Organization; General Provisions; Disclosure to Shareholders

FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 618, and 620

RIN 3052-AB42

Organization; General Provisions; Disclosure to Shareholders

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit

Administration Board (Board), adopts a final rule concerning director

and senior officer compensation. The regulation amends the director

compensation regulations to reflect changes to the Farm Credit Act of

1971 (Act) made by the Farm Credit Banks and Associations Safety and

Soundness Act of 1992 (1992 Amendments),1 and amends the annual

report disclosure rules for director reimbursable expenses to address

concerns raised by Farm Credit banks regarding the equity and

regulatory burden of the existing rule. Additionally, the rule amends

the disclosure requirements for senior officer compensation to make the

disclosures more informative and useful to shareholders.

\1\Pub. L. 102-552, 106 Stat. 4102

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EFFECTIVE DATE: The regulation shall become effective upon expiration

of 30 days after publication in the Federal Register during which

either or both Houses of Congress are in session. Notice of effective

date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Laurie A. Rea, Policy Analyst, Regulation Development, Office of

Examination, Farm Credit Administration, McLean, VA 22102-5090, (703)

883-4498, TDD (703) 883-4444, or

Joy E. Strickland, Senior Attorney, Regulatory Operations Division,

Office of General Counsel, Farm Credit Administration, McLean, VA

22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

1. Overview

The FCA published a proposed rule concerning director and senior

officer compensation and reimbursable expense disclosures on December

23, 1993 (58 FR 68069). The comment period closed January 24, 1994.

Section 611.400, concerning bank director compensation, is adopted

substantially as proposed with the exception that the cap on the amount

by which the FCA Board would consider waiving the statutory limitation

on bank director compensation for exceptional circumstances has been

increased from 25 to 30 percent. Section 618.8270, regarding the

reimbursement of travel, subsistence, and related expenses, has been

modified by reducing several of the policy and procedure requirements

originally proposed. The final rule retains the requirement that each

Farm Credit System (FCS or System) institution develop a written policy

regarding the reimbursement of travel, subsistence, and other related

expenses to its directors, officers, and employees and provide

stockholders with a brief description of the policy. Substantial

changes have been made to the proposed senior officer compensation

disclosure requirements in Sec. 620.5(i)(2). The final rule requires

FCS institutions to disclose: (1) Individual compensation information

of chief executive officers (CEOs) whose annualized salary and bonus

exceed $150,000, adjusted annually to reflect changes in the Consumer

Price Index (CPI); and (2) aggregate compensation information of all

senior officers as a group. Both the CEO and aggregate senior officer

compensation information is required to be reported for each of the

last 3 fiscal years and presented in a Summary Compensation Table. The

final rule retains the requirement that the institutions provide a

discussion of compensation plans. Finally, a provision was added to

allow associations the option of disclosing senior officer compensation

information in either the Association Annual Meeting Information

Statement or the annual report.

II. Response to Comments

The FCA received 140 comment letters from the Farm Credit Council

(FCC) on behalf of its membership, 7 Farm Credit Banks, 3 Banks for

Cooperatives, 122 associations, and 7 shareholders. Commenters

expressed strong opposition to the proposed disclosure of individual

compensation information for each of the five most highly paid senior

officers. The following discussion focuses on the FCA response to

commenters' concerns regarding the proposed senior officer disclosures

as this was the predominant issue raised in their letters. The section-

by-section discussion also addresses other comments received on the

proposed rule.

A. Basis for Senior Officer Compensation Disclosures

Commenters stated that FCS institutions are not parallel to

commercial banks or thrifts, or analogous to other Government-sponsored

enterprises (GSEs). Therefore, commenters adamantly believe that FCS

institutions should not be required to make similar executive

compensation disclosures. Commenters stressed four main points in

support of their position. First, the compensation disclosure

requirements for commercial banks, national banks, thrift institutions,

and state member banks are applicable only to financial institutions

subject to the registration requirements of section 12(b) or (g) of the

Securities Exchange Act of 1934 (1934 Act).2 Second, equity

securities in FCS institutions are owned only by borrowing members of

the institutions, not purchased primarily for investment, and not

publicly traded. Thus, the investor concerns addressed by the 1934 Act

are not present in the case of FCS institutions. Third, although

formally exempt from the registration requirements of the 1934 Act,

other GSEs report as if they were subject to Securities and Exchange

Commission (SEC) statutes, in part, because their securities are

subject to the listing requirements of the New York Stock Exchange.

Fourth, the disclosures provide limited benefits to investors in FCS

debt obligations because the banks are jointly and severally liable on

these obligations. Consequently, investors generally rely on the

strength of the System as a whole. Rather, commenters contend it would

be more appropriate, in their judgment, for the FCA to compare the

treatment of FCS institutions under the proposed rule to Federal Home

Loan Banks (FHLBs) and credit unions, as the ownership structures of

those entities more closely parallel those of the FCS banks and direct

lender associations. Unlike commercial banks and thrifts, credit unions

and FHLBs are not subject to executive compensation disclosures.

