[Federal Register Volume 77, Number 187 (Wednesday, September 26, 2012)]
[Rules and Regulations]
[Pages 59050-59053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23723]


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FARM CREDIT ADMINISTRATION

12 CFR Part 630

RIN 3052-AC77


Disclosure to Investors in System-Wide and Consolidated Bank Debt 
Obligations of the Farm Credit System; System Audit Committee

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, us, we, or our) amends 
our regulations related to the Federal Farm Credit Banks Funding 
Corporation (Funding Corporation) System Audit Committee (SAC) and the 
Farm Credit System (System) annual report to investors. The final rule 
removes the provision for a two-thirds majority vote of the Funding 
Corporation board of directors to deny a request for resources by the 
SAC and requires the SAC to use resources to preserve and promote the 
safety and soundness of the System. The rule also requires quarterly 
reporting by the SAC to the Funding Corporation board and annual 
reporting to investors on resources used.

DATES: This regulation will be effective 30 days after publication in 
the Federal Register during which either or both Houses of Congress are 
in session. We will publish a notice of the effective date in the 
Federal Register.

FOR FURTHER INFORMATION CONTACT: Deborah 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. Objectives

    The objectives of this final rule are to:
     Allow the SAC unrestricted access to resources to engage 
legal counsel, consultants and outside advisors; and
     Clarify that the SAC must have the agreement of the 
Funding Corporation board of directors in order to appoint, compensate, 
and retain the external auditor of the combined System-wide reports.

II. Background

    The Farm Credit Act of 1971, as amended (Act),\1\ authorizes the 
FCA to issue regulations implementing the Act's provisions.\2\ Our 
regulations are intended to ensure the safe and sound operations of 
System institutions and to govern the disclosure of financial 
information to shareholders of, and investors in, the System. Section 
630.6(a) of our existing regulations requires the Funding Corporation 
to establish and maintain the SAC, including providing monetary and 
nonmonetary resources for SAC operations. Our existing regulation 
requires a two-thirds vote of the full Funding Corporation board to 
deny any SAC request for resources.
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    \1\ Public Law 92-181, 85 Stat. 583 (1971), 12 U.S.C. 2001 et 
seq.
    \2\ 12 U.S.C. 2252(a)(8), (9) and (10).
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    In a May 2010 petition, the SAC requested that we amend Sec.  
630.6(a) to allow the SAC the unfettered ability to engage outside 
advisors, consultants and legal counsel in the performance of its 
duties. In a February 14, 2012, proposed rulemaking, we proposed:
     Removing the requirement that the Funding Corporation 
Board deny a SAC request for resources by a two-thirds majority vote of 
the full board;
     The SAC use resources in a manner that would not adversely 
affect the safety and soundness of the System; and
     Disclosure of resources used by, and the composition of, 
the SAC.\3\
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    \3\ 77 FR 8179 (Feb. 14, 2012).
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    The 60-day comment period for the proposed rule closed on April 16, 
2012.

III. Comments and Our Responses

    We received comment letters on the proposed rule from each of the 
four Farm Credit banks, the Farm Credit Council (Council) on behalf of 
its membership, and a joint letter from the Funding Corporation and the 
SAC (joint letter). The Farm Credit banks and the Council expressed 
support for the comments made in the joint letter. We discuss the 
comments to our proposed rule and our responses below. Unless otherwise 
discussed in this preamble, those areas of the proposed rule not 
receiving comment are finalized as proposed.

A. System Audit Committee Authority [Sec.  630.6(a)]

    All commenters supported removing the requirement that a two-thirds 
majority vote of the full Funding Corporation board of directors was 
needed to deny a SAC request for resources. Also, commenters supported 
the requirement that the SAC report at least quarterly to the Funding 
Corporation board on its use of resources.
    Commenters expressed concern with the requirement that the SAC use 
Funding Corporation resources in a

