Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System

FARM CREDIT ADMINISTRATION

12 CFR Part 630

RIN 3052-AB23

Disclosure to Investors in Systemwide and Consolidated Bank Debt

Obligations of the Farm Credit System

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

new final regulations governing the Farm Credit System's (FCS or

System) preparation and reporting of Systemwide financial information

to investors. The final rule requires that each bank of the System, the

Federal Farm Credit Banks Funding Corporation (Funding Corporation),

and the Farm Credit System Financial Assistance Corporation (Financial

Assistance Corporation) jointly publish periodic reports to investors

and potential investors in Systemwide debt obligations and consolidated

bank debt obligations of the Farm Credit System (FCS debt obligations).

The purpose of the rule is to ensure that timely and accurate

Systemwide financial information continues to be disclosed to investors

and the public to assist them in making informed decisions regarding

FCS debt obligations and System institutions. The required report to

investors must present Systemwide combined financial statements,

supplemental financial statement information, and related analyses

pertaining to System institutions on a combined basis. The final rule

covers Systemwide financial and non-financial information now regularly

disclosed by the Funding Corporation in annual and quarterly

information statements and press releases.

The final regulations generally parallel the existing Farm Credit

System Disclosure Program (System Disclosure Program) and should not

impose any significant additional burdens on System institutions.

Consistent with the System Disclosure Program, the final rule preserves

the existing reporting relationship between a System bank and its

related associations.

EFFECTIVE DATE: The regulations shall become effective upon the

expiration of 30 days after publication in the Federal Register during

which either or both Houses of Congress are in session. Notice of the

effective date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Tong-Ching Chang, Staff Accountant, Policy Development and Planning

Division, Office of Examination, Farm Credit Administration, McLean,

Virginia 22102-5090, (703) 883-4483, TDD (703) 883-4444,

or

William L. Larsen, Senior Attorney, Regulatory Operations Division,

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

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

SUPPLEMENTARY INFORMATION:

I. Background

Under the System Disclosure Program, the Funding Corporation, on

behalf of the System, periodically distributes to investors a

disclosure document containing Systemwide financial information. The

System institutions that participate in the System Disclosure Program

(i.e., each of the System banks, the Funding Corporation, and the

Financial Assistance Corporation\1\) jointly publish the Report to

Investors of the Farm Credit System (FCS Report) on an annual basis.

The FCS Report includes an Information Statement and a general report.

The Information Statement contains combined financial statements and

related analyses pertaining to all System institutions. The general

report contains other information about the System, its debt

obligations, and the environment in which it operates. Except for the

quarter that coincides with the end of the fiscal year, System

institutions also jointly publish a quarterly Information Statement. In

connection with the sale of debt securities, the Funding Corporation

routinely distributes the FCS Report and quarterly Information

Statement to the investment dealers and dealer banks (selling group)

that sell FCS debt securities. The FCA currently has no regulations

that specifically govern the System's disclosure of Systemwide

financial information to investors.

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\1\Since the board of the Funding Corporation is also the board

of the Financial Assistance Corporation, the Financial Assistance

Corporation's participation in the System Disclosure Program is

implied.

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II. Statutory Authority and Proposed Rulemaking

Under section 5.17(a)(8) of the Farm Credit Act of 1971, as amended

(1971 Act), 12 U.S.C. 2252(a)(8), the FCA is authorized to ``Regulate

the preparation by System institutions and the dissemination to

stockholders and investors of information on the financial condition

and operations of such institutions. * * *'' On February 4, 1994, the

FCA proposed regulations for a new part 630, Disclosure to Investors in

Systemwide and Consolidated Bank Debt Obligations of the Farm Credit

System, to govern the System's preparation and reporting of Systemwide

financial information to investors. (59 FR 5341) In general, the

proposed regulations reflected the current division of responsibilities

among the institutions participating in the System Disclosure Program,

and included requirements for disclosures similar to those contained in

the Information Statements currently published by the System. The

institutions participating in the System Disclosure Program were

designated as the ``disclosure entities'' in the proposed regulations,

in recognition of their shared responsibility for disclosure of

Systemwide financial information to investors and the general public.

III. Discussion of the Final Rule and Summary of Public Comments

The FCA is adopting part 630 largely as proposed. The final rule

includes changes and clarifications to address comments received on the

proposed rule. As in the proposed regulations, the final regulations

(1) Require the System to publish annual and quarterly reports to

investors; (2) delineate responsibilities relating to the preparation

of the report; (3) reinforce internal controls over Systemwide

financial disclosure; and (4) establish reporting standards for the

report to ensure that relevant information concerning the combined

financial condition and results of operations of the System is

disclosed to investors and potential investors. The final rule will

prevent any inconsistency between Systemwide disclosure to investors

and FCA regulations governing accounting and reporting standards and

individual System institution disclosure to shareholders. These new FCA

regulations will apply to the information currently contained in the

System's Information Statements and press releases that contain

Systemwide financial information. The final rule also implements

section 514 of the Farm Credit Banks and Associations Safety and

Soundness Act of 1992, Pub. L. 102-552 (1992 Act), which requires

adequate disclosure to investors of financial and conflict-of-interest

information.

The final regulations will ensure that timely and accurate

Systemwide financial information continues to be disclosed to investors

and the public to assist them in making informed decisions regarding

FCS debt obligations and System institutions. This is consistent with

the FCA Board's regulatory policy to ``Protect the public, the

investors, and the customer/shareholders of the System in an effort to

create an environment whereby customer/shareholders and investors can

take advantage of the System's strength and rely on its future

viability with confidence.'' (See FCA Board Policy Statement on

Regulatory Philosophy, 59 FR 32189, June 22, 1994)

The FCA received six comment letters on the proposed regulations

during the comment period, which expired on April 20, 1994. One letter

was submitted by the Farm Credit Council (FCC) on behalf of its

membership. The FCC comments were the product of input from a number of

sources, including System banks, the System's Accounting Standards Work

Group, and the Funding Corporation. The FCC recognized and concurred

with the FCA's efforts to ensure that timely and accurate Systemwide

financial information continues to be disclosed to investors and

potential investors in FCS debt securities. Noting the System's general

support for the proposed regulations, the FCC submitted comments on

several provisions of the proposed regulations in the body of its

letter and provided technical comments on other provisions in an

attached appendix.

The Funding Corporation, the Farm Credit Bank of Texas (FCBT), and

the Farm Credit Bank of Baltimore (FCBB) each submitted a letter

addressing specific issues. The Funding Corporation commented

concerning its access to FCA Examination Reports of System banks and

associations. The FCBT addressed the same issue in its letter. In

addition, the FCBT urged that the FCA prohibit directors of System

institutions from serving on the System Audit Committee. While

endorsing the comments submitted by the FCC, the FCBB urged that the

FCA clarify, for purposes of Systemwide disclosure, the treatment of

the FCBB's wholly-owned subsidiary, the Farm Credit Finance Corporation

of Puerto Rico.

The American Institute of Certified Public Accountants (AICPA) and

Price Waterhouse, the external auditor currently engaged to provide an

opinion on the Systemwide combined financial statements, also commented

on the proposed regulations. Both of these commenters suggested that

the requirements for an accountant's opinion on supplemental

information be clarified. The AICPA also commented on issues concerning

the definition of ``material,'' the due dates of the reports to

investors, and the requirement for filing a letter with the FCA

explaining the preferability of an accounting change.

After the FCA published the proposed rule, the General Accounting

Office (GAO) issued a report entitled ``Farm Credit System: Repayment

of Federal Assistance and Competitive Position'' (GAO/GGD-94-39, dated

March 10, 1994), which recommended that the FCA require the System to

exclude the Farm Credit Insurance Fund (Insurance Fund) from the

System's combined financial statements because of the GAO's view that

exclusion is the most appropriate accounting treatment. On May 10,

1994, the FCA responded to the GAO's recommendation in a letter to

Congressional committees which described the FCA's approach to

Insurance Fund reporting as reflected in this rulemaking. The final

regulations require that the System prepare the Systemwide combined

financial statements in accordance with generally accepted accounting

principles (GAAP), provide supplemental financial statement data with

and without the Insurance Fund, and give a thorough discussion and

analysis of the fund in the report to investors. The FCA believes that

these regulations, as adopted, will ensure that investors are provided

with meaningful information regarding the Insurance Fund and the effect

of the fund on the System's financial position.

Provided below are a section-by-section analysis of changes to the

proposed rule and FCA responses to the comments received.

IV. Section-by-Section Analysis of Public Comments

A. Section 630.2--Definitions

1. Section 630.2(b) and (h)--Definitions of ``Combined Financial

Statements'' and ``Systemwide Combined Financial Statements''

For preparation of the Systemwide combined financial statements,

the final rule requires that each bank provide the Funding Corporation

with bank-only financial data as well as with combined financial data

of the bank and its related associations. The FCC and the FCBB

commented that the proposed regulations should be clarified to address

how the consolidated financial data of a bank and its wholly-owned

subsidiaries should be reported in the Systemwide disclosure.

To distinguish financial data prepared on a combined basis from

that prepared on a consolidated basis, a new definition of ``combined

financial statements'' has been added in Sec. 630.2(b) of the final

rule. The definition is added to clarify that combined financial

statements are prepared by a group of affiliated entities that share

the same financial interest regardless of whether any of the entities

has the ability to exercise control over another. In contrast,

consolidated financial statements are prepared by a parent-entity to

include the financial data of subsidiaries that are under its

``control.''

To prevent this newly added definition of ``combined financial

statements'' from being confused with the definition of ``Systemwide

combined financial statements'' contained in Sec. 630.2(g) of the

proposed rule, proposed Sec. 630.2(g) has been simplified to define

``Systemwide combined financial statements'' as the combined financial

statements required by this part. Proposed Sec. 630.2(g) also is

redesignated as Sec. 630.2(h). The proposed language specifying the

purpose for which the Systemwide combined financial statements are

prepared has been moved and combined with provisions pertinent to

financial statements in Sec. 630.20(l).