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\2\Public companies with at least 500 shareholders of record and

assets of at least $5,000,000 must register with the SEC pursuant to

SEC regulations implementing the Securities Exchange Act of 1934.

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The FCA agrees with commenters that a comparison of ownership

structures between FCS institutions and credit unions and FHLBs has

some validity, and that FCS institutions are notably different from

commercial banks, thrifts and other GSEs. Nevertheless, the FCA did not

intend to imply or draw a direct parallel between FCS institutions and

any other type of financial institution or to use a comparison between

the institutions as the sole basis for establishing or modifying the

senior officer compensation disclosure requirements. The primary

comparison being made was that the FCA's proposed compensation

disclosure requirements were similar in many respects to those imposed

on commercial banks and thrifts by other regulators. As stated in the

proposed rule, the FCA believes that more detailed compensation

disclosures, such as those imposed by the SEC, would satisfy the

objectives of section 514 of the Act,\3\ and the proposed disclosures

would benefit FCS shareholders by providing them with senior officer

compensation information that was comparable to that available to

shareholders of other financial institutions. The proposed disclosure

requirements were still, however, markedly less extensive than those

established by the SEC, partly due to the many differences between

commercial banks and FCS institutions. The final regulations deviate

further from the SEC's compensation disclosure requirements in

consideration of the uniqueness of the FCS institutions. For example,

the $100,000 compensation threshold established by the SEC for

individual senior officer compensation disclosure was one area where

the FCA chose to differ. Instead, the FCA decided to adopt a $150,000

compensation disclosure threshold that applies only to FCS institution

CEOs.

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\3\The stated objective of section 514 is ``to ensure that

information reported by directors, officers, and employees of Farm

Credit System institutions under regulations of the Farm Credit

Administration requiring the disclosure of financial information and

reporting of potential conflicts of interests--(1) provides the

stockholders of all Farm Credit System institutions with information

to assist the stockholders in making informed decisions regarding

the operations of the institutions; (2) provides investors and

potential investors with information necessary to make investment

decisions regarding Farm Credit System obligations or institutions;

and (3) provides the Farm Credit Administration with information

necessary to allow the Farm Credit Administration to effectively and

efficiently examine and regulate all Farm Credit System institutions

and thus enhance the safety and soundness of the System.''

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The FCA's rationale for requiring director and senior officer

compensation disclosures stems primarily from the ``at-risk'' nature of

the stock and the significant number and wide distribution of

shareholders, which are similar attributes to those of financial

institutions with publicly traded stock. In terms of assets, the size

of many FCS institutions is comparable to, and sometimes greater than,

financial institutions whose equity and debt securities are widely held

by the public. In addition, even if commenters are correct in their

assertion that investors of FCS debt obligations are more concerned

with the System as a whole, the FCA believes that the investor concerns

addressed by the 1934 Act are not completely absent as suggested by

commenters. Regardless of their motivation for purchasing the stock,

borrowers make a financial investment in FCS institutions and obtain

the right to participate in the affairs of those institutions.

Shareholders can potentially benefit from their investment in terms of

dividends and patronage refunds. Thus, shareholders need sufficient

information to make intelligent decisions about the management and

operation of the institutions in which they have invested and to hold

directors and management accountable for their actions.

The FCA stated in the preamble to the shareholder disclosure

regulations published on June 12, 1986 (51 FR 21337) that while not all

FCS institutions would meet the test for public companies, many of them

have in excess of 500 shareholders, and the number of institutions with

fewer than 500 shareholders continues to decline in conjunction with

the trend toward mergers. Further, the FCA stated that while the stock

is not publicly traded on the secondary market, it is held by over

900,000 individuals and business entities that have a common interest

in the financial and operating information of the institutions. The FCA

Board continues to believe that the distinction between holding stock

for investment and holding stock for doing business with an institution

does not have a material bearing on the right of shareholders to have

access to information in order to make informed decisions. Therefore,

the final compensation disclosure requirements continue to place CEOs

of FCS institutions with a significant amount of assets and number of

shareholders under the same scrutiny as CEOs of financial institutions

with publicly traded stock subject to the registration requirements of

the 1934 Act.

B. Section 514 of the 1992 Amendments

The FCA agrees with the commenters that section 514 is quite broad

and its interpretation, as it applies to compensation disclosures, is a

matter of the FCA's discretion. Commenters stated that nothing in

section 514 of the 1992 Amendments compels the disclosure of

individualized senior officer compensation or concludes that the

current disclosure requirements are inadequate in any respect. They

felt strongly that the existing disclosure of senior officer

compensation in the aggregate, coupled with the requirement that

shareholders may request the individual compensation of any senior

officer, or any other individual included in the aggregate whose

compensation exceeds $50,000, was adequate.