[[Page 59051]]

manner that would not adversely affect the safety and soundness of the 
System. They stated that the safety and soundness provision was not 
operational and could be subject to different interpretations. One 
commenter provided an example in which the SAC may choose not to 
investigate or uncover potential financial wrongdoing because 
disclosing how it used the resources and the results from the use of 
those resources may impact the System's cost of funds in a manner that 
could adversely affect the safety and soundness of the System. The 
commenter noted that failure of the SAC to investigate or uncover a 
potential financial wrongdoing could also adversely affect the safety 
and soundness of the System. We respectfully disagree with comments 
arguing that the provision may not be operational when there may be a 
duty to disclose financial wrongdoing which might adversely affect the 
cost of funds for the System. Uncovering financial wrongdoing and any 
unavoidable impact would not be contrary to the rule. While the 
wrongdoing itself may affect safety and soundness, the corrective 
actions taken to respond to and resolve the wrongdoing would be a 
positive impact on the safety and soundness of the System and, 
therefore, not prohibited under the rule. It is the financial 
wrongdoing that could adversely affect the safety and soundness of the 
System, not the action taken by the SAC to uncover and correct it.
    Commenters stated that requiring the SAC to use Funding Corporation 
resources in a manner that would not adversely affect the safety and 
soundness of the System provision would create a standard that is 
stricter than that applied under governance best practices and should 
not be required. Some commenters expressed that holding the SAC to a 
stricter standard in the use of resources may hinder the Funding 
Corporation's ability to attract and retain SAC members, which could 
potentially damage the safety and soundness of the System. As the 
safety and soundness regulator of System institutions, including the 
Funding Corporation and its SAC, we expect all institutions to use 
resources according to law and regulations and in a safe and sound 
manner. We believe using resources accordingly and in such a manner 
should always be considered a best practice. Further, since the SAC is 
not composed solely of members of the board of directors as are other 
System institution audit committees,\4\ we want to be clear that the 
SAC is held to the same safety and soundness standard.
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    \4\ The SAC is only required to have one-third of its membership 
from the Funding Corporation board of directors. Audit committee 
members of Farm Credit banks and associations are composed solely of 
members of the respective institution's board of directors.
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    Commenters stated the SAC cannot guarantee that the use of 
resources would lead directly to results that ensure the safety and 
soundness of the System. One commenter noted that the requirement may 
discourage the SAC from engaging outside third parties to assist with 
investigations or prevent the SAC from seeking their advice. The rule 
does not require the SAC use of resources guarantee the System's safety 
and soundness. Instead, the rule requires that the SAC not use Funding 
Corporation resources in a manner that would adversely affect the 
safety and soundness of the System or be contrary to law and 
regulation. We refer again to the example in which the SAC would use 
resources to uncover financial wrongdoing. The actual act of financial 
wrongdoing may adversely affect the safety and soundness of the System. 
The use of resources by the SAC to uncover and correct the wrongdoing 
may not be considered to have caused the adverse effect, but may help 
preserve and promote the safety and soundness of the System.
    The joint letter asserted that the SAC is already bound by its 
fiduciary duties to act prudently. The joint letter stated that the 
Business Judgment Rule allows SAC members to rely on the advice of 
experts, but the safety and soundness provision would create a judicial 
and regulatory hindsight that the Business Judgment Rule was meant to 
deter. The commenter stated that this could potentially lead to a 
liability for SAC members.
    The Business Judgment Rule provides a measure of liability 
protection to directors, officers, employees, and agents of a 
corporation when, in the course of decision-making, they place a 
reasonable reliance on expert advice. When applying the Business 
Judgment Rule, the courts consider whether the decision-making process 
involved careful consideration of reasonably available and relevant 
facts and whether the decision-maker honestly and reasonably believed 
that the decision was in the best interest of the institution. The 
safety and soundness of the System is in the best interest of the SAC 
and the Funding Corporation. We see nothing in the requirement to use 
Funding Corporation resources in a safe and sound manner that is 
contrary to the SAC's fiduciary duties or diminishes the protection 
offered the SAC under the ``Business Judgment Rule.'' As such, the 
argument that the provision hinders or otherwise contradicts the 
principals behind the Business Judgment Rule is not meritorious.
    The SAC's use of Funding Corporation resources must have the 
intended purpose of preserving or promoting the safety and soundness of 
the System. We do not believe that it is more difficult for the SAC to 
carry out its responsibilities in a manner that does not adversely 
affect the System's safety and soundness than it is for other System 
institution audit committees. However, in consideration of the 
comments, we are modifying the language to clarify the requirement. The 
provision as finalized places a positive duty on the SAC to use 
resources in a lawful manner and to preserve and promote the safety and 
soundness of the System. This provision does not prevent the Funding 
Corporation board from developing its own policies and procedures to 
address the request for and use of resources by the SAC.