2. Proposed Definition of ``Material''

Section 630.2(f) of the proposed regulations provided a definition

of ``material'' similar to that found in Securities and Exchange

Commission (SEC) Rule 405. The FCA received two comments on the

proposed definition of ``material.'' The AICPA asserted that defining

``material'' other than as established in accounting literature would

be confusing and inconsistent if audits of the Systemwide combined

financial statements are required to be performed in accordance with

generally accepted auditing standards (GAAS). The AICPA recommended

either deleting the proposed definition of ``material'' or amending it

to refer to the materiality definition in GAAS or in Financial

Accounting Standards Board Statement of Financial Accounting Concepts

No. 2, Qualitative Characteristics of Accounting Information (FAC No.

2).

The FCA notes that the definition of ``material'' in the proposed

rule was intended to govern information presented outside the basic

financial statements.2 Regardless of the proposed definition, the

Systemwide combined financial statements required by this part are

subject to materiality criteria established in GAAP. Specifically,

pursuant to Sec. 630.3(c),3 the Systemwide combined financial

statements must be prepared in accordance with the accounting and

reporting standards set forth in part 621 of this chapter. Because

Sec. 621.2(g) defines the term ``material'' in accordance with FAC No.

2, the GAAP definition of ``material'' contained in part 621 of this

chapter will govern the System's preparation of Systemwide combined

financial statements. Consequently, materiality judgments for

preparation of the Systemwide combined financial statements must be

made in accordance with GAAP.

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\2\Information presented ``outside'' the basic financial

statements refers to information that is not considered necessary

for presentation of financial position, results of operations, or

cashflows in conformity with GAAP, e.g., management's discussion and

analysis.

\3\Section 630.3(c) provides that ``All items of essentially the

same character as items required to be reported in the reports of

condition and performance pursuant to part 621 of this chapter shall

be prepared in accordance with the rules set forth in part 621 of

this chapter.''

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The FCC recommended that the proposed definition of ``material'' be

expanded to recognize the different levels of reporting and disclosure

responsibilities of the System banks and the Funding Corporation. The

FCC suggested two separate definitions of ``material.'' One of the

suggested definitions would apply to the Banks' reporting

responsibilities to the Funding Corporation and the second would apply

to the Funding Corporation's disclosure responsibilities on a

Systemwide basis as subject to antifraud provisions of the Federal

securities laws.

Under GAAP, individual materiality judgments are made on a case-by-

case basis and materiality is measured at each reporting level in light

of surrounding circumstances. The GAAP position is supported by FAC No.

2 and recognizes that no general standards of materiality could be

formulated to take into account all the considerations that enter into

an experienced human judgment. In line with this approach to the

concept of materiality, the FCA believes that it is unnecessary to

include, as suggested by the FCC, two separate definitions of

``material.''

Materiality judgments regarding information presented outside the

financial statements, while not covered by the GAAP definition, are

governed by current standards of materiality under the securities

laws.\4\ The FCA believes that the case law standard of materiality

provides sufficient guidance to the System in preparing information to

be presented outside the financial statements. To avoid any confusion

between the GAAP materiality standard which governs preparation of the

financial statements, and the standard of materiality enunciated in the

case law, which governs information presented outside of the financial

statements, the proposed definition of ``material'' has been eliminated

from the final rule.

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\4\See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449

(1976) and cases following.

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3. Section 630.2(g)--Definition of ``Report to Investors''

The FCC commented that, although the preamble clarifies that the

term ``report to investors'' used throughout the proposed rule is

intended to mean the Information Statement currently published by the

Funding Corporation, confusion exists as to whether the term refers to

the FCS Report or the Information Statement. Because the FCS Report

currently prepared by the Funding Corporation contains certain

information that is not part of the System Disclosure Program, and for

which System banks are not responsible, the FCC suggested that all

references to the ``report to investors'' in the regulation be replaced

with the term ``Information Statement.''

The FCA does not intend to regulate the name of the report required

by this part. The term ``report to investors'' used in the proposed

rule is merely a general reference to the disclosure document required

by this part. However, in response to the FCC's comment, a new

definition of ``report to investors'' has been added as Sec. 630.2(g)

of the final rule to clarify that the term ``report to investors''

referred to in the regulations means ``a report that presents the

Systemwide combined financial statements, supplemental financial

statement information, and related financial and nonfinancial

information pertaining to the System required by this part.'' Under

this provision, a document containing only information that is not

required by this part and that is clearly identified as separate from

the required report will not be subject to this final rule.

B. Section 630.3--Publishing and Filing the Report to Investors

1. Section 630.3(a)

The FCA received two comments on Sec. 630.3(a), which establishes

the due dates for publishing the annual and quarterly reports to

investors. The FCC opined that the word ``publish'' in Sec. 630.3(a) is

subject to interpretation, and could mean printed, mailed, or received

by the investors. The commenter suggested that the word ``publish'' be

replaced with the phrase ``make available.''

Section 630.3(a) requires not only that the System ``make

available'' the report to investors by the dates specified in

Sec. 630.3(a)(1) and (a)(2) but that the System take affirmative steps

to distribute the report to investors. One such step, as noted in the

rule proposal, is distribution of sufficient copies of the report to

the selling group dealers for subsequent distribution to interested

investors. The FCA believes that the suggested substitution of the

phrase ``make available'' may discourage exploration of other report

distribution techniques and, accordingly, has retained the word

``publish'' in Sec. 630.3(a).

The AICPA also commented on Sec. 630.3(a), suggesting that the FCA

reconsider whether the due dates prescribed in Sec. 630.3(a) provide

sufficient time for preparation of the combined information from

various entities within the System. The FCA believes that the due dates

established in Sec. 630.3(a) for publishing and filing an annual report

within 90 days after the end of each fiscal year and a quarterly report

within 60 days after the end of each reporting quarter are adequate.

The 90-day requirement for publishing the annual report to investors is

consistent with industry practice. The 60-day requirement for

publishing the quarterly report permits the Funding Corporation to

publish the report 15 days after the constituent System banks and

associations have filed their quarterly reports with the FCA pursuant

to part 620 of this chapter. In addition, in the event the Funding

Corporation is unable to prepare and publish the report to investors

because one or more banks fail to fulfill their responsibilities for

providing information to the Funding Corporation in accordance with

Sec. 630.4(c), Sec. 630.4(a)(7) authorizes the Funding Corporation to

request the FCA to extend the due date for publishing the report to

investors. Accordingly, the FCA has adopted the due dates established

in Sec. 630.3(a) as proposed.

2. Section 630.3(f)--Banks' Joint and Several Liability for

Consolidated Bank Debt Obligations

Section 630.3(f) requires that each report to investors include a

statement that Systemwide debt securities and consolidated bank debt

obligations are joint and several liabilities of individual banks. The

FCC questioned the statutory basis for this required statement as

regards individual bank joint and several liability for consolidated

bank debt obligations. The FCC requested that the FCA provide a legal

analysis of the statutory basis and extend the comment period for this

provision.

The FCA believes that no extensive analysis is required to justify

the position that consolidated bank debt obligations are joint and

several liabilities of individual banks. The basis for this disclosure

is found in section 4.4 of the 1971 Act, which clearly establishes

joint and several liability of all banks for consolidated and

Systemwide debt regardless of the title of the 1971 Act under which the

bank operates. The FCA notes that the 75-day comment period on these

regulations included a 30-day extension of the original comment period

and believes that another extension of the comment period is

unnecessary. The FCA has adopted Sec. 630.3(f) as proposed.

C. Section 630.4--Responsibilities for Preparing the Report to

Investors

1. Section 630.4(a)(2)(ii), (a)(3), and (a)(9)--Report of Examination

Proposed Sec. 630.4(a)(9) authorizes the Funding Corporation to

make a request to the FCA regarding the content of the latest Reports

of Examination of any banks and related associations if the information

is necessary for preparation of the report to investors. Two System

institutions--the Funding Corporation and the FCBT--commented on the

proposed provision.

The Funding Corporation suggested that the regulation be expanded

so that, upon its request, each bank would be required to provide the

Funding Corporation with the Reports of Examination and related

information for the bank and related associations. The Funding

Corporation is concerned that the regulation as proposed may be

interpreted to implicitly absolve a bank of its responsibility to

report to the Funding Corporation any significant regulatory conditions

imposed or actions taken by the FCA against the bank or its related

associations.

Conversely, the FCBT supported proposed Sec. 630.4(a)(9) as written

on the basis that it maintains an appropriate balance between the

confidentiality of examination reports required by Sec. 602.205 of this

chapter and the need to provide complete and accurate disclosure to

investors required by the proposed rule. Section 630.4(c) sets forth

the responsibilities of each bank for preparation of the report to

investors. Based on Sec. 630.4(c)(5)(i), which requires that each bank

certify to the Funding Corporation that the bank has submitted all

information needed for preparation of the report to investors in

accordance with the instruction of the Funding Corporation, the FCBT

concluded that protection of the confidentiality of examination reports

will not encourage banks to avoid their primary disclosure

responsibilities with respect to material matters that may be discussed

in the examination report.

While the FCBT supports Sec. 630.4(a)(9) as proposed, it commented

that the phrase ``if necessary'' leaves doubt as to whether the Funding

Corporation should request the FCA to provide information contained in

the examination reports in all cases or simply in those cases where a

bank does not provide information contained in the examination report

to the Funding Corporation. The FCBT requested that the FCA provide a

definitive and unambiguous rule regarding the obligation to furnish

copies of these reports.

In response to the comments received, the FCA has revised

paragraphs (a)(2)(ii), (a)(3), and (a)(9) of Sec. 630.4 to clarify that

the Funding Corporation is responsible for collecting from each

disclosure entity information needed for preparation of the report to

investors, including any information that is material to a single

disclosure entity. Likewise, in accordance with the Funding

Corporation's instructions, each bank is responsible for providing the

Funding Corporation with information that is material either to the

bank or, on a combined basis, to the bank and its related associations.

