[Federal Register Volume 75, Number 222 (Thursday, November 18, 2010)]
[Proposed Rules]
[Pages 70619-70623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29025]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 612, 620, and 630

RIN 3052-AC41


Standards of Conduct and Referral of Known or Suspected Criminal 
Violations; Disclosure to Shareholders; and Disclosure to Investors in 
System-Wide and Consolidated Bank Debt Obligations of the Farm Credit 
System; Compensation, Retirement Programs, and Related Benefits

AGENCY: Farm Credit Administration.

ACTION: Advance notice of proposed rulemaking (ANPRM).

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SUMMARY: The Farm Credit Administration (FCA, we, or our) is requesting 
comments on ways to clarify or otherwise enhance our regulations 
related to Farm Credit System (System) institutions' disclosures to 
shareholders and investors on compensation, retirement programs and 
related benefits for senior officers, highly compensated individuals, 
and certain individual employees or other groups of employees. We are 
also seeking comments on whether we should issue new regulations in 
related areas. In keeping with today's financial and economic 
environment, we believe it prudent and timely to undertake a review of 
our regulatory guidance on the identified areas. We intend to consider 
the information and suggestions we receive in response to this ANPRM 
when developing a rulemaking on compensation disclosures and related 
areas.

DATES: You may send comments on or before March 18, 2011.

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. 
As facsimiles (fax) are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act, we are no longer 
accepting comments submitted by fax. Regardless of the method you use, 
please do not submit your comments 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.

You may review copies of all comments we receive at our office in 
McLean, Virginia or on 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, including any 
supporting data provided, 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:
    Deborah A. Wilson, Senior Accountant, Office of Regulatory Policy, 
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4414, TTY 
(703) 883-4434, or
    Laura McFarland, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION:

I. Objective

    The objective of this ANPRM is to gather information for the 
development of a rulemaking that could result in:
     Enhancing the transparency and consistency of disclosures 
related to System institution compensation policies and practices \1\ 
for senior officers,\2\ highly compensated individuals,\3\ and/or 
certain other groups of employees whose activities, either individually 
or in the aggregate, are reasonably likely to materially impact an 
institution's financial performance and risk profile;
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    \1\ 12 CFR 620.5(i).
    \2\ All references to senior officer(s) in this ANPRM refer to a 
senior officer as defined in 12 CFR 619.9310.
    \3\ All references to highly compensated individuals in this 
ANPRM refer to those officers described in 12 CFR 620.5(i)(2)(i)(B).
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     Clarifying and enhancing the authorities and 
responsibilities of System institution compensation committees \4\ in 
furtherance of their oversight activities;
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    \4\ All references to compensation committees in this ANPRM 
refer to compensation committees as set forth in 12 CFR 620.31 and 
12 CFR 630.6(b).
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     Increasing user-control in System institutions' 
compensation policies and practices by providing for a non-binding 
shareholder vote on senior officer compensation;
     Requiring timely notice to interested parties of 
significant events, facts or circumstances occurring at a System 
institution between required reporting periods;
     Addressing the appropriateness of, and enhancing the 
disclosure of, certain payments to System institution directors; and
     Providing audit committees greater authority to access 
external resources when needed.

II. Background

    The Farm Credit Act of 1971, as amended (Act),\5\ authorizes the 
FCA to issue regulations implementing the provisions of the Act, 
including those provisions that address System institution disclosures 
to shareholders and investors. Our regulations are intended to ensure 
the safe and sound operations of System institutions and govern the 
disclosure of financial information to shareholders of, and investors 
in, the Farm Credit System.\6\ Congress explained in section 514 of the 
Farm Credit Banks and Associations Safety and Soundness Act of 1992 
(1992 Act) \7\ that disclosure of financial information and the 
reporting of potential conflicts of interest by institution directors, 
officers, and employees help ensure the financial viability of the 
System. In the 1992 Act, Congress required that we review our 
regulations to ensure that System institutions provide adequate 
disclosures to shareholders and other interested parties. We completed 
this initial review in 1993 making appropriate amendments to our

