[Federal Register Volume 71, Number 244 (Wednesday, December 20, 2006)]
[Rules and Regulations]
[Pages 76111-76122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-21529]



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  Federal Register / Vol. 71, No. 244 / Wednesday, December 20, 2006 / 
Rules and Regulations  

[[Page 76111]]



FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 619, 620, 621, 624, 627, and 630

RIN 3052-AC11


Organization; Definitions; Disclosure to Shareholders; Accounting 
and Reporting Requirements; Regulatory Accounting Practices; Title IV 
Conservators, Receivers, and Voluntary Liquidations; and Disclosure to 
Investors in System-Wide and Consolidated Bank Debt Obligations of the 
Farm Credit System

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) issues this 
final rule amending our disclosure and reporting regulations for Farm 
Credit System (System) institutions. The final rule clarifies and 
enhances existing disclosure requirements for reports to System 
shareholders and investors. The rule provides for ``real time'' 
disclosures to shareholders, investors, and the public by accelerating 
the time period for filing annual and quarterly reports. The final rule 
requires the Federal Farm Credit Banks Funding Corporation (Funding 
Corporation) to issue interim reports to investors in System-wide debt 
obligations based on policies and procedures it would have to adopt. 
Issuing interim reports will improve the timely and accurate 
distribution of System-wide financial information. The rule also 
supports financial accuracy certifications in periodic reports for all 
System institutions by requiring management of the Funding Corporation 
and the largest System institutions (with over $1 billion in assets) to 
annually review and report on the internal control over financial 
reporting. The Funding Corporation will have to provide for an annual 
attestation from its external auditor on the Funding Corporation's 
assessment of internal control over financial reporting. Further, this 
rule creates a regulatory section on the independence of external 
auditors, adding restrictions on non-audit services and conflicts of 
interest, as well as requiring auditor rotation.

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.
    Compliance Date: Compliance with all provisions of the rule must be 
achieved by the start of the fiscal year immediately following the 
effective date of this rule, unless the start of that fiscal year is 
within 3 months or less of the effective date. In that case, full 
compliance is delayed until the start of the next full fiscal year.

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
Laura McFarland, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    Our objectives in this rulemaking are to:
     Incorporate recent changes in industry practices into our 
financial disclosure and reporting requirements for System 
institutions;
     Augment existing reporting timeframes with ``real time 
disclosure'' principles to improve shareholder, investor, and public 
access to material financial information used in informed investment 
decisionmaking;
     Strengthen the independence of System financial audits;
     Streamline the financial reporting certification 
requirement, making them easier to understand and use; and
     Enhance shareholders' and investors' understanding of, and 
confidence in, the System's operations through improved transparency.

II. Background

    The Farm Credit Act of 1971, as amended (Act),\1\ authorizes FCA to 
issue regulations implementing the provisions of the Act. The 1985 
Amendments to the Act \2\ added provisions requiring FCA to regulate 
the disclosure and reporting practices of System institutions and 
require each System institution to prepare and publish annual financial 
reports to shareholders. The Act at section 5.19(b)(1) also requires 
that financial statements be prepared in accordance with generally 
accepted accounting principles (GAAP) and be audited by an independent 
public accountant.
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    \1\ Pub. L. 92-181 (Dec. 10, 1971).
    \2\ Farm Credit Amendments Act of 1985, Pub. L. 99-205 (Dec. 23, 
1985).
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    Our existing regulations require each System institution to prepare 
annual and quarterly reports, identifying the minimum information 
requirements of the reports. Our existing regulations also set forth 
reporting timeframes and signatory requirements for the reports to 
ensure that System institutions provide timely and reliable financial 
information to multiple audiences, including borrowers, shareholders, 
investors and the public.
    On March 14, 2006, we published a proposed rule (71 FR 13040) to 
amend those sections of parts 620, 621 and 630 affecting reporting 
timeframes, certifications and external auditors. We also proposed 
other amendments to our reporting and disclosure regulations. In the 
course of developing this rule, we considered the disclosure and 
reporting practices of publicly traded companies, reporting 
requirements of the Federal Deposit Insurance Corporation (FDIC) and 
other Federal bank regulatory agencies, the financial reporting and 
disclosure provisions of the Sarbanes-Oxley Act of 2002 (Sarbanes-
Oxley) \3\ and the Securities and Exchange Commission (SEC) 
implementing regulations. We also considered studies and public 
statements of individuals and organizations with knowledge and 
expertise in financial disclosure and reporting practices. Throughout 
this process we evaluated changes to our rules against our role as the 
safety and soundness regulator of the System and the System's 
cooperative structure.
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    \3\ Pub. L. 107-204 (July 30, 2002).
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    The comment period for the proposed rule closed on June 12, 2006.

[[Page 76112]]

III. Comments and Our Response

    We received 14 comment letters on our proposed rule, all from 
individuals and entities associated with the System. Of the comments 
received, eleven were from System associations, two were from Farm 
Credit banks, and one was from the Farm Credit Council (FCC), acting 
for its membership and the Funding Corporation. In general, most 
commenters supported the proposed rule, but suggested changes to our 
proposal on internal control assessments, reporting timeframes and 
auditor rotation. One association commenter stated our proposed rule 
was generally burdensome and not cost effective, while another thanked 
us for focusing on eliminating unnecessary burdens for System 
institutions. Still another commenter asked us to mitigate the 
``negative impact'' of the rule to allow more effective use of 
shareholder patronage dollars. We discuss and respond to the comments 
to our proposed rule below. Those provisions of the proposed rule on 
which we did not receive comments are finalized as proposed.

A. Definition of Qualified Public Accountant [new Sec.  619.9270 and 
Sec.  621.2(i)]

    We received no comments on our proposed definition of ``qualified 
public accountant'' or on moving the term from Sec.  621.2(i) to Sec.  
619.9270. We adopt this proposed provision as final. In conformance 
with this change, we remove the Sec.  621.2(i) reference in Sec. Sec.  
611.1250(a)(3) and (b)(4), 611.1255(a)(3) and (b)(4), 620.5(m)(1), and 
630.20(l).

B. Certification and Submission of Financial Reports [Sec. Sec.  620.2, 
620.3, 620.5, 627.2785(d), 630.3, 630.4 and 630.5]

1. Report Submissions, Signatures, and Certification of Financial 
Accuracy
[Sec. Sec.  620.2, 620.3, 620.5, 627.2785(d), 630.3, 630.4, and 630.5]
    We received no comments on our proposal to remove the requirement 
that multiple copies of reports be sent to us. We also received no 
comments on our proposed changes to the signatory and financial 
accuracy requirements for reports. We adopt these proposed provisions 
as final with a minor clarification to redesignated Sec.  630.4(c) to 
clarify that it is the signature and certification provisions of Sec.  
620.3 that are applicable to information submitted to the funding banks 
by associations for the System-wide report. We also adopt the 
conforming technical changes requiring all reports, regardless of the 
recipient, to comply with Sec. Sec.  620.3 and 630.5, as well as 
technical changes to Sec. Sec.  630.20(h)(1); 620.5(m)(2); 630.4(a)(4), 
(b)(5) and (c)(1); and 627.2785(d).
    We received six comments from five associations and one Farm Credit 
bank on our existing rule at Sec.  630.4 dealing with the supply of 
information to the Funding Corporation. The Farm Credit bank supported 
our existing rule, but the associations stated that our rule at Sec.  
630.4 obligates the associations to provide their funding bank with the 
information necessary for the bank to provide accurate and complete 
district information to the Funding Corporation. The commenters stated 
it is inappropriate and burdensome to regulate the relationship between 
the associations and their funding bank and asked that the provision be 
removed. The commenters asked that the associations and banks be 
allowed to use contractual relationships to orchestrate how district 
information is provided to the Funding Corporation. The commenters 
suggested the general financing agreement (GFA) as an appropriate tool 
for negotiating how to submit the required information. One commenter 
explained that banks should work with associations to determine the 
information necessary, rather than giving the bank ``regulatory 
authority.'' Another commenter stated that the current information 
submission relationship works adequately and does not require a 
revision.
    While we agree that the Funding Corporation, banks and associations 
should work together to identify the information provided for the 
System-wide report, we do not believe that a contractual relationship, 
or a GFA, is an appropriate method of ensuring the Funding Corporation 
receives information necessary to prepare the report to investors. It 
is essential that the banks and associations be held accountable to 
their regulator for providing the Funding Corporation with necessary 
financial information to ensure an accurate, timely and complete report 
is provided to System investors. We also point out that this 
requirement has been in existence since 1994 and is not a new proposal. 
We only proposed changes to the certification and signatory 
requirements to the existing submission requirements, as well as 
limiting access to the individual institution's external auditor. These 
changes were proposed to reduce the burden on associations and banks by 
using the same signatures and certifications for both the Report to 
Shareholders and for the information submitted to the Funding 
Corporation. We are not removing the existing requirement in Sec.  
630.4 that associations provide their funding bank with information 
needed by the Funding Corporation and adopt the proposed modifications 
to Sec.  630.4 to require banks and associations to submit information 
complying with the signature and certification requirements in Sec.  
620.3. We also remove, as proposed, the provision that previously 
allowed the Funding Corporation and banks to question another System 
institution's external auditor about submissions for the System-wide 
report.
2. Bank and Association Assessment of Internal Control Over Financial 
Reporting
[Sec.  620.3(d)]
    We proposed adding a new Sec.  620.3(d) requiring each institution 
with total assets over $500 million (as of the end of the previous 
fiscal year) to perform a management assessment of the institution's 
internal financial controls and report the results of the assessment in 
the annual and quarterly reports of the institution. We received 
comments from the FCC, two Farm Credit banks and nine associations 
opposing the type and frequency of the assessment of internal financial 
controls. The commenters first asked that we replace the phrase 
``assessment of the internal financial controls of the institution'' 
with ``assessment of internal control over financial reporting.'' 
Commenters stated the suggested change conforms to the industry 
standard, explaining that any language different from the industry 
standard may be confusing or lead to misunderstandings. Commenters also 
said that an ``assessment of internal control over financial 
reporting'' is distinguishable from the general requirements for 
internal controls in part 618 of our regulations.
    We agree that an assessment of internal control over financial 
reporting has a narrow focus when compared to the general requirements 
for internal controls in part 618 of our regulations; part 618 
addresses an institution's internal controls associated with enterprise 
risk management and corporate governance. We also agree that using the 
industry phrase ``internal control over financial reporting'' 
facilitates an application of uniform procedures in internal control 
assessments, minimizing potential confusion. The SEC, in adopting 
regulations implementing Sarbanes-Oxley, explained that ``internal 
control over financial reporting'' is the predominant term used by 
companies and auditors and best encompasses the

