the following financial data:
    (A) A balance sheet and income statement for each of the 3 
preceding fiscal years;
    (B) A balance sheet as of a date within 90 days of the date you 
send the plan of termination to us, presented on a comparative basis 
with the corresponding period of the previous 2 fiscal years;
    (C) An income statement for the interim period between the end of 
the last fiscal year and the date of the balance sheet required by 
paragraph (d)(23)(i)(B) of this section, presented on a comparative 
basis with the corresponding period of the previous 2 fiscal years;
    (D) A pro forma balance sheet of the successor institution 
presented as if termination had occurred as of the date of the most 
recent balance sheet presented in the plan of termination; and
    (E) A pro forma summary of earnings for the successor institution 
presented as if the termination had been effective at the beginning of 
the interim period between the end of the last fiscal year and the date 
of the balance sheet presented under paragraph (d)(23)(i)(D) of this 
section.
    (ii) The format for the balance sheet and income statement must be 
the same as the format in your annual report and must contain 
appropriate footnote disclosures, including data on high-risk assets, 
other property owned, and allowance for losses.
    (iii) The financial statements must include either:
    (A) A statement signed by the chief executive officer and each 
board member that the various financial statements are unaudited but 
have been prepared in all material respects in conformity with GAAP 
(except as otherwise disclosed) and are, to the best of each signer's 
knowledge, a fair and accurate presentation of the financial condition 
of the institution; or
    (B) A signed opinion by an independent certified public accountant 
that the various financial statements have been examined in conformity 
with generally accepted auditing standards and included such tests of 
the accounting records and other such auditing procedures as were 
considered necessary in the circumstances, and, as of the date of the 
statements, present fairly the financial position of the institution in 
conformity with GAAP applied on a consistent basis, except as otherwise 
disclosed.
    (24) Subsequent financial events. Describe any event after the date 
of the financial statements, but before the date you send the plan of 
termination to us, that would have a material impact on your financial 
condition or the condition of the successor institution.
    (25) Other subsequent events. Describe any event after you send the 
plan of termination to us that could have a material impact on any 
information in the plan of termination.
    (26) Other material disclosures. Describe any other material fact 
or circumstance that a stockholder would need to know to make an 
informed decision on the termination, or that is necessary to make the 
disclosures not misleading. We may require you to disclose any 
assessments, analyses, studies, or rulings we require under Sec.  
611.1211.
    (27) Ballot and proxy. Include a ballot and proxy, with 
instructions on the purpose and authority for their use, and the proper 
method for the stockholder to sign the proxy.
    (28) Board of directors certification. Include a certification 
signed by the entire board of directors as to the truth, accuracy, and 
completeness of the information contained in the plan of termination. 
If any director refuses to sign the certification, the director must 
inform us of the reasons for refusing.
    (29) Directors' statements. You must include statements, if any, by 
directors regarding the proposed termination.
    (d) Requirement to provide updated information. After you send us 
the plan of termination, you must immediately send us:
    (1) Any material change to information in the plan of termination, 
including financial information, that occurs between the date you file 
the plan of termination and the termination date;
    (2) Copies of any additional written information on the termination 
that you have given or give to current or prospective equity holders 
before termination; and
    (3) A description of any subsequent event(s) that could have a 
material impact on any information in the plan of termination or on the 
termination.


Sec.  611.1230  FCA review and approval--plan of termination.

    (a) FCA review period. No later than 60 days after we receive the 
plan of termination, we will review it and either approve or disapprove 
the plan for submission to your equity holders. If we take no action on 
the plan of termination within the 60 days, you may submit the plan to 
your equity holders. The 60-day review period under section 7.11 of the 
Act will begin on the date we receive a complete plan of termination. 
We will advise you in writing when the 60-day period begins.
    (b) FCA approval of the plan of termination. Our approval of the 
plan of termination for submission to your equity holders:
    (1) Is not our approval of the termination; and
    (2) May be subject to any condition we impose.


Sec.  611.1235  Plan of termination--distribution.

    (a) Reaffirmation resolution. Not more than 14 days before mailing 
the plan of termination to your equity holders, your board of directors 
must adopt a resolution reaffirming support of the termination. A 
certified copy of the resolution must be sent to us and must accompany 
the plan of termination when it is distributed to stockholders.
    (b) Notice of meeting and distribution of plan. You must provide 
all equity holders with a notice of meeting and the plan of termination 
at least 45 days before the stockholder vote. You must also provide a 
copy of the plan to us when you provide it to your equity holders.