If information necessary for preparation of a report to investors that

is meaningful and not misleading is not forthcoming from a bank in

accordance with the provisions of Sec. 630.4(c), the Funding

Corporation may request the FCA to provide information regarding the

content of the latest Reports of Examination of any banks or related

associations necessary to ensure that the information presented in the

report to investors is meaningful and not misleading. The FCA will then

make a determination whether to provide the Funding Corporation with

relevant information contained in the Report of Examination or, if

appropriate, the entire report.

The FCA is cognizant of both the Funding Corporation's desire to

have direct access to Reports of Examination and the FCBT's concern

with protection of the confidentiality of the Reports of Examination.

The FCA does not believe that Sec. 630.4(a)(9) would relieve a bank of

its responsibility to report any significant regulatory conditions that

would have a material impact on the information being presented in the

report to investors. It remains the primary responsibility of each bank

to provide accurate and complete information to the Funding Corporation

for preparing disclosure to investors. Each bank is required to certify

to this effect to the Funding Corporation.

Section 630.4(a)(9) is established to provide the Funding

Corporation with a contingency source for obtaining information needed

to prepare accurate and comprehensive annual and quarterly reports to

investors, while maintaining the confidentiality of the Reports of

Examination. However, such requests from the Funding Corporation to the

FCA are expected to be rare. Also, as the FCBT noted in its comment

letter, Sec. 630.5 prohibits banks from making incomplete, inaccurate,

or misleading disclosures. Failure to disclose material information

would violate these regulations and subject a bank and its officers and

directors to possible FCA enforcement action.

2. Sections 630.4(c)(1) and 630.20(m)(3)--Bank-Only Financial Data

Section 630.4(c)(1) requires that each bank provide the Funding

Corporation with information needed for preparation of the report to

investors. The FCC suggested that proposed Sec. 630.4(c)(1) be revised

to clarify that, for Systemwide disclosure, information to be provided

by each bank to the Funding Corporation includes not only financial

information, but nonfinancial information as well, including

information covering structural changes and regulatory enforcement

activity. Proposed Sec. 630.4(c)(1) has been clarified to refer to

other nonfinancial information.

The FCC also suggested that proposed Secs. 630.4(c)(1) and

630.20(m)(3)(i) be revised to clarify that it is appropriate to include

any wholly-owned subsidiary of a bank in the bank-only information. The

FCBB submitted a separate comment in which it urged the FCA to include

the FCC's suggestion in the final rule to address the treatment of the

Farm Credit Finance Corporation of Puerto Rico, a wholly-owned

subsidiary of the FCBB.

To address the concerns raised by the commenters regarding a bank's

reporting of consolidated financial data in Systemwide disclosure, the

FCA has removed the wording ``bank-only'' from Sec. 630.4(c)(1) and

clarified that, if a bank is required to prepare consolidated financial

statements in accordance with GAAP, it is appropriate that the bank

provide consolidated financial data of the bank and its consolidated

subsidiaries to the Funding Corporation. Conforming changes were also

made to Sec. 630.20(m)(3) and Appendix A of the final rule.

3. Section 630.4(d)--Responsibilities of Associations

Proposed Sec. 630.4(d) provides the banks with access to their

related associations' auditors for preparation of the report to

investors. The FCC commented that the banks sometimes may need to have

access to others, such as legal counsel. To ensure that the banks have

the ability to obtain any information necessary to accurately prepare

their submission to the Funding Corporation, the FCC suggested that the

regulation include a general statement that the banks may have access

to any material association information. Under sections 2.2 and 2.12 of

the 1971 Act, each association is subject to supervision by its related

bank. Each Farm Credit Bank is responsible for preparing the combined

financial statements of the bank and related associations for

disclosure to shareholders pursuant to part 620 of this chapter. Part

620 of this chapter does not, however, specify how the disclosure

responsibilities between banks and related associations are shared. To

clarify this issue for purposes of part 630, the FCA has expanded

proposed Sec. 630.4(d) by adding a general statement in

Sec. 630.4(d)(1) of the final rule to require that each association

provide its related bank with the information necessary to allow the

bank to provide accurate and complete information to the Funding

Corporation for preparation of the report to investors. The original

text of proposed Sec. 630.4(d) has been redesignated as

Sec. 630.4(d)(2).

D. Section 630.5--Prohibition Against Incomplete, Inaccurate, or

Misleading Disclosure

The FCC suggested that the FCA clarify that Sec. 630.5 concerning

prohibition against incomplete, inaccurate, or misleading disclosure

would apply only when the defective disclosure is material. Since

compliance with the disclosure standards of this part is generally

subject to a materiality test in any event, the FCA finds it

unnecessary to add the suggested materiality language to Sec. 630.5 and

has adopted this section as proposed.

E. Section 630.6--System Audit Committee and Bank Audit Committees

1. Section 630.6(a)(2)

Under Sec. 630.6(a)(2), officers or employees of a System

institution are prohibited from serving on the System Audit Committee

(SAC) because they are not independent of management. The FCBT urged

the FCA to prohibit System directors from serving on the SAC due to

potential conflicts of interest based on competition between System

institutions.

The FCA believes that the suggested prohibition would be disruptive

to the existing SAC and force the Funding Corporation to recruit SAC

members from outside the System. In addition, the FCA views the FCBT's

argument as relating less to conflict of interest than to concern

regarding preservation of the confidentiality of information reviewed

by the SAC. Under section 4.9 of the 1971 Act, directors and management

of System institutions are eligible to serve on the board of the

Funding Corporation. As a practical matter, any information available

to SAC members is equally available to the members of the board of the

Funding Corporation. Thus, precluding System directors from serving on

the SAC would not necessarily prevent confidential information from

being exposed to directors of other System banks. In light of these

considerations, the FCA is adopting the rule as proposed but will

monitor SAC activities for apparent inappropriate use of information.

Finally, the FCA notes that Sec. 630.6(a) does not prevent the Funding

Corporation board from adopting a policy to disqualify System directors

from serving on the SAC.

2. Section 630.6(a)(4)(iii)

The FCC commented that the word ``approve'' contained in

Sec. 630.6(a)(4)(iii) of the proposed rule implies that the SAC has the

authority to dictate individual bank accounting policies or that the

Funding Corporation has the authority to require banks to uniformly and

consistently adopt or change accounting policies. This was not the

intent of the proposed rule. The primary duty of the SAC is to ensure

the integrity of the report to investors jointly prepared by the

Funding Corporation and System banks. The SAC is responsible for

overseeing the reporting process and internal controls implemented by

the Funding Corporation for preparation of the System's report to

investors. To clarify that neither the SAC nor the Funding Corporation

is charged with the responsibility for dictating individual banks'

accounting polices, the FCA has substituted the word ``review'' for the

word ``approve'' as suggested.

3. Section 630.6(a)(4)(iv)

Under proposed Sec. 630.6(a)(4)(iv), the SAC is required to review

each disclosure document containing Systemwide information prescribed

in this part, including annual reports, quarterly reports, and press

releases, prior to its release. The FCC commented that the SAC's

responsibility should pertain only to financial information and

disclosures contained in the annual information statements because the

SAC generally would not have the expertise to review and evaluate

nonfinancial information, such as is found in the description of

business and description of debt securities. The FCC also suggested

that, to facilitate timely issuance of quarterly information, the

requirement for a review of each quarterly report or press release by

the SAC prior to its release be eliminated.

To ensure the quality of the report to investors, the FCA believes

that each annual or quarterly report should be reviewed by the SAC in

its entirety. Under Sec. 630.6(a)(2), which provides that ``members

shall be knowledgeable in public and corporate finance and financial

reporting and disclosure,'' members selected to serve on the SAC should

have the expertise to review the entire report to investors, including

both financial and nonfinancial information. However, the FCA agrees

that the essence of press releases is to provide timely release of

interim information and has deleted the requirement for a review of

press releases by the SAC from Sec. 630.6(a)(4)(iv).

4. Section 630.6(a)(4)(v) and (b)(3)(ii)

The FCC suggested that the word ``oversee'' contained in proposed

Sec. 630.6(a)(4)(v) and (b)(3)(ii) regarding the responsibility of the

SAC and the bank audit committee be replaced with the word ``review''

because the proposed wording implies that the audit committee would

perform a management function in the System or the bank. The FCC also

suggested other changes to proposed Sec. 630.6(a)(4)(v) to avoid this

implication.

The audit committee is commonly recognized as an entity established

to perform an oversight function in the areas of financial reporting,

internal control, and corporate governance. The word ``oversee''

contained in the proposed rule is consistent with the customary role of

audit committees. The FCA has retained the word ``oversee'' in

Sec. 630.6(a)(4)(v) and (b)(3)(ii). The FCA notes that it is the

responsibility of the board of each System institution to determine the

steps the audit committee should perform to fulfill its oversight

responsibilities. Thus, the boards of individual System institutions

could charter their audit committee to review and direct management to

take necessary corrective actions or merely to review and make

corrective recommendations to the board.

F. Subpart B--Annual Report to Investors

1. Section 630.20(c)(2)--Description of Legal Proceedings and

Enforcement Actions

The FCC suggested that the proposed Sec. 630.20(c)(2) disclosure

requirement for a summary of FCA enforcement actions against individual

institutions be clarified and that any required discussion of the

impact of the enforcement actions on the System's operations be linked

to materiality. The FCA agrees with this suggestion and has revised the

language of Sec. 630.20(c)(2) of the final rule accordingly.

2. Section 630.20(d)--Description of Liabilities

The FCC expressed the view that the information called for by

Sec. 630.20(d)(1) regarding System debt obligations is too detailed

and, thus, impractical. Section 630.20(d)(1)(ii) is, in large part,

based upon the disclosure currently furnished by the System in its

Information Statements. Unless otherwise needed to provide readers of

the report to investors with information needed to understand the

characteristics of System debt, the FCA does not expect extensive

detail regarding the characteristics of specific debt offerings. To

clarify this position, the FCA has deleted the words ``terms and

conditions'' and added prefatory language to Sec. 630.20(d)(1)(ii)

requiring a description of debt obligations statutorily authorized to

be issued and currently issued by the System, as well as other

pertinent information.

