[Federal Register Volume 85, Number 196 (Thursday, October 8, 2020)]
[Rules and Regulations]
[Pages 63428-63431]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20264]


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

FARM CREDIT ADMINISTRATION

12 CFR Part 620

RIN 3052-AD37


District Financial Reporting

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

SUMMARY: The Farm Credit Administration (FCA, we, or our) is amending 
our regulations governing how a Farm Credit bank presents information 
on its related associations when preparing annual bank financial 
statements on a stand-alone basis. The final rule provides two 
presentation options when disclosing related association financial 
information in an annual bank report: By footnote or attached in a 
supplement.

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 notification of the effective date in the 
Federal Register.

FOR FURTHER INFORMATION CONTACT: 
    Technical information: Joi Neal, Senior Accountant, Office of 
Regulatory Policy, (703) 883-4223, TTY (703) 883-4056.
    Legal information: Laura McFarland, Senior Counsel, Office of 
General Counsel, (703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

I. Objective

    The objective of the final rule is to improve shareholder access to 
district financial information by providing an additional method of 
presenting financial information on a bank's related associations to 
those banks preparing annual financial statements on a stand-alone 
basis.

II. Background

    The Farm Credit Act of 1971 (Act), as amended,\1\ authorizes the 
FCA to issue regulations implementing the Act's provisions. Our 
regulations are intended to ensure the safe and sound operation of Farm 
Credit System (System) institutions and to govern the disclosure of 
financial information to shareholders of, and investors in, the System. 
Congress explained in section 514 of the Farm Credit Banks and 
Associations Safety and Soundness Act of 1992 \2\ that disclosures of 
financial information, among other disclosures, provide System 
shareholders with information

[[Page 63429]]

necessary to better manage their institution and make informed 
decisions regarding its operations.
---------------------------------------------------------------------------

    \1\ Public Law 92-181, 85 Stat. 583 (1971), 12. U.S.C. 2001, et 
seq.
    \2\ Public Law 102-552, 106 Stat. 4131 (1992).
---------------------------------------------------------------------------

    We issued a proposed rule on December 12, 2019, asking for comments 
on proposed changes to 12 CFR 620.2.\3\ Specifically, we proposed 
allowing Farm Credit banks to use a supplement for disclosure of 
combined districtwide (bank and related association) financial 
information in lieu of a footnote when issuing stand-alone annual 
financial statements. As proposed, the supplement would be considered 
part of the bank's annual report and therefore be distributed at the 
same time as the annual report, and covered by its accuracy, 
distribution, and internal control requirements. The comment period for 
the proposed rule closed on March 9, 2020.
---------------------------------------------------------------------------

    \3\ 85 FR 647.
---------------------------------------------------------------------------

III. Comments and Our Responses

    We received two comment letters on our proposed changes to Sec.  
620.2(g)(2). One letter came from CoBank, ACB (CoBank), a System 
institution, and one letter came from the American Bankers Association 
(ABA). Both letters supported FCA's objective for the rulemaking but 
asked for changes to what was proposed. We discuss these comments to 
our proposed rule and our responses below. However, after consideration 
of all the comments, we are making no changes and final all provisions 
as proposed.

A. Treatment of Supplement as Part of the Annual Report

    We proposed requiring the inclusion of the combined districtwide 
financial information via a supplement to be considered part of the 
annual report. CoBank expressed support for the flexibility of using 
either a supplement or footnote for discussion of districtwide 
financial information within the bank's annual report. However, CoBank 
requested removal of the proposed requirement that the supplement be 
considered part of the annual bank stand-alone report, asking that the 
supplement be a separate report. CoBank gave several reasons for the 
request and we address each of the reasons given by CoBank later in 
this preamble, but generally respond here by explaining that the 
supplement was proposed as an alternative presentation format to using 
a footnote as provided under our existing regulations. In keeping with 
this existing regulatory requirement, we proposed keeping the combined 
districtwide financial information as an essential part of the annual 
report itself, whether presented as a footnote or supplement.
    We explained in the preamble to the proposed rule that use of a 
supplement instead of a footnote was not creating a new report, but 
merely giving the alternative presentation method requested by the four 
Farm Credit banks.\4\ Because by its nature a footnote is indelibly 
part of a report, we proposed concurrent distribution when presentation 
of districtwide information is done through a supplement to ensure it 
received the same treatment as if presented in a footnote. Meaning, 
whether a supplement or footnote, the contents would be part of the 
annual report, distributed with the annual report pursuant to 12 CFR 
620.4, and therefore included in the annual report signature, 
certification, and internal controls requirements of 12 CFR 620.3. 
Additionally, we believe that shareholders need both the bank-only 
financial information and combined districtwide financial information 
at the same time to foster a better understanding of the bank and its 
district operations. All the financial information--bank-only and 
combined districtwide financial information--needs to be available at 
the same time to accomplish that goal.
---------------------------------------------------------------------------