[[Page 76113]]

objectives of the Sarbanes-Oxley Act.'' \4\ Although System 
institutions are not covered by this provision of Sarbanes-Oxley, nor 
regulated by the SEC, the SEC rule is generally regarded as the 
industry standard in this area. Accordingly, we replaced the proposed 
references to ``internal control over financial reporting'' in the 
final rule.
---------------------------------------------------------------------------

    \4\ See 68 FR 36636 (June 18, 2003).
---------------------------------------------------------------------------

    Second, the commenters asked that the frequency of the assessment 
requirement be changed to an annual requirement, following industry 
standards and best practices. The commenters stated that current best 
practices only require such assessments on an annual basis, not 
quarterly as we proposed. One Farm Credit bank acknowledged that 
Sarbanes-Oxley requires a quarterly evaluation of internal controls, 
but does not require that the evaluation be disclosed or included in 
quarterly reports. Two commenters specifically asked that the quarterly 
update be part of the certification of financial accuracy. Three 
commenters stated that quarterly assessments create an undue burden and 
estimated the cost at $30,000 for each assessment, increasing the 
association's cost by $90,000 over that of publicly traded companies 
who only conduct an annual assessment.
    We agree that both a quarterly and annual assessment may be too 
burdensome given the cooperative nature of the System and have replaced 
the proposed quarterly requirement with a quarterly update on material 
changes in the internal control over financial reporting. Although most 
commenters suggested a quarterly update only at the System-wide level, 
we are keeping the requirement at the entity level for the same reasons 
that we are keeping the requirement for an annual assessment at the 
entity level. In the final rule, we require that an institution 
disclose any material change in the internal control over financial 
reporting occurring during the reporting period. We expect institutions 
to disclose changes that materially affected, or are reasonably likely 
to materially affect, the institution's internal control over financial 
reporting. We believe disclosing material changes in internal control 
over financial reporting is more efficient and less costly than 
requiring an institution to perform a quarterly assessment and responds 
to commenters concerns in this area. Such a requirement is also more 
consistent with industry best practices. We decline the suggestion that 
the internal control assessment be part of the certification. We 
consider the certification of financial accuracy to be a separate and 
extremely important process. Internal control updates, while they may 
impact the financial reporting, should not be blended into an accuracy 
certification. We expect internal control quarterly updates to be 
separate from the financial accuracy certification.
    Third, some commenters objected to the assessment being required at 
an entity level (i.e., the individual institution level), stating that 
a System-wide assessment would provide the most meaningful protection 
to shareholders and investors. Commenters stated a significant amount 
of time and expense would be required for each System institution to 
perform an assessment of internal control over financial reporting. One 
commenter stated that an entity-level assessment would harm, not help, 
shareholders, while another argued entity-level assessments were not 
practical, cost effective and not beneficial to shareholders. The 
commenters also disagreed with our statement in the preamble of the 
proposed rule that most institutions already plan to prepare the 
assessments, stating System institutions assess their internal control 
over financial reporting as part of an overall System-wide evaluation 
of internal controls over financial reporting. The commenters clarified 
that the System has conducted an annual assessment of internal control 
over financial reporting for the System-wide Report to Investors since 
the 2005 reporting year. The FCC specifically described the nature of 
the current System-wide assessment, explaining the scope of work is 
limited at the bank and association level to information that would be 
provided to the Funding Corporation to develop the System-wide report. 
The commenters also asserted that the scope of work for this System-
wide evaluation is at a much higher materiality level than an 
assessment made on an individual entity basis and, as a result, the 
amount of work necessary to perform an entity-level assessment is 
significantly greater than that currently being performed. One Farm 
Credit bank explained internal controls relevant to a System-wide 
assessment are different from controls needed at an entity level, 
making the two types of assessments fundamentally different. This 
commenter also asked us to weigh the benefit versus the cost, 
explaining the lack of traded stock at the entity level reduced the 
critical need for the assessment.
    We recognize additional work may be required for an entity-level 
assessment and may involve additional time and expense. We do not 
agree, however, that the benefit of an entity-level assessment is not 
as great as it may be for a System-wide assessment. We continue to 
believe that the requirement for management's assessment of internal 
control over financial reporting provides a valuable assurance to 
System shareholders, investors, and potential investors that internal 
control procedures are periodically reviewed. While System stock is not 
publicly traded, we do not believe this fact necessarily minimizes the 
interest, financial and otherwise, that System stockholders have in the 
operations of the institutions of which they are members, and 
particularly if those institutions allocate patronage to their 
shareholders. Management's responsibility for establishing and 
maintaining adequate internal control over financial reporting, and for 
assessing the effectiveness of that control, serves to enhance the 
quality of reporting by identifying potentially damaging practices 
within the institution. Furthermore, we believe the requirement to 
provide an assessment of internal control over financial reporting 
serves to enhance the safety and soundness of these institutions, 
reflects best practices and promotes comparability of reporting with 
other businesses in the financial services sector. While a requirement 
for an entity-level assessment may increase the costs, we believe these 
costs are justified, especially in the largest institutions, to 
maintain the quality of reporting in more complex operations and are 
mitigated somewhat by the current efforts of banks and associations to 
facilitate an assessment of internal control over financial reporting 
at the System level. We adopt as final the requirement that the Funding 
Corporation and the largest institutions provide an assessment of 
internal control over financial reporting in their annual reports.
    Fourth, commenters asked that we change the minimum requirement for 
the assessment to more closely reflect industry practices. We agree 
that we do not need to regulate, at the present time, the specific 
content of the assessment since there are sufficient guidelines for 
System institutions to follow. The final rule requires a report on 
management's assessment of internal control over financial reporting to 
be included in the annual report to shareholders without specifying the 
content of the internal control report. We believe removing this 
specificity gives institutions the flexibility to pattern the content 
of their management report, including any topics addressed or 
recitations made by

