[Federal Register Volume 72, Number 186 (Wednesday, September 26, 2007)]
[Rules and Regulations]
[Pages 54525-54527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-18965]


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FARM CREDIT ADMINISTRATION

12 CFR Part 627

RIN 3052-AC38


Title IV Conservators, Receivers, and Voluntary Liquidations; 
Priority of Claims--Subordinated Debt

AGENCY: Farm Credit Administration.

ACTION: Direct final rule with opportunity to comment.

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SUMMARY: The Farm Credit Administration (FCA, Agency, we), issues a 
direct final rule amending its priority of claims regulations. The 
effect of the amendments is to provide that, when the assets of a Farm 
Credit System (FCS or System) institution in liquidation are 
distributed, the claims of holders of subordinated debt will be paid 
after all general creditor claims.

DATES: If no significant adverse comment is received on or before 
October 26, 2007, these regulations will be effective upon the 
expiration of 30 days after publication in the Federal Register during 
which either or both Houses of Congress are in session. Notice of the 
effective date will be published in the Federal Register. If 
significant adverse comment is received on an amendment, paragraph, or 
section of this rule, and that provision may be addressed separately 
from the remainder of the rule, the FCA will withdraw that amendment, 
paragraph, or section and adopt as final those provisions of the rule 
that are not the subject of a significant comment. In such case, we 
will then tell you how we expect to continue further rulemaking on the 
provisions that were the subject of significant adverse comment.

ADDRESSES: We offer a variety of methods for you to submit comments. 
For accuracy and efficiency reasons, we encourage commenters to submit 
comments by e-mail or through the Agency's Web site or the Federal 
eRulemaking Portal. As faxes are difficult for us to process and 
achieve compliance with section 508 of the Rehabilitation Act, please 
consider another means to submit your comment if possible. Regardless 
of the method you use, please do not submit your comment multiple times 
via different methods. You may submit comments by any of the following 
methods:
     E-mail: Send us an e-mail at [email protected].
     Agency Web site: http://www.fca.gov. Once you are at the 
Web site, select ``Public Commenters,'' then ``Public Comments.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Gary K. Van Meter, Deputy Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
     FAX: (703) 883-4477. Posting and processing of faxes may 
be delayed. Please consider another means to comment, if possible.
You may review copies of comments we receive at our office in McLean, 
Virginia, or from our Web site at http://www.fca.gov. Once you are in 
the Web site, select ``Public Commenters,'' then select ``Public 
Comments,'' then select ``Submitting a Comment'' and follow the 
instructions there. We will show your comments as submitted, but for 
technical reasons we may omit items such as logos and special 
characters. Identifying information that you provide, such as phone 
numbers and addresses, will be publicly available. However, we will 
attempt to remove e-mail addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT:
Christopher D. Wilson, Policy Analyst, Office of Regulatory Policy, 
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4414, TTY 
(703) 883-4434, or

[[Page 54526]]

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. Objective

    Our objective in this direct final rule is to clarify the claims 
priority of subordinated debt in the event of the liquidation of a 
System institution.