Sec.  611.1240  Voting record date and stockholder approval.

    (a) Stockholder meeting. You must call the meeting by written 
notice in compliance with your bylaws. The stockholder meeting to vote 
on the termination must occur at least 60 days after our approval of 
the plan of termination (or, if we take no action, at least 60 days 
after the end of our approval period).
    (b) Voting record date. The voting record date may not be more than 
70 days before the stockholders' meeting.
    (c) Quorum requirement for termination vote. At least 30 percent, 
unless your bylaws provide for a higher quorum, of the voting 
stockholders of the institution must be present at the meeting either 
in person or by proxy in order to hold the vote on the termination.
    (d) Approval requirement. The affirmative vote of a majority of the 
voting stockholders of the institution present and voting or voting by 
proxy at the duly authorized meeting at which a quorum is present as 
prescribed in paragraph (c) of this section is required for approval of 
the termination.
    (e) Voting procedures. The voting procedures must comply with 
Sec. Sec.  611.330 and 611.340. You must have

[[Page 44425]]

an independent third party count the ballots. If a voting stockholder 
notifies you of the stockholder's intent to exercise dissenters' 
rights, the tabulator must be able to verify to you that the 
stockholder voted against the termination. Otherwise, the votes of 
stockholders must remain confidential.
    (f) Notice to FCA and equity holders of voting results. Within 10 
days of the termination vote, you must send us a certified record of 
the results of the vote. You must notify all equity holders of the 
results within 30 days after the stockholder meeting. If the 
stockholders approve the termination, you must give the following 
information to equity holders:
    (1) Stockholders who voted against termination and equity holders 
who were not entitled to vote have a right to dissent as provided in 
Sec.  611.1280; and
    (2) Voting stockholders have a right, under Sec.  611.1245, to file 
a petition with the FCA for reconsideration within 35 days after the 
date you mail to them the notice of the results of the termination 
vote.
    (g) Requirement to notify new equity holders. You must provide the 
information described in paragraph (f)(1) of this section to each 
person that becomes an equity holder after the termination vote and 
before termination.


Sec.  611.1245  Stockholder reconsideration.

    (a) Right to reconsider termination. Voting stockholders have the 
right to reconsider their approval of the termination if a petition 
signed by at least 15 percent of the voting stockholders is filed with 
us within 35 days after you mail notices to stockholders that the 
termination was approved. If we determine that the petition complies 
with the requirements of section 7.9 of the Act, you must call a 
special stockholders' meeting to reconsider the vote. The meeting must 
occur within 60 days after the date on which you mailed to stockholders 
the results of the termination vote.
    (b) Quorum requirement for termination reconsideration vote. At 
least 30 percent, unless your bylaws provide for a higher quorum, of 
the voting stockholders of the institution must be present at the 
stockholders' meeting either in person or by proxy in order to hold the 
reconsideration vote. If a majority of the voting stockholders voting 
in person or by proxy vote against the termination, the termination may 
not take place.
    (c) Stockholder list and expenses. You must, at your expense, 
timely give stockholders who request it a list of the names and 
addresses of stockholders eligible to vote in the reconsideration vote. 
The petitioners must pay all other expenses for the petition. You must 
pay expenses that you incur for the reconsideration vote.


Sec.  611.1246  Filing of termination application and its contents.

    (a) Filing of termination application. Send us your termination 
application no later than 90 days after you send us notice of the 
stockholder vote approving the termination. Please send us an original 
and five copies of the termination application for review and approval. 
If you send us the termination application in electronic form, you must 
send us at least one hard copy with original signatures.
    (b) Contents of termination application. The application must 
contain:
    (1) A certified copy of the termination and reaffirmation 
resolutions;
    (2) A certification signed by the board of directors that the board 
continues to support the termination, there has been no material change 
to any of the information contained in the plan of termination or 
information statement after the FCA approved the plan of termination, 
and there have not been any subsequent events that could have a 
material impact on any of the information in the plan of termination or 
the termination; and
    (3) Any additional information that is required under this subpart, 
that we request or that your board of directors wishes to submit in 
support of the application.


Sec.  611.1247  FCA review and approval--termination.