[[Page 76114]]

management, after industry standards and best practices. For example, 
institutions may wish to consider SEC rules for assessments of internal 
control over financial reporting in publicly traded companies. Publicly 
traded companies state in their assessment management's responsibility 
for establishing and maintaining adequate internal control over 
financial reporting for the institution; the framework used by 
management to evaluate the effectiveness of the internal control over 
financial reporting; and whether or not the internal control over 
financial reporting is effective. These companies also discuss any 
material weakness in internal control over financial reporting and may 
not conclude that the internal control over financial reporting is 
effective if one or more material weakness exists.
    While we have removed some of the proposed content requirements of 
the internal control assessment, the final rule maintains the 
requirement that the assessment be reported to the institution's board. 
We also remind institutions that each audit committee has oversight 
responsibility for the internal control over financial reports under 
existing Sec.  620.30(d)(3) and to involve them accordingly in the 
assessment reporting process.
    Finally, the commenters asked that, should we retain the 
requirement for an entity-level assessment, we re-define a large 
institution as one with over $1 billion in assets and that they be the 
only institutions required to conduct the assessment of internal 
control over financial reporting. The commenters stated that an entity-
level assessment by institutions of this size conforms more closely to 
current best practices and such a requirement is consistent with other 
regulators. One Farm Credit bank specifically commented that the FDIC 
uses $1 billion for commercial banks and that we offered no reason for 
proposing a lower level.
    We continue to consider a large institution as one with $500 
million or more in total assets, but agree that a higher threshold for 
identifying institutions that must conduct the assessment of internal 
control over financial reporting is appropriate. We have changed the 
requirement to only require the largest institutions to conduct the 
internal control assessment, which we define as those institutions with 
total assets over $1 billion (as of the end of the previous fiscal 
year). We were persuaded by the commenters' arguments that smaller 
institutions may have more difficulty in evaluating their internal 
control over financial reporting because they have more limited 
resources and may not have as sophisticated a system of internal 
control over financial reporting as the largest institutions. We 
believe a $1 billion threshold level appropriately balances the 
additional effort, resources, and costs against the benefits derived by 
the largest institutions, who tend to have more complex operations. We 
are also mindful that the $1 billion threshold level encompasses 
approximately 70 percent of the System assets and includes institutions 
in each Farm Credit district.
    While mandatory compliance with the provision for an annual 
management assessment of internal control over financial reporting is 
not required for those institutions with total assets of $1 billion or 
less, we encourage those institutions to voluntarily assess their 
internal control over financial reporting as we believe it is 
representative of industry best practices. We also encourage System 
institutions to consider, where appropriate, enhanced disclosures to 
shareholders that address the work performed by an institution in 
evaluating its internal controls to facilitate the Funding Corporation 
management's assessment of internal control over financial reporting 
and related external auditor attestation regarding the System's 
assessment.
3. Funding Corporation Assessment of Internal Control Over Financial 
Reporting and Auditor Attestation
[Sec.  630.5(d)]
    We proposed requirements for the System-wide Report to Investors 
that are similar to those for banks and associations pertaining to 
management assessment of the internal control over financial reporting 
in the annual and quarterly reports. Commenters reiterated their 
earlier remarks regarding the terminology, frequency, and detail of the 
internal control assessment. For reasons discussed in Section III.B.2 
of this preamble, we make the corresponding changes to Sec.  630.5 for 
System-wide reports.
    We proposed an additional requirement at the System-wide level for 
an external auditor attestation on management's assessment of the 
internal control over financial reporting. We received comments from 
the FCC, two banks and eight associations concerning this provision. 
The commenters, while not objecting to the external auditor 
attestation, stated that the external auditor might not be able to make 
the statement required by the proposed regulation. They explained that 
accounting firms must comply with Auditing Standard No. 2, ``An Audit 
of Internal Control Over Financial Reporting Performed in Conjunction 
with an Audit of Financial Statements,'' issued by the Public Company 
Accounting Oversight Board (PCAOB) for clients registered with the 
SEC.\5\ Commenters pointed out that the differences between our 
proposed rule and the PCAOB standard might cause a conflict for the 
external auditor and requested we reconcile our rule to the PCAOB 
standard.
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    \5\ See PCAOB Auditing Standard No. 2, ``An Audit of Internal 
Control Over Financial Reporting Performed in Conjunction with an 
Audit of Financial Statements.'' Among other things, Auditing 
Standard No. 2 establishes specific requirements for the elements 
that must be included in the auditor's report on management's 
assessment of internal control over financial reporting.
---------------------------------------------------------------------------

    We are removing specific statements that an auditor must make from 
the final rule provision on an auditor attestation. We agree that 
describing the content of the auditor's report on management's 
assessment of internal control over financial reporting may have 
potentially created a conflict between the rule and the relevant PCAOB 
standard. We believe that the external auditor's attestation report 
should conform to applicable industry standards. Accordingly, we have 
adopted as final the requirement for an attestation report in Sec.  
630.5(d)(2) in a manner that does not conflict with the PCAOB standard 
by removing any specificity as to the content of the report.

C. Timing of Periodic Reports to Shareholders and Investors

1. Annual and Quarterly Report Filing Deadlines
[Sec. Sec.  620.4(a), 620.10(a) and 630.3(a)]
    We proposed reducing the quarterly reporting deadline to 40 
calendar days and reducing the annual reporting deadline to 75 calendar 
days. We received comments from the FCC, two banks and eight 
associations opposing the reduction of filing deadlines for quarterly 
or annual reports or both. Most commenters asked that the timeframes 
for quarterly reports remain at 45 days. Three commenters recommended 
that the reporting timeframe for quarterly reports be in the range of 
75 days, the same as annual reports. Some commenters stated that 40 
days does not provide adequate time to prepare the quarterly reports 
and address any unforeseen contingencies, such as litigation matters, 
and subsequent events. A Farm Credit bank commented that while 
technology has improved the ability to process and disseminate reports, 
time is still needed to ensure that information is accurate

[[Page 76115]]

and timely. The bank also asked us to consider the variations in the 
sizes and complexities of the System institutions while remarking that 
though FCA filing deadlines appear longer than those of the SEC, they 
aren't. The SEC makes a distinction between accelerated filers and 
others, providing different deadlines due to market needs. The 
commenters asked us to balance the burden against the shareholder need 
before requiring the same deadlines as the SEC. We considered the same 
information presented by this commenter when proposing abbreviated 
deadlines and point out that the proposed deadlines are not the same as 
the SEC. The SEC gives 60 days to file annual reports and we proposed 
75 days. While the commenter did not object to our annual report filing 
timeframe, they did object to the timeframe for quarterly reports. One 
Farm Credit bank specifically stated that the additional time is more 
critical for quarterly reports than annual reports and therefore did 
not object to the proposed reduction in annual report filing deadlines, 
only to quarterly report deadlines.
    Commenters also stated it would be difficult for the Funding 
Corporation to meet the 40-day deadline in view of the information that 
must be provided by the associations to the banks and the banks to the 
Funding Corporation. The commenters explained that requiring System-
wide information statements to be published within 40 days after the 
end of the quarter is an unduly tight timeframe given the need to 
combine approximately 100 entities. Commenters stated that, since it 
would only take one institution to cause the Funding Corporation to not 
make the deadline, they believe a more appropriate timeframe for 
quarterly reports is 45 days. They also remarked on the responsibility 
to provide information to the Funding Corporation while completing 
their own quarterly reports.
    We continue to believe the System's ability to capture, process, 
and disseminate financial statement information has improved 
significantly with the advancement of technology. We also do not 
believe increasing the quarterly deadline to 75 days is a reasonable 
suggestion, especially as the existing rule provides a maximum of 45 
days for bank and association quarterly reports and 60 days for the 
Funding Corporation. System institutions have enhanced technological 
resources that improve their ability to process financial data. 
Therefore, a longer filing deadline at the entity level cannot be 
justified, especially as industry practices call for faster, ``real 
time'' disclosure to shareholders and investors. However, we understand 
the importance of having adequate time to prepare financial information 
that is accurate and meaningful, and the complications of having 
information reported from the associations to the banks, and by the 
banks to the Funding Corporation. Accordingly, we increased the 
deadline for the issuance of the System-wide quarterly report to 
investors to 45 calendar days, while keeping the quarterly reporting 
due date for banks and associations at 40 calendar days. We believe 
this change will facilitate furnishing information to the Funding 
Corporation without unduly delaying bank and association quarterly 
reports. However we are not increasing the proposed filing time for 
annual reports. We believe the 75-day filing requirement for bank, 
association, and System-wide annual reports is well within the 
reporting capabilities of these institutions and most commenters did 
not object to this requirement. The filing time for annual reports in 
both our existing rule and in this final rule is 30 days longer than 
the time provided for filing quarterly reports. While we appreciate 
that extra time may be desirable for compilation of the System-wide 
annual report to investors, we believe sufficient time is already 
incorporated into the overall annual reporting deadline so that a 
separate, longer filing deadline for the annual System-wide report is 
unnecessary. Accordingly, we adopt this proposed provision as final.
2. System-wide Interim Reports
[new Sec.  630.3(a)(3)]
    We proposed that the Funding Corporation issue interim reports to 
disclose significant events or material changes in System-wide 
operations occurring after publication of a quarterly or annual System-
wide report. We received no comments on this proposed requirement and 
adopt this provision as final.

