[Federal Register Volume 78, Number 102 (Tuesday, May 28, 2013)]
[Rules and Regulations]
[Pages 31822-31835]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-12594]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 604, 611, 612, 619, 620, 621, 622, 623, and 630

RIN 3052-AC65


Unincorporated Business Entities

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, we, us, or our) issues 
this final rule to establish a regulatory framework for Farm Credit 
System (System) institutions' use of unincorporated business entities 
(UBEs) organized under State law for certain business activities. A UBE 
includes limited partnerships (LPs), limited liability partnerships 
(LLPs), limited liability limited partnerships (LLLPs), limited 
liability companies (LLCs), and any other unincorporated business 
entities, such as unincorporated business trusts, organized under State 
law. The final rule does not apply to UBEs that one or more System 
institutions may establish as Rural Business Investment Companies 
(RBICs) pursuant to the institutions' authority under the provisions of 
title VI of the Farm Security and Rural Investment Act of 2002, as 
amended (FSRIA), and United States Department of Agriculture (USDA) 
regulations implementing FSRIA. This rule does apply, however, to 
System institutions that organize UBEs for the express purpose of 
investing in RBICs.

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: Elna Luopa, Senior Corporate Analyst, 
Office of Regulatory Policy, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4414, TTY (703) 883-4056, or Wendy Laguarda, 
Assistant General Counsel, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4056.

SUPPLEMENTARY INFORMATION: 

I. Objectives

    The objectives of this final rule are to:
     Affirm FCA's authority to regulate and examine the System 
institutions' use of UBEs, including the authority to impose any 
conditions FCA deems necessary and appropriate on UBE business 
activity, and to take enforcement action against System institutions 
whose business operations use UBEs;
     Prohibit System institutions from using UBEs to engage in 
direct lending or any activity that exceeds their authority under the 
Farm Credit Act of 1971, as amended (Act) or circumvents the 
application of cooperative principles;
     Limit the amount of a System institution's equity 
investments in UBEs;
     Create a process for FCA review and approval of requests 
by System institutions to organize or invest in UBEs for certain 
business activity;
     Establish standards for the proper and adequate disclosure 
and reporting of System UBE activity; and
     Ensure that the System's use of UBEs remains transparent 
and free from conflicts of interest.

II. Background

    The System's existing investment \1\ and incidental powers \2\ 
provide the authorities for System institutions to invest in and form 
UBEs for certain business activity.
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    \1\ Sections 1.5(15) and 3.1(13)(A) of the Act set forth the 
investment authorities for System banks. Sections 2.2(10) and 
2.12(18) of the Act set forth the investment authorities for System 
associations. FCA regulations in subpart E of part 615 imbue service 
corporations, chartered under section 4.25 of the Act, with the same 
investment authorities as their organizing System banks and 
associations.
    \2\ Sections 1.5(3), (15) and (21); 2.2(3), (10) and (20); 
2.12(3), (18) and (19); 3.1(3) and (16) of the Act.
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    As business models and structures have evolved under State uniform 
statutes governing unincorporated, largely limited liability business 
structures, System institutions, with FCA approval, have been using 
their incidental and investment authorities to organize and invest in 
State-chartered UBEs to promote collaborative and expedient 
initiatives. Since 2009, System institutions have been organizing UBEs 
for the limited purposes of: (1) Making credit bids at a foreclosure 
sale or other court-approved auction of property collateralizing a 
System institution's loans that are in default; and (2) holding and 
managing acquired property to minimize losses, protect the property's 
value, and limit potential liability, including taking appropriate 
actions to limit the potential for liability under applicable 
environmental law and regulations.\3\ On a case-by-case basis, FCA has 
approved the System's use of other types of UBEs for certain business 
purposes. In view of the many advantages of UBEs for certain business 
activity, on September 13, 2012, FCA published a proposed rule to 
establish a regulatory framework for their continued use. The proposed 
rule, which was published for public comment for 60 days, generated 
nine comment letters from the public. After considering the comments, 
we now finalize the proposed provisions as discussed below. We note 
that because this final rule codifies the guidance contained in FCA 
Bookletter BL-057,

[[Page 31823]]

the bookletter is rescinded upon the effective date of the rule.
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    \3\ FCA Bookletter BL-057, Use of State-Chartered Business 
Entities to Hold Acquired Property (April 2, 2009).
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    We believe this final rule provides a more uniform approval and 
oversight process for the System's ongoing use of UBEs. The rule 
emphasizes that incidental powers can be neither the basis for 
broadening or circumventing a System institution's express powers in 
carrying on the business of the bank or association nor used to engage 
in activities that are impermissible under the Act. The delivery of 
System credit, services and other products will still chiefly be 
provided by System institutions' direct use of their express powers to 
serve their eligible borrowers and customers. Without strong 
justifications to form a UBE, including one-member UBEs, System 
institutions will continue to conduct all aspects of their business 
either directly or through a service corporation authorized under 
section 4.25 of the Act.
    In recognizing changing business practices through the System's use 
of UBEs, we also stress that the preservation of the System's member-
focused principles remains paramount. Therefore, this rule prohibits 
System institutions from engaging in any activity through UBEs that 
circumvents the application of cooperative principles. Further, by 
limiting the use of one-member UBEs, the rule underscores the primarily 
collaborative purpose of partnerships and multi-member limited 
liability companies among System institutions to foster more efficient 
operations and improved services to member-borrowers and other 
customers.
    Finally, to ensure that the System's use of UBEs remains 
transparent to the public, FCA will post on its Web site the name and 
business purpose of UBEs organized and controlled by one or more System 
institutions that are approved under this rule. Those UBEs subject to 
the notice provision will not be posted on our Web site.

III. Discussion of Comment Letters and Section-by-Section Analysis of 
Final Rule

    We received nine comment letters on the proposed UBE rule. The 
letters came from each of the four Farm Credit banks (CoBank, ACB; 
AgriBank, FCB; AgFirst Farm Credit Bank and the Farm Credit Bank of 
Texas); two System associations, Farm Credit Services of America, ACA 
and Farm Credit East, ACA; the Farm Credit Council (Council), acting on 
behalf of its membership; the Independent Community Bankers of America 
(ICBA); and one other member of the public. These letters contained a 
number of constructive comments that resulted in changes to a number of 
provisions in the proposed rule. We made no changes to the provisions 
in the proposed rule that either received no comments or supportive 
ones unless otherwise discussed in this preamble.

General Issues

    Four commenters generally support our efforts to set up a 
regulatory framework, with one of these commenters noting that the 
framework should not create a restrictive, cumbersome process.
    In our response to comments on certain provisions of the proposed 
rule (see Specific Issues below), we have made some changes that will 
further streamline the notice and approval processes.
    Of those supporting our effort, one commenter notes that the System 
should be permitted to benefit from the more formal and flexible UBE 
structures now available, and that their use also helps ensure that 
System stockholders are more protected from liability. Another 
commenter, while appreciating FCA's recognition of the System's 
authority to organize UBEs for appropriate business purposes, believes 
that FCA currently has an effective policy framework for UBEs and 
questions the purpose of the rulemaking as adding little overall value. 
This same commenter also asserts that the rulemaking lacks adherence to 
FCA's Policy Statement FCA-PS-59 on Regulatory Philosophy and suggests 
that FCA discontinue the rulemaking to save unnecessary effort and 
associated costs ultimately born by System customers and shareholders.
    FCA's current practice of considering requests to organize and 
invest in UBEs on a case-by-case basis is no substitute for the 
regulatory framework that this final rule provides. Such a framework 
creates a more uniform oversight process for the System's continued use 
of UBEs; establishes standards that improve our UBE review and approval 
process; reinforces and preserves the System's member-focused 
principles; promotes collaboration between and among System 
institutions in their organization of UBEs by limiting the use of one-
member UBEs; and brings a greater level of transparency to the System's 
use of UBEs.
    Further, we see no inconsistencies between this rulemaking and the 
FCA Board's Policy Statement FCA-PS-59 on Regulatory Philosophy.\4\ Our 
rulemaking promotes the principles set forth in FCA-PS-59 in that it 
supports achievement of the System's public mission, enhances the 
ability of System institutions to better meet the needs of agriculture 
and rural communities, and underscores the importance of cooperative 
principles for the farmer-owned Government-sponsored enterprise. The 
final rule reinforces FCA's obligations to ensure the System's safety 
and soundness by making it clear that FCA has regulatory, supervisory, 
oversight, examination, and enforcement authority over the System's use 
of UBEs. For all these reasons, we have continued this rulemaking 
process on the basis that the benefits of the rule outweigh its 
implementation costs.
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    \4\ See, FCA Policy Statement FCA-PS-59, Regulatory Philosophy 
(July 8, 2011). This policy statement may be viewed at www.fca.gov. 
Under Quick Links, click on FCA Handbook, and then click on FCA 
Board Policy Statements.
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    In its comment letter, the Council recognizes that FCA's goal is to 
provide a regulatory framework for UBEs through which System 
institutions can obtain approval either by means of an advance notice 
to FCA or through an approval process. The Council encourages us to 
continue to identify additional circumstances in which the notice 
provision can be used and to streamline the approval process through 
guidance provided to System institutions via a bookletter.
    As the Council requests, we anticipate that we will be adding other 
kinds of UBE requests to the notice provision over time, but are unable 
to identify such requests beyond those we already have in the final 
rule. As the System gains more experience with its use of UBEs, and as 
we gain more comfort in such use, we foresee permitting more types of 
UBEs to be organized under the notice provision.
    The Council also states its concern over our use of the term 
``cooperative principles'' in the rule, suggesting instead that we 
reference the specific statutory requirements relating to such 
principles to avoid disagreement over what the term means.
    Because other parties also commented on our use of the term 
``cooperative principles,'' we address the Council's comment in the 
Specific Issues section below.
    In its comments, the ICBA states its belief that System 
institutions do not have the appropriate legal authority to form UBEs 
regardless of their intended merits, and that FCA has failed to provide 
a sound legal basis for permitting System institutions to form UBEs. 
The ICBA states that even FCA acknowledges this lack of express legal 
authority in the Act, relying instead on the System's investment 
authorities as

