[Federal Register Volume 73, Number 116 (Monday, June 16, 2008)]
[Proposed Rules]
[Pages 33931-33940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-13382]


=======================================================================
-----------------------------------------------------------------------

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AC42


Funding and Fiscal Affairs, Loan Policies and Operations, and 
Funding Operations; Mission-Related Investments, Rural Community 
Investments

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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

SUMMARY: The Farm Credit Administration (FCA) proposes a new rule that 
would authorize each Farm Credit System (Farm Credit, System, or FCS) 
bank, association, and service corporation (institution) to invest in 
rural communities across America under certain conditions. The proposed 
rule would allow each System institution to make investments in rural 
communities that are outside of an urbanized area only for specific 
purposes. Several provisions in the proposed rule would ensure that 
System investments in rural America are safe and sound and comply with 
the Farm Credit Act of 1971, as amended (Act), and other applicable 
statutes.

DATES: Comments should be received on or before August 15, 2008.

ADDRESSES: We offer a variety of methods for you to submit your 
comments. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by e-mail or through the FCA'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].
     FCA Web Site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     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,

[[Page 33932]]

Virginia, or from our Web site at http://www.fca.gov. Once you are in 
the Web site, select ``Public Commenters,'' then ``Public Comments,'' 
and follow the directions for ``Reading Submitted Public Comments.'' We 
will show your comments as submitted, but for technical reasons we may 
omit items such as logos and special characters. Identifying 
information 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: 
Laurie Rea, Associate Director, Office of Regulatory Policy, Farm 
Credit Administration, 1501 Farm Credit Drive, McLean, VA, (703) 883-
4414, TTY (703) 883-4434; or
Dawn Johnson, Policy Analyst, Office of Regulatory Policy, Farm Credit 
Administration, Denver, CO, (303) 696-9737, TTY (303) 696-9259; or
Richard A. Katz, Senior Counsel, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.

SUPPLEMENTARY INFORMATION:

I. Background

    The FCA proposes a new rule, Sec.  615.5176, which would enable 
System institutions to more effectively serve the needs of rural 
communities by exercising investment powers under the Act. The proposed 
rule focuses on specific needs in rural communities. Essentially, the 
proposed rule would authorize two separate types of investments that 
System institutions could make in America's rural communities. First, 
System institutions could invest in debt securities that would involve 
projects or programs that benefit the public in rural communities. 
Equity investments in venture capital funds are the second type of 
investment that the proposed rule would authorize. Venture capital 
funds create new economic opportunities and jobs in rural communities 
by providing capital to small or start-up businesses.
    The proposed rule would authorize each System institution to make 
investments in rural areas that according to the terms of the latest 
United States decennial census have fewer than 50,000 residents and are 
outside of an urbanized area. The proposed rule would allow System 
institutions to invest in: (1) Essential community facilities; (2) 
basic transportation infrastructure; (3) rural communities recovering 
from disasters; (4) debt securities for rural development projects that 
the United States, its agencies, any state, Puerto Rico, or a local 
municipal government sponsors or guarantees; (5) debt securities that 
support the rural development activities of non-System financial 
institutions; (6) rural business investment companies; and (7) venture 
capital funds that invest in rural businesses that create jobs and 
economic growth under specific conditions. The proposed rule also would 
allow System institutions to make other investments that are not 
expressly covered by this regulation with FCA approval. Under the 
proposed rule, an institution may hold rural community investments in 
an amount that does not exceed 150 percent of its total surplus. As 
discussed in greater detail below, other provisions of the proposed 
rule address safety and soundness and compliance with the Act.

A. The Statutory Basis for the Proposed Rule

    System institutions derive their investment authorities from 
several provisions of the Act. Sections 1.5(15) and 3.1(13)(A) of the 
Act \1\ authorize System banks to invest in securities of the United 
States and its agencies, and make ``other investments as may be 
authorized under regulations issued by the Farm Credit 
Administration.'' Sections 2.2(10) and 2.12(18) of the Act \2\ 
authorize System associations to invest their funds as approved by 
their district banks in accordance with FCA regulations. A System 
service corporation is authorized by section 4.25 of the Act \3\ to 
engage in investment activities to the same extent as its System 
parents.\4\
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 2013 (15) and 2122 (13)(A).
    \2\ 12 U.S.C. 2073 (10) and 2093 (18).
    \3\ 12 U.S.C. 2211. Section 4.25 authorizes System banks to 
organize service corporations. Section 4.28A of the Act, 12 U.S.C. 
2214a, confers this authority on System associations.
    \4\ Section 4.25 of the Act prohibits service corporations from 
extending credit or providing insurance services to System 
borrowers. Otherwise, the Act authorizes service corporations to 
perform any other function or service that its FCS parents may 
perform. Service corporations currently have authority to purchase 
and hold other investments under FCA regulations in subpart E of 
part 615.
---------------------------------------------------------------------------

    Investments in rural communities are compatible with the System's 
statutory mandate. The preamble to the Act clearly states that Congress 
enacted the law ``to provide for an adequate and flexible flow of money 
into rural areas, and to modernize * * * existing farm credit law to 
meet current and future rural credit needs, and for other purposes.'' 
The preamble and investment provisions of the Act form a broad 
statutory framework that confers considerable discretion on the FCA to 
decide the purposes, conditions, and limits for all investment 
activities at System institutions. In exercising this discretion, the 
FCA has authorized System institutions to invest their funds in 
obligations that are suitable for liquidity, risk management, and 
activities that are closely related to the System's statutory mandate.
    In implementing the investment provisions of the Act, the FCA has 
taken a cautious and incremental approach in approving System 
investments for mission-related purposes. Since Congress enacted the 
Act in 1971, the FCA has approved new regulations and programs that 
authorize the System to make specified investments in agriculture and 
rural communities, subject to certain conditions and limits. The 
factors that the FCA considers whenever it decides to approve new 
mission-related investments are: (1) The financial needs of agriculture 
and rural communities; (2) new investment products offered in the 
marketplace; (3) the System's status as a Government-sponsored 
enterprise (GSE); and (4) compliance with the Act and other applicable 
statutes. Under FCA regulations and programs, System investments in 
agriculture and rural communities have remained small because lending 
to farmers, ranchers, cooperatives, and other eligible borrowers is the 
primary activity of System institutions under the Act. Additionally, 
most mission-related investments that the FCA has approved are related 
to the System's expertise in financing agriculture, rural housing, and 
infrastructure in rural areas.
    Historically, the FCA has authorized System institutions to invest 
in debt securities, but not in equity securities of non-System 
entities. In 2002, Congress granted System institutions express 
authority to invest in rural business investment companies (RBICs), 
which are venture capital funds that the United States Department of 
Agriculture (USDA) funds and oversees. The FCA believes that allowing 
the System to invest in venture capital funds that hold small equity 
positions in start-up rural enterprises is consistent with 
congressional intent. As discussed in greater detail below, the 
proposed rule would implement the provisions of title VI of the Farm 
Security and Rural Investment Act of the 2002 \5\ and the Act by 
allowing System institutions to invest in RBICs and other venture