II. Background

    Part 627 of our regulations governs the conduct of System 
institution conservatorships and receiverships. Sections 627.2745, 
627.2750, and 627.2752 set forth the priority of claims by creditors 
for the distribution of the assets of associations, banks and other 
Farm Credit institutions, respectively, in liquidation. Section 
627.2755(b) provides that, ``[f]ollowing the payment of all claims, the 
receiver shall distribute the remainder of the assets of the 
institution to the owners of stock, participation certificates, and 
other equities in accordance with the priorities for impairment set 
forth in the bylaws of the institution.'' These provisions do not 
expressly provide for payments on claims by holders of unsecured 
obligations that, according to the terms of such obligations, are 
subordinated to the claims of general creditors (subordinated debt). A 
System bank that recently issued subordinated debt has requested that 
we amend our regulations to clarify that holders of subordinated debt 
would be paid after general creditors are paid. The System bank made 
this request in a comment to a proposed rule published on March 12, 
2007, that would provide priority of claims rights to System banks if 
they make payments under a contractual agreement to reallocate joint 
and several liability.\1\ The Agency has adopted that proposal as a 
final rule concurrent with this direct final rule.
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    \1\ See 72 FR 10939.
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    Subordinated debt is a type of obligation whose repayment, in a 
liquidation context, is subordinated to the claims of general creditors 
but is paid ahead of claims of equity holders. Subordinated debt that 
meets certain characteristics can be an attractive method of funding 
for regulated financial institutions, such as System institutions and 
commercial banks, because of the lower cost of funding and the ability 
to include some or all of the debt in regulatory capital.\2\ An 
institution can issue more than one class of subordinated debt and can 
provide for all classes of the debt to have the same claims priority 
upon liquidation. Alternatively, an institution with multiple classes 
of subordinated debt can provide for one or more classes of 
subordinated debt to be subordinated to one or more other classes of 
subordinated debt.
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    \2\ System institutions may include debt in regulatory capital 
only when the FCA determines that the debt is appropriate to be 
considered permanent capital or that the debt is the functional 
equivalent of core surplus or total surplus. See 12 U.S.C. 
2154a(a)(1)(E); 12 CFR 615.5201 definition of permanent capital (7); 
12 CFR 615.5301(b)(1)(iv) and (i)(6).
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    This rule is intended to clarify the payment priority of 
subordinated debt holders with respect to holders of other debt and 
among holders of different classes of subordinated debt.

III. Description of Rule

    Sections 627.2745, 627.2750, and 627.2752 are amended by adding 
language to each section to provide that, in the liquidation of banks, 
associations, and other Farm Credit institutions, respectively, the 
holders of claims subordinated to general creditors' claims will be 
paid after general creditors according to the priority specified in the 
written documents evidencing those claims. We have used the more 
general term ``claims'' to include, in addition to subordinated debt, 
any other instruments whose payment in liquidation is subordinated to 
payments to general creditors but ahead of payments made to equity 
holders under Sec.  627.2755(b).
    Our rule is intended also to provide that the receiver will pay 
these claims in accordance with the subordination priorities 
established by the issuing institution. We note that, unlike the other 
paragraphs in Sec. Sec.  627.2745, 627.2750, and 627.2752, the new 
paragraph in each section can cover multiple classes of claimants, and 
we are adding a reference to Sec.  627.2755(a) to each new paragraph to 
clarify this.

IV. Direct Final Rulemaking

    With the promulgation of this rule, the FCA is using the ``Direct 
Final'' procedure for rulemaking. Direct final rulemaking permits 
agencies to adopt noncontroversial rules on an expedited basis, without 
going through the usual proposal and final stages of notice-and-comment 
rulemaking. Direct final rulemaking was recommended for promulgation of 
noncontroversial rules by the Administrative Conference of the United 
States (ACUS) in its Recommendation 95-4, adopted June 15, 1995.
    The FCA's use of innovative rulemaking techniques furthers its 
strategic goal of implementing effective and efficient regulations. We 
believe that the use of direct final rulemaking in appropriate 
circumstances can streamline the rulemaking process for 
noncontroversial rules by reducing the time and resources needed for 
development, review, clearance, and publication, while still affording 
the public adequate opportunity to comment on or object to a rule.
    In direct final rulemaking, the agency gives notice that a rule 
will become final at a specified future date unless the agency receives 
significant adverse comment on the rule during the comment period 
established in the rulemaking notice. The Administrative Procedure Act, 
5 U.S.C. 551-59, et seq. (APA), supports this streamlined technique of 
rulemaking. Direct final rulemaking is justified under section 
553(b)(B) of the APA. Section 553(b)(B) is the APA's ``good cause'' 
exemption for omitting notice and comment on a rule where an agency 
finds ``that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.'' In direct final 
rulemaking, the agency finds that the rule is sufficiently 
straightforward and noncontroversial to make normal notice and comment 
unnecessary under the APA. However, rather than eliminating public 
comment altogether, as would be permissible under section 553(b)(B), 
the agency gives the public an opportunity to rebut the agency's 
conclusion that public input on the rule is unnecessary.
    Notwithstanding this ``good cause'' rationale under section 
553(b)(B), direct final rulemaking also meets the basic notice-and-
comment requirements of the APA, although the timing and format of 
notice and opportunity for comment necessarily differs from a typical 
notice-and-comment rulemaking. If, during the comment period provided, 
the agency receives a significant adverse comment on an amendment, 
paragraph, or section of this rule, and that provision may be addressed 
separately from the remainder of the rule, the agency commits to 
withdraw that amendment, paragraph, or section and adopt as final those 
provisions of the rule that are not subject of a significant comment. 
In such case, we would then notify the public how we expect to continue 
further rulemaking on the provisions that were the subject of the 
significant adverse comment. A significant adverse comment is defined 
as one where the commenter explains why the rule would be 
inappropriate, including challenges to the rule's underlying premise or 
approach, or would be ineffective or unacceptable without a change. In