[[Page 31824]]

the basis for authorizing the creation of UBEs. The ICBA recommends 
that FCA seek the necessary authorities from Congress rather than 
circumventing the Act by giving it an intentional misreading. The ICBA 
also states that FCA's assertion that the formation of UBEs is 
appropriate based on Congressional intent for System institutions to 
operate collaboratively so as to improve the efficiency of their 
products and services, is not a legal basis to allow the System to form 
entities not authorized by the Act.
    FCA is confident in relying upon the System's incidental powers and 
investment authorities as sound legal bases for the System's use of 
UBEs. The System's incidental powers enable its institutions to 
organize non-corporate affiliates for authorized business operations in 
light of currently accepted, commercially reasonable practices used by 
other financial institutions. FCA has allowed the formation and use of 
UBEs where the use of a service corporation chartered under section 
4.25 of the Act was neither commercially reasonable or practical (as in 
the case of UBEs formed for acquired property), nor permitted (as in 
the case of UBEs formed to offer crop insurance, a service that is 
precluded under section 4.25 of the Act). Moreover, the UBE structures 
enable the System to deliver certain products and services with 
enhanced safety and soundness via entities that address ownership 
rights, management, operations, assumption of liability, allocation of 
profits and losses, payment of taxes, and the limiting of liability.
    The ICBA notes that FCA does not explain why the use of service 
corporations, which are permitted under the Act, fails to provide the 
flexibility that System institutions need and that, in allowing the 
formation of UBEs under a ``fairly benign'' application and approval 
process, the FCA will be discouraging the System's future use of 
service corporations.
    We do not anticipate that System institutions will refrain from 
using service corporations as a result of their authority to organize 
UBEs. The UBE notice, approval, reporting and disclosure provisions in 
this rule are in many ways as comprehensive as the service corporation 
review and approval process and System institutions must justify the 
need for their use.
    The ICBA also asks that we explain why we believe System 
institutions are permitted to purchase or own crop insurance agencies 
and why we are apparently allowing System institutions to engage in 
illegal ``tying'' schemes in which farmers are offered lower interest 
rates on loans in exchange for purchasing System provided crop 
insurance. The ICBA concludes that the public deserves more 
transparency on this issue.
    The ICBA's contention that System institutions are not authorized 
to provide crop insurance services through a UBE is misguided. The Act 
only prohibits System institutions from providing insurance services 
through a service corporation structure. In fact, System institutions, 
both individually and in coordination with one another, have long been 
providing hail and multi-peril crop insurance to its borrowers outside 
of the service corporation structure. Such services fulfill a primary 
purpose of the System, which is to provide sound, adequate, and 
constructive credit and closely related services to American farmers 
and ranchers and their cooperatives for efficient farming operations. 
As a fundamental need for crop farmers, crop insurance is a closely 
related service that System institutions have express authority to 
provide under the Act. The use of UBEs for such purpose will facilitate 
the provision of these important services to System borrowers and is a 
significant reason why service corporations are unable to provide the 
flexibility that System institutions need to fulfill the Act's purpose. 
We also note that section 4.29 of the Act and Sec.  618.8040 of our 
regulations prohibit illegal tying arrangements.
    Finally, the ICBA disagrees with our language that Congress 
intended the System to provide coordinated services or products to 
``rural communities,'' noting its belief that the Act authorizes the 
System to provide credit and related services only to those borrowers 
specified in the Act. The ICBA therefore concludes that all existing 
UBEs should be dissolved and/or rechartered under the guidelines and 
constraints of authorized service corporations.
    The Act authorizes the System to provide credit and related 
services to eligible persons as specified in the Act. However, we note 
that by servicing eligible borrowers, which includes providing credit 
for rural homes, services closely related to agriculture, and farm-
related businesses, the System does indeed improve the well-being of 
rural communities where the overwhelming majority of eligible borrowers 
live and work. Therefore, based on the sound legal basis, the benefits, 
and the safeguards incorporated into this final rule, we will permit 
the continued use of UBEs concurrent with the System's authority to 
organize service corporations.
    One public commenter thinks the regulation is out of control and 
harms business, but offers no further elaboration. Without specific 
comments, we are unable to address this individual's concerns. However, 
as stated above, this rule provides adequate safeguards for the 
regulation and oversight of the System's use of UBEs for limited 
business purposes authorized under the Act.

Specific Issues

1. Definitions [Sec.  New 611.1151]
    We received comments recommending that two definitions be added to 
Sec.  611.1151. One commenter suggested that because the rule 
establishes a ``necessary or expedient'' standard for use of a UBE, we 
should define the term to avoid creating an uncertain and arbitrary 
standard.
    FCA declines to adopt this recommendation based on the fact that 
this standard, used in all banking legislation, is meant to provide 
flexibility in a System institution's use of its incidental 
authorities. From our perspective, a definition would narrow the term 
to the institution's detriment by removing the significant discretion 
currently enjoyed by System institutions to decide what is necessary or 
expedient to their business.
    This same commenter also suggests that we define the ``unusual and 
complex'' standard for establishing a UBE to hold and manage acquired 
loan collateral consistent with its usage in BL-057.
    In the final rule, we adopt part of the commenter's suggestion by 
adding a definition of ``unusual and complex collateral'' to Sec.  
611.1151 that is consistent with its use in BL-057. This final rule now 
defines ``unusual and complex collateral'' to mean acquired property 
that may expose the owner to risks beyond those commonly associated 
with loans, including, but not limited to, acquired industrial or 
manufacturing properties where there is an increased risk of incurring 
potential environmental or other liabilities that may accrue to the 
owners of such properties.
    This same commenter also suggests that we enhance the bookletter 
definition to include the concept of increasing the marketability and 
potential value of acquired loan collateral through the use of a UBE as 
well as easing the sale of acquired property consistent with borrower 
rights requirements.
    We do not agree that there is a need to enhance the definition 
beyond the one provided in BL-057 as the

[[Page 31825]]

commenter suggests. The final rule reflects the limited purposes of 
those UBEs formed to hold and manage acquired property: (1) Making 
credit bids at a foreclosure sale or other court-approved auction of 
property collateralizing System institutions' loans that are in 
default; and (2) holding and managing acquired property to minimize 
losses, protect the property's value, and limit potential liability, 
including taking appropriate actions to limit the potential for 
liability under applicable environmental law and regulations. We 
believe these limited purposes encompass the goals of not only 
protecting, but also enhancing the property's value to ease its 
eventual sale.
2. Assessing UBE Investments and Business Activity [New Sec.  
611.1152(b)]
    One commenter notes that it is understood FCA would want to recover 
examination costs associated with a System institution's investments in 
UBEs, but states that the proposed rule fails to define a clear 
standard or methodology for adding such costs to current regulatory 
assessment requirements. The commenter notes that the proposed rule 
provision appears to contradict the well-defined regulatory assessment 
formula, imposes added costs, and possibly creates an inequity by 
subjecting institutions with UBEs to double assessments--that is, one 
on the equity investment included in total assets and one on the UBE 
itself. The commenter asks that FCA establish a specific formula for 
assessing UBEs.
    FCA never intended to change the assessment formula set forth in 
Sec.  607.3. Consequently, in response to the commenter's concern, we 
have modified the language in Sec.  611.1152(b) to cite only to section 
5.15 of the Act. The cost of regulating and examining System 
institutions' activities involving UBEs will be taken into account 
under FCA's current assessment formula.
3. General Restrictions and Prohibitions on the Use of UBEs [New Sec.  
611.1153]
a. Authorized Business Activity Must Be Necessary or Expedient, as 
Determined by the FCA, to the Business of One or More System 
Institutions Owning the UBE. [New Sec.  611.1153(a)(1)]
    Two commenters object to the language that would allow FCA to 
determine what is necessary or expedient to the institution's business, 
stating that such language places FCA in a management role more aptly 
reserved for a System institution's board of directors or management 
team. The commenters state that FCA's role should be limited to 
evaluating a System institution's rationale for forming a UBE and 
requesting any other information deemed necessary.
    In response to the commenter's objection, we have decided to remove 
the language ``as determined by FCA.'' We note, however, that in doing 
so, FCA will evaluate an institution's assessment that the UBE is 
necessary or expedient to the institution's business in our review 
process under the notice or approval provision. To this end, we expect 
a board of directors to substantiate its statement that the UBE meets 
this criterion in its submission to FCA.
b. Circumvention of Cooperative Principles [new Sec.  611.1153(b)]
    We received comments from two commenters and the Council on this 
provision, prohibiting System institutions from using UBEs to engage in 
activities that would circumvent the application of cooperative 
principles. One commenter believes that this limitation could restrict 
potential future innovation that might further enhance the System's 
ability to effectively serve its mission to agriculture and rural 
America. Another commenter states that since FCA retains the right to 
approve or otherwise regulate any and all investments by System 
institutions in a UBE, the limitation is unnecessary to protect the 
System's integrity or its cooperative principles.
    We do not agree with the commenters that this restriction 
unnecessarily limits a System institution's ability to be innovative. 
This rule provides greater flexibility for System institutions to 
collaborate on initiatives to better serve agriculture and rural 
America through innovative and diverse business structures while 
respecting the fact UBEs must operate within the Act and regulation and 
cannot have any greater authority than that of System institutions. 
Moreover, the prohibitions on UBEs making direct loans or engaging in 
any other activities that circumvent cooperative principles ensure that 
these primary functions remain within the corporate charters of System 
institutions and the stated objectives of the farmer-owned Farm Credit 
System as set forth in section 1.1 of the Act.
    Another commenter objects to FCA's implication that System 
institutions would engage in activities that might circumvent the 
requirements of the Act. The commenter believes it would be preferable 
for FCA to focus on the statutory requirements relating to cooperative 
principles rather than attempt to define the term by regulation. This 
same commenter adds that the application of cooperative principles goes 
beyond and has little to do with established statutory requirements 
and, instead, ``. . . encompasses a way of doing business that is the 
responsibility of the membership, directors, and management to 
determine how best to implement for their individual institution.'' To 
avoid creating confusion with clear legal requirements and dictating 
how members should run their cooperatives, the commenter recommends 
that we drop the term ``cooperative principles'' and replace it with a 
more technically precise term such as ``circumvention of the Act's 
requirements.'' Another commenter suggests that the term ``cooperative 
principles'' make specific reference to the specific statutory 
requirements for the System's cooperative structure by citing to the 
Act's provisions on stock ownership, patronage, and borrower and voting 
rights.
    After considering the foregoing comments, FCA has decided not to 
remove this restriction from the final rule. We agree, in part, with 
one of the commenters that certain cooperative principles may go beyond 
the statutory and regulatory provisions relating to the System's 
cooperative structure to also encompass ``a way of doing business'' 
that is in some measure left to an institution's member-owners. FCA 
Board Policy Statement FCA-PS-80 on cooperative operating philosophy 
underscores that cooperative principles are an integral part of the 
System's cooperative structure under the Act and therefore requires an 
institution to conduct its business with this member-focused 
perspective in mind.\5\ For this reason, we are removing the ``as 
determined by FCA'' language from this provision in the final rule but 
point out that in our review process under the notice and approval 
provisions, FCA must be satisfied that an institution has adequately 
demonstrated that its use of a UBE will not contravene cooperative 
principles. Therefore, we expect an institution's board to substantiate 
in its statement to FCA that the UBE's service, function, or activity 
will not circumvent cooperative principles.
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    \5\ See, section 1.1(a) of the Act and FCA Policy Statement FCA-
PS-80, Cooperative Operating Philosophy--Serving the Members of Farm 
Credit System Institutions (October 14, 2010). This policy statement 
may be viewed at www.fca.gov. Under Quick Links, click on FCA 
Handbook, and then click on FCA Board Policy Statements. Sections 
611.350, 615.5220, and 615.5230 of our regulations also address 
cooperative principles.