The FCC also requested that the regulation clearly set forth the

option of incorporating by reference the annual and quarterly reports

to investors into specific offering documents. The FCA notes that the

focus of this regulation is on periodic reports of the System to

investors. It does not govern offering circulars or specific offering

documents. Nothing in this regulation precludes the System from

incorporating by reference information contained in the annual or

quarterly reports to investors into specific offering documents if

otherwise appropriate.

3. Section 630.20(g)(1)--Loan Portfolio

Proposed Sec. 630.20(g)(1)(ii) required disclosure of the amount of

loans outstanding that were used to finance the purchases of stock or

other equities of System institutions.

The FCC expressed concern regarding the System's ability to comply

with this requirement and questioned its relevance to investors. The

FCC opined that disclosures currently provided by the System in its

annual Information Statement are sufficient. The System's 1993 annual

Information Statement states that association borrowers do not

typically purchase capital stock for cash, but instead add the

aggregate par value of stock to the principal amount of the related

loan obligation. The 1993 report also provided the amount of capital

stock and participation certificates outstanding at December 31, 1993.

The FCC indicated that System compliance with the proposed requirement

could only be on a prospective basis because System banks do not have a

system in place to track needed information. Further, the FCC argued

that the costs involved in complying with this proposed requirement

would outweigh the benefits derived from the disclosure.

The FCA supports the commenter's view that the cost involved in

providing meaningful information to investors should not outweigh the

benefits derived. The FCA also notes that Sec. 630.20(e)(2), which

requires the System to ``describe the statutory requirement that a

borrower purchase stock as a condition of obtaining a loan; how such

stock is purchased, transferred, and retired; and how earnings are

distributed,'' will ensure that investors continue to receive

information that describes the nature of borrower stock of the System.

As a result, proposed Sec. 630.20(g)(1)(ii) has been deleted from the

final rule and proposed Sec. 630.20(g)(1)(iii) and (iv) have been

redesignated.

4. Section 630.20(g)(1)(ii)--Risk Exposure

Proposed Sec. 630.20(g)(1)(iii) requires discussion and analysis of

the risk exposure of the loan portfolio. The FCC suggested that the

term ``nonperforming loans'' replace the term ``high-risk assets'' in

this section of the regulation because it is more widely used in the

commercial banking industry. Use of the term ``high-risk assets'' in

proposed Sec. 630.20(g)(1)(iii) is consistent with the recent amendment

of the FCA's accounting and reporting guidelines in part 621 of this

chapter. See 58 FR 48780 (September 20, 1993). In the FCA's

regulations, the term ``high-risk assets'' is a generic reference to

loans and loan-related assets that are to be categorized for loan

performance and valuation assessment purposes according to the criteria

set forth in Sec. 621.6 of this chapter. Collectively, the

classifications identified in Sec. 621.6 of this chapter are consistent

with the terminology used in the commercial banking industry for

nonperforming loans. There is no regulatory requirement to categorize

the classification as ``high-risk assets'' in the report to investors.

Rather, proposed Sec. 630.20(g)(1)(iii) requires discussion of any

risks that could adversely affect the loan portfolio and loan-related

assets. Accordingly, the FCA has retained the term ``high-risk assets''

and adopted Sec. 630.20(g)(1)(iii) essentially as proposed. Proposed

Sec. 630.20(g)(1)(iii) is redesignated as Sec. 630.20(g)(1)(ii). The

FCA further notes that it expects to revisit the issue of accounting

for impaired loans in the future to assess the impact of the

implementation of Statement of Financial Accounting Standards No. 114,

Accounting by Creditors for Impairment of a Loan, issued by the

Financial and Accounting Standards Board.

5. Section 630.20(g)(1)(iii)--Secondary Market Activities

The FCC commented that secondary market activities have never been

and currently are not anticipated to be material to the System's

financial condition. The FCC suggested that proposed

Sec. 630.20(g)(1)(iv) be modified to require these activities to be

described when they become material to the System's financial

condition. The FCA agrees with the commenter that the System's

involvement in the secondary markets should be disclosed to investors

when the effect of such activities on the financial condition of the

System is material and has revised proposed Sec. 630.20(g)(1)(iv) to

add materiality tests. This provision is redesignated as

Sec. 630.20(g)(1)(iii) of the final rule.

The FCA believes that the System's statutory authority to

participate in secondary markets should be disclosed to investors in

any event. A new paragraph has thus been added in Sec. 630.20(a)(1)(vi)

of the final rule to require, without regard to materiality, a

description of the authority of System institutions to purchase and

sell interests in loans in secondary markets and the risk involved.

6. Section 630.20(g)(3)(ii) and (iii)--Liquidity and Investment

Section Sec. 630.20(g)(3)(ii) and (iii) require that the System

provide a brief description of the System's policies regarding

liquidity and investment. The FCC pointed out that each System bank

adopts its own liquidity and investment policies according to its

business objectives. In the absence of universal policies regarding

investment and liquidity among System institutions, the commenter

suggested that the proposed regulations be revised to require only a

general description of System banks' policies. The suggested change is

consistent with the intent of the proposed regulations. The FCA has

clarified the proposed regulations by revising Sec. 630.20(g)(3)(ii)(A)

and (g)(3)(iii) to require a brief overview of liquidity and investment

matters.

7. Section 630.20(g)(3)(iv)--Interest Rate Sensitivity

Section 630.20(g)(3)(iv) requires a general description of the

System's risk management practices, including a brief discussion of

derivative transactions. Due to the heightened interest of the public,

financial institution regulators, and Congress in this area, the FCA

solicited comments on whether disclosure requirements regarding

derivative activities should be more detailed. The FCC suggested that,

given the changing GAAP environment for derivative transactions, the

FCA consider the approach to derivatives activity regulation used by

other bank regulators. This approach requires regulated institutions to

adopt policies in accordance with GAAP. The regulator provides any

clarification of GAAP or additional guidance through Call Report

instructions or other mechanisms.

The FCA adopts Sec. 630.20(g)(3)(iv) as proposed, with a

clarification to provide for a ``brief overview'' of the System's asset

and liability management practices. The FCA believes that this approach

to derivatives activities disclosure is consistent with the FCC's

suggestion. In addition, along with other financial institution

regulators, the FCA is monitoring the area of derivatives activities.

The FCA will consider requiring more extensive disclosure based on its

assessment of the level and significance of System derivatives

activities and as the need for regulatory policy in this area becomes

more clearly defined.

8. Section 630.20(g)(5)--Insurance Fund

The FCC commented that Sec. 630.20(g)(5), which requires a

discussion of the Insurance Fund in the Discussion and Analysis (D&A)

section of the report to investors, is unnecessary and would duplicate

the disclosure contained in the notes to the System's combined

financial statements. Section 630.20(g)(5) requires a discussion of the

purposes of the Insurance Fund, a schedule itemizing Insurance Fund

assets that have been identified for specific purposes, and an

explanation of how expenditures of Insurance Fund assets affect the

assets and capital of the System.

The FCA does not believe that the requirement of Sec. 630.20(g)(5)

will result in duplication of information in the report. Section

630.3(e) provides that ``Information in any part of the report may be

incorporated by reference * * * to any other item of the report.

Information * * * may be presented in any order deemed suitable by the

Funding Corporation.'' Accordingly, the Funding Corporation has the

flexibility to determine where the D&A regarding the Insurance Fund is

to be presented. The FCA has adopted Sec. 630.20(g)(5) as proposed.

The FCA notes that the regulation does not require the D&A

regarding the Insurance Fund to be audited. Pursuant to Sec. 630.3(e),

the System could opt to include the required D&A in the notes to the

Systemwide combined financial statements and incorporate the disclosure

by reference into the D&A. In this situation, the required D&A

regarding the Insurance Fund would be covered in the independent

accountant's report on the Systemwide combined financial statements.

9. Section 630.20(g)(6)--Instructions for Discussion and Analysis

Proposed Sec. 630.20(g)(6)(ii) requires that discussions required

by proposed Sec. 630.20(g) cover the 3-year period covered by the

financial statements. The FCC suggested that the words ``3-year'' be

deleted. In recognition that the reporting period for the balance sheet

is only 2 comparative years, the FCA agrees with the commenter and has

amended Sec. 630.20(g)(6)(ii) of the final rule as suggested and

revised the introductory paragraph of Sec. 630.20(g) accordingly.

10. Section 630.20(i)--Compensation of Directors and Senior Officers

Section 630.20(i) requires the annual report to state that

information on the compensation of directors and senior officers of

System banks is contained in each bank's annual report to shareholders

and that the annual report of each bank is available to investors upon

request pursuant to Sec. 630.3(f). The FCC commented that this

requirement provides no useful information to investors and is

redundant.

As stated in the rule proposal, the FCA is required by section 514

of the 1992 Act to ensure that the disclosure of financial and

conflict-of-interest information by System personnel provides investors

and potential investors with information necessary to assist them in

making investment decisions regarding FCS debt obligations or

institutions. The FCA believes that information on compensation of

System directors and senior officers presented in individual System

institutions' disclosure to shareholders pursuant to part 620 of this

chapter could provide useful information to investors in making

investment decisions. Thus, to implement the requirement of section 514

of the 1992 Act, Sec. 630.20(i) requires that the report provide a

statement informing investors of the availability of such information.

The FCA adopts Sec. 630.20(i) of the final rule as proposed.

11. Section 630.20(l) and (m)--Financial Statements and Supplemental

Information

Proposed Sec. 630.30(l) requires that the System prepare the

combined financial statements in accordance with GAAP and instructions

and other requirements of the FCA. Proposed Sec. 630.20(m) further

requires that the System provide supplemental information in addition

to the audited financial statements and that the supplemental

information be examined by a qualified public accountant for compliance

with FCA regulations and guidelines and an opinion expressed thereon.

The FCA received comments on proposed Sec. 630.20(l) from the AICPA and

the FCC and comments on proposed Sec. 630.20(m) from the AICPA and

Price Waterhouse.