There was no intention in the proposed rule to suggest that section

514 mandates individual disclosure of senior officer compensation. In

section 514, Congress stressed the importance of disclosure of

compensation paid to, loans made to, and transactions made with FCS

institutions by directors and senior officers of the institution.

Congress also directed the FCA to review its regulations to ensure that

they meet the purpose of the section and applicable laws, but did not

prescribe any specific regulation amendments. After reviewing its

regulations, the FCA concluded that more detailed senior officer

compensation disclosures satisfied the spirit and intent of section

514.

C. Board Accountability

Commenters expressed concern that providing individual compensation

information would undermine the board's authority and its ability to

effectively administer the institution's salary administration program.

Further, commenters asserted that the disclosure rule would dilute the

board's responsibility and shift the oversight responsibility from the

board of directors to the shareholders as a whole.

The FCA Board disagrees that disclosure of information undermines

board accountability and responsibility. In fact, disclosure of senior

officer compensation is intended to promote board accountability to

shareholders rather than shift board responsibility to shareholders.

The objective of this type of disclosure is to provide shareholders

with information to assess whether senior officer compensation is

appropriate in view of the institution's financial condition and

performance and to hold the board accountable for maintaining a

reasonable rationale for the level of compensation paid to its senior

officers.

D. Invasion of Privacy

Although numerous reasons were cited in opposition to

individualized compensation disclosure, no other issue generated the

intense reaction created by concerns of ``invasion of privacy.''

Respondents were highly concerned that the disclosure of potentially

sensitive information in a public format, such as the annual report,

would cause considerable staff dissension and would render management

unable to effectively administer the institutions' salary programs. One

commenter stated that disclosure of the individual salaries of the five

highest paid senior officers will, more than likely, cause salaries to

gravitate to the highest paid levels in order to maintain morale rather

than ``limit'' compensation paid to senior officers. Several commenters

expressed concern that the disclosures may cause employee flight.

Additionally, some FCS associations were concerned that the individual

compensation disclosures may inadvertently reach the branch officer

level.

The FCA recognizes that internal conflict may be generated when the

information presented is used by parties for purposes for which they

were not intended, such as a means for co-workers to compare salaries

or to use as a bargaining tool for salary negotiations. The FCA also

believes, however, that management is ultimately responsible for

maintaining employee morale and retaining competent staff through fair

and reasonable compensation, and for communicating to staff how this is

accomplished through the salary administration program. A primary

aspect of the disclosures is to provide shareholders insight regarding

the methodology and basis the boards use to determine what they

consider to be ``fair and reasonable'' compensation, rather than to

``limit'' senior officer compensation as suggested by a commenter.

Further, the FCA believes stockholders have valid reasons to have this

type of information readily available to them and they should not be

penalized because of the potential for internal conflicts.

Many commenters were opposed to the proposed disclosures because

FCS institution annual reports are used as marketing tools, among other

things, and made available to a wide spectrum of interested parties.

Some commenters believed that the broad distribution of the reports

could promote animosity among shareholders and employees throughout the

FCS and possibly other members of rural communities. Several commenters

also stated that in order to evaluate the reasonableness of individual

senior officer compensation, shareholders would need to understand

several key aspects of the employer/employee relationship, such as the

experience and knowledge an employee brings to his/her job,

geographical cost-of-living data, market compensation for similar

positions, job responsibilities, and the competitive and regulatory

environment in which the employee operates. Commenters also asserted

that providing just a dollar amount of compensation, without any other

relevant data, would be interpreted by the readers of the annual report

in terms of their own frame of reference. This could easily lead to

confusion and ill feelings among employees and shareholders because

they are not provided with all the facts involved in determining an

individual's compensation.

The FCA disagrees that shareholders would be unable to understand

and assess the senior officer compensation disclosures. In addition to

reporting ``dollar amounts'' of compensation paid, institutions are

required to provide a discussion of the compensation plans to aid the

reader's understanding of the disclosures. Moreover, nothing in the

regulations prevents an institution from providing explanations of the

market or any other factors used in the determination of compensation.

Management always has the discretion to provide such explanations if

they feel they are needed to fairly portray the amounts being paid to

senior officers.

The FCA Board recognizes that it should, to the extent possible,

balance shareholders' needs to receive meaningful information

concerning their institutions and individual privacy concerns. As

expressed in the FCA Board's Policy Statement on Regulatory Philosophy,

``The FCA Board is mindful that most regulatory activities will involve

competing considerations and is committed to considering and weighing

those competing considerations and arriving at thoughtful regulatory

judgments''. (Published June 22, 1994 at 59 FR 32189) Therefore, in

reaching a balance between the competing considerations regarding the

proposed regulation, substantial modifications were made to the senior

officer disclosure requirements and are more fully explained in the

section-by-section discussion.