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[[Page 31826]]

c. Transparency and the Avoidance of Conflicts of Interest [new Sec.  
611.1153(c)]
    The ICBA and one other commenter offered suggestions on this 
provision requiring that the business between the System institution 
and the UBE remain transparent and free from conflicts of interest. One 
commenter indicates support of the need to maintain a clear separation 
of UBEs from their parent organizations, but is concerned that the term 
``commingling'' could be misconstrued and inappropriately applied. The 
commenter provides the example of an institution and its UBE sharing 
the same physical resources, which might be construed as an improper 
``commingling,'' even though their internal controls maintain 
appropriate levels of separation. The commenter adds that unless 
commingling results in a piercing of the corporate veil or a clear 
conflict of interest, the proper sharing of resources should not be 
restricted so that existing resources can be fully leveraged.
    The restriction in the proposed rule states that business 
transactions, accounts, and records of the UBE are not to be commingled 
with those of the System institution. We want to clarify that this 
restriction does not prevent the use of the same physical resources as 
long as the transactions, records and accounts are separately accounted 
for and adequate internal controls are in place to ensure such 
separation. For these reasons, we see no need to change the language in 
the final rule.
    The ICBA supports all transparency requirements but believes they 
should include all UBEs and allow for the public review of UBE 
documents to ensure that laws are being followed.
    We note that the System's use of UBEs will be made transparent to 
the public under FCA's plan to post on its Web site the name and 
business purpose of UBEs organized and controlled by one or more System 
institutions that are approved under the rule. We do not agree with the 
ICBA's suggestion that the transparency provision should allow for 
public review of UBE documents to ensure a UBE's compliance with the 
law. It is FCA's responsibility rather than that of the general public 
to determine that a System institution has properly established a UBE 
and is complying with applicable law and regulation.
d. Prohibition on UBE Subsidiaries [new Sec.  611.1153(f)]
    Two parties commented on the prohibition on creating UBE 
subsidiaries. One commenter stated that the prohibition removes needed 
flexibility to manage acquired property associated with syndicated, 
participated, or other loan transactions where it may be more workable 
for each investor's pro rata interest in the acquired property to be 
held in a separate subsidiary of the parent UBE. According to the 
commenter, such an arrangement would avoid difficult negotiations 
relating to management agreements and ownership structures. Since 
ownership interests in the UBEs would be clear and unambiguous, the 
commenter believes that FCA's examination process in looking at this 
subsidiary structure would not be difficult. The second commenter 
generally supports our limitation on use of multi-layered UBEs but 
urges us to consider comments from others in dealing with acquired 
property associated with syndicated loans and other complex multi-owner 
situations.
    We are persuaded by the comments that we should allow some 
flexibility in the final rule for those acquired property UBEs 
involving both System and non-System lenders. Therefore, we are 
permitting an exception to the prohibition on UBE subsidiaries by 
allowing System institutions to establish UBEs as subsidiaries of an 
acquired property UBE to hold each investor's pro rata interests in 
acquired property provided that the loan collateral at issue involves 
multi-lender transactions that include System and non-System 
institutions. This exception is not available when the acquired 
property is owned solely by System institutions. In those instances, 
System institutions can effectively work through the partnership or 
management agreements to establish their pro rata interests within the 
single UBE while still protecting their limited liability.
e. Limit on Amount of Equity Investments in UBEs [new Sec.  
611.1153(h)]
    We received a comment from the ICBA and one other comment on this 
provision, which limits a System institution's aggregate amount of 
equity investments in UBEs to one percent of its total loans 
outstanding, calculated at the time of each investment. One commenter 
remarked that the limit is too small, especially for smaller 
institutions, and will result in unnecessary requests for 
exemptions.\6\
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    \6\ This limit does not apply to a System institution's equity 
investment in an acquired property UBE.
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    We decline to increase the aggregate limit based on our belief that 
small associations should take a more cautious approach in determining 
whether to establish a UBE for certain business activity. Moreover, 
given the small number of UBEs currently affiliated with System 
institutions, we do not believe this limit will result in an 
overwhelming number of requests for exceptions.
    The ICBA does not agree that FCA should be able to make exceptions 
to restrictions listed in the proposed rule, stating that such 
exceptions create the appearance that we would favor some institutions 
over others. The ICBA suggests that FCA go through a public comment 
process to make any additional changes to the methodologies in the 
regulations.
    As proposed, this final rule allows only two instances where FCA is 
able to make exceptions to the restrictions on a case-by-case basis. 
The first exception is in this provision Sec.  611.1153(h) at issue. It 
allows FCA to set either a higher or lower limit than the one-percent 
aggregate equity investment limit based on safety and soundness or 
other relevant concerns. The second exception is in Sec.  611.1153(i), 
in which System institutions are prohibited from making an equity 
investment in a third-party UBE except as FCA may authorize under Sec.  
615.5140(e) for de minimis and passive investments.\7\ We do not agree 
with the ICBA that these two exceptions create an appearance that we 
are favoring some System institutions over others. As an arm's-length 
regulator, we must carry out our oversight responsibilities with 
impartiality, providing equal access and consideration to all System 
institutions. We would determine such exceptions according to these 
principles. Our final rule will retain the foregoing exceptions, which 
we deem necessary for safety and soundness concerns.
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    \7\ Such requests will be considered on a case-by-case basis 
outside of this final rule in accordance with the requirements of 
Sec.  615.5140(e).
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f. Limitation on Non-System Equity Investments [new Sec.  611.1153(j)]
    Four respondents provided comments on this provision, which limits 
non-System investment in a System-owned UBE to 20 percent of total 
equity. One commenter thought the limit could be an issue for a loan 
syndicated to non-System lenders, which, if the loan became distressed, 
might force a System institution to buy out a commercial bank's 
interest.
    At the outset, we note that this 20-percent outside investment 
limitation applies only to those UBEs organized to provide limited 
services integral to a System institution's daily internal operations, 
such as fixed asset, electronic transaction, or trustee

[[Page 31827]]

services. Further, the UBE operating agreement would address the 
process for an outside investor to extricate itself from the UBE based 
on financial or other reasons.
    Another commenter contends that a System UBE should be able to 
attract and leverage outside ownership as long as the System 
institution controls it and FCA retains full authority over it. This 
same commenter suggests increasing outside ownership to 50 percent. A 
third commenter asks FCA to reexamine the limitation as well.\8\
---------------------------------------------------------------------------

    \8\ FCA notes that this restriction does not apply to acquired 
property UBEs that often involve System and non-System lenders.
---------------------------------------------------------------------------