[[Page 33933]]

capital funds that provide start-up money to rural entrepreneurs.
---------------------------------------------------------------------------

    \5\ Pub. L. No. 107-171, Sec.  384J, 116 Stat. 134, 397 (May 13, 
2002).
---------------------------------------------------------------------------

    In accordance with the Act, the FCA has enacted several regulations 
since 1971 that authorize System investments in agriculture and 
America's rural communities. The first mission-related investments that 
the FCA approved were farmers' notes.\6\ Since 1972, FCA regulations 
have authorized System banks and associations to invest in obligations 
of States, municipalities, and local governments. In 1993, a new 
regulation authorized System institutions to purchase and hold mortgage 
securities issued or guaranteed by the Federal Agricultural Mortgage 
Corporation (Farmer Mac). In 1999, the FCA amended another regulation 
to permit investment in asset securities backed by agricultural 
equipment. An existing regulation, Sec.  615.5140(e), allows Farm 
Credit institutions to hold other investments that the FCA approves on 
a case-by-case basis. This regulatory framework guides investment 
practices at Farm Credit institutions and ensures that System 
investments comply with law and are safe and sound.
---------------------------------------------------------------------------

    \6\ The farmers' note program authorizes production credit 
associations and agricultural credit associations to invest in 
notes, contracts, and other obligations farmers and ranchers enter 
into with cooperatives and dealers that sell farm equipment, inputs, 
and supplies. Farmers' notes are investments that provide liquidity 
to small rural agribusinesses.
---------------------------------------------------------------------------

    Since 2005, the FCA has approved requests by System banks and 
associations, on a case-by-case basis, to initiate pilot programs for 
investing in America's rural communities under specified conditions. 
Under these FCA-approved pilot programs, System institutions acquired 
expertise and became active in making investments that provided funding 
for essential projects in rural communities.
    Based on the positive experience of these pilot programs, the FCA 
is proposing a rule that will allow all System banks, associations, and 
service corporations to make certain investments in rural communities 
under prescribed conditions without prior FCA approval. This proposed 
rule would permit the rural-based System to use its expertise and a 
portion of its financial resources to support rural economic growth and 
development by investing in those projects and programs in America's 
rural communities that often have difficulty attracting financing at 
affordable rates.
    The proposed rule implements the investment provisions of the Act 
by ensuring that: (1) System institutions invest in rural communities 
only for specific purposes; and (2) all instruments purchased and held 
by Farm Credit institutions are investment securities in accordance 
with market practices and securities laws. Investments in rural 
communities also would be subject to a portfolio limit and other 
controls to ensure that FCS rural community investment activities 
comply with the Act and are safe and sound.
    The FCA emphasizes that lending to farmers, ranchers, aquatic 
producers and harvesters, farm-related businesses, rural homeowners, 
cooperatives, and rural utilities remains the primary purpose of the 
System. However, within the parameters prescribed by the proposed rule, 
System investments, which help strengthen the economic viability of 
rural communities, are compatible with the preamble and several 
provisions of the Act. Investing in rural communities enables Farm 
Credit to fulfill its mission by helping sustain rural communities on 
which the System's borrowers and owners are dependent for their 
livelihoods.

B. Why Investments in Rural Communities Are Important

    The FCA proposes this rule to allow the System to make investments 
in rural communities and to support and supplement investments by 
government, commercial banks, investment banks, and venture capital 
funds. The FCA believes that this new rule will enable the System to 
more fully assist rural communities in financing projects that are 
designed to provide essential facilities, infrastructure, and services 
to residents. As discussed in greater detail below, System institutions 
made investments under FCA authorized pilot programs, which 
demonstrated that the FCS is both locally and regionally positioned to 
effectively participate and assist rural development networks that 
strive to address rural needs. The proposed rule is designed to enable 
FCS institutions to collaborate and partner in rural development 
initiatives that advance the System's mission and its capacity to serve 
as a financial intermediary promoting the flow of money into rural 
areas.
    Many rural communities are struggling to retain economic viability 
and vitality that can provide economic opportunities and a better 
quality of life for their residents. Rural communities face numerous 
demographic, social, and economic challenges in meeting the needs of 
their residents. As a result, rural communities often find it difficult 
to provide the essential facilities, infrastructure, and services that 
their residents need. For example, an aging population in rural areas 
requires medical and assisted health care facilities. However, rural 
communities often have fewer health care providers and facilities to 
meet the increasing medical needs of its growing elderly population.\7\
---------------------------------------------------------------------------

    \7\ Carol A. Jones, et al., ``Population Dynamics Are Changing 
the Profile of Rural Areas,'' Amber Waves, Economic Research 
Service, United States Department of Agriculture, April 2007, p. 5.
---------------------------------------------------------------------------

    Also, a large gap persists between rural and metropolitan residents 
who have earned college degrees. This gap is reinforced by a lower 
demand for workers with post-secondary degrees in rural areas, which in 
turn, contributes to the out-migration of skilled workers.\8\ These 
factors place rural communities at a disadvantage in attracting 
businesses that offer higher wages and better job benefits to 
employees. Essential facilities, infrastructure, and services in rural 
areas often lag behind those in metropolitan areas. This is another 
factor that limits the ability of rural communities to attract and 
retain businesses that provide employment and economic opportunities. 
These obstacles to rural economic development and revitalization are 
further compounded by funding challenges for projects that are designed 
to assist rural communities in resolving these problems.
---------------------------------------------------------------------------

    \8\ ``Rural Education At A Glance,'' Rural Development Research 
Report Number 98, Economic Research Service, United States 
Department of Agriculture, November 2003, p. 4.
---------------------------------------------------------------------------

    Funding for economic growth and development projects in rural 
communities is available from a variety of sources, most notably the 
Federal and State governments, and private-sector financiers, including 
commercial and investment banks. Each of these entities faces 
challenges in providing rural communities with the funding needed for 
these projects. Efforts by Federal or State governments to help rural 
communities are often curtailed by budget constraints. Also, many rural 
community banks are willing to provide short-term funding, but find it 
difficult to provide the additional long-term capital investment needed 
for facilities in rural areas.\9\ Essential facilities and large 
capital improvements, such as critical care access hospitals, require a 
large capital investment that is repaid over an extended period of 
time. In many cases, no single investor is willing and able to supply 
all of the capital necessary for such projects, and rural