III. Section-by-Section Discussion

A. Section 611.400--Compensation of Bank Board Members

The commenters generally expressed support for proposed

Sec. 611.400, Bank Director Compensation. The FCC stated that the

proposed procedure for adjusting the bank directors' compensation

ceiling and the approval process for exceeding the statutory limitation

in ``exceptional circumstances'' seemed to be both fair and well-

considered.

The FCA is adopting the amendments to Sec. 611.400 as proposed with

two modifications. The proposed rule included a 25-percent cap on the

amount by which the FCA Board would approve a waiver of the statutory

limitation on bank director compensation. The FCA received two requests

for waivers of the statutory limitation since publishing the proposed

rule. Based on its operational experience in reviewing those requests,

the FCA Board determined that a 30-percent cap on the amount by which

it would approve waivers of the statutory limitation would be more

appropriate. In addition, the requirement in proposed

Sec. 611.400(c)(3) that the FCA respond to requests for waivers of the

statutory limitation within 30 days was modified by extending the

agency's self-imposed response time to 60 days. The FCA will respond to

requests for waivers as quickly as possible and anticipates replying to

the vast majority of requests in well under 60 days. Nevertheless,

there may be unusual circumstances that would necessitate a longer

period to gather and analyze pertinent information related to the

request, and the longer response period should reduce the frequency of

formal extensions of the response period.

The FCA recognizes the difficulty in predicting all the exceptional

circumstances under which a bank may desire to seek a waiver of the

statutory limitation on bank director compensation. Therefore, the FCA

would like to clarify that Sec. 611.400(d)(3), pertaining to a bank's

policy on bank director compensation, need only address exceptional

circumstances that the bank's board is able to identify. The policy

should also include a procedure for evaluating, on a case-by-case

basis, other extraordinary circumstances that may arise where the

bank's board would consider seeking a waiver of the limitation.

B. Section 618.8270--Travel, Subsistence, and Other Related Expenses

Commenters generally supported proposed Sec. 618.8270, but

challenged whether the level of detail in policy and procedure

requirements was necessary. The FCC commended the FCA Board for its

openmindedness and willingness to reconsider the existing requirement

for individual disclosure of bank director reimbursable expenses and

replace it with an aggregate disclosure requirement. The FCC and other

commenters stated that while it is quite appropriate for the FCA to

require each FCS institution's board to develop written policies

concerning the reimbursement of travel, subsistence, and other related

expenses, the details of such policies should be left to each board's

discretion. In their judgment, the degree of detail spelled out in

proposed Sec. 618.8270(a) constitutes micro-management, which they

believed the current FCA Board was seeking to remove from the

regulations. Another commenter responded that the administrative burden

created by the detailed policy requirements, documentation, reporting,

and auditing is not supported by the value, if any, that would be added

to the stockholder disclosure process.

In February 1994, subsequent to publication of the proposed

regulations, the FCA Board adopted the previously mentioned Policy

Statement on Regulatory Philosophy (59 FR 32189, June 22, 1994) that

stated ``It is the FCA Board's philosophy to promulgate regulations

that are necessary to implement the law and to promote the safety and

soundness of the Farm Credit System.'' One method cited for achieving

the FCA Board's regulatory objective was to issue regulations, to the

extent feasible, that specify performance criteria and objectives

rather than operational methods for achieving its purposes. In light of

this recently adopted position, the FCA reevaluated proposed

Sec. 618.8270 and made modifications accordingly.

The examples of guidelines and limitations that an institution may

consider addressing in their travel policy (i.e., modes of

transportation; mileage rates for use of personal vehicles and per diem

allowances, including maximum or limitations on lodging, meals and

incidental expenses; and telephone calls and any other miscellaneous

expenses) were eliminated from the final rule. The examples cited in

proposed Sec. 618.8270(a)(2)(i) through (iv) were removed because many

commenters interpreted them as mandatory regulatory requirements.

However, the FCA Board continues to believe that the management of each

FCS institution should determine to what extent the individual items

cited as sample guidelines and limitations in the proposed rule are

necessary to ensure that the reimbursement of expenses for directors,

officers, and employees is reasonable and well-justified.

Certain aspects of proposed Sec. 618.8270 that incorporated, in

part, procedures from existing Sec. 611.400(b) and (c) were eliminated

from the final rule. The FCA Board believes that such detailed

operating procedures should remain at the discretion of each FCS

institution's management rather than be formally prescribed by

regulations. Therefore, all of the procedures in proposed

Sec. 618.8270(a)(3) and (4) were removed and the basic requirement for

maintaining written records of expense reimbursements was assimilated

into final Sec. 618.8270(a).

One commenter recommended that the last sentence in

Sec. 618.8270(b) referring to ``the personnel authorized to process

reimbursements,'' be amended by substituting ``approve'' for

``process.'' The commenter asserted that the persons who normally

process reimbursements are accounting clerks, and stated that it is not

usually part of their function to attempt to determine whether expenses

are appropriate. In an effort to clarify the regulation, the last

sentence was stricken from the final rule.