    \4\ Refer to the proposed rule at section II, ``Background'' (85 
FR 647, January 7, 2020).
---------------------------------------------------------------------------

1. Comingling Districtwide Data With Bank Only Information
    CoBank commented that it believes the inclusion of the supplement 
as part of the bank's annual report renders the bank's disclosures 
misleading to its investors because the bank has lending activities 
beyond the associations. CoBank has the unique status of being the only 
System institution possessing Title III authorities, resulting in Title 
III voting stockholders that are not System associations--these 
stockholders are called ``cooperative association stockholders'' (CA 
stockholders). CoBank explained that, because the districtwide 
disclosures exclude its Title III lending activities, an investor might 
interpret the different disclosure treatment as being required due to 
accounting or financial reasons. CoBank also claimed its CA 
shareholders could mistakenly conclude there are multi-tiered classes 
of common stockholders due both to the heightened prominence of the 
district financial information resulting from use of a supplement over 
a footnote and the equity interests of this group of stockholders not 
being reflected in the districtwide information.
    We disagree with CoBank's stated concern. A clearly presented 
supplement or footnote would label the information in a manner to avoid 
an investor or shareholder misreading the data. Although CoBank has 
both System association shareholders and CA stockholders, the 
districtwide financial information presented in a supplement or 
footnote further supports the bank's discussion of the components of 
its operations. Throughout its annual report, CoBank discusses the 
distinctions between its association shareholders and CA stockholders. 
The disclosure of districtwide financial information continues the 
bank's efforts to clarify its operations to its association 
shareholders and CA stockholders by reducing confusion on its district 
operations. In addition, both the footnote and the supplement specify 
the scope of the financial information presented, which avoids 
confusion with CoBank's lending activities with CA stockholder 
entities.
2. Delay in Receipt of Districtwide Information
    CoBank objected to distributing the supplement concurrently with 
the annual report because receipt of the districtwide information may 
be delayed, making the entire annual report late. CoBank stated that 
any delay in issuing the annual report could adversely affect CoBank's 
credibility in the capital markets, which in turn could imperil access 
to third-party capital resources. CoBank added that it envisioned 
sending both items together except when there was a delay in obtaining 
the districtwide data.
    As the funding bank for its associations, we believe CoBank can 
minimize the potential for financial reporting delays and other issues 
at its related associations. By using its ongoing monitoring and other 
supervisory activities, each bank can identify and assess the impact of 
potential delays and other issues on the preparation of annual reports 
and take proactive steps to minimize the potential consequences should 
a delay or other issue occur. Further, effective internal controls over 
financial reporting at a bank and its related associations reduces the 
likelihood of delays. We encourage the banks to proactively utilize 
measures that improve its districtwide financial reporting processes, 
while decreasing any issuance risks. Separately, investors from the 
capital markets, just like System shareholders, must obtain timely, 
reliable financial information to make informed investment decisions 
when purchasing System securities. We

[[Page 63430]]

do not believe that separately issuing bank-only and combined 
districtwide financial information accomplishes that goal. By 
concurrently issuing combined districtwide information with the bank's 
annual report, the investors receive a timely and complete view of the 
bank's operations and obligations in order to price System securities 
accordingly.
3. Different Accounting Treatment
    We proposed clarifying that the current Sec.  620.2(g)(2) option 
for banks to issue the related associations' financial information on 
an unaudited basis extends to all the financial information provided 
for the related associations, whether in a footnote or supplement. We 
also proposed language to specify that all information provided through 
use of either a footnote or a supplement would be considered part of 
the bank's annual report and therefore included in the distribution, 
signature, certification, and internal control assessments of the 
annual report. CoBank questioned treating the supplement as part of the 
annual report's financial certification when separate auditing 
protocols are applied to the bank only financial information. CoBank 
explained that it appeared inappropriate to include unaudited 
districtwide financial information within the report when the bank-only 
financial information is audited. CoBank added that it had no 
disagreement with the districtwide information being unaudited, only 
with treating it as part of the annual report.
    We disagree with CoBank's comment that the bank's annual reports, 
which contain both audited and unaudited information, is contradictory 
or misleading. The rule does not change the current regulatory 
provision that the combined bank and association financial information 
may be unaudited, nor does it change the requirement for the bank to 
disclose the basis of presentation for the districtwide financial 
information. Additionally, the bank-only component of the annual report 
also contains both audited and unaudited financial information. For 
example, management's discussion and analysis is a required unaudited 
element, whereas a bank's financial statements are an audited element 
of the annual report. We also remark that Generally Acceptable 
Accounting Principles allow the inclusion of both audited and unaudited 
information in an annual report. As a result, we believe our rule 
provides consistent application of accounting and reporting standards 
across all elements of a bank's annual report. Also, we believe 
inclusion of districtwide financial information within the annual 
report, as either a footnote or supplement, bolsters the disclosure 
purpose of the annual report.