[[Page 70620]]

``Standards of Conduct'' regulations (59 FR 24889, May 13, 1994), our 
``Disclosure to Shareholders'' regulations (59 FR 37406, July 22, 
1994), and our ``Disclosure to Investors in System-wide and 
Consolidated Bank Debt Obligations of the Farm Credit System'' 
regulations (59 FR 46742, September 12, 1994). We continue to 
periodically review and update our disclosure regulations to ensure 
they are appropriate for current business practices, that they ensure 
System institutions provide their shareholders with information to 
assist them in making informed decisions regarding the operations of 
the institutions, and that the disclosures provide investors with 
information necessary to assist them in making investment decisions.
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    \5\ Public Law 92-181, 85 Stat. 583, 12 U.S.C. 2001 et seq.
    \6\ Section 5.17(a)(8), (9) and (10) of the Act. 12 U.S.C. 
2252(a)(8)(9) and (10).
    \7\ Public Law 102-552, 106 Stat. 4131.
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    In keeping with today's economic and business environments and in 
accordance with the findings of Congress under the 1992 Act, we believe 
it is prudent and timely to undertake a review of our regulatory 
guidance related to senior officer compensation. The recent turmoil 
within the financial industry and the ensuing decline in the economy 
highlight the need to ensure that shareholders and investors are 
informed of compensation policies and practices. Shareholders and 
investors need information that allows them to assess which policies 
and practices encourage excessive risk-taking at the expense of the 
institution's safety and soundness. With appropriate information, 
shareholders and investors can evaluate whether the institution's 
compensation policies and practices create an environment in which 
employees take imprudent risks in order to maximize their expected 
income at the expense of the institution's earnings performance and 
shareholder return. Similar efforts are in process at other regulatory 
agencies. For example, the Securities and Exchange Commission (SEC) 
recently revised its regulations to require that issuers disclose their 
compensation policies and practices as they relate to the company's 
risk management.\8\ Likewise, the Board of Governors of the Federal 
Reserve System (FRB) has undertaken two supervisory initiatives 
involving a review of incentive compensation practices at certain 
banking organizations. The FRB has issued supervisory guidance designed 
to ensure that incentive compensation policies at banking organizations 
supervised by the FRB do not encourage imprudent risk-taking and are 
consistent with the safety and soundness of the organization.\9\ Also, 
the recently enacted Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Wall Street Reform Act) \10\ includes amendments to the 
Securities Exchange Act of 1934 requiring, among other things, a 
separate resolution subject to a non-binding shareholder vote on the 
compensation of executive officers of a SEC issuer.\11\ In addition, 
under the Wall Street Reform Act, each SEC issuer is required to 
disclose information that shows the relationship between executive 
compensation actually paid and the financial performance of the 
reporting entity.\12\
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    \8\ See SEC Release No. 33-9089, ``Proxy Disclosure and 
Enhancements,'' issued February 28, 2010.
    \9\ Board of Governors of the Federal Reserve System, Docket No. 
OP-1374, ``Guidance on Sound Incentive Compensation Policies,'' June 
21, 2010.
    \10\ Public Law 111-203, 124 Stat. 1376.
    \11\ See section 951 of Subtitle E of Title IX, ``Investor 
Protections and Improvements to the Regulation of Securities,'' of 
the Wall Street Reform Act.
    \12\ See section 953 of Subtitle E of Title IX, ``Investor 
Protections and Improvements to the Regulation of Securities,'' of 
the Wall Street Reform Act.
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    Active, effective oversight of senior officer compensation policies 
and practices will help align those policies and practices with safe 
and sound operations. Providing transparent, timely and accurate 
disclosures of senior officer compensation policies and practices will 
help ensure an institution adequately fulfills its obligation to its 
shareholders and investors.