With respect to proposed Sec. 630.20(l), both the FCC and the AICPA

suggested, for different reasons, that the phrase ``instructions and

other requirements of the FCA'' be deleted from the proposed rule. The

FCC was concerned that the proposed language indicates that regulatory

accounting practices (RAP) may be utilized, causing investor confusion.

On the other hand, the AICPA provided suggested language that would

require both the basic financial statement and the supplemental

information required by proposed Sec. 630.20(l) and (m) to be audited

in accordance with GAAS. The AICPA asserted that the requirements of

proposed Sec. 630.20(m) regarding supplemental information disclosure

appear to comprise the ``instructions and other requirements of the

FCA'' referred to in Sec. 630.20(l) and, further, that GAAS addresses

auditors' reporting on information presented outside financial

statements.

Price Waterhouse, the external auditor of the System, also

commented on proposed Sec. 630.20(m). Price Waterhouse asserted that

the proposed language that ``supplemental information be examined by a

qualified public accountant for compliance with FCA regulations and

guidelines'' is too broad and would be interpreted as requiring the

independent accountant to render a report on the System's compliance

with all FCA regulations and guidelines. This would require significant

work by the independent accountant. Price Waterhouse commented that the

proposed regulatory language in Sec. 630.20(m) provides insufficient

detail to enable the external auditor to determine the scope of

additional work to be performed and the type of report to be issued by

the auditor on the supplemental information.

Proposed Sec. 630.20(l) was intended to preserve the FCA's ability

to prescribe additional requirements for preparation and presentation

of the Systemwide combined financial statements. However, after

consideration of the comments received, the FCA adopts the AICPA's

suggestion in the final rule to require that both the basic financial

statements and the supplemental information required by Sec. 630.20(l)

and (m) be examined in accordance with GAAS and an opinion expressed

thereon by an independent accountant. This change will resolve the FCC

concern regarding RAP financial statements and Price Waterhouse's

concern regarding the scope of examination of supplemental information

and reporting by the independent accountant. However, to preserve the

flexibility to revise the format and content specified in Appendix A of

the final rule, the FCA retains the requirement that supplemental

information be prepared in accordance with any additional FCA guidance

or instructions.

12. Section 630.20(o)--Cross-Reference Sheet

Proposed Sec. 630.20(o) called for a cross-reference sheet giving

the location of information required by these regulations, in the order

required, and identified by item numbers and captions. The FCC did not

object to the preparation of a cross-reference sheet, but suggested

that the cross-reference sheet would only be useful to the FCA and

should only be required as an exhibit to copies of the report filed

with the FCA. The FCA believes the cross reference to the content of

the report provides useful information to readers of the report. To

make this indexing requirement more useful to investors, the FCA has

revised Sec. 630.20(o) to inform readers of the location in the report

of the information required under the major disclosure captions of this

part.

G. Subpart C--Quarterly Report to Investors

Proposed Sec. 630.40(b)(5) requires that the System file a

``preferability'' letter with the FCA disclosing any accounting changes

made during the reporting period that are not required by new

accounting pronouncements. The AICPA and the FCC commented that the

requirement for filing a separate letter with the FCA explaining the

reason for the preferable alternative accounting principle is

unnecessary. They suggested that the requirement be deleted from

Sec. 630.40(b)(5).

The preferability letter was intended as a notice to inform the FCA

of any accounting change made by the System during the interim period

that is not required by existing accounting pronouncements. Because the

quarterly report will be required to disclose such accounting changes,

upon further consideration, the FCA has deleted the requirement of

filing a preferability letter from Sec. 630.40(b)(5) of the final rule.

List of Subjects in 12 CFR Part 630

Accounting, Agriculture, Banks, banking, Credit, Organization and

functions (Government agencies), Reporting and recordkeeping

requirements, Rural areas.

For the reasons stated in the preamble, part 630 of chapter VI,

title 12 of the Code of Federal Regulations is added to read as

follows:

PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED

BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

Subpart A--General

Sec.

630.1 Purpose.

630.2 Definitions.

630.3 Publishing and filing the report to investors.

630.4 Responsibilities for preparing the report to investors.

630.5 Prohibition against incomplete, inaccurate, or misleading

disclosure.

630.6 Farm Credit System audit committee and bank audit committees.

Subpart B--Annual Report to Investors

630.20 Contents of the annual report to investors.

Subpart C--Quarterly Reports to Investors

630.40 Contents of the quarterly report to investors.

Appendix A to Part 630--Supplemental Information Disclosure Guidelines

Authority: Secs. 5.17, 5.19 of the Farm Credit Act (12 U.S.C.

2252, 2254); sec. 424 of Pub. L. 100-233, 101 Stat. 1568, 1656.

Subpart A--General

Sec. 630.1 Purpose.

This part sets forth the requirements for preparation and

publication by the Farm Credit System (FCS or System) of annual and

quarterly reports to investors and potential investors in Systemwide

and consolidated bank debt obligations of the System and to other users

of the reports in the general public.

Sec. 630.2 Definitions.

For purposes of this part, the following definitions shall apply:

(a) Bank means any bank chartered under the Farm Credit Act of

1971, as amended (Act).

(b) Combined financial statements means financial statements

prepared on a combined basis by a group of affiliated entities that

share the same financial interest, regardless of whether any of the

entities has the ability to exercise control over another. For purposes

of this part, unless otherwise specified, combined financial data of a

bank and its related associations includes financial data of the bank's

consolidated subsidiaries.

(c) Disclosure entity means any bank, the Farm Credit System

Financial Assistance Corporation (Financial Assistance Corporation),

and the Federal Farm Credit Banks Funding Corporation (Funding

Corporation).

(d) Engagement letter means the proposal, contract, letter, and

other documents reflecting the understandings between the audit

committee or board of directors of a bank or an association and its

independent public accountant regarding the scope, terms, and nature of

the audit services to be performed.

(e) Farm Credit System means, collectively, the banks,

associations, and such other institutions that are or may be made a

part of the System under the Act, all of which are chartered by and

subject to regulation by the Farm Credit Administration (FCA). For

purposes of this part, the System does not include the Federal

Agricultural Mortgage Corporation (Farmer Mac).

(f) FCS debt obligation means, collectively, notes, bonds,

debentures, and other debt securities issued by banks pursuant to

section 4.2(c) (consolidated bank debt securities) and section 4.2(d)

(Systemwide debt securities) of the Act.

(g) Report to investors or report means a report that presents the

Systemwide combined financial statements, supplemental financial

statement information, and related financial and nonfinancial

information pertaining to the System required by this part.

(h) Systemwide combined financial statements means the combined

financial statements required by this part.

Sec. 630.3 Publishing and filing the report to investors.

(a) The disclosure entities shall jointly publish the following

reports in order to provide meaningful information pertaining to the

financial condition and results of operations of the System to

investors and potential investors in FCS debt obligations and other

users of the report:

(1) An annual report to investors within 90 days after the end of

each fiscal year;

(2) A quarterly report to investors within 60 days after the end of

each quarter, except for the quarter that coincides with the end of the

fiscal year.

(b) Each report to investors shall present Systemwide combined

financial statements and related footnotes deemed appropriate for the

purpose of the report to provide investors with the most meaningful

presentation pertaining to the financial condition and results of

operations of the System.

(c) All items of essentially the same character as items required

to be reported in the reports of condition and performance pursuant to

part 621 of this chapter shall be prepared in accordance with the rules

set forth in part 621 of this chapter.

(d) Each report to investors shall contain the information required

by subparts B and C of this part, as applicable, and such other

information as is necessary to make the required statements, in light

of the circumstances under which they are made, not misleading.

(e) Information in any part of the report may be referenced or

incorporated in answer or partial answer to any other item of the

report. Information required by this part may be presented in any order

deemed suitable by the Funding Corporation.

(f) The report shall include a statement in a prominent location

that Systemwide debt securities and consolidated bank debt obligations

are joint and several liabilities of individual banks and that copies

of each bank's recent periodic reports to shareholders are available

upon request. The report shall also include addresses and telephone

numbers where copies of the report to investors and the periodic

reports of individual banks can be obtained. Copies of the report to

investors shall be available for public inspection at the Funding

Corporation.

(g) Three complete copies of the report shall be filed with the

Chief Examiner, Farm Credit Administration, McLean, Virginia 22102-

5090, within the applicable period prescribed under paragraphs (a)(1)

and (a)(2) of this section.

(1) At least one copy of the report filed with the FCA shall be

dated and manually signed by the following officers and director(s) of

the Funding Corporation on its behalf:

(i) The officer(s) designated by the board of directors to certify

the report;

(ii) The chief executive officer; and

(iii) Each member of the board or, at a minimum, one of the

following board members formally designated by action of the board to

certify on behalf of individual board members: the chairperson of the

board or a board member designated by the chairperson of the board.

(2) The name and position title of each person signing the report

shall be typed or printed beneath his or her signature. Signers of the

report shall attest as follows:

The undersigned certify that this report has been prepared in

accordance with all applicable statutory or regulatory requirements

and that the information contained herein is true, accurate, and

complete to the best of his or her knowledge and belief.

Sec. 630.4 Responsibilities for preparing the report to investors.

(a) Responsibilities of the Funding Corporation. The Funding

Corporation shall:

(1) Prepare the reports to investors required by Sec. 630.3(a),

including the Systemwide combined financial statements and notes

thereto, and such other disclosures, supplemental information, and

related analysis as are required by this part to make the reports

meaningful and not misleading.

(2) Establish a system of internal controls sufficient to

reasonably ensure that any information it releases to investors and the

general public concerning any matter required to be disclosed by this

part is true and that there are no omissions of material information.

The system of internal controls, at a minimum, shall require that the

Funding Corporation:

(i) Maintain written policies and procedures, approved by the

System Audit Committee, to be carried out by the disclosure entities

for preparation of the report to investors;

(ii) Provide instructions to the disclosure entities regarding the

information needed for preparation of the Systemwide combined financial

statements and disclosures required to be presented in the report to

investors;

(iii) Review the information submitted to it for preparation of the

report to investors, and make reasonable inquiries to ascertain whether

the information is reliable, accurate, and complete; and

(iv) Specify procedures for monitoring interim disclosures of

System institutions and disclose, in a timely manner, any material

changes in information contained in the most recently published report

to investors.