    Contrary to the suggestions of these commenters, we see no 
justification for expanding outside ownership beyond the 20 percent of 
total equity that is permitted for those UBEs performing limited 
services considered integral to a System institution's daily internal 
operations. Were we to increase outside ownership to 50 percent, as one 
commenter suggests, the System would no longer be a majority owner. 
Given that the outside investor authority for service corporations 
(where non-System ownership is also limited to 20 percent of total 
equity) has yet to be exercised by System institutions in the 12 years 
that they have had this regulatory authority, we see no need to 
increase the 20-percent cap in this final rule.
    In contrast to the other commenters, the ICBA opposes allowing non-
System persons or entities to invest in a System-controlled UBE, 
arguing that the Act does not authorize outside investments in service 
corporations or in UBEs. It notes that outside investments violate 
cooperative principles, would be unmanageable for FCA to regulate and 
examine, pose safety and soundness risks, and raise questions on voting 
rights due to the non-member status of third-party investors.
    The FCA has permitted this same level of non-System equity 
investment in System-owned service corporations under FCA regulations 
(see Sec.  611.1135(b)) based on our determination that such a minority 
level would not jeopardize the cooperative structure of a System 
institution or its associated principles, be unmanageable to regulate 
or examine, or negatively affect the safety and soundness of the 
institution. Nor do we agree with the ICBA's contention that this 
exception would jeopardize cooperative principles or create a safety 
and soundness risk. With regard to voting rights for non-System 
investors, we note that the partnership or membership agreement would 
control how decisions are made within the UBE for the majority and 
minority equity holders. We emphasize that the voting rights 
established within the UBE will have no effect on the voting rights of 
the member/borrowers of the System institution itself. For all the 
foregoing reasons, FCA has retained this limited outside investment 
authority as proposed.
4. Notice of Equity Investments in UBEs [New Sec.  611.1154]
    FCA received 11 comments on various provisions of Sec.  611.1154. 
The ICBA opposes the notice provision entirely and believes all 
requests for UBE formations should be made through the approval 
provision. The ICBA adds that allowing some System institutions to 
provide notice only is discriminatory in that it favors the large 
institutions, serves no legitimate purpose, and appears to violate 
cooperative principles.
    FCA does not believe the notice provision favors the large System 
institutions, serves no legitimate purpose, or violates cooperative 
principles. The eligibility for providing notice of a UBE formation 
versus submitting an approval application is based on the type of 
business activity, function or service being conducted in the UBE, all 
of which has no bearing on the size of a System institution. A number 
of System institutions, differing in size, have been using UBEs for 
acquired property and to provide hail and multi-peril crop insurance 
without jeopardizing cooperative principles or otherwise putting the 
institutions at risk. Based on the experience gained by the System in 
using UBEs for such purposes, and FCA's consequent experience in 
overseeing such UBEs, we see no reason for such UBEs to be subject to 
an approval process. The notice provision serves the purpose of 
avoiding unnecessary administrative burdens and costs and has therefore 
been retained in this final rule.
    We summarize the remaining comments under the relevant sections 
that follow.
a. Applicability [New Sec.  611.1154(a)]
    The proposed rule included a notice provision available only to 
System institutions with a Financial Institution Rating System (FIRS) 
rating of 1 or 2. Those with lower FIRS ratings would have been 
required to request FCA approval of the proposed UBE under Sec.  
611.1155. One commenter remarks that requiring prior approval for an 
institution to use a UBE to hold and manage acquired property increases 
the time and expense needed to manage the assets. The commenter 
references a statement in BL-057 that it is generally inappropriate for 
FCA to provide prior approval or concurrence regarding decisions on use 
of UBEs for acquired property purposes.
    We note that System institutions, regardless of FIRS ratings, have 
organized UBEs to hold and manage acquired property since the 
bookletter's issuance in 2009 without negative consequences. Therefore, 
FCA agrees to remove the FIRS rating restriction altogether from the 
notice provision based on our more considered belief that such a 
restriction is unnecessary to ensure that such UBEs will not put an 
institution at further risk. We retain the requirement, however, that 
System institutions notify FCA of their intent to form an acquired 
property UBE. This notice allows us to keep track of such UBEs and to 
ensure that their use will help the institution manage its acquired 
property.
b. Notice Requirements [New Sec.  611.1154(b)]
    Our proposed rule requires System institutions to provide notice to 
FCA 20 business days in advance of making an equity investment in a 
UBE. Five commenters said that 20 business days was excessive. These 
commenters stated that because decisions to hold acquired property 
often occur within a relatively short span of time after commencing a 
collection/foreclosure action, requiring at least 20 business days for 
an advance notice is inconsistent with the need to reach a quick 
resolution. One commenter suggests a standard that is ``as soon as is 
reasonably practicable,'' but not less than 5 business days prior to 
formation. Other commenters note that the 20 business days advance 
notice is too restrictive and that System institutions need to be able 
to respond in a timely manner to decisions made by lender groups and 
borrowers relating to a collection of large syndicated loans.
    FCA has considered the foregoing concerns related to the 20 
business days advance notice and, consequently, has adopted a 10 
business day advance notice requirement in this final rule. We believe 
that a 10 business-day review is a fair compromise between the proposed 
20 business-day review and the requested 5-day review, which is not 
sufficient for FCA purposes. The notice provision allows us time to 
review the documentation provided by the System institution. Should we 
find noncompliance issues or safety and soundness concerns, FCA will 
notify the institution before the notice period ends that it must delay 
the UBE's formation and submit an application for approval under Sec.  
611.1155. We are adding this

[[Page 31828]]

requirement to the notice provision as a counterbalance to our removing 
the FIRS restriction and decreasing by half the number of business days 
required for the notice. This requirement is now found at Sec.  
611.1154(d).
c. A Certified Resolution of the System Institution's Board of 
Directors [New Sec.  611.1154(b)(3)]
    We received several comments on the requirement to submit a 
certified board resolution under the notice provision. One commenter 
believes that the board resolution requirement is too prescriptive and 
inappropriately dictates how boards must conduct their oversight 
responsibilities. The commenter adds that it has long been an 
acceptable governance standard for the board of directors to adopt a 
policy authorizing management to conduct certain activities within 
established limits, controls, and reporting requirements. Such a 
practice, according to the commenter, would ensure timely and 
appropriate use of authorities when management must act quickly. The 
commenter suggests that FCA allow System institutions to follow this 
business practice and use a policy-based approach.
    FCA strongly believes that the System's authority to organize UBEs 
rises to the level of board action. As the body that is ultimately held 
accountable for an institution's actions and outcomes, we believe that 
it is both appropriate and necessary for System boards to approve the 
investment in, and business activity of, a UBE. Moreover, we do not 
believe that a board policy in this area is an adequate substitute for 
this rule. While a policy-based approach may be appropriate for 
administering a program, it is not relevant to the formation of a UBE, 
which requires FCA's advance review or approval. However, we encourage 
System boards to develop policies on the use of UBEs that might include 
reporting requirements on UBE activity to the board and other internal 
controls ensuring that UBE activity remains in compliance with the 
requirements of this rule.
    Another commenter is concerned with the level of board involvement 
in forming UBEs when they are used to hold and manage acquired 
property, stating that requiring certified board resolutions for every 
investment in an acquired property UBE is burdensome and may cause 
delays in the collection/foreclosure process.
    We understand that requiring a certified board resolution each time 
an institution organizes a UBE to hold and manage acquired property in 
which unusual and complex collateral is involved could become 
burdensome and possibly cause disruptions in the collection and 
foreclosure process. To ease these concerns, this final rule allows the 
board of directors to adopt a blanket certified resolution that would 
cover all acquired property UBEs that the institution may form. This 
``blanket resolution,'' as we refer to it, must be filed with FCA with 
each advance notice of an acquired property UBE. This requirement is 
now found at Sec.  611.1154(b)(3). We note that the use of this blanket 
resolution is applicable only for the acquired property UBEs. Notices 
of hail and multi-peril crop insurance UBEs, and those UBEs added to 
the notice provision by FCA in the future, will still require a 
separate and timely certified board resolution.
d. A Statement From the Board of Directors [new Sec.  611.1154(b)(5)]
    Three commenters remarked that requiring a separate board-adopted 
statement is inefficient, ineffective, unnecessary, and bureaucratic 
and that FCA should allow the statement to be addressed within the 
context of a board adopted policy instead. One commenter believes that 
the restrictions and prohibitions required as part of the board 
statement in paragraph (b)(5)(vi) unnecessarily restrict potential 
future innovation that could further enhance a System institution's 
ability to effectively serve its mission to agriculture and rural 
America and is simply not necessary to protect the System's integrity 
or its cooperative principles.
    As with the board resolution, FCA believes that it is both 
appropriate and necessary for the board to affirm that the UBE will 
operate in accordance with certain requirements and restrictions in the 
rule. This statement provides that a UBE cannot be used to make direct 
loans, perform any functions, services or engage in any activities that 
the System institution itself is not authorized to carry out under the 
Act and regulations or to exceed the stated purpose of the UBE as set 
forth in its articles of formation. The statement also provides board 
support that the UBE is necessary or expedient to the institution's 
business and will operate with transparency, free from conflicts of 
interest, and in accordance with applicable law.
    Also, we are perplexed by the comment that Sec.  611.1154(b)(5)(vi) 
unnecessarily restricts System institutions' potential future 
innovation. This provision provides that UBEs will not engage in direct 
lending or exceed their stated purpose. These directives parallel the 
limits on service corporations formed under section 4.25 of the Act. As 
previously discussed, this rule gives System institutions yet another 
means to conduct certain business activity through expedient and 
efficient business structures while retaining the primary functions of 
a System institution within its federal charter, subject to all 
statutory and regulatory restrictions. The System's desire to innovate 
is necessarily restricted by applicable law, regulation, and safety and 
soundness concerns.
    Although we are retaining the board statement, we clarify in the 
final rule that a separate board action is not required for the 
statement. By approving and adopting its resolution, the board will 
also be approving the board statement included with the certified 
resolution.
    Finally, we note that the regulation does not require a board 
statement for acquired property UBEs that are filed under the notice 
provision. Under the notice provision, the board statement is required 
only for those UBEs organized to provide hail or multi-peril crop 
insurance or other functions, services, or activities that FCA may 
allow to be filed under the notice provision in the future (see Sec.  
611.1154(b)(5)).
    In the final rule, we are moving the board statement requirement 
from Sec.  611.1154(b)(5) to Sec.  611.1154(b)(4) so that the certified 
board resolution and the board statement appear in sequence. As a 
result of this technical change, the requirement for a letter from the 
funding bank approving the institution's equity investment in the UBE 
is being moved to Sec.  611.1154(b)(5).
e. Funding Bank Approval Letter [new Sec.  611.1154(b)(4)]
    In the final rule, we are moving the requirement for the funding 
bank's approval of the equity investment to Sec.  611.1154(b)(5). 
Moreover, to alleviate the need for the funding bank to approve each 
association's equity investment in a UBE organized to hold and manage 
unusual or complex collateral associated with loans, we are allowing a 
funding bank to provide a blanket approval letter for all such UBEs 
that its district associations may invest in or organize.
f. Supplementation or Omission of Information [new Sec.  611.1154(c) 
and Sec.  611.1155(b)]
    We received one comment that this provision creates ambiguity and 
uncertainty as to what information a System institution should provide 
in order to establish or invest in UBEs.
    The requirements in both the notice and approval provisions clearly 
state