Two commenters misinterpreted proposed Sec. 618.8270(c) to require

that an internal auditor review every expense claim and record. The FCA

has clarified that the regulation only requires an internal auditor to

determine whether the institution's policies and procedures are being

consistently followed by testing the reimbursement process through a

sampling of expense claims and records. The final rule reads that

``Each board shall require a review by the institution's internal

auditor (or person designated by the board) of at least a sampling of

records maintained * * *.'' Furthermore, the requirement for an

internal audit review of travel records is now contained in

Sec. 618.8270(b) in the final rule.

C. Section 620.5(i)--Compensation of Directors and Senior Officers

1. Director compensation

The disclosure requirements in the final regulation remain

unchanged from the proposed regulation.

2. Senior officer compensation

The senior officer compensation disclosure requirements were

substantially changed in the final regulation. As previously discussed,

the modifications were made because the FCA Board considered it

important to balance commenters' privacy concerns with the

shareholders' need for access to pertinent information regarding their

institutions, and to further reflect the unique attributes of FCS

institutions in the regulations. In addition, technical and clarifying

changes were made to improve the understanding of the requirements and

enhance the consistency of the disclosures presented to shareholders.

An alternative means for associations to disseminate senior officer

compensation information was added to the final rule. Many commenters

asserted that the disclosure of compensation information is more

appropriate for a proxy statement. To address this issue, final

Sec. 620.5(i)(2) permits associations to disclose senior officer

compensation information in either the Association Annual Meeting

Information Statement (AAMIS) or the annual report. By allowing

associations to disclose compensation information in the AAMIS, the FCA

Board aims to reduce the concern of wide distribution of potentially

sensitive information in a public format. Currently, there is no other

disclosure medium for banks that serves a similar purpose as the AAMIS.

Thus, the banks would continue to publish senior officer compensation

in the annual report.

The final rule limits the requirement for disclosure of individual

compensation information to FCS institution CEOs. Proposed

Sec. 620.5(i)(2)(i), which would have required institutions to make

individual compensation disclosure for each of the five highest

compensated senior officers, was dropped from the final rule. Final

Sec. 620.5(i)(2)(i)(A) requires FCS institutions to report the total

compensation and the amount of each component of compensation paid to

the institution's CEO for each of the last 3 completed fiscal years. If

more than one person served in the capacity of CEO during any given

fiscal year, individual compensation information must be reported for

each CEO. However, no disclosure need be provided for any CEO whose

salary and bonus (or annualized salary and bonus, if the CEO served in

that capacity less than a year) do not exceed $150,000, adjusted

annually to reflect changes in the Consumer Price Index (CPI) for all

urban consumers. The 1994 calendar year will serve as the base year for

making subsequent CPI adjustments to the $150,000 disclosure threshold.

Proposed Sec. 620.5(i)(2)(ii), which would have required FCS

institutions to report the aggregate amount of compensation and the

components of compensation paid to all officers as a group, was revised

in the final regulation. The FCA did not perceive the proposed

requirement as markedly different from the existing aggregate senior

officer compensation disclosure requirement. Yet, several commenters

interpreted the requirement to be more extensive. The FCA decided to

retain the language in the existing rule with some modifications to

reduce any ambiguity that may have been raised by the proposed

requirement. Final Sec. 620.5(i)(2)(i)(B) requires institutions to

report the aggregate amount of compensation and the components of

compensation paid during each of the last 3 completed fiscal years to

all senior officers as a group, stating the number of officers in the

group without naming them. As with the existing regulation, at a

minimum, institutions must disclose the aggregate amount of

compensation paid to the five most highly compensated officers, whether

or not designated as a senior officer by the board.

A requirement for preparation of a ``Summary Compensation Table''

(table) was added to the final regulation to enhance the comparability

of the compensation disclosures. Commenters indicated there was a need

to improve the consistency of reporting compensation information and

suggested the regulations stipulate a format for disclosure. In

response, the general definition of ``compensation'' was eliminated and

replaced by the more descriptive table and corresponding instructions.

For purposes of reporting compensation information in the table,

compensation is divided into two main categories: (1) ``Annual;'' and

(2) ``Other.'' The separation is to distinguish normal annual

compensation from compensation that is unusual, infrequent, reflects

special circumstances, or is earned during the fiscal year but is not

usually available to the senior officer until a later date.

The components of ``Annual'' compensation include salary, bonuses,

deferred compensation and perquisites. Amounts shown as ``salary'' and

``bonus'' are to reflect the gross amounts earned during the fiscal

year before any reductions for amounts contributed during the fiscal

year to a 401(k) plan or similar plan. If, for any reason, the exact

amount of salary or bonus earned in the fiscal year is not expected to

be known in time for its inclusion in the report, the institution is to

include in the report its best estimate of the compensation amount and

provide appropriate footnote disclosure with the table. Amounts shown

as ``deferred/perquisites'' will include such items as deferred

compensation, perquisites, and any other significant personal benefits

customarily paid, earned or received on an annual basis. With respect

to deferred compensation, this amount should reflect all forms of

deferred compensation earned during the fiscal year, whether or not

paid in cash. For example, if the deferred compensation was earned

during the period but payment in cash was voluntarily deferred by the

senior officer to a later period (e.g., upon retirement) the amount

earned must still be included in the current period's compensation

amount. Consequently, cash payments under deferred compensation

arrangements where the amounts were earned in previous periods would

not be included as part of the current period's compensation.