D. Auditor Independence

[Sec. Sec.  621.4(b), new 621.30, new 621.31, and new 621.32]
    We proposed a new subpart in part 621 to facilitate external 
auditor independence within the System. We received limited comments on 
certain aspects of this subpart and discuss them below.
1. Prohibited Non-Audit Services
[new Sec.  621.31(a)]
    We proposed adding a new Sec.  621.31 prohibiting external auditors 
of System institutions from providing certain non-audit services. We 
also proposed, as a conforming change, removing the requirement that 
banks and associations include a provision in their audit engagement 
letters authorizing the external auditors to respond to questions from 
funding banks and the Funding Corporation. We received one comment on 
this section of our proposed rule. A Farm Credit bank commented that it 
did not object to the list of non-audit services, but asked that we 
clarify the prohibition at Sec.  621.31(a)(8) against advocating an 
institution's interests in litigation, regulatory or administrative 
investigations and proceedings. The commenter remarked that SEC 
regulations on auditor independence place advocating an audit client's 
interests in litigation, or regulatory or administrative investigations 
or proceedings, under the general heading of ``expert services'' and is 
not a category unto itself. The commenter also explained that the SEC's 
commentary relative to this prohibition states that an accountant would 
not be precluded from performing internal investigations or fact 
finding at the request of the client's audit committee or legal 
counsel. The commenter also said that, under SEC rules, an auditor's 
work product may be used by the client and auditors may provide factual 
accounts or testimony about the work performed. This commenter also 
stated that our rule did not identify the basic principles of auditor 
independence. We note that auditor independence principles are 
contained in our proposed definition of an independent auditor at Sec.  
619.9270.
    We have clarified the list of non-audit services to more clearly 
explain that the external auditor may not advocate an institution's 
interest in any area that is not the subject of audit work. The 
external auditor may not provide an expert opinion or other expert 
service for activities of the institution that fall outside the 
auditor's work reviewing financial statements. This prohibition does 
not preclude the external auditor from performing internal 
investigations or fact finding on items covered by an audit when 
requested by the institution's audit committee or legal counsel. We 
clarify that our rule follows the SEC regulations implementing section 
201 of Sarbanes-Oxley, which explain that non-audit services may not 
include an accountant providing expert opinions or other services for 
the purpose of advocating an audit client's interests in litigation, 
regulatory or administrative investigations and proceedings. However, 
auditors may perform internal investigations or fact

[[Page 76116]]

findings that results in a report to the audit client. We clarify that, 
as an extension of their audit work, external auditors are allowed to 
use their work product and provide factual accounts or testimony about 
the audit work performed. We adopt all other proposed provisions of 
Sec.  621.31 as final.
2. Permitted Non-Audit Services
[Sec. Sec.  620.30, new 621.31 and 630.6]
    We proposed requiring System institutions to obtain its audit 
committee's approval prior to contracting for permissible non-audit 
services from the external auditor. The proposed rule also amended the 
authorities of the audit committees to specifically include approval of 
non-audit services. One Farm Credit bank commented that the proposed 
regulation contemplates that, under certain circumstances, an audit 
committee may approve a non-audit service that is on the prohibited 
list but, does not provide any guidance on what circumstances might 
make a non-audit service acceptable. The commenter suggested including 
in our rule the three basic principles identified in SEC's regulations, 
on which the prohibited list of non-audit services is based: (1) An 
auditor cannot function in the role of management, (2) an auditor 
cannot audit his or her own work, and (3) an auditor cannot serve in an 
advocacy role for the audit client.
    The commenter appears to have misinterpreted the requirements of 
proposed Sec.  621.31(b). The proposed regulation does not allow an 
audit committee to approve non-audit services that are on the 
prohibited list. We have clarified the rule text to reflect that the 
audit committee may only approve non-audit services not specifically 
listed as prohibited in Sec.  621.31(a). Further, the three basic 
principles of auditor independence identified by the commenter are 
already captured in new Sec.  619.9270, defining independent external 
auditors. We received no other comments on Sec.  621.31(b) and adopt it 
as final.
3. Auditor Conflicts of Interest and Rotation
[new Sec.  621.32]
a. ``Cooling Off'' Period [new Sec.  621.32(a)]
    We received no comments on the proposed prohibition that a System 
institution may not engage the audit services of a qualified public 
accountant if the accountant, accounting partner (or concurring 
partner), or lead audit team member was an employee, officer or 
director of the System institution in the 12 months prior to 
contracting for audit services. Nor did we receive comments on the 
proposed prohibition that an institution may not make employment offers 
to an external auditor, accounting firm partner, concurring partner, or 
lead audit team member during the audit, or within 1 year of its 
conclusion. We adopt these proposed provisions as final.
b. Auditor Rotation [new Sec.  621.32(b)]
    We proposed prohibiting a System institution from engaging for 5 
years the same lead and reviewing audit partner after 5 consecutive 
years of audit services to that institution. The commenters agreed that 
the lead (or concurring) audit partners for the System-wide report 
should be rotated after 5 years, with a 5-year timeout period, but 
asked that external auditors for banks and associations have a 7-year 
rotation. We received only one comment on the ``time out'' period. This 
commenter said the time out period of the lead (or concurring) audit 
partners for the banks and associations should be 2 years. The 
commenters explained that a 7-year rotation timeframe at the bank and 
association level is more consistent with the requirements for publicly 
traded companies.
    The commenters contend a 7-year engagement at the bank and 
association level is justified because a partner must invest 
considerable time to develop an understanding of the System and 
requiring this learning process every 5 years would be inefficient. One 
Farm Credit bank commented that the System's relationship with the 
external auditor is managed at both a System-wide level and an 
individual institution level. The commenter stated this ``two-tiered'' 
relationship warrants a two-tiered rotation schedule where the lead and 
concurring auditor partners engaged for the System-wide report would 
have a 5-year rotation, but the lead and concurring auditor partners 
engaged by each bank and association would have a 7-year rotation and 
2-year time out, similar to the SEC's rules for corporations and their 
subsidiaries. This commenter, and one other association commenter, 
explained that the SEC treatment of auditor rotation for subsidiaries, 
which may allow for a longer rotation period in certain circumstances, 
is more appropriate for the System.
    After careful review, we concluded that the SEC's treatment of 
auditor rotation for subsidiaries is not an appropriate approach given 
the cooperative structure of the System. Unlike a subsidiary structure, 
associations are the borrowers, members, and shareholders of the bank, 
consistent with the cooperative structure of the System. We also 
concluded that auditor engagements are appropriately handled using a 
uniform approach that recognizes the interdependency of System 
institutions, but preserves the independent authority of each 
institution to determine the engagement of its own external auditor. 
Basing an auditor rotation on a two-tier method modeled after the SEC's 
approach might be in conflict with this authority because a two-tiered 
rotation is designed to reflect a traditional subsidiary structure 
rather than the cooperative structure of the Farm Credit System.
    We also do not agree that a longer engagement period at the bank 
and association level is necessary. A 5-year audit partner rotation and 
5-year cooling off period for the lead and concurring audit partners is 
consistent with industry best practices and section 203 of Sarbanes-
Oxley. While commenters are correct that the SEC allows for a 7-year 
audit partner engagement, this time period is restricted to other 
significant members of the audit team who are not the lead, concurring 
or reviewing partner. The SEC rule applies a 7-year rotation schedule 
to those partners who are not the lead, concurring, or reviewing 
partner but who are responsible for decisionmaking on significant 
auditing, accounting, and reporting matters affecting financial 
statements or who maintain regular contact with the audit client 
management and audit committee. The SEC imposes a 5-year ``time-out'' 
for the lead and concurring accounting partners and a 2-year ``time-
out'' for other rotated partners before returning to a client.
    While we used industry practice, as well as the SEC rule and 
Sarbanes-Oxley, as guides we also considered the time a lead partner 
must invest to acquire an understanding of the System. That 
consideration resulted in our limiting the rotation from the audited 
institution only, instead of requiring a rotation out of the entire 
System. Our final rule does not prohibit or otherwise limit lead and 
concurring partners from moving from one System institution to another, 
whether it is a bank or association. We adopt this proposed provision 
as final.
    We make a technical change to correctly identify the location of 
the audit independence provisions as subpart E, not subpart F as stated 
in the proposed rule.

