[Federal Register Volume 78, Number 33 (Tuesday, February 19, 2013)]
[Rules and Regulations]
[Pages 11551-11552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-03620]



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  Federal Register / Vol. 78, No. 33 / Tuesday, February 19, 2013 / 
Rules and Regulations  

[[Page 11551]]



FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 612, 619, 620, and 630

RIN 3052-AC41


Compensation, Retirement Programs, and Related Benefits

AGENCY: Farm Credit Administration.

ACTION: Notice of petition for regulatory change and request for 
comment.

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SUMMARY: On December 4, 2012, the Farm Credit Council (Council) filed a 
Petition for Regulatory Change (Petition) with the Farm Credit 
Administration (FCA, we, or our) on behalf of its Farm Credit System 
(System) members. The Council requested in the Petition that we repeal 
the provisions of the recently effective final rule regarding 
``Compensation, Retirement Programs, and Related Benefits,'' that 
require a non-binding, advisory vote on senior officer compensation. We 
are publishing the Petition and soliciting comments on the merits of 
the Petition.

DATES: Comments on this notice of petition must be received on or 
before April 22, 2013.

ADDRESSES: Comments may be submitted by any of the following methods:
     Email: Send an email to [email protected].
     FCA Web site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     Mail: Barry F. Mardock, 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 email addresses to help 
reduce Internet spam.

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.

I. Background

    On October 3, 2012, the FCA issued a final rule amending our 
regulations in parts 611, 612, 619, and 620 regarding senior officer 
compensation disclosures and related topics.\1\ The rule was effective 
December 27, 2012.\2\ One provision of the rule requires that Farm 
Credit banks and associations hold non-binding, advisory votes on 
senior officer compensation.\3\ In accordance with the rule, 
associations must hold a vote on senior officer compensation when 5 
percent of the voting stockholders petition for the vote. Also, 
associations and Farm Credit banks must hold a vote on chief executive 
officer (CEO) compensation, senior officer compensation, or both if 
compensation increases by 15 percent or more from the previous 
reporting period. On November 30, 2012, the FCA Board delayed the 
baseline year for the non-binding, advisory vote on increases in 
compensation to 2013.
---------------------------------------------------------------------------

    \1\ See 77 FR 60582.
    \2\ See 77 FR 76215.
    \3\ 12 CFR 611.360 and 611.410.
---------------------------------------------------------------------------

    Comments received on the non-binding, advisory vote during the 
rulemaking process objected to the provisions, but offered no 
alternative except that the FCA not finalize the provision. In the 
final rulemaking, we considered all comments received, made 
modifications to the proposed provision, but declined to withdraw the 
provision. We explained in the final rule that the intent of the 
provision is to further the public policy mission of the System, which 
includes promoting shareholder involvement in the management, control, 
and use of System institutions. Also, we explained that drawing the 
shareholders' attention to a matter through advisory voting was 
relevant to the core principle of System institutions being member-
owned.

II. The Petition

    Interested parties have the right to petition a federal agency to 
issue, amend, or repeal regulations.\4\ On December 4, 2012, the 
Council filed a Petition requesting that we repeal the provisions of 
the final rule regarding ``Compensation, Retirement Programs, and 
Related Benefits,'' that require a non-binding, advisory vote on senior 
officer compensation contained in Sec. Sec.  611.360 and 611.410.
---------------------------------------------------------------------------

    \4\ 5 U.S.C. 553(e).
---------------------------------------------------------------------------

    The Petition as filed with the FCA reads, in its entirety, as 
follows:

Petition for Regulatory Change Approved by The Farm Credit Council 
Board of Directors