    (a) FCA action on application. After we receive the termination 
application, we will review it and either approve or disapprove the 
termination.
    (b) Basis for disapproval. We will disapprove the termination if we 
determine that there are one or more appropriate reasons for 
disapproval consistent with our authorities under the Act and our 
regulations. We will inform you of our reason(s) for disapproval in 
writing.
    (c) Conditions of FCA approval. We will approve your termination 
application only if:
    (1) Your stockholders have voted in favor of termination in the 
termination vote and in any reconsideration vote;
    (2) You have given us executed copies of all contracts, agreements, 
and other documents submitted under Sec. Sec.  611.1221 and 611.1223;
    (3) You have paid or made adequate provision for payment of debts, 
including responsibility for any contingent liabilities, and for 
retirement of equities;
    (4) A Federal or State chartering authority has granted a new 
charter to the successor institution;
    (5) You deposit into escrow an amount equal to 110 percent of the 
estimated exit fee plus 110 percent of the estimated amount you must 
pay to retire equities of dissenting stockholders and Farm Credit 
institutions, as described in Sec.  611.1255(c); and
    (6) You have fulfilled any condition of termination we impose.
    (d) Effective date of termination. If we approve the termination, 
we will revoke your charter, and the termination will be effective on 
the date that we provide, but no earlier than the last to occur of:
    (1) Fulfillment of all conditions listed in or imposed under 
paragraph (c) of this section;
    (2) Your proposed termination date;
    (3) Ninety (90) days after we receive your termination application 
described in Sec.  611.1246; or
    (4) Fifteen (15) days after any reconsideration vote.


Sec.  611.1250  Preliminary exit fee estimate.

    (a) Preliminary exit fee estimate--terminating association. You 
must provide a preliminary exit fee estimate to us when you submit the 
plan of termination under Sec.  611.1221. Calculate the preliminary 
exit fee estimate in the following order:
    (1) Base your exit fee calculation on the average daily balances of 
assets and liabilities for the 12-month period as of the quarter end 
immediately before the date you send us your plan of termination.
    (2) Any amounts we refer to in this section are average daily 
balances unless we specify that they are not. Amounts that are not 
average daily balances will be referred to as ``dollar amount.''
    (3) Compute the average daily balances based on financial 
statements that comply with GAAP. The financial statements, as of the 
quarter end immediately before the date you send us your plan of 
termination, must be independently audited by a qualified public 
accountant, as defined in Sec.  621.2(i) of this chapter. We may, in 
our discretion, waive the audit requirement if an independent audit was 
performed as of a date less than 6 months before you submit the plan of 
termination.
    (4) Make adjustments to assets as follows:
    (i) Add back expenses you have incurred related to termination. 
Related expenses include, but are not limited to, legal services, 
accounting services, tax services, studies, auditing, business 
planning, equity holder meetings, and

[[Page 44426]]