The category depicted as ``Other'' in the table includes amounts

not appropriately characterized as components of annual compensation.

Section 620.5(i)(2)(i)(E) specifies two forms of compensation that

should be included in this category: (1) Compensation in the form of

payouts due to a senior officer's resignation, retirement, or

termination from employment; and (2) contributions by the institution

on behalf of the senior officer to a defined contribution plan for

which cash payments from the plan are typically not available to the

senior officer until a later date. Any form of compensation in this

part must be specifically identified and described in a footnote to the

table.

The FCA received a mixed response to proposed

Sec. 620.5(i)(2)(iii), which would have required FCS institutions to

provide a general discussion of compensation plans of its senior

officers. While many commenters supported the proposed requirement,

others believed that the disclosures would be too burdensome to

compile. The FCA Board continues to believe that such discussion would

be beneficial in providing explanations of compensation plans to the

readers of the report. For the most part, the final regulation retains

the requirements in proposed Sec. 620.5(i)(2)(iii) that FCS

institutions provide a description of the compensation plans of all

those senior officers covered by the regulations. Proposed

Sec. 620.5(i)(2)(iii) (F) and (G), which would have required

institutions to discuss the amounts paid under the plans, were dropped

from the final rule because the final rule requires these comments to

be disclosed in the table. The remaining compensation discussion

requirements are now contained in Sec. 620.5(i)(2)(ii) in the final

rule.

The final rule clarifies that bank senior officer compensation

information is part of the financial information that should be made

available to shareholders of both the bank and its related associations

upon request. When the disclosure regulations in part 620 of this

chapter were initially adopted, the FCA determined that, due to the

structure of the System and the impact the banks have on the financial

results of the associations, there was a need for association

shareholders to receive the financial information of the bank in

addition to the financial information of the association. Existing

Sec. 620.4(b) implements this philosophy by requiring banks to

distribute their annual reports to shareholders of related

associations. Likewise, under the proposed rule, both the shareholders

of the bank and related associations would have received the bank's

annual report containing individual compensation information on the

five most highly compensated bank senior officers. Although the

disclosure requirement for individual senior officer compensation

information was limited to CEOs in the final rule, the FCA Board

continues to believe that it is important for shareholders of related

associations to have access to individual compensation information of

bank senior officers included in the aggregate disclosure required by

Sec. 620.5(i)(2)(i)(B).

Therefore, the required disclosure statement in proposed

Sec. 620.5(i)(2)(iv) was modified to clarify its requirements and is

now contained in Sec. 620.5(i)(2)(iii) in the final rule. Final

Sec. 620.5(i)(2)(iii) requires institutions to include a statement in

the annual report or the AAMIS (if the association chooses to include

compensation information in the AAMIS) that ``information concerning

the total compensation paid during the last fiscal year to any senior

officer or to any other officer included in the aggregate whose

compensation exceeds $50,000 is available and will be disclosed to

shareholders of the institution and shareholders of related

associations (if applicable) upon request.''

3. Travel, subsistence, and other related expenses

The disclosure requirements for travel, subsistence, and other

related expenses in the final regulation remain unchanged from the

proposed regulation with one exception. Pursuant to the preceding

discussion, the final rule clarifies that the institution's policy

regarding travel, subsistence, and other related expenses should also

be made available to shareholders of related associations (if

applicable) upon request.

List of Subjects

12 CFR Part 611

Agriculture, Banks, banking, Rural areas.

12 CFR Part 618

Agriculture, Archives and records, Banks, banking, Insurance,

Reporting and recordkeeping requirements, Rural areas, Technical

assistance.

12 CFR Part 620

Accounting, Agriculture, Banks, banking, Reporting and

recordkeeping requirements, Rural areas.

For the reasons stated in the preamble, parts 611, 618, and 620 of

chapter VI, title 12 of the Code of Federal Regulations is amended to

read as follows:

PART 611--ORGANIZATION

1. The authority citation for part 611 is revised to read as

follows:

Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15,

4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act (12

U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2209, 2243,

2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub.

L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-

399, 102 Stat. 989, 1003, and 1004.

Subpart D--Rules for Compensation of Board Members

2. Section 611.400 is revised to read as follows:

Sec. 611.400 Compensation of bank board members.

(a) Farm Credit System banks are authorized to pay fair and

reasonable compensation to directors for services performed in an

official capacity at a rate not to exceed the level established in

section 4.21 of the Farm Credit Act of 1971, as amended, unless the FCA

determines that such a level adversely affects the safety and soundness

of the institution.