[[Page 33934]]

communities must depend on a combination of government and private-
sector financial sources and local donations.\10\ Another obstacle is 
that rural development projects in remote rural locations typically 
involve higher costs and greater risks, which deter investors. For 
these reasons, government and private-sector financial resources often 
are insufficient to fully fund many necessary and worthwhile projects 
that rural residents need.
---------------------------------------------------------------------------

    \9\ Walter Gregg, The Availability and Use of Capital by 
Critical Access Hospitals, Flex Monitoring Team Briefing Paper No. 
4, Flex Monitoring Team--University of Minnesota, University of 
North Carolina at Chapel Hill, and the University of Southern Maine, 
March 2005, p. 10.
    \10\ Ibid., p. 25 and 26.
---------------------------------------------------------------------------

    System institutions are an integral part of rural America. The 
farmers and ranchers who borrow from and own the FCS live and work in 
rural communities. These System stockholders and their families depend 
on local rural communities for essential services, employment, and 
other economic opportunities. Today, the majority of farm household 
income is derived from off-farm sources.\11\ As a result, farm families 
depend on local rural communities for employment that supplements farm 
income. Further, agricultural production is one of the most hazardous 
industrial sectors.\12\ Farmers and ranchers confront the same problems 
as other residents of America's rural communities in obtaining access 
to quality hospitals, medical facilities, schools and essential 
services.
---------------------------------------------------------------------------

    \11\ Ted Covey, et al., ``Agricultural Income and Finance 
Outlook,'' Outlook, AIS-85, Economic Research Service, United States 
Department of Agriculture, December 2007, p. 49.
    \12\ ``Chapter 3-Focus on Agriculture,'' Worker Health Chartbook 
2004, National Institute for Occupational Safety and Health, NIOSH 
Publication No. 2004-146, p. 1.
---------------------------------------------------------------------------

    System institutions are active in financial markets that serve 
regional and local rural areas across the United States. For this 
reason, the System is familiar with the challenges that rural 
communities face in meeting the needs of both farm and nonfarm rural 
residents. The System has the financial capacity to invest in rural 
development, and this proposed rule would advance the System's 
contributions to rural development efforts.

C. Investments in Rural Communities Made Under Pilot Programs

    Over the past 3 years, a number of System institutions have 
developed programs to make investments in rural communities through 
FCA-approved pilot programs. As a result of the investments made under 
these pilot programs, rural communities were able to address specific 
regional needs because these investments provided greater access to 
capital for community facilities, revitalization projects, and other 
economic development initiatives. These investments also provided 
additional liquidity into rural financial markets. In several cases, 
these investments helped provide capital at more affordable terms and 
rates, which in turn made these projects more feasible.
    The pilot programs have demonstrated that Farm Credit institutions 
have the capacity and willingness to work collaboratively with rural 
communities and financial institutions to address local and regional 
rural economic development needs. As previously discussed, many rural 
development projects are reliant on multiple partners for success. In 
making rural community investments under the pilot programs, System 
institutions partnered with: Federal, State, and regional rural 
development authorities; non-System financial institutions including 
rural community banks; nonprofit organizations; and venture capital 
funds. For example, System investments under the pilot programs have 
provided capital for rural hospitals designated as critical access 
facilities, which were sponsored, in part, by the USDA's Rural 
Development Community Facilities Program. Other examples of specific 
System investments that have made a positive difference in rural 
communities include investments in: Medical and mental clinics; 
treatment facilities for adolescents and adults; living and nursing 
centers for the elderly; schools; and community facilities. Several 
projects, which were sponsored by regional or State development 
authorities, modernized obsolete facilities for value-added 
agricultural products, or created new facilities to promote local 
economic growth. These projects were designed to promote economic 
growth in rural areas by attracting and promoting businesses that 
create or retain jobs in these rural communities.
    Non-System financial institutions and venture capital funds have 
also benefited from investments that System institutions made under the 
pilot programs. For example, System institutions have helped to 
increase liquidity at several rural community banks by buying bonds 
that support the rural development efforts of these banks. These 
investments enabled these banks to reduce the long-term financing costs 
for specific rural development projects. Additionally, investments in 
regional investment networks provided venture capital to rural 
entrepreneurs for start-up businesses that contributed to the vitality 
of rural communities. System institutions were prudent in undertaking 
investment activities in rural communities and assumed reasonable risks 
within pilot program conditions.
    In addition to the pilot programs, grant programs and charitable 
contributions at many System institutions complement their commitments 
to the citizens of local rural communities. Although the proposed rule 
does not specifically address grants, System institutions have 
authority under the incidental power provisions of the Act to make 
charitable grants and donations.\13\ The FCA continues to encourage FCS 
institutions to consider making charitable donations and contributions 
to worthwhile causes in the communities they serve. System institutions 
have contributed to a wide variety of community organizations and 
entities, including emergency and medical services, agricultural and 
rural community development educational programs, and value-added 
agricultural product initiatives. Charitable grants by System 
institutions complement rural community investment programs and are an 
additional way for Farm Credit institutions to further the System's 
mission and help enhance the quality of life for residents in rural 
communities.
---------------------------------------------------------------------------

    \13\ Sections 1.5 (21), 2.2 (20), 2.12 (20) and 3.1 (16) of the 
Farm Credit Act (12 U.S.C. 2013 (21), 2073 (20), 2093 (20), 2122 
(16)).
---------------------------------------------------------------------------

II. Section-by-Section Analysis

A. Rural Communities

    Proposed Sec.  615.5176(a) would authorize Farm Credit banks, 
associations, and service corporations to make rural community 
investments. Proposed Sec.  615.5176(a) also provides that FCS 
institutions may make these investments only in areas outside of an 
``urbanized area'' \14\ as defined by the latest decennial census of 
the United States. For the purposes of this proposed rule, areas 
outside of an urbanized area are ``rural.'' The proposed rule would 
authorize the FCS to make rural community investments in areas that the 
United States Census Bureau determined in the latest decennial census 
to have a population of less than 50,000 residents. For the purposes 
under this proposed rule, the geographic area includes any State within 
the United States and the Commonwealth of Puerto Rico.
---------------------------------------------------------------------------