application fees for the termination and reorganization. Do not add 
back to assets expenses related to a requirement by the FCA to engage 
independent experts to conduct assessments, analyses, or studies, or to 
request rulings that solely address the impact of the termination on 
the System or parties other than the terminating institution and its 
stockholders.
    (ii) Subtract the dollar amount of estimated current and deferred 
tax expenses, if any, due to the termination.
    (iii) Add the dollar amount of estimated current and deferred tax 
benefits, if any, due to the termination.
    (iv) Adjust for the dollar amount of significant transactions you 
reasonably expect to occur between the quarter end before you file your 
plan of termination and date of termination. Examples of these 
transactions include, but are not limited to, gains or losses on the 
sale of assets, retirements of equity, loan repayments, and patronage 
distributions. Do not make adjustments for future expenses related to 
termination, such as severance or special retirement payments, or stock 
retirements to dissenting stockholders and Farm Credit institutions.
    (5) Subtract from liabilities any liability that we treat as 
regulatory capital under the capital or collateral requirements in 
subparts H and K of part 615 of this chapter.
    (6) Make any adjustments we require under paragraph (c) of this 
section.
    (7) After making these adjustments to assets and liabilities, 
subtract liabilities from assets. This is your preliminary total 
capital for purposes of termination.
    (8) Multiply assets as adjusted above by 6 percent, and subtract 
this amount from preliminary total capital. This is your preliminary 
exit fee estimate.
    (b) Preliminary exit fee estimate--terminating bank.
    (1) Affiliated associations that are terminating with you must 
calculate their individual preliminary exit fee estimates as described 
in paragraph (a) of this section.
    (2) Base your exit fee calculation on the average daily balances of 
assets and liabilities for the 12-month period as of the quarter end 
immediately before the date you send us your plan of termination.
    (3) Any amounts we refer to in this section are average daily 
balances unless we specify that they are not. Amounts that are not 
average daily balances will be referred to as ``dollar amount.''
    (4) Compute the average daily balances based on bank-only financial 
statements that comply with GAAP. The financial statements, as of the 
quarter end immediately before the date you send us your plan of 
termination, must be independently audited by a qualified public 
accountant, as defined in Sec.  621.2(i) of this chapter. We may, in 
our discretion, waive this requirement if an independent audit was 
performed as of a date less than 6 months before you submit the plan of 
termination.
    (5) Make adjustments to assets and liabilities as follows:
    (i) Add back to assets the following:
    (A) Expenses you have incurred related to termination. Related 
expenses include, but are not limited to, legal services, accounting 
services, tax services, studies, auditing, business planning, equity 
holder meetings, and application fees for the termination and 
reorganization. Do not add back to assets expenses related to a 
requirement by the FCA to engage independent experts to conduct 
assessments, analyses, or studies, or to request rulings that solely 
address the impact of the termination on the System or parties other 
than the terminating institution and its stockholders.
    (B) Any specific allowance for losses, and a pro rata portion of 
any general allowance for loan losses, on direct loans to associations 
that you do not expect to incur before or at termination.
    (ii) Subtract from your assets and liabilities an amount equal to 
your direct loans to your affiliated associations that are not 
terminating.
    (iii) Subtract the following from assets:
    (A) Equity investments in your institution that are held by 
nonterminating associations and that you expect to transfer to another 
System bank before or at termination. A nonterminating association's 
investment consists of purchased equities, allocated equities, and a 
share of the bank's unallocated surplus calculated in accordance with 
the bank's bylaw provisions on liquidation. We may require a different 
calculation method for the unallocated surplus if we determine that 
using the liquidation provision would be inequitable to stockholders; 
and
    (B) The dollar amount of estimated current and deferred tax 
expenses, if any, due to the termination.
    (iv) Add the dollar amount of current and deferred estimated tax 
benefits, if any, due to the termination.
    (v) Subtract from liabilities any liability that we treat as 
regulatory capital under the capital or collateral requirements in 
subparts H and K of part 615 of this chapter.
    (vi) Adjust for the dollar amount of significant transactions you 
reasonably expect to occur between the quarter end before you file your 
plan of termination and date of termination. Examples of these 
transactions include, but are not limited to, retirements of equity, 
loan repayments, and patronage distributions. Do not make adjustments 
for future expenses related to termination, such as severance or 
special retirement payments, or stock retirements to dissenting 
stockholders and Farm Credit institutions.
    (6) Make any adjustments we require under paragraph (c) of this 
section.
    (7) After the above adjustments, combine your balance sheet with 
the balance sheets of your terminating associations after they have 
made the adjustments required in paragraph (a) of this section. 
Subtract liabilities from assets. This is your preliminary total 
capital estimate for purposes of termination.
    (8) Multiply the assets of the combined balance sheet after the 
above adjustments by 6 percent. Subtract this amount from the 
preliminary total capital estimate of the combined balance sheet. The 
remainder is the preliminary exit fee estimate of the bank and 
terminating affiliated associations.
    (9) Your preliminary exit fee estimate is the amount by which the 
preliminary exit fee estimate for the combined entity exceeds the total 
of the individual preliminary exit fee estimates of your affiliated 
terminating associations.
    (c) Adjustments.
    (1) We will review your account balances, transactions over the 3 
years before the date of the termination resolution under Sec.  
611.1220, and any subsequent transactions. Our review will include, but 
not be limited to, the following:
    (i) Additions to or subtractions from any allowance for losses;
    (ii) Additions to assets or liabilities, or subtractions from 
assets or liabilities, due to transactions that are outside your 
ordinary course of business;
    (iii) Dividends or patronage refunds exceeding your usual 
practices;
    (iv) Changes in the institution's capital plan, or in implementing 
the plan, that increased or decreased the level of borrower investment;
    (v) Contingent liabilities, such as loss-sharing obligations, that 
can be reasonably quantified; and
    (vi) Assets, including real property and servicing rights, that may 
be overvalued, undervalued, or not recorded on your books.
    (2) If we determine the account balances do not accurately show the 
value of your assets and liabilities (whether the assets and 
liabilities were booked before or during the 3-year look-

[[Page 44427]]

back adjustment period), we will make any adjustments we deem 
necessary.
    (3) We may require you to reverse the effect of a transaction if we 
determine that:
    (i) You have retired capital outside the ordinary course of 
business;
    (ii) You have taken any other actions unrelated to your core 
business that have the effect of changing the exit fee; or
    (iii) You incurred expenses related to termination prior to the 12-
month average daily balance period on which the exit fee calculation is 
based.
    (4) We may require you to make these adjustments to the preliminary 
exit fee estimate that is disclosed in the information statement, the 
final exit fee calculation, and the calculations of the value of 
equities held by dissenting stockholders, Farm Credit institutions that 
choose to have their equities retired at termination, and reaffiliating 
associations.