(3) Collect from each disclosure entity financial data and related

analyses and other information needed for preparation of the report to

investors, including any information that is material to the disclosure

entity.

(4) File the reports with the FCA in accordance with Sec. 630.3(g).

(5) Ensure prompt delivery of sufficient copies of each report to

selling group dealers for distribution to investors and potential

investors in FCS debt obligations.

(6) Make the report available to the general public upon request.

(7) Notify the FCA if it is unable to prepare and publish the

report to investors in compliance with the requirements of this part

because one or more banks have failed to comply with the requirements

of paragraph (c) of this section. A notification, signed by the

officer(s) designated by the board of directors of the Funding

Corporation to certify the report to investors and by the chief

executive officer, shall be made to the FCA as soon as the Funding

Corporation becomes aware of its inability to comply. The Funding

Corporation shall explain the reasons for the notification and may

request that the FCA extend the due date for the report to investors.

(8) Include in the report a statement that briefly explains the

respective responsibilities of the disclosure entities and states that

the Funding Corporation has policies and procedures in place to ensure,

to the best of the knowledge and belief of management and the board of

the Funding Corporation, that the information contained in the report

is true, accurate, and complete. The statement shall be signed by the

chief executive officer and the chairperson of the board of the Funding

Corporation.

(9) Request the FCA to provide information regarding the content of

the latest Reports of Examination of any banks and related

associations, if such information is necessary for preparation of a

report that is meaningful and not misleading and is not forthcoming

from a bank in accordance with paragraph (c) of this section. The

request shall be made to the Chief Examiner, Farm Credit

Administration, McLean, Virginia 22102-5090.

(b) Responsibilities of the Financial Assistance Corporation. The

Financial Assistance Corporation shall provide to the Funding

Corporation such information as may be required by the Funding

Corporation to prepare the report.

(c) Responsibilities of banks. Each bank shall:

(1) Provide to the Funding Corporation annual, quarterly, and

interim financial and other information in accordance with instructions

of the Funding Corporation for preparation of the report to investors,

including:

(i) Financial data of the bank or, if the bank is required under

generally accepted accounting principles (GAAP) to prepare its

financial statements on a consolidated basis with its subsidiaries,

consolidated financial data of the bank and its consolidated

subsidiaries; and

(ii) Combined financial data of the bank (including any

consolidated subsidiaries of the bank) and related associations of the

bank.

(2) Respond to Funding Corporation inquiries and provide any

followup information requested by the Funding Corporation in connection

with the preparation of the report to investors in accordance with

instructions of the Funding Corporation.

(3) Notify the Funding Corporation promptly of any events occurring

subsequent to publication of the report that may be material either to

the financial condition and results of operations of the bank or to the

combined financial condition and results of operations of the bank and

its related associations. Furnish the Funding Corporation with any

information necessary to provide interim Systemwide disclosure to

investors to make the most recently published report to investors not

misleading.

(4) Provide in the engagement letter with its external auditor that

the external auditor shall, after notifying the bank, respond to

inquiries from the Funding Corporation relating to preparation of the

report.

(5)(i) Certify to the Funding Corporation that:

(A) All information needed for preparation of the report to

investors has been submitted in accordance with the instructions of the

Funding Corporation;

(B) The information submitted is prepared in accordance with all

applicable statutory and regulatory requirements; and

(C) The information submitted is true, accurate, and complete to

the best of management's knowledge and belief.

(ii) The certification required by paragraph (c)(5)(i) of this

section shall be prepared as specified by the Funding Corporation and

shall be manually signed and dated on behalf of the bank by:

(A) The officer(s) designated by the board of directors to certify

the information submitted to the Funding Corporation; and

(B) The chief executive officer.

(d) Responsibilities of associations. Each association shall:

(1) Provide its related bank with the information necessary to

allow the bank to provide accurate and complete information regarding

the bank and its related associations to the Funding Corporation for

preparation of the report.

(2) Provide in the engagement letter with its external auditor that

the external auditor of the association shall, after notifying the

association, respond to inquiries of the related bank pertaining to

preparation of the combined financial data of the association and its

related bank.

Sec. 630.5 Prohibition against incomplete, inaccurate, or misleading

disclosure.

Neither the Funding Corporation, nor any institution supplying

information to the Funding Corporation under this part, nor any

employee, officer, director, or nominee for director of the Funding

Corporation or of such institutions, shall make or cause to be made any

disclosure to investors and the general public required by this part

that is incomplete, inaccurate, or misleading. When any such

institution or person makes or causes to be made disclosure under this

part that, in the judgment of the FCA, is incomplete, inaccurate, or

misleading, whether or not such disclosure is made in published

statements required by this part, such institution or person shall

promptly furnish to the Funding Corporation, and the Funding

Corporation shall promptly publish, such additional or corrective

disclosure as is necessary to provide full and fair disclosure to

investors and the general public. Nothing in this section shall prevent

the FCA from taking additional actions to enforce this section pursuant

to its authority under title V, part C of the Act.

Sec. 630.6 Farm Credit System audit committee and bank audit

committees.

(a) Farm Credit System audit committee. (1) The board of the

Funding Corporation shall establish and maintain a System Audit

Committee and adopt a written charter describing the committee's

composition, authorities, and responsibilities.

(2) The System Audit Committee shall consist of no fewer than three

members. Members shall be independent of management of any disclosure

entity and association and free from any relationship that, in the

opinion of the board of directors of the Funding Corporation, would

interfere with the exercise of independent judgment as a committee

member. Members shall be knowledgeable in public and corporate finance,

and financial reporting and disclosure.

(3) The System Audit Committee shall report to the board of the

Funding Corporation and shall be given adequate resources and

authorities to discharge its responsibilities, including the ability to

consult the Funding Corporation's legal counsel.

(4) Responsibilities. At a minimum, the System Audit Committee

shall:

(i) Make recommendations to the board of the Funding Corporation

regarding the selection of an independent auditor of the Systemwide

combined financial statements;

(ii) Oversee the Funding Corporation management's preparation of

the report to investors;

(iii) Review the impact of any significant accounting and auditing

developments, and review accounting policy changes relating to

preparation of the Systemwide combined financial statements;

(iv) Review the System's annual and quarterly reports to investors

prior to their release; and

(v) Oversee the Funding Corporation's system of internal controls

relating to preparation of the report, including controls relating to

the System's compliance with applicable laws and regulations.

(b) Farm Credit System bank audit committees. (1) Each System bank

shall establish and maintain a bank audit committee that shall report

to the board of the bank.

(2) The bank audit committee shall consist of no fewer than three

members. Members shall be independent of management and free from any

relationship that, in the opinion of the board of directors of the

bank, would interfere with the exercise of independent judgment as a

committee member. Members shall be knowledgeable in public and

corporate finance, and financial reporting and disclosure.

(3) Responsibilities. At a minimum, the bank audit committee shall:

(i) Review the bank's financial statements and significant

accounting policies;

(ii) Oversee the bank's financial reporting regarding its

disclosure to shareholders and to the Funding Corporation for

disclosure to investors;

(iii) Oversee the audit activities of the external auditor; and

(iv) Monitor internal controls, including those relating to

compliance with laws and regulations.

Subpart B--Annual Report to Investors

Sec. 630.20 Contents of the annual report to investors.

The annual report shall contain the following:

(a) Description of business. (1) The description shall include a

brief discussion of the following:

(i) The System's overall organizational structure, its lending

institutions by type and their respective authorities, the

relationships between different types of institutions, and the overall

geographic area and eligible borrowers served by those institutions;

(ii) The types of lending activities engaged in and financial

services offered by System institutions;

(iii) Any significant developments within the last 5 years that

have had or could have a material impact on the System's organizational

structure and the manner in which System institutions conduct business,

including, but not limited to, statutory or regulatory changes, mergers

or liquidations of System institutions, terminations of System

institution status, and financial assistance provided by or to System

institutions through loss-sharing or capital preservation agreements or

from any other source;

(iv) Any acquisition or disposition of material assets during the

last fiscal year that took place outside the ordinary course of

business;

(v) Any concentrations of more than 10 percent of total assets in

particular types of agricultural activities or businesses, and any

dependence of an institution or a group of institutions of the System

upon a specific activity or business, a single customer, or a few

customers, including other financing institutions (OFIs), as defined in

Sec. 614.4540(e) of this chapter, the loss of any one of which would

have a material effect on the System; and

(vi) The authority of System institutions to purchase and sell

interests in loans in secondary markets and the risk involved in such

activities.

(2) List the address of the headquarters of each disclosure entity

and service organization of the System.

(b) Federal regulation and insurance--(1) Farm Credit

Administration. Describe the regulatory and enforcement authority of

the FCA over System institutions under the Act.

(2) Farm Credit System Insurance Corporation. (i) Describe the role

and authorities of the Farm Credit System Insurance Corporation (FCSIC)

under part E of title V of the Act. Describe specifically the role of

the FCSIC in insuring the timely payment of principal and interest on

FCS debt obligations and in providing assistance to System

institutions.

(ii) Describe the FCSIC's status as a Government corporation and

state that System institutions have no control over the management of

the FCSIC or the discretionary expenditures from the Farm Credit

Insurance Fund (Insurance Fund), which are the sole prerogative of the

FCSIC.

(3) Farm Credit System Financial Assistance Corporation. Describe

the role and authorities of the Financial Assistance Corporation under

title VI of the Act, debt obligations of the Financial Assistance

Corporation issued to provide financial assistance to the System, and

statutory repayment obligations of System institutions.

(c) Description of legal proceedings and enforcement actions. (1)

Describe any material pending legal proceedings in which one or more

System institutions are a party, or that involve claims that a System

institution(s) may be required by contract or operation of law to

satisfy, and the potential impact of such proceedings, to the extent

known, on the System.