[[Page 31829]]

what we expect System institutions to provide. However, because we 
cannot anticipate all the reasons for UBE use, this provision gives FCA 
the flexibility to ask for additional information on unusual or complex 
applications or to permit the omission of certain information on less 
complex applications. Therefore, we have retained this provision in the 
final rule, which provides needed flexibility affecting the clarity of 
the notice or approval process.
5. Approval of Equity Investments in UBEs [new Sec.  611.1155]
a. Request [new Sec.  611.1155(a)]
    Two commenters claim that the proposed rule fails to require timely 
action or response by FCA on any request. The commenters believe that 
FCA should hold itself to a reasonable timeframe to approve or deny any 
request, consistent with the 60-day requirement for merger 
applications.
    Although we decline to add a provision in the final rule requiring 
FCA action by a certain time, it is FCA's practice to act within 60 
business days of the receipt of a complete approval request whenever 
feasible. We note that the 60-day requirement for action on mergers is 
a statutory requirement.\9\ There is no statutory time limit on most 
approval requests coming before the Agency.
---------------------------------------------------------------------------

    \9\ This 60-day statutory time limit in section 7.11 of the Act 
also applies to termination of a System institution's status as a 
member of the System, dissolutions, and transfer of lending 
authority. In the latter case, all transfers of lending authority 
from banks to federal land bank associations and agricultural credit 
associations have occurred.
---------------------------------------------------------------------------

b. A Certified Resolution of the System Institution's Board of 
Directors [new Sec.  611.1155(a)(4)]
    We received the same comments on the requirement for a certified 
board resolution under the approval provision as we did under the 
notice provision. We refer you to Sec.  611.1154(b)(3) above for a 
discussion of these comments. For all the reasons stated in our 
discussion of the comments under the Notice provision, we have retained 
the requirement for a certified board resolution under this approval 
provision.
c. A Statement From the Board of Directors [new Sec.  611.1155 (a)(6)].
    Similarly, comments on the board statement, which is required under 
both the notice and approval provisions, were summarized under the 
notice provision in Sec.  611.1154(b)(5). No new or additional comments 
were made on the board statement in this section.
    As we explained in our response to the comments on the notice 
provision in proposed Sec.  611.1154(b)(5), we are retaining the board 
statement requirement but clarify that we are not requiring a separate 
board action for the statement. In adopting its resolution, the board 
also will be approving the board statement included with the certified 
resolution.
    In the final rule, we are combining the certified board resolution 
and board statement requirements into Sec.  611.1155(a)(4). As a result 
of this technical change, the requirement for a letter from the funding 
bank approving the institution's equity investment in the UBE is being 
moved to Sec.  611.1155(a)(5).
d. Denial of a Request [new Sec.  611.1155(c)]
    One commenter believes that FCA should establish clear and 
transparent regulatory standards for denial of a bona fide request. 
Otherwise, a denial could be arbitrary and capricious and subject to 
the personal views of FCA staff.
    With respect to establishing standards for denial of a request, we 
have not included such standards in the final rule because we are 
unable to anticipate all the reasons for denying a request. By law, FCA 
is obligated to act in a reasoned, impartial, and equitable manner in 
its approval and denial actions. Should a System institution believe 
that we failed to do so, our decision may be judicially challenged 
based on the arbitrary and capricious standard. Therefore, should we 
deny a request, our reasons for denial will be made clear after 
careful, impartial and judicious consideration.
6. Ongoing Requirements [new Sec.  611.1156]
    One commenter suggests that we replace the word ``interest'' in 
Sec.  611.1156(a) with the word ``investment.'' We decline to make the 
change because the word ``interest'' is broader in meaning and connotes 
not only the institution's equity investment in the UBE, but also 
interests such as that of preserving the operations of the UBE's 
ongoing business, maintaining good customer relationships, and avoiding 
reputational risk.
a. Divestiture [new Sec.  611.1156(b)-(d)]
    Three commenters remarked on the divestiture provisions. One 
commenter believes that the provisions are redundant and confusing and 
suggests that we combine them into one standard. This commenter also is 
concerned that FCA's authority to require divestiture without a 
suitable cause should be restricted and suggests that FCA establish 
standards for a divestiture order. Another commenter, remarking on the 
same subject, is concerned that Sec.  611.1156(c) allows FCA to require 
divestiture at any time without any triggering event, thus resulting in 
a complete loss to the institution. The commenter recommends that we 
delete paragraph (c) from the rule.
    In response to these comments, we have deleted some and combined 
other paragraphs of Sec.  611.1156(b) in this final rule to eliminate 
the redundancy in the divestiture provisions. However, we have retained 
the provision that allows FCA to direct a System institution to divest 
of its investment in a UBE. We note that this provision mirrors the 
discretion retained by FCA for those UBEs that we have approved on a 
case-by-case basis. Such approvals are subject to a condition giving 
FCA the right to order a divestiture without a pre-determined 
triggering event. As we are unable to anticipate all the conditions 
that might trigger the need for divestiture, we retain this authority 
in the final rule.
    The ICBA agrees with FCA that a System institution must divest its 
ownership interest or withdraw as a member or partner from any UBE if a 
non-System entity takes control of the UBE. However, the ICBA comments 
that the divestiture should take place within a period not to exceed 6 
months with a right to appeal for an extension of not more than 3 
months should more time be needed. Finally, the ICBA adds that such a 
time limit should apply to divestitures of all UBEs, including those 
that have no non-System ownership.
    We understand the ICBA's timeliness concerns. However, we decline 
to set a specific time limit for divestiture given that investments in 
UBEs are generally not liquid or marketable. Moreover, there may be 
legal or practical impediments to divesting within a particular 
timeframe depending on the nature and ownership structure of the UBE. 
Although we are not imposing a time requirement in the regulation, we 
expect System institutions to act expeditiously and may specify a time 
limit when FCA directs divestiture.
7. Grandfather Provision [new Sec.  611.1158]
a. Scope [new Sec.  611.1158(a)]
    We received several comments on the scope of the provision that 
allows those existing UBEs that received specific, written approval by 
the FCA prior to the effective date of this final rule, as well as 
existing acquired property UBEs, to

[[Page 31830]]