Sec.  611.1255  Exit fee calculation.

    (a) Final exit fee calculation--terminating association. Calculate 
the final exit fee in the following order:
    (1) Base your exit fee calculation on the average daily balances of 
assets and liabilities for the 12-month period preceding the 
termination date. Assume for this calculation that you have not paid or 
accrued the items described in paragraph (a)(4)(ii) and (iii) of this 
section.
    (2) Any amounts we refer to in this section are average daily 
balances unless we specify that they are not. Amounts that are not 
average daily balances will be referred to as ``dollar amount.''
    (3) Compute the average daily balances based on financial 
statements that comply with GAAP. The financial statements, as of the 
termination date, must be independently audited by a qualified public 
accountant, as defined in Sec.  621.2(i) of this chapter.
    (4) Make adjustments to assets and liabilities as follows:
    (i) Add back expenses related to the termination. Related expenses 
include, but are not limited to, legal services, accounting services, 
tax services, studies, auditing, business planning, payments of 
severance and special retirements, equity holder meetings, and 
application fees for the termination and reorganization. Do not add 
back to assets expenses related to a requirement by the FCA to engage 
independent experts to conduct assessments, analyses, or studies, or to 
request rulings that solely address the impact of the termination on 
the System or parties other than the terminating institution and its 
stockholders.
    (ii) Subtract from assets the dollar amount of current and deferred 
tax expenses, if any, due to the termination.
    (iii) Add to assets the dollar amount of current and deferred tax 
benefits, if any, due to the termination.
    (iv) Subtract from liabilities any liability that we treat as 
regulatory capital under the capital or collateral requirements in 
subparts H and K of part 615 of this chapter.
    (v) Make the adjustments that we require under Sec.  611.1250(c). 
For the final exit fee, we will review and may require additional 
adjustments for transactions between the date you adopted the 
termination resolution and the termination date.
    (5) After making these adjustments to assets and liabilities, 
subtract liabilities from assets. This is your total capital for 
purposes of termination.
    (6) Multiply assets by 6 percent, and subtract this amount from 
total capital. This is your final exit fee.
    (b) Final exit fee calculation--terminating bank.
    (1) The individual exit fees of affiliated associations that are 
terminating with you must be calculated as described in paragraph (a) 
of this section.
    (2) Base your exit fee calculation on the average daily balances of 
assets and liabilities for the 12-month period preceding the 
termination date. Assume for this calculation that you have not paid or 
accrued the items described in paragraph (b)(5)(iii)(B) and (b)(5)(iv) 
of this section.
    (3) Any amounts we refer to in this section are average daily 
balances unless we specify that they are not. Amounts that are not 
average daily balances will be referred to as ``dollar amount.''
    (4) Compute the average daily balances based on bank-only financial 
statements that comply with GAAP. The financial statements, as of the 
termination date, must be independently audited by a qualified public 
accountant, as defined in Sec.  621.2(i) of this chapter.
    (5) Make adjustments to assets and liabilities as follows:
    (i) Add back the following to your assets:
    (A) Expenses you have incurred related to termination. Related 
expenses include, but are not limited to, legal services, accounting 
services, tax services, studies, auditing, business planning, payments 
of severance and special retirements, equity holder meetings, and 
application fees for the termination and reorganization. Do not add 
back to assets expenses related to a requirement by the FCA to engage 
independent experts to conduct assessments, analyses, or studies, or to 
request rulings that solely address the impact of the termination on 
the System or parties other than the terminating institution and its 
stockholders.
    (B) Any specific allowance for losses, and a pro rata share of any 
general allowance for losses, on direct loans to associations that are 
paid off or transferred before or at termination.
    (ii) Subtract from your assets and liabilities your direct loans to 
affiliated associations that were paid off or transferred in the 12-
month period before termination or at termination.
    (iii) Subtract from your assets the following:
    (A) Equity investments held in your institution by affiliated 
associations that you transferred at termination or during the 12 
months before termination; and
    (B) The dollar amount of current and deferred tax expenses, if any, 
due to the termination;
    (iv) Add to assets, the dollar amount of estimated current and 
deferred tax benefits, if any, due to the termination.
    (v) Subtract from liabilities any liability that we treat as 
regulatory capital (or that we do not treat as a liability) under the 
capital or collateral requirements in subparts H and K of part 615 of 
this chapter.
    (vi) Make the adjustments that we require under Sec.  611.1250(c). 
For the final exit fee, we will review and may require additional 
adjustments for transactions between the date you adopted the 
termination resolution and the termination date.
    (6) After the above adjustments, combine your balance sheet with 
the balance sheets of terminating associations after making the 
adjustments required in paragraph (a) of this section.
    (7) Subtract combined liabilities from combined assets. This is the 
total capital of the combined balance sheet.
    (8) Multiply the assets of the combined balance sheet after the 
above adjustments by 6 percent. Subtract this amount from the total 
capital of the combined balance sheet. This amount is the combined 
final exit fee for your institution and the terminating affiliated 
associations.
    (9) Your final exit fee is the amount by which the combined final 
exit fee exceeds the total of the individual final exit fees of your 
affiliated terminating associations.
    (c) Payment of exit fee. On the termination date, you must:
    (1) Deposit into an escrow account acceptable to us and the FCSIC 
an