[[Page 76117]]

E. Contents of Periodic Reports

[Sec. Sec.  620.5 and 630.20]
1. Description of Property
[Sec.  620.5(b)]
    We received no comments on our proposal to remove the requirement 
at Sec.  620.5(b) that Farm Credit banks and associations describe, in 
their annual reports, the terms and condition of agreements involving 
institution property subject to major encumbrances. We adopt this 
proposed provision as final.
2. Legal Proceedings and Enforcement
[Sec.  620.5(c)(1)]
    We received no comments on our proposal to remove that portion of 
Sec.  620.5(c)(1) requiring banks and associations to provide filing 
information on court proceedings, including a description of factual 
allegations, in annual reports. We adopt this proposed provision as 
final.
3. Selected Financial Data and Management Discussion and Analysis 
(MD&A)
[Sec. Sec.  620.5(f) and 620.5(g)]
    We received no comments on our proposed clarification in Sec.  
620.5(f)(1), (g)(l)(iii)(A) and (g)(l)(iv)(E) that disclosure of 
selected financial data, loan purchases and sales involving the Federal 
Agricultural Mortgage Corporation, and risk exposure need only be 
reported if they are material. Nor did we receive any comments on 
removing the reference in Sec.  620.5(g)(1)(iv)(E) to section 8.7 of 
the Act or on revising the requirement for a discussion of the adequacy 
of loan loss allowances in Sec.  620.5(g)(l)(iv)(B). We adopt these 
proposed provisions as final.
4. Fees to Qualified Public Accountants
[Sec.  620.5(l)(2)]
    We received no comments on requiring System institutions to 
disclose the fees paid to their qualified public accountants. We adopt 
this proposed provision as final.
5. Selected Financial Data
[Sec.  630.20(f)]
    We received no comments on our proposed clarification to Sec.  
630.20(f) that this section requires only material combined financial 
data for 5 years, not all financial data. We adopt this proposed 
provision as final.
6. Reporting on Young, Beginning and Small Farmers
[Sec. Sec.  614.4165(c), 620.5(n) and 630.20(p)]
    In the proposed rule we addressed comments on our existing 
regulations received before developing the proposed and final rule. 
These comments included a request to reduce regulatory burden by 
restricting the young, beginning and small farmers (YBS) reporting 
requirement to association annual reports and delete the specificity 
required by Sec.  614.4165(c). We declined in our proposed rule to make 
these changes. Commenters renewed this request in response to our 
proposed rule.
    We are making no changes to Sec. Sec.  620.5(n) and 630.20(p), 
which require annual reports to shareholders and investors include 
information on YBS lending activities. As we discussed in the proposed 
rule, section 4.19 of the Act requires Farm Credit banks to submit an 
annual report to FCA summarizing the YBS operations and achievements of 
their affiliated associations. We continue to believe reporting to 
shareholders and the public on the YBS mission underscores the 
importance of the System's public purpose mission and the YBS mission, 
resulting in greater transparency to the public on the System's 
accomplishments in this area.
7. Financial Assistance Corporation (FAC)
[Sec. Sec.  630.2, 630.4, and 630.20(b)]
    We proposed removing references to the FAC from the definition of 
``disclosure entity'' in Sec.  630.2(c) and removing Sec. Sec.  
630.4(b) and 630.20(b)(3) outlining the responsibilities of the FAC. We 
received comments from the FCC and five associations requesting that we 
also remove Sec.  630.20(a)(3) and (m)(2)(iii) where the FAC is 
mentioned. Commenters stated that these sections serve no useful 
purpose since there is no activity at the FAC and the FAC will be 
dissolved no later than June 2007. The FAC has discharged all of its 
responsibilities with respect to the repayment of FAC obligations and 
has no reportable financial data as of September 30, 2005. There is no 
existing Sec.  630.20(a)(3) as referenced by the commenters, but we 
presume they meant Sec.  630.20(b)(3). We proposed removing this 
reference and take this comment as agreement with our proposal. 
However, we did not propose removing Sec.  630.20(m)(2)(iii) but agree 
with commenters that the reference to the FAC should be removed from 
Sec.  630.20(m)(2)(iii) for the same reasons we used when proposing 
removal of other FAC references in our rule. Accordingly, we remove 
this provision in the final rule and consider this additional change to 
be a conforming technical correction.

F. Other Issues

1. Regulatory Accounting Practices
[Part 624]
    We received no comments on removing part 624, which authorized 
System institutions to use Regulatory Accounting Practices to defer 
certain interest costs and portions of the provision for loan losses. 
We adopt this proposed provision as final.
2. Report to Investor Cross Reference
[Sec. Sec.  630.20(h), 630.20(i), and 630.4(a)(4)]
    We proposed changing the cross-reference in Sec.  630.20(h)(1) and 
(i) on how certain information would be available from Sec.  630.3(f) 
to Sec.  630.4(a)(5) and (a)(6). One commenter was unclear as to the 
basis for this change while another questioned the accuracy of the 
proposed cite. The existing rule contains an incorrect cross-reference 
that came about from prior revisions to the rule. We are correcting the 
reference at Sec.  630.20(i) to reflect the correct cite of Sec.  
630.3(g), rather than the proposed cite of Sec.  630.4(a)(5) and 
(a)(6). We are removing the cross reference from Sec.  630.20(h)(1) 
entirely as it is not required.
3. Distribution of Annual Report to Shareholder
[Sec. Sec.  620.1(q) and 620.4(a)]
a. Method of Distribution
    We received comments from the FCC, a Farm Credit bank and six 
associations asking that the requirement in Sec.  620.4(a) for each 
System institution to provide its shareholders an annual report be 
altered. In an effort to reduce regulatory burden and make annual 
report distribution more cost effective, the commenters asked that we 
allow annual reports to be issued in other than a printed ``hard 
copy.'' Commenters also suggested that shareholders be allowed to ``opt 
out'' of automatically receiving a printed copy of the annual report. 
For those shareholders who elected not to receive a printed copy of the 
annual report, a copy would be available on the institution's Web site.
    We proposed no changes to these sections. Because the comments are 
outside the scope of the proposed rule, we are not making any changes 
in response to the comments. We point out that, under our current 
regulations on E-Commerce, shareholders and their institutions already 
have a choice to

[[Page 76118]]

receive electronic copies of reports. Our rules provide that if all 
participants agree, electronic communication may be used. Therefore, if 
an individual shareholder and his or her institution agree, the 
shareholder may be given electronic reports. We caution that an 
institution, under our current E-Commerce rules, may not require a 
shareholder to use electronic commerce. This issue was also addressed 
in our July 26, 2002, Informational Memorandum entitled ``Specific 
Guidance on Electronic Disclosures and Notices'' in which we stated 
that System institutions may do business electronically if all parties 
agree. Comments received as part of any future rulemaking that 
addresses this area will be considered at that time.
b. Definition of ``Shareholder''
    We received comments from the FCC, a Farm Credit bank and six 
associations asking that we change our definition of ``shareholders'' 
contained in Sec.  620.1(q). We define shareholder in Sec.  620.1(q) as 
all equity holders in an institution. Commenters asked us to exclude 
Non-qualified Surplus Allocated--Retained shareholders from the 
definition, which would remove those equity holders from those required 
to receive annual reports. Commenters also asked to exclude from this 
group shareholders who have paid-off loans and retired stock. Because 
there are no plans to redeem this surplus, commenters argue that this 
group of shareholders has no vested interest in the institution and 
therefore no need for the annual report. The commenters also asserted 
that significant cost savings would result from only providing reports 
to ``current common and preferred'' shareholders.
    We proposed no changes to this section. Because the comments are 
outside the scope of this rulemaking, we are not making any changes in 
response to the comments. We will, however, address any such future 
comments when applicable to other rulemaking.
4. Disclosures in the Quarterly and Annual Report to Shareholders
[Sec. Sec.  620.5 and 620.11]
    We received comments from the FCC and six other commenters asking 
that we remove or revise certain disclosures made in the annual report 
to shareholders. Specifically, the commenters asked that we remove the 
requirements in Sec.  620.5(i) to disclose the number of days served by 
a director and travel expense reimbursements in annual reports. 
Commenters also asked that we replace requirements in Sec.  620.11(b) 
to account for business combinations with ones that follow GAAP, 
arguing that pooling of interests is no longer permitted under GAAP. 
They also asked that we change the language of Sec.  620.11(b)(6) to 
clarify whose statement, the accountant or management, is to be 
included as an exhibit. We proposed no changes to these sections. 
Because the comments are outside the scope of this rulemaking, we are 
not making any changes in response to them. We will, however, address 
any such future comments when applicable to other rulemaking.
5. Accounting for Loan Losses
[Sec.  621.5(a)]
    We received comments from the FCC and six other commenters asking 
that we revise the requirement in Sec.  621.5(a) on the allowance for 
loan losses. The commenters asked us to revise the regulation to 
specifically require that the institutions' allowance for loan losses 
shall be maintained in accordance with GAAP. We proposed no changes to 
this section. Because the comments are outside the scope of this 
rulemaking, we are not making any changes in response to the comments. 
We also direct the commenters to existing Sec.  621.3 instructing 
institutions to follow GAAP. This is further elaborated on in our April 
26, 2004 Bookletter, ``Adequacy of Farm Credit System Institutions'' 
Allowance for Loan Losses and Risk Funds'' (BL-049), where we explain 
that Sec.  621.5(a) provides broad guidance in this area. Throughout 
BL-049, we reinforce the position that a System institution's allowance 
for loan losses should be maintained in accordance with GAAP.