    \14\ The United States Census Bureau defines an urbanized area 
as an urban area of 50,000 or more people that have core census 
block groups or blocks that have a population density of at least 
1,000 people per square mile and surrounding census blocks that have 
an overall density of at least 500 people per square mile.
---------------------------------------------------------------------------

    The FCA considered numerous definitions of ``rural,'' recognizing 
there is no single, universally preferred

[[Page 33935]]

definition of ``rural'' that policymakers commonly use.\15\ In fact, 
more than 15 definitions of ``rural'' are currently used by different 
Federal agencies for various programs.\16\ In developing the proposed 
rule, the FCA relied on Census Bureau terminology to ensure that the 
geographic areas in which investments are permitted are readily 
identifiable and easily distinguished.
    In determining which geographic areas should qualify under the 
proposed rule, the FCA seeks to include those areas with sufficient 
population densities to support health care and other essential 
facilities serving rural residents, while prohibiting investments in 
urbanized areas. For example, hospitals and other health care 
facilities that primarily serve rural geographic areas are typically 
located in areas that have less than 50,000 residents. Also, whenever 
Congress has expressly authorized FCS institutions to lend or invest in 
rural development projects, it has allowed these activities in 
communities with populations of 50,000 or fewer residents.\17\ 
Additionally, most Federal agencies and demographic experts have 
determined that densely populated areas with 50,000 or more inhabitants 
are urbanized areas. For this reason, investments authorized under the 
proposed rule would allow System institutions to invest in areas with 
populations of less than 50,000 residents based on the latest decennial 
census of the United States.
---------------------------------------------------------------------------

    \15\ Andrew F. Coburn et al., ``Choosing Rural Definitions: 
Implications for Health Policy,'' Rural Policy Research Institute 
Health Panel, March 2007, p. 1.
    \16\ Ibid.
    \17\ According to section 3.7(f) of the Act, 12 U.S.C. 2128(f), 
banks for cooperatives and agricultural credit banks may extend 
credit to water and waste disposal facilities in communities where 
the population does not exceed 20,000 inhabitants based on the 
latest decennial census of the United States. A provision of the 
Farm Security and Rural Investment Act of 2002, 7 U.S.C. 2009cc, et 
seq., authorizes System institutions to establish and invest in 
rural business investment companies in communities in non-
metropolitan counties that have populations of 50,000 or less 
inhabitants under the last decennial census of the Unites States.
---------------------------------------------------------------------------

    By allowing the System to invest in rural communities that have 
fewer than 50,000 residents, the proposed rule provides ``an adequate 
and flexible flow of funds into rural areas'' in accordance with the 
Act, while precluding System institutions from investing in urbanized 
areas. Information is publicly available on the Census Bureau's Web 
site, including census population statistics and maps. As a result, 
System institutions and other interested parties are able to determine 
if a particular location is within a ``rural'' community for the 
purposes of Sec.  615.5176(a).

B. Debt Securities

    Proposed Sec.  615.5176(b) would authorize System institutions to 
invest in rural communities by purchasing and holding debt securities 
for purposes specified in Sec.  615.5176(b)(1) through (5). The 
proposed rule defines debt securities as obligations that are commonly 
recognized in capital markets as a medium for investment, including 
government obligations, corporate bonds, revenue bonds, asset-backed 
securities and mortgage securities. Proposed Sec.  615.5176(b) 
expressly excludes commercial loans and instruments or transactions 
that are more similar to commercial loans than to traditional 
investment instruments in order to clarify the statutory distinction 
between loans and investments. Under the proposed rule, System 
institutions could not use their authority to invest in rural 
communities to make loans to otherwise ineligible borrowers.
1. Essential Community Facilities
    Proposed Sec.  615.5176(b)(1) would authorize System institutions 
to invest in debt securities that finance essential community 
facilities, such as hospitals, health care facilities, emergency 
services, and schools. Many essential community facilities are owned 
and operated by State, local, or municipal governments. In other cases, 
quasi-governmental or highly regulated private and nonprofit entities 
own and operate essential community facilities. Government obligations 
and revenue bonds often fund the construction and renovation of these 
facilities. Rural communities are currently facing increasing 
difficulty in funding these facilities because of deteriorating 
liquidity in financial markets. System institutions can help alleviate 
this problem by purchasing and holding debt securities as investments 
in community facilities that provide essential services to rural 
residents.
2. Basic Transportation Infrastructure
    Financing basic transportation infrastructure, such as roads, 
bridges, and other public transportation systems, is another authorized 
investment purpose under the proposed rule. The public sector owns, 
maintains, and operates most basic transportation infrastructure in the 
United States. Most rural transportation facilities are operated by 
public agencies or nonprofit groups, with a small percentage operated 
by private entities. Transportation projects are another area where the 
System could significantly help rural communities build and improve 
infrastructure, which would strengthen their economic viability. Rural 
communities and particularly agricultural industries, depend on quality 
transportation systems, which are critical in supplying inputs, 
shipping and distributing outputs and products, and supporting economic 
development. Proposed Sec.  615.5176(b)(2) would authorize System 
institutions to purchase government obligations, revenue bonds, and 
other debt obligations that support basic transportation 
infrastructure.
3. Revitalization of Rural Communities After a Disaster
    Proposed Sec.  615.5176(b)(3) would permit System institutions to 
purchase debt securities in revitalization projects that help rebuild 
rural areas devastated by disasters where an emergency has been 
declared pursuant to law. These investments must support local efforts 
and residents by contributing to the economic recovery of the affected 
rural community.
4. Rural Development Projects With Government Sponsorship or Guarantees
    Under proposed Sec.  615.5176(b)(4), System institutions could 
invest in debt securities that a government issues, sponsors, or 
guarantees under programs to fund rural community development projects. 
Without crucial financial support from Federal, State, or local 
governments, rural communities would face greater difficulty in funding 
vital development projects. By investing in debt securities for rural 
economic development under government programs, the System assists 
rural communities across America in accordance with its statutory 
mandate. By proposing Sec.  615.5176(b)(4), the FCA is encouraging 
System institutions to work with Federal, State, and local governments 
and their partners to invest in projects that bring jobs, 
infrastructure, community facilities, and vital services to rural areas 
and their residents.
    Proposed Sec.  615.5176(b)(4)(i) covers debt securities that the 
United States and its agencies issue, sponsor, or guarantee under 
programs that have the specific purpose of directly financing economic 
development in rural communities. The FCA emphasizes that the proposed 
rule does not require the full faith and credit of the United States 
for bonds issued or guaranteed by agencies of the United States. 
However, these investments are authorized only if the Federal agency 
issues or guarantees these bonds or obligations in accordance with a 
program that has the specific purpose of promoting economic development 
in rural areas. For