(b) The bank director compensation level established in section

4.21 of the Act shall be adjusted to reflect changes in the Consumer

Price Index (CPI) for all urban consumers, as published by the Bureau

of Labor Statistics, in the following manner: Current year's maximum

compensation = Prior year's maximum compensation adjusted by the prior

year's annual average percent change in the CPI for all urban

consumers. Adjustments will be made to the bank director statutory

compensation limit beginning from October 28, 1992 (the date of

enactment of the Farm Credit Banks and Associations Safety and

Soundness Act of 1992). Additionally, each year the FCA will distribute

a bookletter to all FCS banks that communicates the CPI adjusted bank

director statutory compensation limit.

(c) A waiver of the compensation limitation prescribed by section

4.21 of the Act may be granted under exceptional circumstances as

approved on a case-by-case basis by the FCA. However, the FCA shall not

grant a waiver that allows a bank to pay any director in excess of 30

percent more than the statutory maximum compensation as determined in

accordance with paragraph (b) of this section. A waiver approval shall

precede any payments by the bank to its director(s) that exceed the

maximum limitation determined in paragraph (b) of this section. A bank

seeking a waiver shall provide the FCA Chairman with a written request

that:

(1) Describes and explains the exceptional circumstance(s) that the

bank believes necessitates a waiver of section 4.21 of the Act;

(2) States the amount and the terms and conditions (if any) of the

proposed compensation level for each director that would exceed the

statutory maximum determined in accordance with paragraph (b) of this

section; and

(3) Justifies the compensation level of each director that would

exceed the statutory limitation based on the extraordinary time and

service devoted to bank business.

The FCA shall respond to written requests within 60 days of receipt

of the preceding information and the receipt of any other additional

information requested by the FCA.

(d) Each bank board shall adopt a written policy regarding

compensation of bank directors. The policy shall address, at a minimum,

the following areas:

(1) The activities or functions for which attendance is necessary

and appropriate and may be compensated, except that a Farm Credit

System bank shall not compensate any director for rendering services on

behalf of any other Farm Credit System institution or a cooperative of

which the director is a member, or for performing other assignments of

a non-official nature;

(2) The methodology for determining each director's rate of

compensation; and

(3) The exceptional circumstances under which the board would seek

a waiver of the statutory limitation on bank director compensation for

any of its directors and any limitations or conditions the board wishes

to place on the availability of such waivers.

(e) Directors may also be reimbursed for reasonable travel,

subsistence, and other related expenses in accordance with the policy

adopted pursuant to Sec. 618.8270 of this chapter.

PART 618--GENERAL PROVISIONS

3. The authority citation for part 618 continues to read as

follows:

Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,

4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12

U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183,

2200, 2211, 2218, 2243, 2244, 2252).

Subpart F--Miscellaneous Provisions

4. Section 618.8270 is revised to read as follows:

Sec. 618.8270 Travel, subsistence, and other related expenses.

(a) Each Farm Credit institution board shall develop a written

policy and maintain written records regarding the reimbursement of

travel, subsistence, and other related expenses to its directors,

officers, and employees. The policy shall address, at a minimum, the

authorized purposes for which reimbursement of travel, subsistence, and

other related expenses may be made and the guidelines and limitations

on reimbursement.

(b) Each board shall require a review by the institution's internal

auditor (or person designated by the board) of at least a sampling of

the records maintained pursuant to paragraph (a) of this section to

determine if the policies are being consistently followed. This review

shall be conducted at least annually, with the results reported to the

board audit committee or the full board, if the board does not have an

audit committee.

PART 620--DISCLOSURE TO SHAREHOLDERS

5. The authority citation for part 620 continues to read as

follows:

Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12

U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101

Stat. 1568, 1656.

6. Section 620.5 is amended by revising paragraph (i) to read as

follows:

Sec. 620.5 Contents of the annual report to shareholders.

* * * * *

(i) Compensation of directors and senior officers.

(1) Director compensation. Describe the arrangements under which

directors of the institution are compensated for all services as a

director (including total cash compensation and any noncash

compensation that exceeds 10 percent of total compensation) and state

the total cash compensation paid to all directors as a group during the

last fiscal year. If applicable, describe any exceptional circumstances

under which a waiver of section 4.21 of the Act was granted by the FCA.

For each director, state:

(i) The number of days served at board meetings;

(ii) The total number of days served in other official activities;

(iii) The total compensation paid to each director during the last

fiscal year.

(2) Senior officer compensation. Disclose the information on senior

officer compensation and compensation plans as required by this

paragraph. Farm Credit System associations may disclose the information

required by this paragraph in the Association Annual Meeting

Information Statement (AAMIS), but must include a reference in the

annual report stating that the senior officer compensation information

is included in the AAMIS.