V. Regulatory Flexibility Act

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

List of Subjects

12 CFR Part 611

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 619

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 620

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

12 CFR Part 621

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

12 CFR Part 624

    Accounting, Agriculture, Banks, banking, Rural areas.

12 CFR Part 627

    Agriculture, Banks, banking, Claims, Rural areas.

12 CFR Part 630

    Accounting, Agriculture, Banks, banking, Organization and functions 
(Government agencies), Reporting and recordkeeping requirements, Rural 
areas.

0
For the reasons stated in the preamble, parts 611, 619, 620, 621, 624, 
627 and 630 of chapter VI, title 12 of the Code of Federal Regulations 
are amended as follows:

PART 611--ORGANIZATION

0
1. The authority citation for part 611 continues 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 Pub. L. 100-233, 101 Stat. 1568, 1638; 
secs. 409 and 414 of Pub. L. 100-399, 102 Stat. 989, 1003, and 1004.

Subpart P--Termination of System Institution Status


Sec.  611.1250  [Amended]

0
2. Amend paragraphs (a)(3) and (b)(4) of Sec.  611.1250 by removing the 
words ``, as defined in Sec.  621.2(i) of this chapter'' from the end 
of the second sentence.


Sec.  611.1255  [Amended]

0
3. Amend paragraphs (a)(3) and (b)(4) of Sec.  611.1255 by removing the 
words ``, as defined in Sec.  621.2(i) of this chapter'' from the end 
of the second sentence.

PART 619--DEFINITIONS

0
4. The authority citation for part 619 is revised to read as follows:

    Authority: Secs. 1.4, 1.7, 2.1, 2.4, 2.11, 3.2, 3.21, 4.9, 5.9, 
5.12, 5.17, 5.18, 5.19, 6.22, 7.0,

[[Page 76119]]

7.1, 7.6, 7.8, 7.12 of the Farm Credit Act (12 U.S.C. 2011, 2015, 
2072, 2075, 2092, 2123, 2142, 2160, 2243, 2244, 2252, 2253, 2254, 
2278b-2, 2279a, 2279a-1, 2279b, 2279b-2, 2279f).


0
5. Amend part 619 by adding a new Sec.  619.9270 to read as follows:


Sec.  619.9270  Qualified Public Accountant or External Auditor.

    A qualified public accountant or external auditor is a person who:
    (a) Holds a valid and unrevoked certificate, issued to such person 
by a legally constituted State authority, identifying such person as a 
certified public accountant;
    (b) Is licensed to practice as a public accountant by an 
appropriate regulatory authority of a State or other political 
subdivision of the United States;
    (c) Is in good standing as a certified and licensed public 
accountant under the laws of the State or other political subdivision 
of the United States in which is located the home office or corporate 
office of the institution that is to be audited;
    (d) Is not suspended or otherwise barred from practice as an 
accountant or public accountant before the Securities and Exchange 
Commission (SEC) or any other appropriate Federal or State regulatory 
authority; and
    (e) Is independent of the institution that is to be audited. For 
the purposes of this definition the term ``independent'' has the same 
meaning as under the rules and interpretations of the American 
Institute of Certified Public Accountants (AICPA). At a minimum, an 
accountant hired to audit a System institution is not independent if he 
or she functions in the role of management, audits his or her own work, 
or serves in an advocacy role for the institution.

PART 620--DISCLOSURE TO SHAREHOLDERS

0
6. The authority citation for part 620 is revised to read as follows:

    Authority: Secs. 4.19, 5.9, 5.17, 5.19, 8.11 of the Farm Credit 
Act (12 U.S.C. 2207, 2243, 2252, 2254, 2279aa-11); sec. 424 of Pub. 
L. 100-233, 100 Stat. 1568, 1656.

Subpart A--General

0
7. Amend Sec.  620.2 as follows:
0
a. Remove paragraphs (b) and (c);
0
b. Add new paragraph (b);
0
c. Redesignate paragraphs (d) through (j) as paragraphs (c) through 
(i), consecutively; and
0
d. Revise paragraphs (a) and newly redesignated paragraph (c).


Sec.  620.2  Preparing and filing the reports.

    For the purposes of this part, the following shall apply:
    (a) Copies of each report required by this part, including 
financial statements and related schedules, exhibits, and all other 
papers and documents that are a part of the report, must be sent to the 
Farm Credit Administration according to our instructions. Submissions 
must comply with the requirements of Sec.  620.3 of this part. The Farm 
Credit Administration must receive the report within the period 
prescribed under applicable subpart sections.
    (b) The reports must be available for public inspection at the 
issuing institution and the Farm Credit Administration office with 
which the reports are filed. Farm Credit bank reports must also be 
available for public inspection at each related association's 
office(s).
    (c) The reports sent to shareholders must comply with the 
requirements of Sec.  620.3 of this part. Shareholders must agree to 
electronic disclosures of reports required by this part.
* * * * *

0
8. Revise Sec.  620.3 to read as follows:


Sec.  620.3  Accuracy of reports and assessment of internal control 
over financial reporting.

    (a) Prohibition against incomplete, inaccurate, or misleading 
disclosures. No institution and no employee, officer, director, or 
nominee for director of the institution shall make any disclosure to 
shareholders or the general public concerning any matter required to be 
disclosed by this part that is incomplete, inaccurate, or misleading. 
When any such person makes disclosure that, in the judgment of the Farm 
Credit Administration, is incomplete, inaccurate, or misleading, 
whether or not such disclosure is made in disclosure statements 
required by this part, such institution or person shall make such 
additional or corrective disclosure as is necessary to provide 
shareholders and the general public with a full and fair disclosure.
    (b) Signatures. The name and position title of each person signing 
the report must be printed beneath his or her signature. If any person 
required to sign the report has not signed the report, the name and 
position title of the individual and the reason(s) such individual is 
unable or refuses to sign must be disclosed in the report. All reports 
must be dated and signed on behalf of the institution by:
    (1) The chief executive officer (CEO);
    (2) The chief financial officer (CFO), or if the institution has no 
CFO, the officer responsible for preparing financial reports; and
    (3) A board member formally designated by action of the board to 
certify reports of condition and performance on behalf of individual 
board members.
    (c) Certification of financial accuracy. The report must be 
certified as financially accurate by the signatories to the report. If 
any signatory is unable to, or refuses to, certify the report, the 
institution must disclose the individual's name and position title and 
the reason(s) such individual is unable or refuses to certify the 
report. At a minimum, the certification must include a statement that:
    (1) The signatories have reviewed the report,
    (2) The report has been prepared in accordance with all applicable 
statutory or regulatory requirements, and
    (3) The information is true, accurate, and complete to the best of 
signatories' knowledge and belief.
    (d) Management assessment of internal control over financial 
reporting. Annual reports of those institutions with over $1 billion in 
total assets (as of the end of the prior fiscal year) must include a 
report by management assessing the effectiveness of the institution's 
internal control over financial reporting. The assessment must be 
conducted during the reporting period and be reported to the 
institution's board of directors. Quarterly and annual reports for 
those institutions with over $1 billion in total assets (as of the end 
of the prior fiscal year) must disclose any material change(s) in the 
internal control over financial reporting occurring during the 
reporting period.