[[Page 33936]]

example, the Tennessee Valley Authority, the Small Business 
Administration, and various agencies in the USDA and the Department of 
Housing and Urban Development issue and guarantee bonds under specific 
programs for infrastructure, facilities, and other development projects 
in rural areas, and System investment in these obligations would be 
authorized by the proposed rule.
    Other Federal agencies operate programs in both metropolitan and 
rural areas which are not part of any specific rural development 
mission. Bonds and other obligations issued or guaranteed under such 
programs would not qualify as investments under the proposed rule. For 
example, the proposed rule would not authorize the FCS to invest in 
mortgage securities issued or guaranteed by the Federal National 
Mortgage Association and the Federal Home Loan Mortgage Corporation 
because the purpose of these securities is to enhance the liquidity of 
residential home loans throughout the United States, rather than to 
promote rural development. Another regulation, Sec.  615.5140, permits 
System institutions to make investments for liquidity and risk-
management purposes in bonds and obligations, including residential 
mortgage securities, that Federal agencies issue or guarantee under 
programs that are unrelated to rural development. The proposed rule 
focuses on investments in rural communities and would not authorize 
System institutions to hold residential mortgage securities issued by 
other GSEs, but the FCA continues to study this issue.
    Proposed Sec.  615.5176(b)(4)(ii) would allow System institutions 
to invest in debt securities that any State, the Commonwealth of Puerto 
Rico, a local or municipal government, or other political subdivision 
of a State, issues, sponsors, or guarantees that are specifically 
related to development in rural communities. Many local or municipal 
governments and other political subdivisions, such as special 
districts, often sponsor particular rural development projects by 
providing tax incentives or other benefits to private-sector obligors 
who issue revenue bonds. These revenue bonds, which help finance rural 
development projects, would qualify as investments that FCS 
institutions could purchase and hold under proposed Sec.  
615.5176(b)(4)(ii). This provision would also allow System institutions 
to invest in mortgage securities that are issued or guaranteed by State 
or local agencies that specialize in rural development.
5. Rural Development Projects Financed by Non-System Financial 
Institutions
    Proposed Sec.  615.5176(b)(5) would allow System institutions to 
invest in debt securities issued by non-System financial institutions. 
The proposed rule would authorize System institutions to purchase these 
debt securities to increase financial assistance to rural communities 
and improve the liquidity of rural financial markets. This provision 
would enhance cooperation between System and non-System financial 
institutions and ultimately benefit rural communities. System 
institutions may purchase asset-backed securities, covered bonds, or 
similar types of bonds issued by non-System financial institutions 
directly or through trusts that supply funds to non-System financial 
institutions for rural development. Investments made under the pilot 
programs evidence that securities, including commercial bank bonds 
issued by rural community banks and purchased by System institutions, 
can effectively increase bank liquidity. These investments benefit 
rural communities and residents, while establishing partnerships 
between non-System and System institutions.

C. Equity Investments

    Equity investments in venture capital funds are another type of 
investment that the proposed rule would authorize FCS institutions to 
purchase and hold. Under this provision of the proposed rule, System 
institutions could invest in venture capital funds that provide capital 
to start-up and small private-sector enterprises that bring jobs and 
economic opportunities to rural communities. Venture capital funds that 
operate in the United States invest only 1.6 percent of their funds in 
rural community enterprises, although these enterprises represent 19.2 
percent of all businesses.\18\ System institutions could make a small, 
but meaningful, contribution to rural economic development by investing 
in venture capital funds that provide capital into rural enterprises. 
As discussed in greater detail below, System institutions would hold 
only small, passive investment positions in venture capital funds 
because of statutory and regulatory restrictions.
---------------------------------------------------------------------------

    \18\ Kendall McDaniel, ``Venturing into Rural America,'' The 
Main Street Economist, Center for the Study of Rural America--
Federal Reserve Bank of Kansas City, p. 2.
---------------------------------------------------------------------------

    Proposed Sec.  615.5176(c) would authorize System institutions to 
make equity investments in two types of entities, RBICs and venture 
capital funds, for the purpose of providing equity capital to rural 
business enterprises. Rural entrepreneurs often lack sufficient equity 
capital to establish and expand businesses that are the mainstay of 
prosperous rural economies. Venture capital funds provide equity 
capital in rural business enterprises, which promote economic 
development and job opportunities in rural communities.
1. Rural Business Investment Companies
    Proposed Sec.  615.5176(c)(1) would authorize System institutions 
to purchase and hold equity investments in RBICs that are established 
and operate in accordance with 7 U.S.C. 2009cc et seq. As discussed 
earlier, the Farm Security and Rural Investment Act of 2002 created the 
Rural Business Investment Program and expressly authorized any Farm 
Credit System institution to establish and invest in RBICs. Congress 
intended to promote economic development, create wealth, and expand job 
opportunities in rural areas through RBIC equity investments. The 
System's statutory authority to establish and invest in RBICs is 
incorporated into proposed Sec.  615.5176(c)(1). The proposed rule 
would enable System institutions to invest in RBICs to the fullest 
extent allowed by 7 U.S.C. 2009cc et seq. The FCA emphasizes that 
proposed Sec.  615.5176(c)(1) would authorize System institutions to 
invest in both leveraged and non-leveraged RBICs.
2. Venture Capital Funds
    Proposed Sec.  615.5176(c)(2) would authorize System institutions 
to invest in venture capital funds which, in turn, invest in rural 
businesses that provide job opportunities. Under this provision, System 
institutions would be able to indirectly provide rural entrepreneurs 
needed equity capital through venture capital funds, such as regional 
investor networks, which have investment objectives similar to RBICs.
    The Center for the Study of Rural America of the Federal Reserve 
Bank of Kansas identified a significant need for equity capital for 
rural entrepreneurs because entrepreneurial activity is strongly linked 
to economic growth.\19\ For this reason, experts conclude that 
additional focus on rural entrepreneurship can be an effective strategy 
in combating the decline of traditional resource-based businesses in

[[Page 33937]]

rural areas.\20\ However, rural economies have difficulty attracting 
venture capital because metropolitan areas usually offer better 
profits. Policy officials and experts agree that entrepreneurship in 
remote and sparsely populated rural areas can be challenging because 
access to skilled labor, technology, and capital is more limited. 
Investments in venture capital funds that focus on rural entrepreneurs 
can effectively begin to overcome these barriers to rural businesses.
---------------------------------------------------------------------------