[[Page 44428]]

amount equal to 110 percent of the preliminary exit fee estimate, 
adjusted to account for stock retirements to dissenting stockholders 
and Farm Credit institutions, and any other adjustments we require.
    (2) Deposit into an escrow account acceptable to us an amount equal 
to 110 percent of the equity you must retire for dissenting 
stockholders and System institutions holding stock that would be 
entitled to a share of the remaining assets in a liquidation.
    (d) Pay-out of escrow. Following the independent audit of the 
institution's account balances as of the termination date, we will 
determine the amount of the final exit fee and the amounts owed to 
stockholders to retire their equities. We will then direct the escrow 
agent to:
    (1) Pay the exit fee to the Farm Credit Insurance Fund;
    (2) Pay the amounts owed to dissenting stockholders and Farm Credit 
institutions; and
    (3) Return any remaining amounts to the successor institution.
    (e) Additional payment. If the amount held in escrow is not enough 
to pay the amounts under paragraph (d)(1) and (d)(2) of this section, 
the successor institution must pay any remaining liability to the 
escrow agent for distribution to the appropriate parties. The 
termination application must include evidence that, after termination, 
the successor institution will pay any remaining amounts owed.


Sec.  611.1260  Payment of debts and assessments--terminating 
association.

    (a) General rule. If your institution is a terminating association, 
you must pay or make adequate provision for the payment of all 
outstanding debt obligations and assessments.
    (b) No OFI relationship. If the successor institution will not 
become an OFI, you must either:
    (1) Pay debts and assessments owed to your affiliated Farm Credit 
bank at termination; or
    (2) With your affiliated Farm Credit bank's concurrence, arrange to 
pay any obligations or assessments to the bank after termination.
    (c) Obligations to other Farm Credit institutions. You must pay or 
make adequate provision for payment of obligations to any Farm Credit 
institution (other than your affiliated bank) under any loss-sharing or 
other agreement.


Sec.  611.1265  Retirement of a terminating association's investment in 
its affiliated bank.

    (a) Safety and soundness restrictions. Notwithstanding anything in 
this subpart to the contrary, we may prohibit a bank from retiring the 
equities you hold in the bank if the retirement would cause the bank to 
fall below its regulatory capital requirements after retirement, or if 
we determine that the bank would be in an unsafe or unsound condition 
after retirement.
    (b) Retirement agreement. Your affiliated bank may retire the 
purchased and allocated equities held by your institution in the bank 
according to the terms of the bank's capital revolvement plan or an 
agreement between you and the bank.
    (c) Retirement in absence of agreement. Your affiliated bank must 
retire any equities not subject to an agreement or revolvement plan no 
later than when you or the successor institution pays off your loan 
from the bank.
    (d) No retirement of unallocated surplus. When your bank retires 
equities you own in the bank, the bank must pay par or face value for 
purchased and allocated equities, less any impairment. The bank may not 
pay you any portion of its unallocated surplus.
    (e) Exclusion of equities from capital ratios. If another Farm 
Credit institution makes an agreement to retire equities you hold in 
that institution after termination, we may require that institution to 
exclude part or all of those equities from assets and capital when the 
institution calculates its capital and net collateral ratios under 
subparts H and K of part 615 of this chapter.


Sec.  611.1270  Repayment of obligations--terminating bank.