be grandfathered under the rule. Two commenters expressed support for 
this provision and one commenter asks that FCA confirm that all 
existing UBEs are effectively grandfathered and may continue current or 
intended business activities.
    In response to the request that FCA confirm that all existing UBEs 
are grandfathered, we specifically stated in the proposed rule, and 
retain the same language in the final rule, that ``those UBE formations 
or equity investments that received specific, written approval by FCA 
prior to the effective date of this regulation'' are grandfathered as 
well as those UBEs organized to acquire and manage unusual or complex 
collateral associated with loans. If a System institution is unsure as 
to whether a UBE's formation or investment in a UBE meets this 
criterion, it should contact FCA for confirmation.
    The ICBA, on the other hand, opposes the grandfathering of existing 
UBEs, stating that such a practice adds greater risk to the System and 
undermines safety and soundness standards.
    We do not agree with the ICBA's comments opposing the grandfather 
provision. All grandfathered UBEs were subject to a careful review 
process, including a review of the System institution's safety and 
soundness. To subject them anew to the notice or approval requirements 
of the rule would violate the principles of due process. We note that, 
although exempt from the notice and approval provisions in the rule, 
grandfathered UBEs will remain subject to their conditions of approval 
and will be subject to the ongoing and disclosure and reporting 
requirements in the rule as set forth in Sec.  611.1158(b)(2).
b. System Institutions' Obligations [new Sec.  611.1158(b)]
    Two commenters asked the FCA to adopt a materiality threshold on 
the degree of change that would trigger an approval request for a 
grandfathered UBE. One commenter believes it is unreasonable to think 
that business activity, ownership interests in, or control of any UBE 
will remain static over time and that any change or expansion to these 
attributes requiring an advance notice to FCA would create a burdensome 
and restrictive process. The same commenter states that the 20 business 
days advance notice is burdensome, restrictive, and may be impossible 
to achieve.
    One commenter asks that FCA create a process for System 
institutions to invest, divest and/or reinvest in grandfathered UBEs.
    In response to these comments, we have modified Sec.  
611.1158(b)(3) in the final rule to change the advance notice 
requirement from 20 business days to 10 business days consistent with 
our change to the advance notice provision in Sec.  611.1154. Also, in 
response to the request for more clarity on what changes or expansions 
would trigger an advance notice, the final rule provides that an 
advance notice is required for any of the following occurrences in a 
grandfathered UBE: (1) A change or expansion of the authorized business 
activity, service or function of the UBE; (2) an introduction of non-
System ownership to the UBE or an increase in the current level of non-
System ownership in the UBE, to the extent such ownership is authorized 
under the final rule; or, (3) a change in control of the UBE as we 
define the term ``control'' in the rule. The purpose of the advance 
notice is to inform FCA of a change or expansion that meets one or more 
of the foregoing criteria now included in this final rule. If FCA 
determines, upon review, that the proposed change or expansion is 
material, we will notify the System institution before the end of the 
advance notice period that it may not proceed with the proposed change 
or expansion before submitting a request for approval under Sec.  
611.1155. We have added this clarifying language to the final rule in 
Sec.  611.1158(b)(4).
    In response to the commenter's request that we provide a process in 
the rule for System institutions wanting to invest, divest, or reinvest 
in grandfathered UBEs, we have modified Sec.  611.1158 to include such 
a process in Sec.  611.1158(c). A System institution asking to invest 
for the first time in a grandfathered UBE or an institution that had 
divested its previous equity investment and wants to reinvest in a 
grandfathered UBE must follow either the notice provision in Sec.  
611.1154 or the approval provision in Sec.  611.1155, depending on the 
UBE's business purpose. Not all requirements will apply under either 
the notice or approval provisions to the requesting System institution 
because the UBE is already established and is grandfathered under the 
rule. Consequently, FCA expects to allow the omission of some 
information under our discretion to do so in Sec. Sec.  611.1154(c) and 
611.1155(b) of the rule. If a System institution chooses to divest its 
equity investment or withdraw as a partner or member in a grandfathered 
UBE, it is expected to follow the requirements of the UBE's membership 
or partnership agreement. FCA also retains its right to require an 
institution to divest its equity interest in a UBE under the provisions 
of Sec.  611.1156.
8. Disclosure and Reporting Requirements [Sec.  611.1157]
    Because all System institutions organizing or investing in a UBE 
under the notice or approval provisions must also comply with the 
disclosure and reporting requirements of this section, we have deleted 
proposed Sec.  611.1154(d) of the notice provision, which included the 
same requirement.
9. Contents of the Annual Report to Shareholders [Sec.  620.5(a)(11)]
    FCA is making a technical correction to this section by moving the 
annual disclosure requirement on UBEs from Sec.  620.5(a)(11) to Sec.  
620.5(a)(12) in this final rule. This change is necessary because the 
final rule on Compensation, Retirement Programs, and Related Benefits 
included a new disclosure provision in Sec.  620.5(a)(11).
    Two commenters believe the disclosure requirements are overly 
prescriptive and that System institutions should determine the nature 
of the disclosure based on the relative materiality of the UBEs being 
disclosed. One commenter saw no value in listing the names of all UBEs 
formed to hold acquired property and suggested the disclosure be 
limited to the number of UBEs formed for that purpose.
    To ensure transparency and meaningful disclosure, FCA retains the 
disclosure requirements as proposed. FCA believes that shareholders 
should be informed of the extent to which their institutions' 
functions, services, or activities are being provided by State-
organized or State-chartered non-System entities (the UBEs), the 
identity of these entities, their purpose and scope of activities, and 
their relationship to the institution itself. We also believe it is 
appropriate to vary the level of required disclosure depending on the 
purpose of the UBE rather than the relative materiality of a UBE, as 
one commenter suggested. Finally, as member-owned and member-controlled 
cooperatives, System boards of directors and executive management have 
an obligation to engage and communicate with their member-owners 
through financial reports that provide transparent and relevant 
information on the results of the institution's business operations 
over the previous year.\10\ Such annual disclosures, which inform the 
member-owners of the extent of the System institution's activities

[[Page 31831]]

conducted through UBEs, are not overly burdensome or without merit.
---------------------------------------------------------------------------

    \10\ See section 5.17(a)(8)of the Act; section 514 of the Farm 
Credit Banks and Associations Safety and Soundness Act of 1992; and 
Sec. Sec.  620.3, 620.5, 630.5, and 630.20 of FCA regulations.
---------------------------------------------------------------------------

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 the 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

12 CFR Part 604

    Sunshine Act.

12 CFR Part 611

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 612

    Agriculture, Banks, banking, Conflict of interests, Crime, 
Investigations, Rural areas.

12 CFR Part 619

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 620

    Accounting, Agriculture, Banks, banking, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 621

    Accounting, Agriculture, Banks, banking, Penalties, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 622

    Administrative practice and procedure, Crime, Investigations, 
Penalties.

12 CFR Part 623

    Administrative practice and procedure.

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, parts 604, 611, 612, 619, 
620, 621, 622, 623, and 630 of chapter VI, title 12 of the Code of 
Federal Regulations are amended as follows:

PART 604--FARM CREDIT ADMINISTRATION BOARD MEETINGS

0
1. The authority citation for part 604 continues to read as follows:

    Authority: Secs. 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 
2243, 2252).


Sec.  604.420  [Amended]

0
2. Section 604.420 is amended by removing the words ``service 
organizations'' in paragraph (i)(1) and adding in their place, the 
words ``service corporations chartered under the Act''.

PART 611--ORGANIZATION

0
3. The authority citation for part 611 is revised to read as follows:

    Authority:  Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2, 
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 3.21, 4.3A, 
4.12, 4.12A, 4.15, 4.20, 4.21, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 
5.25, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011, 
2012, 2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121, 
2122, 2123, 2124, 2128, 2129, 2130, 2142, 2154a, 2183, 2184, 2203, 
2208, 2209, 2211, 2212, 2213, 2214, 2243, 2252, 2261, 2279a-2279f-1, 
2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568, 
1638; sec. 414 of Pub. L. 100-399, 102 Stat. 989, 1004.

Sec.  611.1130  [Amended]

0
4. Section 611.1130 is amended in the first sentence of paragraph (a) 
by removing the words ``service organizations organized under the Act'' 
and adding in their place, the words ``service corporations chartered 
under the Act''.

0
5. Revise the heading of subpart I to read as follows:

Subpart I--Service Corporations


Sec.  611.1136  [Amended]

0
6. Section 611.1136 is amended by:
0
a. Revising the section heading;
0
b. Removing the words ``and unincorporated service organizations'' in 
paragraph (c);
0
c. Removing the words ``service organization'' or ``service 
organizations'' each place they appear and adding in their place, the 
words ``service corporation'' or ``service corporations'' respectively.
    The revision reads as follows:


Sec.  611.1136  Regulation and examination of service corporations.

* * * * *

0
7. Add a new subpart J, consisting of Sec. Sec.  611.1150-611.1158, to 
read as follows:
Subpart J--Unincorporated Business Entities
Sec.
611.1150 Purpose and scope.
611.1151 Definitions.
611.1152 Authority over equity investments in UBEs for business 
activity.
611.1153 General restrictions and prohibitions on the use of UBEs.
611.1154 Notice of equity investments in UBEs.
611.1155 Approval of equity investments in UBEs.
611.1156 Ongoing requirements.
611.1157 Disclosure and reporting requirements.
611.1158 Grandfather provision.

Subpart J--Unincorporated Business Entities


Sec.  611.1150  Purpose and scope.

    (a) Purpose. This subpart sets forth the parameters for one or more 
Farm Credit System (System) institutions to organize or invest in an 
Unincorporated Business Entity (UBE) in accordance with the Farm Credit 
Act of 1971, as amended (Act).
    (b) Scope. Except as authorized under these regulations, no System 
institution may manage, control, become a member or partner, or invest 
in a State-organized or chartered business entity. This subpart applies 
to each System institution that organizes or invests in a UBE, 
including a UBE organized for the express purpose of investing in a 
Rural Business Investment Company. This subpart does not apply to UBEs 
that one or more System institutions have the authority to establish as 
Rural Business Investment Companies pursuant to the provisions of title 
VI of the Farm Security and Rural Investment Act of 2002, as amended 
(FSRIA) and United States Department of Agriculture regulations 
implementing FSRIA.


Sec.  611.1151  Definitions.

    For purposes of this subpart, the following definitions apply:
    Articles of formation means registration certificates, charters, 
articles of organization, partnership agreements, membership or trust 
agreements, operating, administration or management agreements, fee 
agreements or any other documentation on the establishment, ownership, 
or operation of a UBE.
    Control means that one System institution, directly or indirectly, 
owns more than 50 percent of the UBE's equity or serves as the general 
partner of an LLLP, or constitutes the sole manager or the managing 
member of a UBE. However, under generally accepted accounting 
principles (GAAP), the power to control may also exist with a lesser 
percentage of ownership, for

[[Page 31832]]

example, if a System institution is the UBE's primary beneficiary, 
exercises significant influence over the UBE or establishes control 
under other facts and circumstances in accordance with GAAP. Under this 
definition, a System institution also will be deemed to have control 
over the UBE if it exercises decision-making authority in a principal 
capacity of the UBE as defined under GAAP.
    Equity investment means a System institution's contribution of 
money or assets to the operating capital of a UBE that provides 
ownership rights in return.
    System institution means each System bank under titles I or III of 
the Act, each System association under title II of the Act, and each 
service corporation chartered under section 4.25 of the Act.
    Third-party UBE means a UBE that is owned or controlled by one or 
more non-System persons or entities as the term ``control'' is defined 
under GAAP.
    UBE means a Limited Partnership (LP), Limited Liability Partnership 
(LLP), Limited Liability Limited Partnership (LLLP), Limited Liability 
Company (LLC), Business or other Trust Entity (TE), or other business 
entity established and maintained under State law that is not 
incorporated under any law or chartered under Federal law.
    UBE business activity means the services and functions delivered by 
a UBE for one or more System institutions.
    Unusual and complex collateral means acquired property that may 
expose the owner to risks beyond those commonly associated with loans, 
including, but not limited to, acquired industrial or manufacturing 
properties where there is increased risk of incurring potential 
environmental or other liabilities that may accrue to the owners of 
such properties.