Subpart B--Annual Report to Shareholders


Sec.  620.4  [Amended]

0
9. Amend Sec.  620.4(a) by removing the word ``shall'' and adding in 
its place the word ``must''; and by removing the reference ``90'' and 
adding in its place the reference ``75 calendar''.

0
10. Amend Sec.  620.5 as follows:
0
a. Remove the word ``shall'' and add in its place, the word ``must'' in 
the introductory text to Sec.  620.5 and in paragraph (a) introductory 
text;

0
b. Remove the last sentence in paragraphs (b) and (c)(1);
0
c. Add the words ``, if material'' at the end of paragraph (f) 
introductory text;
0
d. Add the word ``material'' before the word ``participation'' in 
paragraph (g)(1)(iii)(A);
0
e. Remove the words ``to absorb the risk inherent in the institution's 
loan

[[Page 76120]]

portfolio'' at the end of paragraph (g)(1)(iv)(B);
0
f. Add the word ``material'' before the word ``obligations'' and before 
the word ``contributions'' in the first sentence of paragraph 
(g)(1)(iv)(E) and remove the words ``pursuant to section 8.7 of the 
Act'' at the end of the first sentence;
0
g. Revise paragraph (l); and
0
h. Remove the words ``, as defined in Sec.  621.2(i) of this chapter,'' 
in paragraph (m)(1); remove existing paragraph (m)(2) and redesignate 
paragraph (m)(3) as new paragraph (m)(2).


Sec.  620.5  Contents of the annual report to shareholders.

* * * * *
    (l) Relationship with qualified public accountant.
    (1) If a change or changes in qualified public accountants have 
taken place since the last annual report to shareholders or if a 
disagreement with a qualified public accountant has occurred that the 
institution would be required to report to the Farm Credit 
Administration under part 621 of this chapter, the information required 
by Sec.  621.4(c) and (d) of this chapter must be disclosed.
    (2) Disclose the total fees, by the category of services provided, 
paid during the reporting period to the qualified public accountant. At 
a minimum, identify fees paid for audit services, tax services, and 
non-audit related services. The types of non-audit services must be 
identified and indicate audit committee approval of the services.
* * * * *

Subpart C--Quarterly Report


Sec.  620.10  [Amended]

0
11. Amend Sec.  620.10(a) by removing the word ``shall'' and adding in 
its place the word ``must'' and by removing the reference ``45'' and 
adding in its place the reference ``40 calendar''.

Subpart F--Bank and Association Audit and Compensation Committees

0
12. Amend Sec.  620.30 by revising paragraph (d)(2) to read as follows:


Sec.  620.30  Audit committees.

    (d) * * *
    (2) External auditors. The external auditor must report directly to 
the audit committee. Each audit committee must:
    (i) Determine the appointment, compensation, and retention of 
external auditors issuing audit reports of the institution;
    (ii) Review the external auditor's work;
    (iii) Give prior approval for any non-audit services performed by 
the external auditor, except the audit committee may not approve those 
non-audit services specifically prohibited by FCA regulation; and
    (iv) Comply with the auditor independence provisions of part 621 of 
this chapter.
* * * * *

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

0
13. The authority citation for part 621 is revised to read as follows:

    Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C. 
2252, 2279aa-11); sec. 514 of Pub. L. 102-552.

Subpart A--Purpose and Definitions


Sec.  621.2  [Amended]

0
14. Amend Sec.  621.2 by removing paragraph (i) and redesignating 
existing paragraph (j) as newly designated paragraph (i).

Subpart B--General Rules

0
15. Amend Sec.  621.4 by revising paragraph (b) to read as follows:


Sec.  621.4  Audit by qualified public accountant.

* * * * *
    (b) The qualified public accountant's opinion of each institution's 
financial statements must be included as a part of each annual report 
to shareholders. The accountant must comply with the auditor 
independence provisions of subpart E of this part.
* * * * *

0
16. Add a new subpart E, consisting of Sec. Sec.  621.30, 621.31, and 
621.32, to read as follows:
Subpart E--Auditor Independence
Sec.
621.30 General.
621.31 Non-audit services.
621.32 Conflicts of interest and rotation.

Subpart E--Auditor Independence


Sec.  621.30  General.

    Each Farm Credit institution must ensure the independence of all 
qualified public accountants conducting the institution's audit by 
establishing and maintaining policies and procedures governing the 
engagement of external auditors. The policies and procedures must 
incorporate the provisions of this subpart and Sec.  612.2260 of this 
chapter.


Sec.  621.31  Non-audit services.

    Non-audit services are any professional services provided by a 
qualified public accountant during the period of an audit engagement 
which are not connected to an audit or review of an institution's 
financial statements.
    (a) A qualified public accountant engaged to conduct a Farm Credit 
institution's audit may not perform the following non-audit services 
for that institution:
    (1) Bookkeeping,
    (2) Financial information systems design,
    (3) Appraisal and valuation services,
    (4) Actuarial services,
    (5) Internal audit outsourcing services,
    (6) Management or human resources functions,
    (7) Legal and expert services unrelated to the audit, and
    (8) Advocating an institution's interests in litigation, regulatory 
or administrative investigations and proceedings unrelated to external 
audit work.
    (b) A qualified public accountant engaged to conduct a Farm Credit 
institution's audit may only perform non-audit services, not otherwise 
prohibited in this section, if the institution's audit committee pre-
approves the services and the services are fully disclosed in the 
annual report.


Sec.  621.32  Conflicts of interest and rotation.

    (a) Conflicts of interest. (1) A Farm Credit institution may not 
engage a qualified public accountant to conduct the institution's audit 
if the accountant uses a partner, concurring partner, or lead member in 
the audit engagement team who was a director, officer or employee of 
the Farm Credit institution within the past year.
    (2) A Farm Credit institution may not make an employment offer to a 
partner, concurring partner, or lead member serving on the 
institution's audit engagement team during the audit or within 1 year 
of the conclusion of the audit engagement.
    (b) Rotation. Each institution may engage the same lead and 
reviewing audit partners of a qualified public accountant to conduct 
the institution's audit for no more than 5 consecutive years. The 
institution must then require the lead and reviewing audit partners 
assigned to the institution's audit team to rotate out of the audit 
team for 5 years. At the end of 5 years, the institution may again 
engage the audit services of those lead and reviewing audit partners.

PART 624--[REMOVED AND RESERVED]

0
17. Remove and reserve part 624.

[[Page 76121]]

PART 627--TITLE IV CONSERVATORS, RECEIVERS, AND VOLUNTARY 
LIQUIDATIONS

0
18. The authority citation for part 627 continues to read as follows:

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

Subpart C--Conservators and Conservatorships

0
19. Amend Sec.  627.2785 by revising paragraphs (b) and (d) to read as 
follows:


Sec.  627.2785  Inventory, examination, audit, and reports to 
stockholders.

* * * * *
    (b) The institution in conservatorship shall be examined by the 
Farm Credit Administration in accordance with section 5.19 of the Act. 
The institution must also be audited by a qualified public accountant 
in accordance with part 621 of this chapter.
* * * * *
    (d) Each institution in conservatorship must prepare and issue 
published financial reports in accordance with the provisions of part 
620 of this chapter, and the certifications and signatures of the board 
of directors or management provided for in Sec.  620.3 of this chapter 
must be provided by the conservator of the institution.

PART 630--DISCLOSURE TO INVESTORS IN SYSTEM-WIDE AND CONSOLIDATED 
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

0
20. The authority citation for part 630 continues to read as follows:

    Authority: Secs. 5.17, 5.19 of the Farm Credit Act (12 U.S.C. 
2252, 2254).

Subpart A--General

0
21. Amend Sec.  630.2 by revising paragraph (c) to read as follows:


Sec.  630.2  Definitions.

* * * * *
    (c) Disclosure entity means any Farm Credit bank and the Federal 
Farm Credit Banks Funding Corporation (Funding Corporation).
* * * * *

0
22. Amend Sec.  630.3 by revising paragraphs (a), (f) and (h) as 
follows:


Sec.  630.3  Publishing and filing the report to investors.