    (a) General rule. If your institution is a terminating bank, you 
must pay or make adequate provision for the payment of all outstanding 
debt obligations, and provide for your responsibility for any probable 
contingent liabilities identified.
    (b) Satisfaction of primary liability on consolidated or System-
wide obligations. After consulting with the other Farm Credit banks, 
the Funding Corporation, and the FCSIC, you must pay or make adequate 
provision for payment of your primary liability on consolidated or 
System-wide obligations in a method that we deem acceptable. Before we 
make a final decision on your proposal and as we deem necessary, we may 
consult with the other Farm Credit banks, the Funding Corporation, and 
the FCSIC.
    (c) Satisfaction of joint and several liability and liability for 
interest on individual obligations.
    (1) You and the other Farm Credit banks must enter into an 
agreement, which is subject to our approval, covering obligations 
issued under section 4.2 of the Act and outstanding on the termination 
date. The agreement must specify how you and your successor institution 
will make adequate provision for the payment of your joint and several 
liability to holders of obligations other than those obligations on 
which you are primarily liable, in the event we make calls for payment 
under section 4.4 of the Act. You and your successor institution must 
also provide for your liability under section 4.4(a)(1) of the Act to 
pay interest on the individual obligations issued by other System 
banks. As a part of the agreement, you must also agree that your 
successor institution will provide ongoing information to the Funding 
Corporation to enable it to fulfill its funding and disclosure duties. 
The Funding Corporation may, at its option, be a party to the agreement 
to the extent necessary to fulfill its duties with respect to financing 
and disclosure.
    (2) If you and the other Farm Credit banks are unable to reach 
agreement within 90 days before the proposed termination date, we will 
specify the manner in which you will make adequate provision for the 
payment of the liabilities in question and how we will make joint and 
several calls for those obligations outstanding on the termination 
date.
    (3) Notwithstanding any other provision in these regulations, the 
successor institution will be jointly and severally liable for 
consolidated and System-wide debt outstanding on the termination date 
(other than the obligations on which you are primarily liable). The 
successor institution will also be liable for interest on other banks' 
individual obligations as described in section 4.4(a)(1) of the Act and 
outstanding on the termination date. The termination application must 
include evidence that the successor institution will continue to be 
liable for consolidated and System-wide debt and for interest on other 
banks' individual obligations.


Sec.  611.1275  Retirement of equities held by other System 
institutions.

    (a) Retirement at option of equity holder. If your institution is a 
terminating institution, System institutions that own your equities 
have the right to require you to retire the equities on the termination 
date.
    (b) Value of equity holders' interests. You must retire the 
equities in accordance with the liquidation provisions in your bylaws 
unless we determine that the liquidation provisions would result in an

[[Page 44429]]

inequitable distribution to stockholders. If we make such a 
determination, we will require you to distribute the equity in 
accordance with another method that we deem equitable to stockholders. 
Before you retire any equity, you must make the following adjustments 
to the amount of stockholder equity as stated in the financial 
statements on the termination date:
    (1) Make deductions for any taxes due to the termination that have 
not yet been recorded;
    (2) Deduct the amount of the exit fee; and
    (3) Make any adjustments described under Sec.  611.1250(c) that we 
may require as we deem appropriate.
    (c) Transfer of affiliated association's investment. As an 
alternative to equity retirement, an affiliated association that 
reaffiliates with another Farm Credit bank instead of terminating with 
its bank has the right to require the terminating bank to transfer its 
investment to its new affiliated bank when it reaffiliates. If your 
institution is a terminating bank, at the time of reaffiliation you 
must transfer the purchased and allocated equities held by the 
association, as well as its share of unallocated surplus, to the new 
affiliated bank. Calculate the association's share before deduction of 
the exit fee as of the month end preceding the reaffiliation date (or 
the termination date if it is the same as the reaffiliation date) in 
accordance with the liquidation provisions of your bylaws, unless we 
determine that the liquidation provisions would result in an 
inequitable distribution. If we make such a determination, we will 
require you to distribute the association's share of your unallocated 
surplus in accordance with another method that we deem equitable to 
stockholders. Before you distribute any unallocated surplus, you must 
make the following adjustments to stockholder equity as stated in the 
financial statements as of the month end preceding the reaffiliation 
date (or the termination date if it is the same as the reaffiliation 
date):
    (1) Add back any taxes due to the termination, and the exit fee; 
and
    (2) Make any adjustments described under Sec.  611.1250(c) that we 
may require as we deem appropriate.
    (d) Prohibition on certain affiliations. No Farm Credit institution 
may retain an equity interest otherwise prohibited by law in a 
successor institution


Sec.  611.1280  Dissenting stockholders' rights.