Sec.  611.1152  Authority over equity investments in UBEs for business 
activity.

    (a) Regulation, supervisory, oversight, examination and enforcement 
authority. FCA has regulatory, supervisory, oversight, examination and 
enforcement authority over each System institution's equity investment 
in or control of a UBE and the services and functions that a UBE 
performs for the System institution. This includes FCA's authority to 
require a System institution's dissolution of, disassociation from, or 
divestiture of an equity investment in a UBE, or to otherwise condition 
the approval of equity investments in UBEs.
    (b) Assessing UBE investments and business activity. In accordance 
with section 5.15 of the Act, the cost of regulating and examining 
System institutions' activities involving UBEs will be taken into 
account when assessing a System institution for the cost of 
administering the Act.


Sec.  611.1153  General restrictions and prohibitions on the use of 
UBEs.

    (a) Authorized UBE business activity. All UBE business activity 
must be:
    (1) Necessary or expedient to the business of one or more System 
institutions owning the UBE; and
    (2) In no instance greater than the functions and services that one 
or more System institutions owning the UBE are authorized to perform 
under the Act and as determined by the FCA.
    (b) Circumvention of cooperative principles. System institutions 
are prohibited from using UBEs to engage in direct lending activities 
or any other activity that would circumvent the application of 
cooperative principles, including borrower rights as described in 
section 4.14A of the Act, or stock ownership, voting rights or 
patronage as described in section 4.3A of the Act.
    (c) Transparency and the avoidance of conflicts of interest. Each 
System institution must ensure that:
    (1) The UBE is held out to the public as a separate or subsidiary 
entity;
    (2) The business transactions, accounts, and records of the UBE are 
not commingled with those of the System institution; and
    (3) All transactions between the UBE and System institution 
directors, officers, employees, and agents are conducted at arm's 
length, in the interest of the System institution, and in compliance 
with standards of conduct rules in Sec. Sec.  612.2130 through 
612.2270.
    (d) Limit on one-member UBEs. A UBE owned solely by a single System 
institution (including between and among a parent agricultural credit 
association and its production credit association and Federal land 
credit association subsidiaries and between a parent agricultural 
credit bank and its subsidiary Farm Credit Bank) as a one-member UBE is 
limited to the following special purposes:
    (1) Acquiring and managing the unusual or complex collateral 
associated with loans; and
    (2) Providing limited services such as electronic transaction, 
fixed asset, trustee or other services that are integral to the daily 
internal operations of a System institution.
    (e) Limit on UBE partnerships. A System institution operating 
through a parent-subsidiary structure may not create a UBE partnership 
between or among the parent agricultural credit association and its 
production credit association and Federal land credit association 
subsidiaries or between a parent Agricultural Credit Bank and its Farm 
Credit Bank subsidiary.
    (f) Prohibition on UBE subsidiaries. Except as provided in this 
paragraph, a System institution may not create a subsidiary of a UBE 
that it has organized or invested in under this subpart or enable the 
UBE itself to create a subsidiary or any other type of affiliated 
entity. A System institution may establish a UBE as a subsidiary of a 
UBE formed pursuant to paragraph (d)(1) of this section to hold each 
investor's pro-rata interest in acquired property provided that the 
loan collateral at issue involves a multi-lender transaction that 
includes System and non-System lenders.
    (g) Limit on potential liability.
    (1) Each System institution's equity investment in a UBE must be 
established in a manner that will limit potential exposure of the 
System institution to no more than the amount of its investment in the 
UBE.
    (2) A System institution cannot become a general partner of any 
partnership other than an LLLP.
    (h) Limit on amount of equity investment in UBEs. The aggregate 
amount of equity investments that a single System institution is 
authorized to hold in UBEs must not exceed one percent of the 
institution's total outstanding loans, calculated at the time of each 
investment. On a case-by-case basis, FCA may approve an exception to 
this limitation that would exceed the one-percent aggregate limit. 
Conversely, FCA may impose a percentage limit lower than the one-
percent aggregate limit based on safety or soundness and other relevant 
concerns. This one-percent aggregate limit does not apply to equity 
investments in one-member UBEs formed for acquired property as 
permitted in paragraph (d)(1) of this section. Any equity investment 
made in a UBE by a service corporation must be attributed to its System 
institution owners based on the ownership percentage of each bank or 
association.
    (i) Prohibition on relationship with a third-party UBE. A System 
institution is prohibited from:
    (1) Making any equity investment in a third-party UBE except as may 
be authorized on a case-by-case basis under Sec.  615.5140(e) of this 
chapter for de minimis and passive investments. Such requests would be 
considered outside of this rule.
    (2) Serving as the general partner or manager of a third-party UBE; 
or
    (3) Being designated as the primary beneficiary of a third-party 
UBE, either alone or with other System institutions.

[[Page 31833]]

    (j) Limitation on non-System equity investments. Non-System persons 
or entities may not invest in a UBE that is controlled by a System 
institution except that non-System persons or entities may own 20 
percent or less of the equity of a System-controlled UBE organized to 
deliver services integral to the daily internal operations of a System 
institution.
    (k) UBEs formed for acquiring and managing collateral. The 
provisions of paragraphs (i) and (j) of this section do not apply to 
UBEs formed for the purpose of acquiring and managing unusual or 
complex collateral associated with multiple-lender loan transactions in 
which non-System persons or entities are participants.


Sec.  611.1154  Notice of equity investments in UBEs.

    (a) Applicability. This notice provision is applicable only to 
System institutions that wish to make an equity investment in UBEs 
whose activities are limited to the following purposes:
    (1) Acquiring and managing unusual or complex collateral associated 
with loans;
    (2) Providing hail or multi-peril crop insurance services in 
collaboration with another System institution in accordance with Sec.  
618.8040 of this chapter; and
    (3) Any other UBE business activity that FCA determines to be 
appropriate for this notice provision.
    (b) Notice requirements. System institutions must provide written 
notice to FCA so that the notice is received by FCA no later than 10 
business days in advance of making an equity investment in a UBE for 
authorized UBE business activity described in paragraph (a) of this 
section. The notice must include:
    (1) The UBE's articles of formation, including its name and the 
State in which it is organized, length of time it will exist, its 
partners or members, and its management structure;
    (2) The dollar amount of the System institution's equity investment 
in the UBE;
    (3) A certified resolution of the System institution's board of 
directors authorizing the equity investment in, and business activity 
of, the UBE and the board's approval to submit the notice to the FCA. 
For UBEs organized to acquire and manage unusual or complex collateral 
associated with loans as identified in paragraph (a)(1) of this 
section, the board of directors may adopt a blanket board resolution to 
cover all such UBEs that the System institution will organize.
    (4) Except for those UBEs identified in paragraph (a)(1) of this 
section, a board statement included with the certified board resolution 
affirming that the UBE:
    (i) Is needed to achieve operating efficiencies and benefits;
    (ii) Is necessary or expedient to the System institution's 
business;
    (iii) Will operate with transparency;
    (iv) Will conduct its business activity in a manner designed to 
prevent conflicts of interest between its purpose and operations and 
the mission and operations of the System institution(s);
    (v) Will otherwise be in compliance with applicable Federal, State, 
and local laws; and
    (vi) Will not be used by the System institution to make direct 
loans; perform any functions or provide any services that the System 
institution is not authorized to perform or provide under the Act and 
FCA regulations; or to exceed the stated purpose of the UBE as set 
forth in its articles of formation.
    (5) A letter from the funding bank that it has approved the 
institution's equity investment in the UBE. For those UBEs organized to 
acquire and manage unusual or complex collateral associated with loans 
as identified in paragraph (a)(1) of this section, the funding bank may 
provide a blanket approval letter to cover all such UBEs that its 
district associations may invest in or organize.
    (6) Any additional information the System institution wishes to 
submit.
    (c) Supplementation or omission of information. FCA may require the 
supplementation or allow the omission of any information required under 
paragraph (b) of this section.
    (d) Other requirements. A System institution may not organize or 
invest in those UBEs identified in paragraph (a) of this section if the 
FCA notifies the institution before the end of the 10 business day 
advance notice period that such investment requires FCA approval under 
the provisions of Sec.  611.1155.


Sec.  611.1155  Approval of equity investments in UBEs.

    (a) Request. System institutions must receive FCA approval before 
organizing or investing in any UBE that does not qualify for the notice 
provision set forth in Sec.  611.1154(a). A request for approval under 
this section must include the following information:
    (1) A detailed statement of the risk characteristics of the 
investment, as required by Sec.  615.5140(e) of this chapter and the 
initial amount of equity investment;
    (2) A detailed statement on the purpose and objectives of the UBE; 
the need for the UBE and the operating efficiencies and benefits that 
will be achieved by using the UBE;
    (3) The proposed articles of formation addressing, at a minimum, 
the following:
    (i) The UBE's name, the State in which it is organized, the city 
and State in which its principal office is to be located, and its 
partners or members and management structure;
    (ii) Specific business activities that the UBE will conduct;
    (iii) General powers of the UBE;
    (iv) Ownership, voting, partnership, membership and operating 
agreements for the UBE;
    (v) Procedures to adopt and amend the partnership, membership or 
operating agreement of the UBE;
    (vi) The standards and procedures for the application and 
distribution of the UBE's earnings; and
    (vii) Length of time the UBE will exist.
    (4) A certified resolution of the System institution's board of 
directors authorizing the equity investment in the UBE and the UBE 
business activity and the board's approval to submit the request to the 
FCA. The certified board resolution must include a board statement 
affirming that the UBE:
    (i) Is necessary or expedient to the System institution's business;
    (ii) Will operate with transparency;
    (iii) Will conduct its business activity in a manner designed to 
prevent conflicts of interest between its purpose and operations and 
the mission and operations of the System institution(s);
    (iv) Will comply with applicable Federal, State, and local laws; 
and
    (v) Will not be used by the System institution to make direct 
loans; perform any functions or provide any services that the System 
institution is not authorized to perform or provide under the Act and 
FCA regulations; or exceed the purpose of the UBE as stated in its 
articles of formation.
    (5) A letter from the funding bank that it has approved the 
institution's equity investment in the UBE;
    (6) Any additional information the System institution wishes to 
submit.
    (b) Supplementation or omission of information. FCA may require the 
supplementation or allow the omission of any information required under 
paragraph (a) of this section based on the complex or noncomplex nature 
of the proposed UBE.
    (c) Denial of a request. The FCA will specify in writing to the 
submitting System institutions the reasons for denial of any request to 
organize or invest in a UBE.