(2) Provide a summary of the types of enforcement actions in effect

during the year, and any material impact of such proceedings on the

System.

(d) Description of liabilities. (1) Describe how the System funds

its lending operations, including:

(i) System banks' authority to borrow, and issue notes, bonds,

debentures, and other obligations, and limitations thereof under

section 4.2 of the Act;

(ii) A description of the types of debt obligations authorized to

be issued under the Act, the types of debt obligations currently

issued, the manner and form in which they are issued, rights of

securities holders, risk factors, use of proceeds, tax effects of

holding securities, market information, and other pertinent

information;

(iii) For each of the types of obligations that may be issued,

whether it is insured, and the extent of any joint and several

liability for the obligations; and

(iv) Any applicable statutory and regulatory requirements affecting

a bank's ability to incur debt.

(2) Describe agreements among System banks and the Funding

Corporation affecting a bank's ability to incur debt.

(3) Describe agreements among System institutions regarding capital

preservation, loss sharing, or any other forms of financial assistance.

(e) Description of capital. (1) Describe the capitalization of the

System, including capital structure, types of stock and participation

certificates, and voting rights of holders of stock and participation

certificates.

(2) Describe the statutory requirement that a borrower purchase

stock as a condition of obtaining a loan; how such stock is purchased,

transferred, and retired; and how earnings are distributed.

(3) Describe any statutory or other authority of a System

institution to require additional capital contributions from

stockholders.

(4) Describe regulatory minimum permanent capital standards and

capital adequacy requirements for banks and associations. State the

number of institutions, if any, categorized by banks and associations,

that are not currently in compliance with such standards and include a

brief discussion of the reasons for the noncompliance.

(5) Describe any statutory and regulatory restrictions on

retirement of stock and distribution of earnings by System

institutions. State the number of System institutions, if any,

categorized by banks and associations, that are currently affected by

such restrictions and provide a summary of the causes of such

prohibitions.

(f) Selected financial data. At a minimum, furnish the following

combined financial data of the System in comparative columnar form for

each of the last 5 fiscal years.

(1) Balance sheet.

(i) Loans.

(ii) Allowance for losses.

(iii) Net loans.

(iv) Cash and investments.

(v) Other property owned.

(vi) Total assets.

(vii) FCS debt obligations and other bonds, notes, debentures, and

obligations, presented by type, with a descriptive title.

(viii) Total liabilities.

(ix) Capital stock and surplus.

(2) Statement of income.

(i) Net interest income.

(ii) Net other expenses.

(iii) Provision for loan losses.

(iv) Extraordinary items.

(v) Provision for income taxes.

(vi) Net income (loss).

(3) Key financial ratios. (i) Return on average assets.

(ii) Return on average capital stock and surplus.

(iii) Net interest income as a percentage of average earning

assets.

(iv) Net loan chargeoffs as a percentage of average loans.

(v) Allowance for loan losses as a percentage of gross loans

outstanding at yearend.

(vi) Capital stock and surplus as a percentage of total assets at

yearend.

(vii) Debt to capital stock and surplus at yearend.

(g) Discussion and analysis. Fully discuss any material aspects of

financial condition, changes in financial condition, and results of

operations of System institutions, on a combined basis, for the

comparative years required by paragraph (g)(6)(ii) of this section or

such other time periods specified in the following paragraphs of this

section. Identify favorable and unfavorable trends, and significant

events or uncertainties necessary to understand the financial condition

and results of operations of the System. At a minimum, the discussion

shall include the following:

(1) Loan portfolio--(i) Categorization. Describe the loan portfolio

of the System by major loan purpose category, indicating the amount and

approximate percentage of the total dollar portfolio represented by

each major category.

(ii) Risk exposure. (A) Describe and analyze all high-risk assets,

including an analysis of the nature and extent of significant current

and potential credit risks within the loan portfolio and of other

information that could adversely affect the loan portfolio and other

property owned.

(B) Provide an analysis of the allowance for loan losses that

includes the ratios of the allowance for loan losses to loans

(outstanding at yearend) and net chargeoffs to average loans, and a

discussion of the adequacy of the allowance for loan losses to absorb

the risk inherent in the loan portfolio and the basis for such

determination.

(iii) Secondary market activities. (A) If material, quantify System

institutions' secondary market activities and the risk involved in such

activities.

(B) If material, provide an analysis of historical loss experience

and the amount provided for risk of loss associated with secondary

market activities.

(2) Results of operations. (i) Describe, on a comparative basis,

changes in the major components of net interest income. Include a

discussion of significant factors that contributed to the changes and

quantify the amount of change(s) due to an increase or decrease in

volume and the amount due to changes in interest rates earned and paid,

based on averages for each period.

(ii) Describe any unusual or infrequent events or transactions, or

any significant economic changes that materially affected reported

income and, in each case, indicate the extent to which income was so

affected.

(iii) Discuss the factors underlying any material changes in the

return on average assets and return on average capital stock and

surplus.

(iv) Describe, on a comparative basis, the major components of

operating expense and any other significant components of income or

expense, indicating the reasons for any significant increases or

decreases.

(v) Describe any known trends or uncertainties that have had, or

that are reasonably expected to have, a material impact on net interest

income or net income. Disclose any known events that will cause a

material change in the relationship between costs and revenues.

(vi) Explain the changes that have taken place, by major components

on a comparative basis, in Insurance Fund assets and related restricted

capital and how such changes affected reported income.

(3) Funding sources and liquidity--(i) Funding sources.

(A) Provide, in tabular form, the component amounts and the total

amount of FCS debt obligations, debt obligations issued by banks

individually, and Financial Assistance Corporation debt obligations

outstanding at yearend for each of the past 2 fiscal years. List debt

obligations issued by System institutions separately by type, also

separating insured obligations from uninsured obligations. For each

type of debt obligation listed, provide the following, at a minimum,

for each fiscal year listed:

(1) The beginning balance, the total amount of debt issued, the

total amount of debt retired, and the yearend balance; and

(2) The average maturities and average interest rates on debt

outstanding at yearend, and the average maturities and average interest

rates of new debt issued during the year.

(B) Summarize any other sources of funds, including lines of credit

with commercial lenders, and their terms.

(ii) Liquidity. (A) Include a brief overview of any FCA regulations

or System policies with regard to liquidity and liquidity reserves.

(B) Identify any known trends, demands, commitments, events, or

uncertainties that will result in, or that are reasonably likely to

result in, System liquidity increasing or decreasing in any material

way. If a material liquidity deficiency is identified, indicate the

course of action that has been taken or is proposed to be taken by

management of affected System institutions to remedy the deficiency.

(iii) Investment. Provide a brief overview of the System's

investment policies and objectives, any regulatory limitations thereon,

and the contents of the System's existing investment portfolio.

(iv) Interest rate sensitivity. (A) Provide a brief overview of the

System's asset and liability management practices, including interest

rate risk measurement systems, and methods used to control interest

rate risk, such as the use of investments, derivatives, and other off-

balance-sheet transactions.

(B) Provide an analysis of the System's exposure to interest rate

risk and its ability to control such risk.

(4) Capital resources. (i) Describe any material commitments to

purchase capital assets and the anticipated sources of funding.

(ii) Describe any material trends, favorable or unfavorable, in the

System's capital resources, including any material changes in the mix

of capital and debt, the relative cost of capital resources, and any

off-balance- sheet financing arrangements.

(iii) Provide a general discussion of any trends, commitments,

contingencies, or events that are reasonably likely to have a material

adverse effect on System institutions' ability to comply with

regulatory capital standards.

(5) Insurance Fund. (i) Describe the purposes for which

expenditures from the Insurance Fund may be made and the statutory

requirements for making such expenditures.

(ii) Provide a schedule itemizing the amount of Insurance Fund

assets that have been specifically identified by the FCSIC for payment

of estimated obligations of the FCSIC and the amount of Insurance Fund

assets for which no specific use has been identified or designated by

the FCSIC. Information provided shall be as of the end of the most

recent fiscal year.

(iii) Explain how FCSIC expenditures or designations of Insurance

Fund assets for payment of future obligations affect the combined

assets and capital of the System, and quantify the effect, if any.

(6) Instructions for discussion and analysis. (i) The purpose of

the discussion and analysis (D&A) shall be to provide to investors and

other users information relevant to an assessment of the combined

financial condition and results of operations of System institutions as

determined by evaluating the amounts and certainty of cashflows from

operations and from outside sources. The information provided pursuant

to this section need only include that which is available to System

institutions and which does not clearly appear in the combined

financial statements.

(ii) The D&A of the financial statements and other statistical data

shall be presented in a manner designed to enhance a reader's

understanding of the combined financial condition, results of

operations, cashflows, and changes in capital of System institutions.

Unless otherwise specified in Sec. 630.20(g), the discussion shall

cover the period covered by the financial statements and shall use

year-to-year comparisons or any other understandable format. Where

trend information is relevant, reference to the 5-year selected

financial data required by paragraph (f) of this section may be

necessary.

(iii) The D&A shall focus specifically on material events and

uncertainties known at the time of reporting that would cause reported

financial information not to be necessarily indicative of future

operating results or of future financial condition. This should include

descriptions and amounts of:

(A) Matters that would have an impact on future operations but that

have not had an impact in the past; and

(B) Matters that have had an impact on reported operations but are

not expected to have an impact on future operations.

(h) Directors and management--(1) Board of directors. Briefly

describe the composition of boards of directors of the disclosure

entities. List the name of each director of such entities, including

the director's term of office and principal occupation during the past

5 years, or state that such information is available upon request

pursuant to Sec. 630.3(f).

(2) Management. List the names of chief executive officers and

presidents of disclosure entities, including position title, length of

service at current position, and positions held during the past 5

years.

(i) Compensation of directors and senior officers. State that

information on the compensation of directors and senior officers of

System banks is contained in each bank's annual report to shareholders

and that the annual report of each bank is available to investors upon

request pursuant to Sec. 630.3(f).