B. Additional Disclosures

    In the preamble to the proposed rule we listed our expectations 
regarding the contents of the districtwide information provided as part 
of a bank's annual report. The ABA expressed strong support for 
increasing districtwide disclosures and asked that the recommended 
information listed in the preamble to the proposed rule be required and 
issued in a tabular format to permit more extensive comparison of 
association financial results within the bank's district. The preamble 
did not discuss or propose the recommended information as regulatory 
text and thus we do not feel that it would be appropriate to now add 
these recommendations as new requirements for the final rule. We do not 
believe that a prescriptive approach regarding the contents of the 
districtwide information provided as part of a bank's annual report is 
appropriate. Rather, while some general uniformity is appropriate, FCA 
recognizes that districtwide financial disclosures may vary among the 
banks. We also reiterate our expectations that district financial 
information at a minimum, include:
     The nature of business relationships between System 
entities within the bank's district;
     Summary of District financial information for the 
preceding three years;
     Summary of district loan portfolio, discussing 
concentration risks and significant changes in credit quality, 
nonperforming assets, past due loans, loan loss allowance and reserves, 
and loan aging analysis within the district as compared to previous 
years.
     A description of combined association investments;
     Districtwide capital levels and regulatory ratios;
     Summary of key districtwide income statement line items 
and profitability measures; and
     A description of any qualified and nonqualified 
districtwide defined pension plan(s), including each plan's current 
funding status, accrued benefit obligation and projected benefit 
obligation, and key actuarial assumptions.
    We believe an annual report, with the above list of items, will 
provide the most meaningful transparency on the financial condition of 
each Farm Credit District.
    The ABA also asked that the rule require increased discussion 
within the annual report of supervisory and enforcement actions. FCA 
existing regulation Sec.  620.5(c) currently requires the disclosure of 
enforcement actions as part of an annual report. We proposed no changes 
to this rule provision so are not making any changes in response to the 
comment.

IV. Regulatory Flexibility Act and Major Rule Conclusion

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that this final rule would 
not have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with its 
related associations, has assets and annual income in excess of the 
amounts that would qualify them as small entities. Therefore, System 
institutions are not ``small entities'' as defined in the Regulatory 
Flexibility Act.
    Under the provisions of the Congressional Review Act (5 U.S.C. 801 
et seq.), the Office of Management and Budget's Office of Information 
and Regulatory Affairs has determined that this final rule is not a 
``major rule,'' as the term is defined at 5 U.S.C. 804(2).

List of Subjects in 12 CFR Part 620

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

    For the reasons stated in the preamble, part 620 of chapter VI, 
title 12 of the Code of Federal Regulations are amended as follows:

PART 620--DISCLOSURE TO SHAREHOLDERS

0
1. 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; sec. 514 of Pub. L. 102-552, 106 
Stat. 4102.

Subpart A--General

0
2. Amend Sec.  620.2 by revising paragraph (g) to read as follows:


Sec.  620.2  Preparing and filing reports.

* * * * *
    (g) Each Farm Credit institution shall present its reports in 
accordance with generally accepted accounting principles and in a 
manner that provides the most meaningful disclosure to shareholders.
    (1) Any Farm Credit institution that presents its annual and 
quarterly financial statements on a combined or consolidated basis 
shall also include in the report the statement of condition and 
statement of income of the

[[Page 63431]]

institution on a stand-alone basis. The stand-alone statements may be 
in summary form and shall disclose the basis of presentation if 
different from accounting policies of the combined or consolidated 
statements.
    (2) Any Farm Credit bank that prepares its annual financial 
statements on a stand-alone basis must also provide financial 
information on its related associations as part of its annual report. 
The information on the related associations must be presented on a 
combined basis with the bank's financial information and, at a minimum, 
include both a condensed statement of condition and a statement of 
income. The combined bank and association financial information may 
either be in the footnotes of the bank's annual report or located in a 
supplement to the report. All combined information provided through 
either a footnote or a supplement will be considered part of the bank's 
annual report, subject to the same annual report preparation, 
distribution, and accuracy requirements of part 620.
    (i) The combined bank and association financial information may be 
unaudited but must disclose the basis of presentation if different from 
accounting policies used for the bank-only financial statements.
    (ii) If the combined bank and association financial information is 
presented in the form of a supplement, the supplement must be 
referenced within the bank's annual report and accompany the annual 
report when distributed.

    Dated: September 9, 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020-20264 Filed 10-7-20; 8:45 am]
BILLING CODE 6705-01-P