[[Page 54527]]

general, a significant adverse comment would raise an issue serious 
enough to warrant a substantive response from the agency in a notice-
and-comment proceeding.
    The FCA believes that these amendments fit the category of rules 
appropriate for direct final rulemaking. These changes merely clarify 
that holders of subordinated debt, which is subordinate to general 
creditors by definition and by the terms of the subordinated debt 
instruments, are entitled to payment in a liquidation only after 
general creditors are paid. For these reasons, the FCA does not 
anticipate that there will be significant adverse comment on this 
rulemaking. Nonetheless, in keeping with the recommended procedures, 
the FCA is providing a 30-day period from publication during which 
members of the public may comment on the rule. If significant adverse 
comment is received during the comment period, we will publish a notice 
of withdrawal of the relevant provisions of this rule that will also 
indicate how further rulemaking will proceed. If no significant adverse 
comment is received, the FCA will publish a notice of the effective 
date under section 5.17(c)(1) of the Act.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the FCA hereby certifies that this rule will not 
have a significant economic impact on a substantial number of small 
entities. Each of the banks in the 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, System 
institutions are not ``small entities'' as defined in the Regulatory 
Flexibility Act.

List of Subjects in 12 CFR Part 627

    Agriculture, Banks, Banking, Claims, Rural areas.


0
For the reasons stated in the preamble, we amend part 627 of chapter 
VI, title 12 of the Code of Federal Regulations to read as follows:

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

0
1. 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 B--Receivers and Receiverships

0
2. Amend Sec.  627.2745 by adding a new paragraph (i) to read as 
follows:


Sec.  627.2745  Priority of claims--associations.

* * * * *
    (i) All claims that, by their terms, are subordinated in whole or 
in part to the claims of general creditors, other than distributions 
covered under Sec.  627.2755(b). Such claims shall receive the priority 
specified in the written instruments that evidence the claims and, to 
the extent that the written documents provide different priorities for 
different categories of such claims, each category shall be considered 
a class of claims for purposes of Sec.  627.2755(a).

0
3. Amend Sec.  627.2750 by adding a new paragraph (j) to read as 
follows:


Sec.  627.2750  Priority of claims--banks.

* * * * *
    (j) All claims that, by their terms, are subordinated in whole or 
in part to the claims of general creditors, other than distributions 
covered under Sec.  627.2755(b). Such claims shall receive the priority 
specified in the written instruments that evidence the claims and, to 
the extent that the written documents provide different priorities for 
different categories of such claims, each category shall be considered 
a class of claims for purposes of Sec.  627.2755(a).

0
4. Amend Sec.  627.2752 by adding a new paragraph (h) to read as 
follows:


Sec.  627.2752  Priority of claims--other Farm Credit institutions.

* * * * *
    (h) All claims that, by their terms, are subordinated in whole or 
in part to the claims of general creditors, other than distributions 
covered under Sec.  627.2755(b). Such claims shall receive the priority 
specified in the written instruments that evidence the claims and, to 
the extent that the written documents provide different priorities for 
different categories of such claims, each category shall be considered 
a class of claims for purposes of Sec.  627.2755(a).

    Dated: September 20, 2007.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E7-18965 Filed 9-25-07; 8:45 am]
BILLING CODE 6705-01-P