III. Areas of Consideration

    We are reviewing our regulations in order to identify where our 
disclosure regulations might be amended to enhance the transparency of 
an institution's compensation policies and practices and if those 
practices affect the safety, soundness and financial performance of the 
institution. Also, we are reviewing our regulations to determine if 
they should be amended to facilitate qualified, objective and active 
compensation committees that are tasked to oversee an institution's 
compensation programs. We are interested in public response to the 
questions contained in this ANPRM, including ways in which our 
regulations might further enhance disclosures of senior officer 
compensation policies and practices. We are also interested in the ways 
in which an institution's compensation committee might further engage 
in active and effective oversight of those policies and practices.

A. Enhanced Disclosures of Senior Officer Compensation

    Our existing disclosure regulations at Sec. Sec.  620.5(i) and 
630.20(i) require that certain disclosures of compensation paid to, or 
earned by, senior officers and other highly compensated employees 
(hereinafter collectively referred to as ``senior officers'') be 
included in an institution's annual report to shareholders (or an 
association's annual meeting information statement). Our regulations 
also require disclosure of certain benefits paid to senior officers 
pursuant to a plan or arrangement in connection with resignation, 
retirement, or termination. However, depending on when an officer 
retires (or otherwise terminates employment with the institution), the 
payment may not be disclosed or it may not be disclosed in a timely 
manner due to the timing of the actual payment to the officer. As a 
result, shareholders and investors may not have all the information 
they need to make informed decisions on an institution's compensation 
policies and practices for senior officers.
    We are considering whether current required disclosures should be 
changed to include quantitative and qualitative information on the 
obligations that have accrued to an institution from senior officers' 
supplemental retirement and deferred compensation plans. Also, we want 
to identify how the disclosures could provide greater clarity to the 
variable components of senior officers' compensation packages. We 
believe disclosures should provide information that assists 
shareholders and investors in understanding the impact of compensation 
programs on an institution's operations. Shareholders and investors 
require sufficient information to assess whether senior officers' 
compensation is appropriate in view of the institution's financial 
condition, risk profile, and business activities. This information 
enables shareholders to understand how an institution's board or 
compensation committee exercises its oversight responsibilities of 
ensuring a comprehensive and balanced compensation program that holds 
management accountable for an institution's financial performance.
    Questions (1) through (8) of Section IV of this ANPRM address this 
topic.

B. Compensation Committees

    Our existing rules at Sec. Sec.  620.31 and 630.6(b) require that 
System institutions have compensation committees and that these 
committees be responsible for reviewing the compensation policies and 
plans for senior officers and employees, as well as approving the 
overall compensation program for senior officers. Compensation 
committee oversight is critical in ensuring compensation policies and 
practices do not jeopardize an institution's safety

[[Page 70621]]

and soundness. In FCA bookletter, ``Compensation Committees'' (BL-060), 
dated July 9, 2009, we issued guidance on how compensation committees 
could fulfill these duties. We are considering incorporating this 
guidance into our existing rules. We are also considering additional 
ways to enhance the authorities and responsibilities of System 
institution compensation committees to continue to achieve active and 
effective oversight of senior officers' compensation policies and 
practices. For example, in order for compensation committees to 
effectively fulfill their role, they must be specifically tasked with 
ensuring that compensation policies and practices do not jeopardize the 
safety and soundness of the institution. We are considering ways to re-
emphasize that oversight responsibility. Understanding the financial 
commitment and total cost to the institution of the compensation 
programs and verifying that the institution is providing accurate and 
transparent disclosures on compensation are appropriate tasks for a 
compensation committee.
    We are aware that some System institutions engage compensation 
consultants to make recommendations on compensation programs, plans, 
policies and practices. Compensation consultants can provide 
significant expertise to the board or compensation committee on 
compensation matters. These same consultants may also provide 
additional services, such as administration of compensation and benefit 
programs or actuarial services, on behalf of an institution's 
management. The degree of reliance placed on the consultant's expertise 
by the compensation committee may be a function of the consultant's 
independence from management influence. Therefore, we are considering 
requiring disclosure of the additional services provided to management 
by the consultant and requiring that the related fees paid to the 
consultant be disclosed. We are also considering if the significance of 
these additional services should impact whether they are included in 
the compensation disclosures.
    Questions (9) through (13) of Section IV of this ANPRM address this 
topic.