    (a) The disclosure entities shall jointly publish the following 
reports in order to provide meaningful information pertaining to the 
financial condition and results of operations of the System to 
investors and potential investors in FCS debt obligations and other 
users of the report:
    (1) An annual report to investors within 75 calendar days after the 
end of each fiscal year;
    (2) A quarterly report to investors within 45 calendar days after 
the end of each quarter, except for the quarter that coincides with the 
end of the fiscal year.
    (3) Interim reports, as required by the Funding Corporation's 
written policies and procedures, disclosing significant events or 
material changes in information occurring since the most recently 
published report to investors.
* * * * *
    (f) Information in documents prepared for investors in connection 
with the offering of debt securities issued through the Funding 
Corporation may be incorporated by reference in the annual and 
quarterly reports in answer or partial answer to any item required in 
the reports under this part. A complete description of any offering 
documents incorporated by reference must be clearly identified in the 
report (e.g., Federal Farm Credit Banks Consolidated System-wide Bonds 
and Discount Notes--Offering Circular issued on [insert date]). 
Offering documents incorporated by reference in either an annual or 
quarterly report prepared under this part must be filed with the Farm 
Credit Administration according to our instructions either prior to or 
at the time of submission of the report under paragraph (h) of this 
section. Any offering document incorporated by reference is subject to 
the delivery and availability requirements set forth in Sec.  
630.4(a)(5) and (a)(6).
* * * * *
    (h) Complete copies of the report must be filed with the Farm 
Credit Administration according to our instructions. All copies must 
comply with the requirements of Sec.  630.5 of this part.

0
23. Amend Sec.  630.4 as follows:
0
a. Revise paragraph (a)(4);
0
b. Remove paragraph (b);

0
c. Redesignate paragraphs (c) and (d) as (b) and (c);
0
d. Revise newly redesignated paragraphs (b)(4), (b)(5), and (c).


Sec.  630.4  Responsibilities for preparing the report to investors.

    (a) * * *
    (4) File the reports with the FCA in accordance with Sec.  630.3(f) 
and (h) and Sec.  630.5.
* * * * *
    (b) * * *
    (4) Respond to inquiries from the Funding Corporation relating to 
preparation of the report.
    (5) Certify to the Funding Corporation that all information needed 
for preparation of the report to investors has been submitted in 
accordance with the instructions of the Funding Corporation and the 
information submitted complies with the signature and certification 
provisions of Sec.  620.3(b) and (c), respectively.
    (c) Responsibilities of associatios. Each association must:
    (1) Provide its related bank with the information necessary to 
allow the bank to provide accurate and complete information regarding 
the bank and its related associations to the Funding Corporation for 
preparation of the report. The financial information provided by the 
association to its related bank must be signed and certified in the 
same manner as provided in Sec.  620.3(b) and (c), respectively.
    (2) Respond to inquiries of the related bank pertaining to 
preparation of the combined financial data of the association and its 
related bank.

0
24. Revise Sec.  630.5 to read as follows:


Sec.  630.5  Accuracy of reports and assessment of internal control 
over financial reporting.

    (a) Prohibition against incomplete, inaccurate, or misleading 
disclosure. Neither the Funding Corporation, nor any institution 
supplying information to the Funding Corporation under this part, nor 
any employee, officer, director, or nominee for director of the Funding 
Corporation or of such institutions, shall make or cause to be made any 
disclosure to investors and the general public required by this part 
that is incomplete, inaccurate, or misleading. When any such 
institution or person makes or causes to be made disclosure under this 
part that, in the judgment of the FCA, is incomplete, inaccurate, or 
misleading, whether or not such disclosure is made in published 
statements required by this part, such institution or person shall 
promptly furnish to the Funding Corporation, and the Funding 
Corporation shall promptly publish, such additional or corrective 
disclosure as is necessary to provide full and fair disclosure to 
investors and the general public. Nothing in this section shall prevent 
the FCA from taking additional actions to enforce this section pursuant 
to its authority under title V, part C of the Act.
    (b) Signatures. The name and position title of each person signing 
the report must be printed beneath his or her signature. If any person 
required to sign

[[Page 76122]]

the report has not signed the report, the name and position title of 
the individual and the reasons such individual is unable to, or refuses 
to, sign must be disclosed in the report. All reports must be dated and 
signed on behalf of the Funding Corporation by:
    (1) The chief executive officer (CEO);
    (2) The officer in charge of preparing financial statements; and
    (3) A board member formally designated by action of the board to 
certify reports of condition and performance on behalf of individual 
board members.
    (c) Certification of financial accuracy. The report must be 
certified as financially accurate by the signatories to the report. If 
any signatory is unable to, or refuses to, certify the report, the 
institution must disclose the individual's name and position title and 
the reason(s) such individual is unable or refuses to certify the 
report. At a minimum, the certification must include a statement that:
    (1) The signatories have reviewed the report,
    (2) The report has been prepared in accordance with all applicable 
statutory or regulatory requirements, and
    (3) The information is true, accurate, and complete to the best of 
signatories' knowledge and belief.
    (d) Management assessment of internal control over financial 
reporting. (1) Annual reports must include a report by the Funding 
Corporation's management assessing the effectiveness of the internal 
control over financial reporting for the System-wide report to 
investors. The assessment must be conducted during the reporting period 
and be reported to the Funding Corporation's board of directors. 
Quarterly and annual reports must disclose any material change(s) in 
the internal control over financial reporting occurring during the 
reporting period.
    (2) The Funding Corporation must require its external auditor to 
review, attest, and report on management's assessment of internal 
control over financial reporting. The resulting attestation report must 
accompany management's assessment and be included in the annual report.

0
25. Amend Sec.  630.6 by revising paragraph (a)(4)(ii) to read as 
follows:


Sec.  630.6  Funding Corporation committees.

    (a) * * *
    (4) * * *
    (ii) External auditors. The external auditor must report directly 
to the SAC. The SAC must:
    (A) Determine the appointment, compensation, and retention of 
external auditors issuing System-wide audit reports;
    (B) Review the external auditor's work;
    (C) Give prior approval for any non-audit services performed by the 
external auditor, except the audit committee may not approve those non-
audit services specifically prohibited by FCA regulation; and
    (D) Comply with the auditor independence provisions of part 621 of 
this chapter.
* * * * *

Subpart B--Annual Report to Investors

0
26. Amend Sec.  630.20 as follows:
0
a. Remove paragraph (b)(3);
0
b. Remove paragraph (m)(2)(iii);
0
c. Redesignate paragraphs (m)(2)(iv) through (vi) as paragraphs 
(m)(2)(iii) through (v); and
0
d. Revise the introductory text, paragraphs (f) introductory text, 
(h)(1), (i), (k), and (l) introductory text to read as follows:


Sec.  630.20  Contents of the annual report to investors.

    The annual report must contain the following:
* * * * *
    (f) Selected financial data. At a minimum, furnish the following 
combined financial data of the System in comparative columnar form for 
each of the last 5 fiscal years, if material.
* * * * *
    (h) Directors and management.
    (1) Board of directors. Briefly describe the composition of boards 
of directors of the disclosure entities. List the name of each director 
of such entities, including the director's term of office and principal 
occupation during the past 5 years, or state that such information is 
available upon request.
    (2) * * *
    (i) Compensation of directors and senior officers. State that 
information on the compensation of directors and senior officers of 
Farm Credit banks is contained in each bank's annual report to 
shareholders and that the annual report of each bank is available to 
investors upon request pursuant to Sec.  630.3(g).
* * * * *
    (k) Relationship with qualified public accountant.
    (1) If a change in the qualified public accountant who has 
previously examined and expressed an opinion on the System-wide 
combined financial statements has taken place since the last annual 
report to investors or if a disagreement with a qualified public 
accountant has occurred that the Funding Corporation would be required 
to report to the FCA under part 621 of this chapter, disclose the 
information required by Sec.  621.4(c) and (d).
    (2) Disclose the total fees paid during the reporting period to the 
qualified public accountant by the category of services provided. At a 
minimum, identify fees paid for audit services, tax services, and non-
audit services. The types of non-audit services must be identified and 
indicate audit committee approval of the services.
    (l) Financial statements. Furnish System-wide combined financial 
statements and related footnotes prepared in accordance with GAAP, and 
accompanied by supplemental information prepared in accordance with the 
requirements of Sec.  630.20(m). The System-wide combined financial 
statements shall provide investors and potential investors in FCS debt 
obligations with the most meaningful presentation pertaining to the 
financial condition and results of operations of the System. The 
System-wide combined financial statement and accompanying supplemental 
information shall be audited in accordance with generally accepted 
auditing standards by a qualified public accountant. The System-wide 
combined financial statements shall include the following:
* * * * *

    Dated: December 12, 2006.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E6-21529 Filed 12-19-06; 8:45 am]
BILLING CODE 6705-01-P