(i) The institution shall disclose the total amount of compensation

paid to senior officers in substantially the same manner as the tabular

form specified in the following Summary Compensation Table (table):

Summary Compensation Table

Annual

Name of individual or No. in --------------------------------------

group Year Deferred/ Other Total

Salary Bonus perquisites

(a) (b) (c) (d) (e) (f) (g)

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

CEO.............................. 199X

199X

199X

Aggregate No. of Senior Officers

(X).......................... 199X

(X).......................... 199X

(X).......................... 199X

(A) Report the total amount of compensation paid and the amount of

each component of compensation paid to the institution's chief

executive officer (CEO) for each of the last 3 completed fiscal years,

naming the individual. If more than one person served in the capacity

of CEO during any given fiscal year, individual compensation

disclosures must be provided for each CEO. Except that, no disclosure

need be provided for any CEO whose salary and bonus (or annualized

salary and bonus, if the CEO served in that capacity less than a year)

do not exceed $150,000, adjusted annually to reflect changes in the

Consumer Price Index (CPI) for all urban consumers, as published by the

Bureau of Labor Statistics. The threshold for individually disclosing

CEO compensation information shall be adjusted in the following manner:

Current year's compensation disclosure threshold = Prior year's

compensation disclosure threshold adjusted by the prior year's annual

average percent change in the CPI for all urban consumers. The 1994

calendar year shall serve as the base year for making subsequent CPI

adjustments to the $150,000 compensation disclosure threshold.

(B) Report the aggregate amount of compensation paid and the

components of compensation paid during each of the last 3 completed

fiscal years to all senior officers as a group, stating the number of

officers in the group without naming them. At a minimum, disclose the

aggregate amount of compensation paid to the five most highly

compensated officers, whether or not designated as a senior officer by

the board.

(C) Amounts shown as ``Salary'' (column (c)) and ``Bonus'' (column

(d)) shall reflect the dollar value of salary and bonus earned by the

senior officer during the fiscal year. Amounts contributed during the

fiscal year by the senior officer pursuant to a plan established under

section 401(k) of the Internal Revenue Code, or similar plan, shall be

included in the salary column or bonus column, as appropriate. If the

amount of salary or bonus earned during the fiscal year is not

calculable by the time the report is prepared, the reporting

institution shall provide its best estimate of the compensation

amount(s) and disclose that fact in a footnote to the table.

(D) Amounts shown as ``deferred/perquisites'' (column (e)) shall

reflect the dollar value of other annual compensation not properly

categorized as salary or bonus, including but not limited to:

(1) Deferred compensation earned during the fiscal year, whether or

not paid in cash; or

(2) Perquisites and other personal benefits unless the aggregate

value of such compensation is the lesser of either $25,000 or 10

percent of the total of annual salary and bonus reported for the senior

officer in columns (c) and (d).

(E) Compensation amounts reported under the category ``Other''

(column (f)) shall reflect the dollar value of all other compensation

not properly reportable in any other column. Items reported in this

column shall be specifically identified and described in a footnote to

the table. Such compensation includes, but is not limited to:

(1) The amount paid to the senior officer pursuant to a plan or

arrangement in connection with the resignation, retirement, or

termination of such officer's employment with the institution; or

(2) The amount of contributions by the institution on behalf of the

senior officer to a vested or unvested defined contribution plan unless

the plan is made available to all employees on the same basis.

(F) Amounts displayed under ``Total'' (column (g)) shall reflect

the sum total of amounts reported in columns (c), (d), (e), and (f).

(ii) Provide a description of all plans pursuant to which cash or

noncash compensation was paid or distributed during the last fiscal

year, or is proposed to be paid or distributed in the future for

performance during the last fiscal year, to those individuals described

in paragraph (i)(2)(i) of this section. The description of each plan

must include, but not be limited to:

(A) A summary of how the plan operates and who is covered by the

plan;

(B) The criteria used to determine amounts payable, including any

performance formula or measure;

(C) The time periods over which the measurement of compensation

will be determined;

(D) Payment schedules; and

(E) Any material amendments to the plan during the last fiscal

year.

(iii) The annual report or AAMIS shall include a statement that

disclosure of information on the total compensation paid during the

last fiscal year to any senior officer or to any other officer included

in the aggregate whose compensation exceeds $50,000 is available and

will be disclosed to shareholders of the institution and shareholders

of related associations (if applicable) upon request.

(3) Travel, subsistence, and other related expenses.

(i) Briefly describe the policy adopted pursuant to Sec. 618.8270

of this chapter addressing reimbursements for travel, subsistence, and

other related expenses as it applies to directors and senior officers.

The report shall include a statement that a copy of the policy is

available to shareholders of the institution and shareholders of

related associations (if applicable) upon request.

(ii) For each of the last 3 fiscal years, state the aggregate

amount of reimbursement for travel, subsistence, and other related

expenses for all directors as a group.

* * * * *

Dated: July 15, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-17906 Filed 7-21-94; 8:45 am]

BILLING CODE 6705-01-P