Sec.  611.1156  Ongoing requirements.

    A System institution that organizes or invests in a UBE must also 
comply with the following requirements:

[[Page 31834]]

    (a) Maintain and ensure FCA's access to all books, papers, records, 
agreements, reports and other documents of each UBE necessary to 
document and protect the institution's interest in each entity;
    (b) Divest, as soon as practicable, the institution's equity or 
beneficial interest in, and sever any relationship with a UBE:
    (1) That conducts activities beyond those authorized to carry out 
its limited purpose or that are contrary to the Act or FCA regulations, 
or as otherwise directed to do so by FCA; or
    (2) Where non-System persons or entities obtain control as defined 
under GAAP. This paragraph does not apply to UBEs formed for the 
purpose of acquiring and managing unusual or complex collateral 
associated with multiple-lender loan transactions in which non-System 
persons or entities are participants.


Sec.  611.1157  Disclosure and reporting requirements.

    (a) Annual report to shareholders. In its annual report to 
shareholders, as set forth in Sec.  620.5(a)(12) of this chapter, a 
System institution must provide information on its UBE investment and 
business activity.
    (b) Periodic reports as directed. As directed by FCA, a System 
institution must submit periodic reports to FCA on any equity 
investment in a UBE or UBE status as provided under Sec.  621.12 of 
this chapter, and in accordance with Sec. Sec.  621.13 and 621.14 of 
this chapter.
    (c) Dissolution of a UBE. A System institution must submit a timely 
report to FCA on the dissolution of a UBE that it controls.


Sec.  611.1158  Grandfather provision.

    (a) Scope. The following equity investments in UBEs are 
grandfathered from the Notice and Approval provisions under Sec. Sec.  
611.1154 and 611.1155, respectively.
    (1) Those UBE formations or equity investments that received 
specific, written approval by FCA prior to the effective date of this 
regulation; and
    (2) Those UBE formations or equity investments that occurred prior 
to the effective date of this regulation to acquire or manage unusual 
or complex collateral associated with loans.
    (b) System institutions' obligations. All System institutions with 
grandfathered UBEs:
    (1) Remain subject to their conditions of approval;
    (2) Are subject to the ongoing requirements of Sec.  611.1156 and 
the disclosure and reporting requirements of Sec.  611.1157; and
    (3) May not change or expand the authorized business activity, 
service, or function of the UBE as approved by FCA, add or increase the 
level of non-System ownership in the UBE to the extent such ownership 
is authorized under Sec.  611.1153(j), or change control of the UBE as 
control is defined in Sec.  611.1151 without giving written notice of 
such changes to FCA at least 10 business days in advance of any such 
change or expansion.
    (4) A System institution may not proceed with any change or 
expansion as defined in paragraph (b)(3) of this section if the FCA 
notifies the institution before the end of the 10 business day advance 
notice period that the proposed change or expansion is material and 
must be submitted for FCA approval under the provisions of Sec.  
611.1155.
    (c) System institution investments or reinvestments in 
grandfathered UBEs. System institutions investing for the first time in 
grandfathered UBEs or reinvesting after having previously divested 
their equity investment must provide notice to FCA or obtain FCA 
approval under either the notice provision in Sec.  611.1154 or the 
approval provision in Sec.  611.1155 depending on the function, 
service, or activity of the grandfathered UBE in which the institution 
seeks to invest or reinvest.

PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED 
CRIMINAL VIOLATIONS

0
8. The authority citation for part 612 continues to read as follows:

    Authority:  Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12 
U.S.C. 2243, 2252, 2254).


0
9. Section 612.2130 is amended by revising paragraphs (p) and (t) to 
read as follows:


Sec.  612.2130  Definitions.

* * * * *
    (p) Service corporation means each service corporation chartered 
under the Act.
* * * * *
    (t) System institution and institution mean any bank, association, 
or service corporation in the Farm Credit System, including the Farm 
Credit Banks, banks for cooperatives, Agricultural Credit Banks, 
Federal land bank associations, agricultural credit associations, 
Federal land credit associations, production credit associations, the 
Federal Farm Credit Banks Funding Corporation, and service corporations 
chartered under the Act.

PART 619--DEFINITIONS

0
10. The authority citation for part 619 continues to read as follows:

    Authority:  Secs. 1.4, 1.5, 1.7, 2.1, 2.2, 2.4, 2.11, 2.12, 3.1, 
3.2, 3.21, 4.9, 5.9, 5.17, 5.19, 7.0, 7.1, 7.6, 7.8, and 7.12 of the 
Farm Credit Act (12 U.S.C. 2012, 2013, 2015, 2072, 2073, 2075, 2092, 
2093, 2122, 2123, 2142, 2160, 2243, 2252, 2254, 2279a, 2279a-1, 
2279b, 2279c-1, 2279f); sec. 514 of Pub. L. 102-552, 106 Stat. 4102.
0
11. Add a new Sec.  619.9338 to read as follows:


Sec.  619.9338  Unincorporated business entities.

    An Unincorporated Business Entity means a Limited Partnership (LP), 
Limited Liability Partnership (LLP), Limited Liability Limited 
Partnership (LLLP), Limited Liability Company (LLC), Business or other 
Trust Entity (TE), or other business entity established and maintained 
under State law that is not incorporated under any law or chartered 
under Federal law.

PART 620--DISCLOSURE TO SHAREHOLDERS

0
12. The authority citation for part 620 continues to read as follows:

    Authority:  Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm 
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254); sec. 424 
of Pub. L. 100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-
552, 106 Stat. 4102.

Subpart B--Annual Report to Shareholders

0
13. Section 620.5 is amended by:
0
a. Removing the words ``service organization'' in paragraph (a)(3) and 
adding in their place, the words ``service corporation chartered under 
the Act''; and
0
b. Adding a new paragraph (a)(12) to read as follows:


Sec.  620.5  Contents of the annual report to shareholders.

* * * * *
    (a) * * *
    (12) For banks and associations, business relationships with 
unincorporated business entities (UBEs).
    (i) Except as provided in paragraph (a)(12)(ii) of this section, 
describe the business relationship with any UBE, as defined in Sec.  
611.1151 of this chapter, that was organized by the bank or association 
or in which the bank or association has an equity interest. Include in 
the description the name of the UBE, the type of business entity, the 
purpose for which the UBE was organized, the scope of its activities, 
and the level of ownership. If the bank or

[[Page 31835]]

association does not have an equity interest, but manages the 
operations of a UBE that is controlled by a System institution, 
describe this business relationship and any fees received.
    (ii) If the UBE is organized for the purpose of acquiring and 
managing unusual or complex collateral associated with loans, the bank 
or association need only disclose the name of the UBE, the type of 
business entity, and the purpose for which the UBE was organized.

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

0
14. The authority citation for part 621 continues to read as follows:

    Authority:  Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C. 
2252, 2279aa-11); sec. 514 of Pub. L. 102-552.


Sec.  621.1  [Amended]

0
15. Section 621.1 is amended by removing the words ``service 
organizations'' and adding in their place, the words ``service 
corporations''.


Sec.  621.2  [Amended]

0
16. Section 621.2(e) is amended by removing the words ``service 
organization'' and adding in their place, the words ``service 
corporation''.

PART 622--RULES OF PRACTICE AND PROCEDURE

0
17. The authority citation for part 622 continues to read as follows:

    Authority:  Secs. 5.9, 5.10, 5.17, 5.25-5.37 of the Farm Credit 
Act (12 U.S.C. 2243, 2244, 2252, 2261-2273); 28 U.S.C. 2461 note; 
and 42 U.S.C. 4012a(f).

Sec.  622.2  [Amended]

0
18. Section 622.2(d) is amended by removing the words ``service 
organization chartered under part E of title IV of the Act'' and adding 
in their place, the words ``service corporation chartered under the 
Act''.

PART 623--PRACTICE BEFORE THE FARM CREDIT ADMINISTRATION

0
19. The authority citation for part 623 is revised to read as follows:

    Authority:  Secs. 5.9, 5.10, 5.17, 5.25-5.37 of the Farm Credit 
Act (12 U.S.C. 2243, 2244, 2252, 2261-2273).


Sec.  623.2  [Amended]

0
20. Section 623.2(d) is amended by removing the words ``service 
organization chartered under part E of title IV of the Act'' and adding 
in their place, the words ``service corporation chartered under the 
Act''.

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

0
21. The authority citation for part 630 continues 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.


Sec.  630.20  [Amended]

0
22. Section 630.20 is amended by removing the words ``service 
organization'' in paragraph (a)(2) and adding in their place, the words 
``service corporation''.

    Dated: May 21, 2013.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2013-12594 Filed 5-24-13; 8:45 am]
BILLING CODE 6705-01-P