C. Shareholder Approval of Senior Officers' Compensation

    Recent initiatives, such as the Wall Street Reform Act, require 
entities that are SEC issuers to include a separate resolution in their 
proxy solicitations subject to shareholder vote on the compensation of 
the entities' executives. We are considering whether the FCA should 
issue regulations requiring a separate, non-binding, advisory 
shareholder vote on senior officer compensation and, if so, what those 
regulations should require. By providing for a non-binding advisory 
vote, shareholders would have a process through which they could 
express their approval or disapproval of an institution's compensation 
policies and practices. Board oversight and governance of compensation 
policies and practices may be more effective and enhanced if the board 
is explicitly informed of shareholder approval or disapproval. A non-
binding, advisory shareholder vote would not bind the board of 
directors or compensation committee to any particular course of action 
and would not overrule any board or committee decisions related to 
senior officers' compensation.
    Submitting senior officer compensation to a non-binding, advisory 
shareholder vote may be a practice that is appropriate for institutions 
that are cooperatively structured. One of the core cooperative 
principles is that those who use the cooperative should also control 
it. Submitting senior officer compensation to an advisory vote by 
System institution shareholders may promote member participation in 
their institution.
    Question (14) of Section IV of this ANPRM addresses this topic.

D. Notice of Significant or Material Events

    The FCA promotes sound governance practices. In doing so, we 
believe interested parties deserve timely notice and disclosure of any 
event, fact or circumstance that boards and management consider 
material or significant to the operations or financial condition of 
their institution. The SEC requires its registrants to file, in a 
timely manner, a current report to announce major events that occur 
between reporting periods (i.e., the Form 8-K, Current Report). We are 
considering requiring System institutions to provide similar current 
reporting on intervening events that occur between annual and quarterly 
reporting periods. The intervening events we are considering include 
enforcement actions taken by or supervisory agreements with the FCA, 
departure of an institution's director or an officer, results of 
matters an institution may submit to a vote by its shareholders, and 
other similar events.
    Question (15) of Section IV of this ANPRM addresses this topic.

E. Remuneration to Boards of Directors in Connection With Conclusion of 
Services

    Section 612.2130(b) of our regulations defines a conflict of 
interest, or the appearance thereof. The rule states that a conflict 
exists, or may appear to exist, when a person has a financial interest 
in a transaction, relationship or activity that actually affects, or 
has the appearance of affecting, the person's ability to perform 
official duties and responsibilities in a totally impartial manner and 
in the best interest of the institution. Payments to a director in 
connection with a restructuring or downsizing of the board or as a 
result of a merger, consolidation or other form of institutional 
reorganization may result in a board member having, or appearing to 
have, a conflict of interest or lack of total independence related to 
the transaction or board action. Shareholders and boards have approved 
such payments for economic reasons or when they wanted to recognize the 
contributions of directors stepping down from the board. We are 
considering regulating payments to directors under certain 
circumstances and also considering how or if these payments should be 
disclosed.
    Question (16) of Section IV of this ANPRM addresses this issue.