    \19\ Mark Drabenstott, et al., ``Main Streets of Tomorrow: 
Growing and Financing Rural Entrepreneurs--A Conference Summary,'' 
Economic Review, Third Quarter 2003, Federal Reserve Bank of Kansas 
City, pp. 73 and 74.
    \20\ Ibid.
---------------------------------------------------------------------------

    Proposed Sec.  615.5176(c)(2) would place specific restrictions on 
System investment in venture capital funds to ensure that these 
investments remain small and passive. Additionally, these controls 
would minimize potential financial risk to the System institutions, 
while providing the System with flexibility to invest in rural 
development under the Act.
    Proposed Sec.  615.5176(c)(2)(i) would control financial risk by 
prohibiting any System institution from investing more than 5 percent 
of its total surplus in venture capital funds and more than 2 percent 
of its total surplus in any one venture capital fund. The FCA 
emphasizes that this limit on venture capital funds in proposed Sec.  
615.5176(c)(2)(i) is in addition to the overall limit in proposed Sec.  
615.5176(e)(i), which prevents total rural community investments at any 
FCS institution from exceeding 150 percent of its total surplus.
    The restrictions in proposed Sec.  615.5176(c)(2)(ii) and (iii) 
would prevent System institutions from controlling and managing venture 
capital funds. Proposed Sec.  615.5176(c)(2)(ii) would prohibit any FCS 
institution from holding more than 20 percent of the voting equity of 
any venture capital fund. The purpose of this provision is to allow 
System institutions to invest in venture capital funds that focus on 
rural areas, while imposing a reasonable limit that prevents any System 
institution from gaining a controlling interest in any fund. Proposed 
Sec.  615.5176(c)(2)(iii) would prohibit any FCS institution from 
participating in the routine management or operation of a venture 
capital fund.
    Finally, proposed Sec.  615.5176(c)(2)(iv) and (v) would establish 
controls to avoid potential conflicts of interest. Proposed Sec.  
615.5176(c)(2)(iv) would prohibit any director, officer, or employee of 
a System institution from serving as a director, officer, employee, 
principal shareholder, or trustee of any venture capital fund or of any 
entity funded by, or affiliated with, the venture capital fund. 
Proposed Sec.  615.5176(c)(2)(v) would prohibit any System institution 
from participating in any decision or action of a venture capital fund 
involving or affecting any customer of the institution. Although 
proposed Sec.  615.5176(c)(2)(v) would permit a System institution to 
invest in venture capital funds that hold equity in one of its 
borrowers, the institution could not participate in decisions or 
actions that affect such customers. Additionally, the proposed rule 
does not prohibit System institution directors, officers, or employees 
from serving in an investment screening or other advisory capacity to a 
venture capital fund, subject to the restrictions discussed above. 
System institution representatives serving in an advisory capacity to a 
venture capital fund also remain subject to FCA conflict of interest 
regulations and institution policies.

D. Other Investments Approved by the Farm Credit Administration

    The FCA's experience with the pilot programs reveals that the types 
of System investments may change as the needs of rural communities 
evolve. For this reason, the FCA believes that the new regulation 
should contain a mechanism for approving investments that currently do 
not exist, but may emerge in the future. Currently, Sec.  615.5140(e) 
provides the FCA with the authority to approve new investments that are 
not specifically authorized by regulation.
    Proposed Sec.  615.5176(d) establishes specific criteria for System 
institutions to apply to the FCA for permission to hold investments 
that are not expressly authorized by this regulation. Under this 
proposal, written requests by System institutions would: (1) Describe 
the proposed project or program in detail; (2) explain its risk 
characteristics; and (3) demonstrate how such investments are 
consistent with the System's statutory mandate to serve agriculture and 
rural communities. In approving such requests, the FCA may impose 
additional or more stringent conditions than the requirements of this 
regulation to ensure safety and soundness or compliance with law.

E. Restrictions on Rural Community Investments

    Other requirements governing System investments in rural 
communities are covered by proposed Sec.  615.5176(e). These 
requirements either pertain to safety and soundness or implement 
statutory requirements.
1. Portfolio Limit
    Proposed Sec.  615.5176(e)(1) would authorize each System bank, 
association, or service corporation to make rural community investments 
in an amount not to exceed 150 percent of the institution's total 
surplus. The proposed portfolio limit on rural community investments 
ensures that lending to farmers, ranchers, aquatic producers, 
cooperatives, and other borrowers that own the FCS remains the primary 
activity of System institutions. At the same time, the proposed limit 
provides the FCS with the flexibility to make investments in an amount 
that offers meaningful assistance to rural communities and their 
residents. This limit on rural community investments is compatible with 
limits that the Act and other FCA regulations impose on System 
activities that are related to the System's mission.
    Based on financial information reported as of December 31, 2007, 
the proposed limit would authorize the System to invest up to a total 
of $35.8 billion in rural community investments.\21\ For example, this 
would permit an FCS association with $1.0 billion in assets and $150.0 
million in total surplus to invest up to $225.0 million in rural 
communities.
---------------------------------------------------------------------------

    \21\ This amount is comparable to the regulatory limits 
established for the System's rural home lending and investments in 
farmers' notes activities, which are limited to amounts totaling 
$35.9 billion for each program as of year-end, although actual 
amounts outstanding under these programs represented 1.3 percent and 
less than 1 percent of total outstanding loans, respectively.
---------------------------------------------------------------------------

    The FCA considered the following factors when it decided to propose 
150 percent of total surplus as the portfolio limit: (1) The safety and 
soundness of FCS institutions; (2) the significant needs of rural 
communities; (3) the FCS's ability and capacity to assist rural 
communities, and (4) the ability of FCS institutions to fulfill mission 
objectives. Total surplus provides a basis for each institution's risk 
tolerance level, and the FCA has historically used this standard to 
limit System investments in unrated obligations that are less liquid. 
System institutions also use limits based on similar capital measures 
to ensure that asset and portfolio concentrations are safely and 
soundly managed.
    This proposed limit also is based on the limits established for the 
pilot programs. The FCA established individual institution limits equal 
to 100 percent of total surplus (or in some cases 10 percent of total 
loans) for investments held under specific pilot programs, and 150 
percent of total surplus for an institution's portfolio of all rural 
community investments. The