    (a) Definition. A dissenting stockholder is an equity holder (other 
than a System institution) in a terminating institution on the 
termination date who either:
    (1) Was eligible to vote on the termination resolution and voted 
against termination;
    (2) Was an equity holder on the voting record date but was not 
eligible to vote; or
    (3) Became an equity holder after the voting record date.
    (b) Retirement at option of a dissenting stockholder. A dissenting 
stockholder may require a terminating institution to retire the 
stockholder's equity interest in the terminating institution.
    (c) Value of a dissenting stockholder's interest. You must pay a 
dissenting stockholder according to the liquidation provision in your 
bylaws, except that you must pay at least par or face value for 
eligible borrower stock (as defined in section 4.9A(d)(2) of the Act). 
If we determine that the liquidation provision is inequitable to 
stockholders, we will require you to calculate their share in 
accordance with another formula that we deem equitable.
    (d) Calculation of interest of a dissenting stockholder. Before you 
retire any equity, you must make the following adjustments to the 
amount of stockholder equity as stated in the financial statements on 
the termination date:
    (1) Deduct any taxes due to the termination that you have not yet 
recorded;
    (2) Deduct the amount of the exit fee; and
    (3) Make any adjustments described under Sec.  611.1250(c) that we 
may require as we deem appropriate.
    (e) Form of payment to a dissenting stockholder. You must pay 
dissenting stockholders for their equities as follows:
    (1) Pay cash for the par or face value of purchased stock, less any 
impairment;
    (2) For equities other than purchased equities, you may:
    (i) Pay cash;
    (ii) Cause or otherwise provide for the successor institution to 
issue, on the date of termination, subordinated debt to the stockholder 
with a face value equal to the value of the remaining equities. This 
subordinated debt must have a maturity date of 7 years or less, must 
have priority in liquidation ahead of all equity, and must carry a rate 
of interest not less than the rate (at the time of termination) for 
debt of comparable maturity issued by the U.S. Treasury plus 1 percent; 
or
    (iii) Provide for a combination of cash and subordinated debt as 
described above.
    (f) Payment to holders of special class of stock. If you have 
adopted bylaws under Sec.  611.1210(f), you must pay a dissenting 
stockholder who owns shares of the special class of stock an amount 
equal to the lower of the par (or face) value or the value of such 
stock as determined under Sec.  611.1280(c) and (d).
    (g) Notice to equity holders. The notice to equity holders required 
in Sec.  611.1240(f) must include a form for stockholders to send back 
to you, stating their intention to exercise dissenters' rights. The 
notice must contain the following information:
    (1) A description of the rights of dissenting stockholders set 
forth in this section and the approximate value per share that a 
dissenting stockholder can expect to receive. State whether the 
successor institution will require borrowers to be stockholders or 
whether it will require stockholders to be borrowers.
    (2) A description of the current book and par value per share of 
each class of equities, and the expected book and market value of the 
stockholder's interest in the successor institution.
    (3) A statement that a stockholder must return the enclosed form to 
you within 30 days if the stockholder chooses to exercise dissenters' 
rights.
    (h) Notice to subsequent equity holders. Equity holders that 
acquire their equities after the termination vote must also receive the 
notice described in paragraph (g) of this section. You must give them 
at least 5 business days to decide whether to request retirement of 
their stock.
    (i) Reconsideration. If a reconsideration vote is held and the 
termination is disapproved, the right of stockholders to exercise 
dissenters' rights is rescinded. If a reconsideration vote is held and 
the termination is approved, you must retire the equities of dissenting 
stockholders as if there had been no reconsideration vote.


Sec.  611.1285  Loan refinancing by borrowers.

    (a) Disclosure of credit and loan information. At the request of a 
borrower seeking refinancing with another System institution before you 
terminate, you must give credit and loan information about the borrower 
to such institution.
    (b) No reassignment of territory. If, at the termination date, we 
have not assigned your territory to another System institution, any 
System institution may lend in your territory, to the extent otherwise 
permitted by the Act and the regulations in this chapter.

[[Page 44430]]

Sec.  611.1290  Continuation of borrower rights.

    You may not require a waiver of contractual borrower rights 
provisions as a condition of borrowing from and owning equity in the 
successor institution. Institutions that become other financing 
institutions on termination must comply with the applicable borrower 
rights provisions in the Act and part 617 of this chapter.

    Dated: July 27, 2006.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. 06-6648 Filed 8-3-06; 8:45 am]
BILLING CODE 6705-01-P