December 4, 2012

    On behalf of our membership, the board of directors of The Farm 
Credit Council hereby petitions the Farm Credit Administration 
(``FCA'' or ``Agency'') pursuant to 5 U.S.C. 553(e) to undertake a 
rulemaking that would revise portions of the recently adopted 
Compensation Disclosure Final Rule (the ``Rule''), 77 FR 60582 (Oct. 
3,2012). We are asking that the Agency repeal the sections of the 
rule requiring advisory votes based on increases in compensation, as 
well as advisory votes based on petitions, pending the enactment 
into law of legislation that would specifically require such ``say 
on pay'' votes for Farm Credit System institutions.
    As the Agency noted in adopting the Rule, it received 458 
comment letters on the proposed rule (and 99 on the Advanced Notice 
of Proposed Rulemaking), none of which supported the provisions 
related to the ``say on pay'' requirements in the Rule. We noted in 
our comment letter on the Proposed Rule that the System is exempt 
from the provisions in Dodd-Frank requiring ``say on pay.'' We also 
noted that unlike the publicly-traded, SEC registered companies that 
are required to hold such votes, the System has no employees who 
serve on their institution's board of directors or compensation 
committees, and that System institutions do not provide any 
compensation in the form of stock or stock options.
    The ``say on pay'' requirements of the Rule go beyond those 
applicable to publicly traded companies by mandating a shareholder 
vote

[[Page 11552]]