[[Page 33938]]

pilot programs evidence that System institutions exercised caution when 
making investments in rural communities. Institutions have not 
approached the portfolio limit. Although the proposed rule establishes 
an upper regulatory portfolio limit, the FCA expects that each System 
institution would determine an appropriate internal portfolio limit 
based on the individual institution's objectives, capital position, 
risk tolerance, and other factors that it considers appropriate, in 
accordance with Sec.  615.5133(c).
    The FCA also considered the System's need to establish a program of 
sufficient size that could adequately deliver benefits to rural 
communities while balancing operational efficiency needs. In 
establishing the portfolio limit, the FCA sought to ensure that each 
System institution, large or small, could effectively partner with 
government agencies and non-System financial institutions in projects 
that may positively affect their local rural communities.
    The current credit crisis emphasizes the importance of funding for 
rural development projects and enhancing the liquidity of rural credit 
markets. The portfolio limit curtails the maximum risk exposure of 
System institutions, and it also encourages partnerships with non-
System financial institutions and government agencies that are active 
in rural development. Collaboration between System institutions and 
larger, more established financial investors is a way to help rural 
communities access financing for vital projects, especially during 
times of economic uncertainty.
2. Obligor Limit
    Proposed Sec.  615.5176(e)(2) would establish an obligor limit for 
investments in rural communities. This provision would not allow any 
System institution to invest more than 15 percent of its total surplus 
in investments issued by a single entity, issuer, or obligor. However, 
the obligor limit would not apply to obligations issued or guaranteed 
on the full faith and credit of the United States, its agencies, 
instrumentalities, or corporations. In the event only a portion of the 
obligation is guaranteed, the non-guaranteed portion of the obligation 
would remain subject to the obligor limit.
    This obligor limit is designed to control undue credit risk from a 
single counterparty on the capital of any System institution and 
provide sufficient diversification of an institution's rural community 
investment portfolio. For safety and soundness reasons, the FCA decided 
that the obligor limit for rural community investments should be lower 
than the 20 percent of total capital obligor limit established for 
investments held by System institutions to maintain liquidity and 
manage market risks in Sec.  615.5140(d). In contrast to the liquid and 
marketable securities held under Sec.  615.5140, rural community 
investments are often unrated and, therefore, capital markets would 
consider them less liquid. The FCA anticipates that most rural 
community investments would be held to maturity and would not trade. 
For these reasons, the FCA proposes an obligor limit for rural 
community investments that does not exceed 15 percent of the total 
surplus of each System institution.
    This regulatory provision would also require a System institution 
to count securities that it holds through an investment company towards 
this 15-percent obligor limit to prevent undue risk concentrations. 
This provision provides an exception when the investment company's 
holding of the security of any one issuer does not exceed 5 percent of 
the investment company's total portfolio. The FCA patterned this 
provision after Sec.  615.5140(d)(2), which applies to investments that 
FCS institutions hold through investment companies for the purposes of 
maintaining liquidity or managing market risks.
    The FCA emphasizes that proposed Sec.  615.5176(e)(2) establishes a 
maximum obligor limit for rural community investments. The FCA expects 
every Farm Credit institution to establish internal obligor limits 
based on its financial condition and the size and complexity of 
securities that it contemplates buying and holding. The obligor limit 
that each System institution sets should be based on both identified 
risks and its own risk-bearing capacity.
3. Maturities for Debt Securities in Rural Communities
    Proposed Sec.  615.5176(e)(3) would require most rural community 
investments to mature in no more than 20 years. However, debt 
securities may mature in not more than 40 years if the United States or 
its agencies provide a guarantee or a conditional commitment of 
guarantee for 50 percent or more of the total issuance or obligation. 
Proposed Sec.  615.5176(e)(3) establishes terms to maturity that are 
flexible enough to accommodate typical rural development projects that 
this rule would authorize. This regulatory approach would enable System 
institutions to participate in USDA and other State rural development 
programs that provide a supplemental or partial guarantee, which 
contributes to, or enhances, whole-project financing. Also, investments 
that fund essential rural community facilities, such as hospitals, 
police and fire stations, and other emergency service facilities, 
typically require project financing over longer terms to maturity.
4. Exclusion From the Liquidity Reserve
    Proposed Sec.  615.5176(e)(4) would require System banks to exclude 
rural community investments from their liquidity reserve under Sec.  
615.5134 of this part. System banks may purchase and hold the eligible 
investments listed in Sec.  615.5140 to maintain liquidity reserves, 
manage interest rate risk, and invest surplus short-term funds in 
accordance with Sec.  615.5132. Only investments that can be promptly 
converted into cash without significant loss are suitable for achieving 
these objectives. Rural community investments are not suitable for 
liquidity purposes or market risk management because these investments 
do not typically carry ratings assigned by a Nationally Recognized 
Statistical Rating Organization and are not actively traded in the 
established secondary markets.
5. Association Investments
    Proposed Sec.  615.5176(e)(5) would implement sections 2.2(10) and 
2.12(18) \22\ of the Act, which require each funding bank to supervise 
and approve the investment activities of its affiliated associations. 
System banks may discharge their statutory and regulatory 
responsibility to approve and supervise an association's rural 
community investments through covenants in the general financing 
agreement, policies, or other appropriate formats. System banks may 
also provide advisory, analytical, and research services that help 
their affiliated associations to devise strategies for investing in 
rural communities and managing these assets.
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 2073 (10) and 2093 (18).
---------------------------------------------------------------------------

6. Attribution of Service Corporation Investments
    Proposed Sec.  615.5176(e)(6) would require System service 
corporations to attribute all rural community investments to their 
System institution parents based on the ownership percentage of each 
bank or association. This provision would prevent FCS institutions from 
utilizing service corporations to exceed the regulatory limits on rural 
community investments.

[[Page 33939]]

F. Management of Rural Community Investments

    Proposed Sec.  615.5176(f) addresses rural community investment 
management practices at FCS institutions and ensures that System 
institutions invest in rural communities in a safe and sound manner. If 
a Farm Credit System institution chooses to invest in rural 
communities, proposed Sec.  615.5176(f) would require its board of 
directors to first adopt written policies for managing the 
institution's investments. These investment management policies must be 
appropriate for the levels, types, and complexities of each 
institution's rural community investments. Proposed Sec.  615.5176(f) 
would also require the board of directors ensure the institution's 
implementation of procedures and internal controls that ensure 
compliance with the board's policies and the regulation.
    Additionally, proposed Sec.  615.5176(f) would require these 
written policies to comply with Sec.  615.5133, which governs 
management practices for investments held for liquidity and risk 
management. Although rural community investments differ from liquid 
investments, strong and disciplined investment management practices are 
essential to the safety and soundness of all investment activities 
within System institutions. As a result, sound investment management 
practices prescribed by Sec.  615.5133 are also applicable to rural 
community investments and, for this reason, the FCA is extending Sec.  
615.5133 to rural community investments.
    Existing Sec.  615.5133 requires a System institution's investment 
management policies to address risk tolerance, delegations of 
authority, internal controls, securities valuation, and reporting to 
the board. Also, Sec.  615.5133 requires that investment policies be 
appropriate for the size, type, and risk characteristics of the 
institution's investments. The FCA expects each System institution to 
fully and carefully evaluate its risk tolerance in accordance with 
Sec.  615.5133(c) when it considers purchasing any rural community 
investments. Finally, proposed Sec.  615.5176(f) expressly exempts 
those rural community investments that System institutions classify and 
account for as held-to-maturity under generally accepted accounting 
principles from the securities valuation requirement in Sec.  
615.5133(f). This exemption is based on the different accounting 
classifications for these securities.