F. Audit Committees

    Sections 620.30(c) and 630.6(a)(3) of the FCA's regulations require 
a two-thirds majority vote of the full board of directors of a bank, an 
association or the Federal Farm Credit Banks Funding Corporation 
(Funding Corporation) to deny its respective audit committee's request 
for resources. We are considering whether we should remove the ability 
of the full board to deny a request from its audit committee for 
external resources.\13\ We are considering this matter based on a May 
7, 2010, request from the Funding Corporation submitted on behalf of 
the System Audit Committee (SAC), asking us to amend Sec.  630.6(a)(3) 
of our regulations to remove the authority of the board of directors of 
the Funding Corporation to deny the SAC certain resources.
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    \13\ External resources may include, but not be limited to, 
outside advisors, consultants, or legal counsel.
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    Question (17) of Section IV of this ANPRM addresses this request.

IV. Request for Comments

    We request and encourage any interested person(s) to submit 
comments on the following questions and ask that you support your 
comments with relevant data or examples. We remind

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commenters that comments, and data submitted in support of a comment, 
are available to the public through our rulemaking files.
    (1) Should FCA enhance senior officer compensation disclosure 
requirements to improve transparency and current practices? 
Specifically, should the FCA consider enhancing disclosures on:
    (a) The significant terms of senior officers' employment 
arrangements, whether or not dollar amounts are paid or earned during 
the reporting year, including components related to deferred 
compensation plans, supplemental retirement plans, performance 
agreements, and incentive or bonus compensation based on financial 
information; and
    (b) The position titles of officers included in the aggregated 
group's compensation reported under existing Sec.  620.5(i)(2)(i)(B) of 
our regulations?
    (2) Should the FCA remove from Sec.  620.5(i)(2) the option that 
allows associations to disclose senior officer compensation information 
in annual meeting information statements instead of disclosing it in 
annual reports?
    (3) What additional disclosures (qualitative and quantitative) are 
needed to ensure that all compensation, including deferred compensation 
and supplemental retirement benefits, are fully disclosed in a timely 
manner and that an institution's total compensation policies, 
practices, and obligations for senior officers are effectively 
communicated in a transparent and timely manner?
    (4) Should FCA require the disclosure of compensation policies and 
practices related to the activities of certain employees, other than 
senior officers, which, either individually or in the aggregate, may 
expose the institution to a material amount of adverse risk? If so, 
what disclosures are needed to ensure the compensation programs, 
practices, and incentives for such employees are adequately disclosed 
so that shareholders and investors are informed of the potential risk 
areas?
    (5) To enhance transparency and a comprehensive understanding of 
the link between risk, return, and compensation incentives, should a 
discussion of an institution's overall risk and reward structure for 
senior officer compensation and benefit policies and practices be a 
required disclosure and, if so, what level of disclosure or qualitative 
information should be required?
    (6) To ensure that all sources of compensation are disclosed, 
should institutions be required to disclose estimated payments to be 
made in the future to each senior officer in connection with deferred 
compensation arrangements, performance or incentive awards, and/or 
supplementary retirement benefits? If so, how should the disclosures be 
presented and for what periods? What other sources of senior officer 
compensation should be captured in current financial disclosures to 
shareholders?
    (7) To ensure that shareholders and investors have an appropriate 
understanding of the assumptions used by the institution to determine 
estimated future payments for compensation or benefits, if disclosed, 
should the assumptions used to determine the future payments also be 
disclosed? If so, should the disclosure include why the assumptions 
used to determine the estimated payments are different from those used 
to determine the present value of dollar amounts disclosed in the 
Summary Compensation Table?
    (8) Should institutions be required to disclose:
    (a) The dollar amount of any tax reimbursements (such as Internal 
Revenue Code Section 280G tax gross-ups) provided by the institution to 
a senior officer;
    (b) The business reason(s) for any material or significant change 
or adjustment to compensation or benefit programs from prior periods 
that increase or decrease salaries or compensation programs 
(individually or in the aggregate);
    (c) Quantitative and qualitative benchmarks used to determine 
senior officer compensation and performance and incentive bonuses, if 
and why benchmarks used in the current reporting period were different 
from those used in prior periods, the business reason(s) for changing 
the benchmarks used, whether the individual officer was successful in 
attaining the requirements of the benchmark used, and if and how each 
benchmark relates to the financial performance of the institution;
    (d) Significant events, trends or other information necessary to 
understand the institution's senior officer compensation policies and 
practices; and
    (e) The vesting periods for long-term incentive and/or performance 
compensation or retirement benefits?
    (9) To support the compensation committee's review and 
accountability processes, should compensation committees be required to 
certify compensation disclosures? If so, should the certification 
include a statement to the effect that:
    (a) The compensation disclosures are true, accurate, and complete, 
and that the disclosures are in compliance with all applicable 
regulatory requirements;
    (b) Comparable compensation practices used by the institution to 
develop its compensation policies support the valuation of senior 
officer compensation; and
    (c) The institution's compensation policies and practices are 
consistent with the adverse risk-bearing capacity of the institution 
(as determined by the institution's board) and do not pose a threat to 
the safety and soundness of the institution?
    (10) If compensation committees are required to certify 
compensation disclosures, what other areas should be addressed in the 
certification and what related statements should the committee certify?
    (11) Would it strengthen the operation and independence of the 
compensation committee if the FCA required that at least one of the 
compensation committee members be an outside director (independent of 
any affiliation with the institution other than serving as a director)? 
What would be the benefits and/or concerns with such a requirement?
    (12) If a System institution compensation committee uses the 
services of a compensation consultant, would the disclosure of that 
information be meaningful to shareholders and investors? What types of 
disclosures should be provided?
    (13) If institution management engages the services of a 
compensation consultant that is also used by the compensation 
committee, or vice versa, should that fact be disclosed? If so, should 
the disclosure include a description of the additional services 
provided by the consultant for management that:
    (a) Benefits the institution as a whole, and
    (b) Are provided solely for management's benefit? Should the 
consultant's fees for the additional services be disclosed if those 
fees are in excess of de minimis amounts?
    (14) To enhance transparency and shareholder understanding of 
compensation programs and practices, should FCA's regulations provide 
for a separate, non-binding advisory vote by System institution voting 
shareholders on senior officer compensation? If so:
    (a) When and how should the vote occur;
    (b) Within what timeframe should the results of the vote be 
reported to shareholders;
    (c) Should certain System institutions be exempt from the voting 
requirement and, if so, what criteria should be used to exempt those 
institutions; and
    (d) If a vote is required, should institutions be required to 
identify