triggered by a specific change in compensation levels. We are aware 
of no precedent for this approach in corporate law or in practice. 
This requirement directly undermines the FCA supported concept of 
incentive compensation programs tied to performance. It risks System 
institutions either deemphasizing or eliminating incentive based 
programs that result in appropriate compensation volatility. 
Requiring ``say on pay'' votes when incentive compensation plans 
operate as intended--by reducing pay when performance does not meet 
standard and then rewarding recovery--is inconsistent with creating 
the optimum incentives for performance that excels.
    The Rule is a precedent setting change that involves 
shareholders directly in the management of their institution. The 
Agency acknowledged in the Rule's preamble that ``the election of 
the board of directors by members has been the primary means for 
member participation in the management of their institution.'' The 
Agency identifies no recent change in the Farm Credit Act justifying 
a change in policy towards direct shareholder management. By 
adopting this change in direction in the context of ``say on pay,'' 
the Agency has obfuscated the full implication of the basic shift it 
has made. The Agency states that ``[w]e encourage institutions to 
expand shareholder votes * * *,'' implying that institutions are 
encouraged to consider shareholder votes on all types of operational 
issues. We believe history has shown that the System is well served 
by a policy that allows shareholders to exercise their ownership 
role through the election of the board of directors, and allows the 
elected board to carry out its responsibilities on behalf of 
shareholders. Changing this policy and the long-standing precedent 
of clear director responsibility as the representatives of 
shareholders is ill considered and should only be accomplished 
following a far more extensive examination of its implications.
    The Agency cites the Farm Credit Banks and Associations Safety 
and Soundness Act of 1992 as encouraging directly shareholder 
``involvement in the compensation practices of their institutions.'' 
Our review of the 1992 Act and its legislative history identified no 
language suggesting that it was intended to achieve direct 
shareholder ``involvement'' in the compensation practices of System 
institutions. The 1992 Act simply mandated that the Agency conduct a 
review of the disclosure requirements that were required of the 
System at that time and to amend its regulations within a year of 
the enactment of the legislation to address any deficiencies found 
some twenty years ago. Nothing in that law suggested that 
shareholders should vote on compensation practices, nor did the 
Agency's review conducted pursuant to this legislation identify this 
as an appropriate response to the legislation. To invoke that law 
today as the basis for a new say on pay requirement is 
inappropriate.
    We also are very troubled by language in the preamble of the 
regulation that states: ``As with other laws not directly involving 
the System, we consider the goals and objectives of those laws for 
applicability to the System.'' While we respect and support the 
authority of the Agency to regulate and oversee the safety and 
soundness and the mission of the Farm Credit System, it is essential 
that the Agency respect the legal boundaries that Congress 
establishes for it. It is not the role or right of the Agency to 
arbitrarily apply to the Farm Credit System laws that do not 
directly involve the System, simply because the Agency believes the 
law should have applied to the System. It is up to the Congress to 
establish public policy in this manner. When the Congress does not 
involve the System in a law, the Agency must not do so on its own 
initiative. Congress made clear that the FCA board has the 
responsibility to recommend legislative changes to the Congress from 
time to time (Sec. 5.17(a)(3)). Nowhere does the Act state that FCA 
can or should apply laws to the System not directly involving the 
System.
    We would suggest that if the Agency believes that the Farm 
Credit System should be subject to say on pay requirements, the 
Agency should develop a comprehensive legislative proposal to 
accomplish this goal and submit it to the Congress for their 
consideration, as contemplated by Section 5.17(a)(3). Doing so would 
ensure that appropriate consideration is given to any say on pay 
requirements and that necessary safeguards are built around such 
requirements.
    Unlike the Dodd-Frank legislation, the regulation does not 
contain any safeguards for System directors or their institutions 
from shareholder lawsuits resulting from negative ``say on pay'' 
votes. The Agency in the preamble of the regulation does discuss 
briefly the interplay between the fiduciary duties of directors and 
a say on pay vote. Unfortunately, this discussion provides potential 
fodder for those who would suggest that a board that ignores the 
results of an advisory say on pay vote is acting inconsistent with 
its fiduciary duty. The preamble states in part that ``fiduciary 
duties require consideration of * * * advisory vote results'' that a 
board is required to ``document how it used the vote results'' and 
that the results of advisory votes must be reported to shareholders 
because of their importance.
    Nowhere does the Agency discuss the potential that advisory 
votes can open boards of directors up to new litigation challenges 
nor does it address why the Dodd-Frank legislation saw fit to 
explicitly state that shareholder votes shall not interfere with the 
fiduciary duties of boards of directors. Even if the FCA were to 
adopt in a regulation safeguards similar to those of in Dodd-Frank, 
it is not clear that they would have the same legal standing as 
statutory protections. Moreover, there is no clear legal standard as 
to how System institutions and their directors will be judged in 
terms of exercising their fiduciary duties.
    These concerns regarding fiduciary responsibility are 
particularly troublesome because of the unique characteristics of 
cooperative directors in contrast to those of publicly traded 
investor owned companies. In the Proposed Rule, FCA referenced 
``cooperative principles'' as a basis for the action. However, 
comments submitted by several cooperative organizations noted that 
they were unaware of any such ``principles'', or of any cooperative 
organization that has adopted a similar ``say on pay'' provision. 
Directors of cooperatives typically are elected by shareholders in 
accord with the one-person, one-vote rule, and FCA has directed that 
these votes occur on that basis. Publicly traded investor owned 
companies conduct their votes based on ownership interest. Also, 
most SEC registered companies do not have an independent regulator 
examining them for safety and soundness and overseeing their 
operations.
    Both the directors and shareholders of System institutions have 
the benefit of the Agency's oversight. Within this framework, System 
shareholders, as with other farmer cooperatives, rely on their duly 
elected directors to establish safe and sound compensation programs. 
Shareholders simply do not have access to the wealth of information 
provided directors in general, and the compensation committee in 
particular, to make informed decisions on the subject, and they do 
not expect to be asked to make those decisions.
    For all of the preceding reasons, we respectfully petition the 
Agency to modify the regulation to eliminate the advisory vote 
provisions including those on say on pay. Should the Agency believe 
that advisory votes are an appropriate policy guidance mechanism for 
System institutions, especially on compensation as required by the 
current rule, then the Agency should seek statutory revisions that 
would establish this requirement while also establishing clear 
guidance as to how it affects the fiduciary duty of directors. Thank 
you for your timely consideration of this petition.

Attest:

Kimberly J. Boscia,
Corporate Secretary.

    We have received letters in support of the Petition from System 
institutions. The Petition and the letters may be viewed at our office 
in McLean, Virginia or on our Web site at http://www.fca.gov.

III. Request for Comments

    Comments received during the rulemaking process and the letters 
received in support of the Petition objected to the non-binding, 
advisory vote provisions, but offered no alternatives. Therefore, we 
are inviting the public to comment on the Petition and the following 
question:
    What reasonable alternative(s) to the non-binding, advisory vote 
provisions on senior officer compensation would comparably engage 
shareholders and provide them greater transparency in and disclosure of 
their institution's senior officer compensation practices?

    Dated: February 11, 2013.
Mary Alice Donner,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 2013-03620 Filed 2-15-13; 8:45 am]
BILLING CODE 6705-01-P