(j) Related party transactions. (1) Briefly describe how System

institutions, in the ordinary course of business and subject to

regulation by the FCA, may enter into loan transactions with related

parties, including their directors, officers, and employees, the

immediate family members (as defined in Sec. 620.1(e) of this chapter)

of such persons, and any organizations with which such persons and

their immediate family members are affiliated.

(2) On a comparative basis for each of the fiscal years covered by

the balance sheet, state the aggregate amount of the following:

(i) Loans made to related parties;

(ii) Loans outstanding at yearend to related parties;

(iii) Loans outstanding at yearend to related parties that are made

on more favorable terms than those prevailing at the time for

comparable transactions with unrelated borrowers; and

(iv) Loans outstanding at yearend to related parties that involve

more than a normal risk of collectibility (as defined in Sec. 620.1(i)

of this chapter).

(k) Relationship with independent public accountant. If a change in

the accountant who has previously examined and expressed an opinion on

the Systemwide combined financial statements has taken place since the

last annual report to investors or if a disagreement with an accountant

has occurred that the Funding Corporation would be required to report

to the FCA under part 621 of this chapter, disclose the information

required by Sec. 621.4(c) and (d) of this chapter.

(l) Financial statements. Furnish Systemwide combined financial

statements and related footnotes prepared in accordance with GAAP, and

accompanied by supplemental information prepared in accordance with the

requirements of Sec. 630.20(m). The Systemwide combined financial

statements shall provide investors and potential investors in FCS debt

obligations with the most meaningful presentation pertaining to the

financial condition and results of operations of the System. The

Systemwide combined financial statement and accompanying supplemental

information shall be audited in accordance with generally accepted

auditing standards by a qualified public accountant (as defined in

Sec. 621.2(i) of this chapter). The Systemwide combined financial

statements shall include the following:

(1) A balance sheet as of the end of each of the 2 most recent

fiscal years; and

(2) Statements of income, statements of changes in capital stock

and surplus (or, if applicable, statements of changes in protected

borrower capital and capital stock and surplus), and statements of cash

flows for each of the 3 most recent fiscal years.

(m) Supplemental information. Furnish supplemental information

regarding the components of the Systemwide combined financial

statements that has been prepared in accordance with the requirements

of this paragraph and any additional guidance or instructions provided

by the FCA.

(1) At a minimum, the supplemental information shall include the

following:

(i) Supplemental balance sheet information as of the end of the

most recent fiscal year; and

(ii) Supplemental income statement information for the most

recently completed fiscal year.

(2) At a minimum, the report shall present supplemental information

showing combined financial data for the following components on a

stand-alone basis:

(i) Banks;

(ii) Associations;

(iii) Financial Assistance Corporation;

(iv) Combined financial data of the System without the Insurance

Fund;

(v) The Insurance Fund and related combination entries; and

(vi) Combined financial data of the System with the Insurance Fund.

(3) The supplemental information shall be presented in a columnar

format and include, at a minimum, the selected financial data listed in

the schedules in Appendix A of this part. The prescribed components

shall be designated as column headings and they may be abbreviated in

the schedules. The financial data required by Sec. 630.20(m)(2)(i)

shall include the financial data required to be submitted by each bank

pursuant to the requirement of Sec. 630.4(c)(1)(i).

(4) The supplemental information may be presented separately or in

accompanying notes to the Systemwide combined financial statements and

shall contain additional disclosures sufficient to explain the basis of

the presentation of the supplemental information, the components, and

any adjustments contained therein to enable readers to understand the

effect of each component on the Systemwide combined financial

statements.

(n) List the names of the System Audit Committee members in the

report to investors.

(o) Include a detailed index setting forth the major disclosure

captions of this subpart and the page or pages on which the required

information appears in the report.

Subpart C--Quarterly Reports to Investors

Sec. 630.40 Contents of the quarterly report to investors.

(a) General. The quarterly report to investors shall contain the

information specified in this section along with any other material

information necessary to make the required disclosures, in light of the

circumstances under which they are made, not misleading. The quarterly

report must be presented in a format that is easily understandable and

not misleading.

(b) Rules for condensation. For purposes of this subpart, major

captions to be provided in interim financial statements are the same as

those provided in the financial statements contained in the annual

report to investors, except that the financial statements included in

the quarterly report may be condensed into major captions in accordance

with the rules prescribed under this paragraph.

(1) Interim balance sheets. When any major balance sheet caption is

less than 10 percent of total assets and the amount in the caption has

not increased or decreased by more than 25 percent since the end of the

preceding fiscal year, the caption may be combined with others.

(2) Interim statements of income. When any major income statement

caption is less than 15 percent of average net income for the 3 most

recent fiscal years and the amount in the caption has not increased or

decreased by more than 20 percent since the corresponding interim

period of the preceding fiscal year, the caption may be combined with

others. In calculating average net income, loss years should be

excluded. If losses were incurred in each of the 3 most recent fiscal

years, the average loss shall be used for purposes of this test.

(3) The interim financial information shall include disclosure

either on the face of the financial statements or in accompanying

footnotes sufficient to make the interim information presented not

misleading. It may be presumed that users of the interim financial

information have read or have access to the audited financial

statements for the preceding fiscal year, and the adequacy of

additional disclosure needed for a fair presentation may be determined

in that context. Accordingly, footnote disclosure that would

substantially duplicate the disclosure contained in the most recent

audited financial statements (such as a statement of significant

accounting policies and practices) and details of accounts that have

not changed significantly in amount or composition since the end of the

most recently completed fiscal year may be omitted.

(4) Interim reports shall disclose events that have occurred

subsequent to the end of the most recently completed fiscal year that

have a material impact on the System. Disclosures should encompass, for

example, significant changes since the end of the most recently

completed fiscal year in such items as accounting principles and

practices, estimates used in the preparation of financial statements,

status of long-term contracts, capitalization, significant new

indebtedness or modification of existing financing agreements,

financial assistance received, significant business combinations and

liquidations of System institutions, and terminations of System

institution status. Notwithstanding the provisions of this paragraph,

where material contingencies exist, disclosure of such matters shall be

provided even though a significant change since yearend may not have

occurred.

(5) In addition to meeting the reporting requirements specified by

existing accounting pronouncements for accounting changes, state the

date of any material accounting change and the reasons for making it.

(6) Any material prior period adjustment made during any period

covered by the interim financial statements shall be disclosed,

together with its effect upon net income and upon the balance of

surplus for any prior period included. If results of operations for any

period presented have been adjusted retroactively by such an item

subsequent to the initial reporting of such period, similar disclosure

of the effect of the change shall be made.

(7) Interim financial statements furnished shall reflect all

adjustments that are necessary to a fair statement of the results for

the interim periods presented. A statement to that effect shall be

included. Furnish any material information necessary to make the

information called for not misleading, such as a statement that the

results for interim periods are not necessarily indicative of results

to be expected for the year.

(8) If any amount that would otherwise be required to be shown by

this section with respect to any item is not material, it need not be

separately shown. The combination of insignificant items is permitted.

(c) Discussion and analysis of interim financial condition and

results of operations. Discuss any material changes to the information

disclosed to investors pursuant to Sec. 630.20(g) that have occurred

during the periods specified in paragraphs (d)(1) and (d)(2) of this

section. Provide any additional information needed to enable the reader

to assess material changes in financial condition and results of

operations between the periods specified in paragraphs (d)(1) and

(d)(2) of this section.

(1) Material changes in financial condition. Discuss any material

changes in financial condition from the end of the preceding fiscal

year to the date of the most recent interim balance sheet provided.

(2) Material changes in results of operations. Discuss any material

changes in the combined results of operations of the System with

respect to the most recent fiscal year-to-date period for which an

income statement is provided and the corresponding year-to-date period

of the preceding fiscal year. Such discussion shall also cover material

changes with respect to the most recent fiscal quarter and the

corresponding fiscal quarter in the preceding fiscal year.

(d) Financial statements. Interim combined financial statements

shall be provided in the quarterly report to investors as set forth in

paragraphs (d)(1) through (4):

(1) An interim balance sheet as of the end of the most recent

fiscal quarter and a balance sheet as of the end of the preceding

fiscal year.

(2) Interim statements of income for the most recent fiscal

quarter, for the period between the end of the preceding fiscal year

and the end of the most recent fiscal quarter, and for the comparable

periods for the previous fiscal year.

(3) Interim statements of changes in capital stock and surplus (or,

if applicable, interim statements of changes in protected borrower

capital and capital stock and surplus) for the period between the end

of the preceding fiscal year and the end of the most recent fiscal

quarter, and for the comparable period for the preceding fiscal year.

(4) Interim statements of cash flows for the period between the end

of the preceding fiscal year and the end of the most recent fiscal

quarter, and for the comparable period for the preceding fiscal year.

(e) Supplemental information. The interim report shall present

supplemental information in accordance with the requirements of

Sec. 630.20(m)(2), (m)(3), and (m)(4), as well as other requirements

and instructions of the FCA, and shall include, at a minimum, the

following:

(1) Supplemental balance sheet information as of the end of the

most recent quarter; and

(2) Supplemental income statement information for the period

between the end of the preceding fiscal year and the end of the most

recent fiscal quarter.

(f) Review by independent public accountant. Unless otherwise

ordered by the FCA as a result of a supervisory action, the interim

financial statements and supplemental information need not be audited

or reviewed by an independent public accountant prior to filing. If,

however, a review of the report is made in accordance with the

established professional standards and procedures for such a review, a

statement that the independent accountant has performed such a review

may be included. If such a statement is made, the report of the

independent accountant on such review shall accompany the interim

financial information.

Appendix A to Part 630--Supplemental Information Disclosure Guidelines

Supplemental information required by Secs. 630.20(m) and

630.40(e) shall contain, at a minimum, the current year financial

data for the components listed in the following tables and be

presented in the columnar format illustrated in the following

tables:

BILLING CODE 6705-01-P

TR12SE94.000

BILLING CODE 6705-01-C

Dated: September 1, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-22221 Filed 9-9-94; 8:45 am]

BILLING CODE 6705-01-P