B. External Auditors [Sec.  630.6(a)(4)(ii)(A)]

    All commenters agreed with the proposed clarification that the SAC 
determines the appointment, compensation, and retention of the external 
auditor only with the agreement of the Funding Corporation board. 
However, commenters asked that the rule text make clear that this 
authority relates to the performance of the audit of the System-wide 
combined financial statements and not the audit fees related to the 
performance of the audit of the financial statements of individuals 
banks and associations. We do not believe any changes are needed to the 
language in Sec.  630.6(a)(4)(ii). The rule clearly states that the 
appointment, compensation and retention of the external auditors 
relates solely to issuing the combined System-wide audit report and not 
the audit report of individual banks and associations. Our rule at 
Sec.  620.30(d)(2) gives that authority to the audit committees of 
individual banks and associations. In addition, in a 2006 rulemaking, 
we made changes to our rules to limit the authority of the Funding 
Corporation, and by extension the SAC, to intervene in the activities 
of any bank or association's external auditor.\5\
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    \5\ See 71 FR 76111, Dec. 20, 2006.
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    The joint letter requested that the rule not require Funding 
Corporation board concurrence for ordinary or recurring external 
auditor fees. We do not believe

[[Page 59052]]

this change is necessary because, as previously stated, the Funding 
Corporation board may develop its own procedures to address the 
activities of the SAC as long as those procedures do not conflict with 
law or regulation.
    We finalize the provisions of Sec.  630.6(a)(4)(ii)(A) as proposed.

C. Disclosure of System Audit Committee Expenditures [Sec.  630.20(n)]

    We proposed in Sec.  630.20(n) that Funding Corporation resources 
used by the SAC be disclosed by category and amount in the annual 
System-wide report to investors if the total of each expense category 
for the reporting year was $5,000 or more. The proposed categories 
included, at a minimum, administrative expenses, contracted legal 
services, contracted consultants and advisors, and other contracted 
services performed on behalf of the SAC. We proposed excluding from 
this section disclosure of the fees paid to the external auditor for 
issuing System-wide audit reports. That disclosure is required by 
existing Sec.  630.20(k)(2).
    Commenters expressed concern with the additional disclosures 
proposed in Sec.  630.20(n). Other commenters contended that the 
disclosure placed a higher standard on the SAC than what is required of 
entities registered with the Securities Exchange Commission (SEC) or as 
required by the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley).\6\ The 
joint letter stated the disclosures were unnecessary and explained that 
as a best practice the SAC follows most SEC disclosure requirements, 
using a materiality assessment. Commenters suggested disclosures not be 
required before any investigation or similar inquiry by the SAC is 
completed. One commenter stated that the disclosures could reveal 
confidential information and might affect the ability of the SAC to 
engage outside consultants. The joint letter asserted attorney-client 
communications would also be compromised.
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    \6\ Public Law 107-204, July 30, 2002. Congress enacted 
Sarbanes-Oxley after revelation of accounting and financial 
management scandals involving public companies. It was enacted to 
strengthen financial disclosure, reporting, and accountability 
requirements for publicly traded companies and other entities 
registered with the SEC. Farm Credit banks and associations are not 
subject to the governance requirements of Sarbanes-Oxley.
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    We believe disclosure of the use of Funding Corporation resources 
by the SAC provides transparency to System stockholders and investors 
and strengthens board and management accountability. Further, we 
believe removing the provision that a two-thirds majority vote of the 
full Funding Corporation board be required to deny an SAC request for 
resources necessitates an added level of accountability by the SAC.
    We do not believe that disclosing the dollar amount of resources 
used to hire legal counsel, consultants and other categories of 
services would compromise confidentiality or attorney-client relations. 
The provision does not require the disclosure in the annual System-wide 
report to investors of the name of or service performed by legal 
counsel, advisors or outside consultants engaged by the SAC. Instead, 
the provision requires reporting the cost of and benefits to the System 
from the use of those resources. However, since disclosure of benefits 
derived from using those resources appears to be the source of 
commenters' concerns, and considering the safety and soundness 
constraints placed on the use of resources, we are finalizing the rule 
with the cost disclosure only and without the requirement to report the 
benefits of resources used. We expect the SAC to disclose information 
on the benefit from the use of resources to the Funding Corporation 
board.
    One commenter requested that we limit the definition of external 
resources to ``experts'' engaged by the SAC and not include resources 
used by the SAC for off-site meeting facilities. The commenter stated 
that the use of these resources should instead be periodically reported 
to the Funding Corporation board. We respectfully disagree with the 
suggestion of limiting the disclosure on the SAC's use of resources to 
only ``experts.'' The Funding Corporation is required to provide both 
monetary and nonmonetary resources to the SAC and we proposed 
disclosures of those resources to ensure that investors are provided 
transparent and complete disclosure on the use of resources by the SAC. 
Further, we identified categories of resources based on use, including 
a disclosure category of ``administrative expenses,'' which may include 
either internal or external resources or both. Thus, if the SAC uses 
Funding Corporation resources for meeting sites, those expenses would 
be reported in the ``administrative expense'' category.
    One commenter asserted that the $5,000 de minimis reporting 
threshold was too low and should be increased. We believe this 
threshold is reasonable given we are removing the requirement for a 
two-thirds majority vote of the full Funding Corporation board to deny 
an SAC request for resources. In addition, the threshold resembles 
other disclosure thresholds contained elsewhere in our rules. We are 
not increasing the reporting threshold in this final rule.
    One commenter requested that we clarify the relationship of the 
proposed Sec.  630.20(n) exemption from reporting external audit fees 
for issuance of System-wide audit reports with the existing requirement 
of Sec.  630.20(k)(2), which requires the disclosure of fees. Existing 
Sec.  630.20(k)(2) requires disclosure of fees paid to the external 
auditor during the reporting period for audit services, tax services, 
and non-audit services. Because Sec.  630.20(k)(2) currently requires 
disclosure of these fees, we did not also propose requiring a similar 
disclosure requirement in Sec.  630.20(n). We are revising the language 
in Sec.  630.20(n) for clarity.
    No comments were received on the proposed requirement to disclose 
in the annual System-wide report to investors the name, experience, and 
compensation of SAC members. Also, we received no comments on the 
categories of resources used by the SAC that were identified in the 
proposed rule and required to be disclosed. We finalize these 
provisions as proposed.