G. 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 the proposed 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 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 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.

    For the reasons stated in the preamble, part 615 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
as follows:

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

    1. The authority citation for part 615 is revised to read as 
follows:

    Authority: Secs. 1.1, 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 
5.17, 6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the 
Farm Credit Act (12 U.S.C. 2001, 2013, 2015, 2018, 2019, 2020, 2073, 
2074, 2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 
2202b, 2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); 7 U.S.C 2009cc 
et. seq.; sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart F--Property, Transfers of Capital and Other Investments

    2. A new Sec.  615.5176 is added to subpart F to read as follows:


Sec.  615.5176  Rural community investments.

    (a) Rural communities. As authorized by this section, each Farm 
Credit System (System) bank, association, or service corporation 
(hereafter ``institution'') may make rural community investments. All 
investments that any System institution makes under this section in 
rural communities must be outside an urbanized area as determined by 
the latest decennial census of the United States.
    (b) Debt securities. Each institution may make investments in rural 
communities by purchasing and holding debt securities. For the purposes 
of this section, debt securities are obligations that are commonly 
recognized in the established capital markets as a medium for 
investment. Debt securities exclude commercial loans and any instrument 
or transaction that is more similar to a commercial loan than to a 
traditional investment instrument or transaction. Debt securities 
include government obligations, corporate debt obligations, revenue 
bonds, asset-backed securities, as defined by Sec.  615.5131(a), and 
mortgage securities, as defined by Sec.  615.5131(h). Debt securities 
that institutions purchase and hold under this section must provide 
funding in rural communities for:
    (1) Essential community facilities such as hospitals, clinics, 
emergency services, and schools;
    (2) Basic transportation infrastructure, such as roads, bridges, 
and other public transportation systems;
    (3) Revitalization projects that rebuild rural areas recovering 
from disasters where an emergency has been declared pursuant to law;
    (4) Rural development projects for which the issuer, sponsor, or 
provider of a guarantee is:
    (i) The United States or any of its agencies, instrumentalities, or 
corporations, under programs that have the specific purpose of directly 
financing economic development in rural areas; or
    (ii) Any State, the Commonwealth of Puerto Rico, local or municipal 
governments, or other political subdivisions.
    (5) Non-System financial institutions for their activities that 
support rural development.
    (c) Equity investments. System institutions may also make 
investments in:
    (1) Rural Business Investment Companies that are established and 
operate in accordance with 7 U.S.C. 2009cc et seq.; or
    (2) Venture capital funds that are established to promote economic 
development and job opportunities in businesses located in rural 
communities, so long as an institution does not:
    (i) Invest more than 5 percent of its total surplus in venture 
capital funds and more than 2 percent of its total surplus in any one 
venture capital fund;
    (ii) Hold more than 20 percent of the voting equity of any one 
venture capital fund;
    (iii) Participate in the routine management or operation of any 
venture capital fund;
    (iv) Allow any institution director, officer, or employee to serve 
as director, officer, employee, principal shareholder, or trustee of 
any venture

[[Page 33940]]

capital fund, or of any entity funded by, or affiliated with any 
venture capital fund; or
    (v) Participate in any decision or action of any venture capital 
fund involving or affecting any customer of the institution.
    (d) Other investments approved by the Farm Credit Administration. 
System institutions may make other investments in rural communities 
that are not expressly authorized by this section if they are approved 
by the Farm Credit Administration. Written requests for Farm Credit 
Administration approval must describe the proposed project or program 
in detail, explain its risk characteristics, and demonstrate how such 
investments are consistent with the statutory mandate of the Farm 
Credit System.
    (e) Restrictions on rural community investments--(1) Portfolio 
limit. An institution must not invest more than 150 percent of its 
total surplus in rural community investments.
    (2) Obligor limit. An institution must not invest more than 15 
percent of its total surplus in rural community investments issued by 
any single entity, issuer, or obligor. This obligor limit does not 
apply to obligations of the United States or its agencies, 
instrumentalities, or corporations. An institution must count 
securities that it holds through an investment company towards the 
obligor limit of this section unless the investment company's holding 
of the securities of any one issuer does not exceed 5 percent of the 
investment company's total portfolio.
    (3) Maturities for debt securities. Debt securities purchased by 
institutions under this section must mature in not more than 20 years, 
except that debt securities may mature in not more than 40 years if the 
United States or its agencies provide a guarantee or a conditional 
commitment of guarantee for 50 percent or more of the total issuance or 
obligation.
    (4) Exclusion from the liquidity reserve. No Farm Credit bank shall 
include any investment made in accordance with this section in its 
liquidity reserve under Sec.  615.5134 of this part.
    (5) Association investments. A System association may hold rural 
community investments only with the approval of its funding bank. Each 
district Farm Credit bank must annually review all rural community 
investments held by its affiliated associations.
    (6) Attribution of service corporation investments. All investments 
in rural communities that service corporations hold under this section 
must be attributed to their System institution parents based on the 
ownership percentage of each bank or association.
    (f) Management of rural community investments. Before a System 
institution invests in rural communities, its board of directors must 
first adopt written policies for managing the institution's rural 
community investments. Investment management policies must be 
appropriate for the levels, types, and complexities of each 
institution's rural community investments. These written policies must 
comply with requirements of Sec.  615.5133. Investments made under this 
section that System institutions classify and account for as held-to-
maturity securities in accordance with generally accepted accounting 
principles are exempt from the requirements of paragraph (f) of Sec.  
615.5133. The board of directors must ensure that the institution 
implements procedures and internal controls to ensure compliance with 
the board's policies and the regulation.

    Dated: June 10, 2008.
Roland Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E8-13382 Filed 6-13-08; 8:45 am]
BILLING CODE 6705-01-P