[[Page 70623]]

senior officer compensation amounts on an individual basis to 
facilitate the vote? \14\
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    \14\ 12 CFR 620.5(i)(2)(i)(B) allows aggregated disclosure in 
the annual report of compensation paid to senior officers.
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    (15) Should System institutions be required to issue current 
reports on events, facts, or circumstances that management considers 
material or significant to the operations or financial condition of a 
System institution, similar to the notice on changes in capital levels 
described in Sec.  620.15? \15\ If so, what form should the report 
take, what types of events should be reported, and what timeframe would 
be appropriate for its issuance?
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    \15\ 12 CFR 620.15 provides for the notice to the FCA and 
shareholders by System banks and associations when an institution is 
not in compliance with the minimum permanent capital standards 
required by the FCA.
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    (16) To ensure that certain payments to institution directors do 
not create the potential for a conflict of interest, or appearance 
thereof, should payments made to System institution directors in 
connection with a restructuring or downsizing of the board, or as a 
result of a merger, consolidation or other form of institutional 
reorganization be allowed or disallowed?
    (a) Under what circumstances would such payments constitute a 
conflict of interest or an appearance thereof?
    (b) If allowed, how and when should such payments be disclosed?
    (17) Should FCA remove from Sec. Sec.  620.30(c) and 630.6(a)(3) 
the ability of a board of directors to deny a request for resources 
from its audit committee?

    Dated: November 12, 2010.
Mary Alice Donner,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 2010-29025 Filed 11-17-10; 8:45 am]
BILLING CODE 6705-01-P