IV. Regulatory Flexibility Act

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

List of Subjects in 12 CFR Part 630

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

    For the reasons stated in the preamble, part 630 of chapter VI, 
title 12 of the Code of Federal Regulations is amended as follows:

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

0
1. The authority citation for part 630 is revised to read as follows:

    Authority:  Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of the Farm Credit 
Act (12 U.S.C. 2153, 2160, 2243, 2252, 2254); sec. 424 of Pub. L. 
100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-552, 106 
Stat. 4102.



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0
2. Section 630.6 is amended by revising paragraphs (a)(3) and 
(a)(4)(ii)(A) to read as follows:


Sec.  630.6  Funding Corporation committees.

    (a) * * *
    (3) Resources. The Funding Corporation must provide the SAC 
monetary and nonmonetary resources the SAC determines necessary to 
enable it to perform the duties listed in paragraph (a)(4) of this 
section. The Funding Corporation must permit the SAC to contract, for 
reasons directly related to the duties listed in paragraph (a)(4) of 
this section, the services of external auditors, independent legal 
counsel, and outside advisors. The SAC must only use the resources of 
the Funding Corporation in a manner that complies with laws and 
regulations and for the purpose of preserving and promoting the safety 
and soundness of the System. The SAC must provide the Funding 
Corporation board of directors a quarterly accounting of expenditures 
made pursuant to this section.
    (4) * * *
    (ii) * * *
    (A) Determine, with the agreement of the Funding Corporation board 
of directors, the appointment, compensation, and retention of the 
external auditors issuing System-wide audit reports;
* * * * *

0
3. Section 630.20 is amended by revising paragraph (n) to read as 
follows:


Sec.  630.20  Contents of the annual report to investors.

* * * * *
    (n) System Audit Committee. The Funding Corporation must include in 
the System-wide Report to Investors a description of the System Audit 
Committee and its activities during the reporting period. At a minimum, 
the description must:
    (1) List the names of the System Audit Committee members, including 
each member's term of office and principal occupation during the past 5 
years. For each member, state the total cash and noncash compensation 
paid for services on the System Audit Committee during the reporting 
period.
    (2) Disclose by category the monetary and nonmonetary resources 
used by the System Audit Committee during the reporting period. Discuss 
only those categories where the resources used within a category 
equaled or exceeded a total aggregate value of $5,000 during the 
reporting period. Fees paid for the audit of the System-wide financial 
statements, which are disclosed under paragraph (k)(2) of this section, 
are not included in any category under this paragraph. At a minimum, 
there must be separate categories for:
    (i) Administrative expenses,
    (ii) Contracted legal services,
    (iii) Contracted consultants and advisors, and
    (iv) Other contracted services, identifying the services.
* * * * *

    Dated: September 20, 2012.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2012-23723 Filed 9-25-12; 8:45 am]
BILLING CODE 6705-01-P