Disclosure to Shareholders

FARM CREDIT ADMINISTRATION

12 CFR Part 620

RIN 3052-AB37

Disclosure to Shareholders

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

Administration Board, issues a final regulation amending its disclosure

requirements for association annual meeting information statements

including required disclosures for director candidates nominated from

the floor. The amendments provide associations more flexibility in

accepting floor nominations for director positions, clarify disclosure

requirements when annual meetings are held in more than one session and

shareholders vote by mail, and make other technical changes.

EFFECTIVE DATE: The regulations shall become effective upon expiration

of 30 days after publication in the Federal Register during which

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

effective date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Laurie A. Rea, Policy Analyst, Office of Examination, Farm Credit

Administration, McLean, VA 22102-5090, (703) 883-4498, or

James M. Morris, Senior Attorney, Office of General Counsel, Farm

Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703)

883-4444.

SUPPLEMENTARY INFORMATION:

Background

On September 13, 1993, the FCA issued a proposed regulation (58 FR

47836) that would amend certain aspects of Sec. 620.21(d) pertaining to

required disclosures in the association annual meeting information

statement (Statement) concerning the nominating and balloting process

for association directors. The FCA proposed changes to Sec. 620.21(d)

after learning that the regulation may have inadvertently placed an

undue burden on certain members. Section 620.21(d)(3) required the

Statement to ``contain a notice that nominations from the floor must be

made at the first sectional meeting'' when the association's annual

meeting was held in consecutive sectional sessions. Consequently,

certain members that would have otherwise attended a different session

were required to travel to the first sectional session if they wished

to participate in the floor nominating process. Sections 620.21(d)(5)

and (d)(6) also required that persons nominated from the floor provide

the necessary written disclosures ``in writing at the meeting(s) at

which the nomination is considered.''

The FCA proposed regulatory amendments to make it less burdensome

for members to participate in the floor nominating process. If the

association's members are voting by mail ballot at the conclusion of

all sessions of the annual meeting, the proposed rule allowed floor

nominations at any sectional session. The proposed rule also relaxed

the disclosure requirement for floor nominees by allowing them to

provide the mandated disclosures ``within 10 days of nominations''

instead of ``at the meeting(s) at which the nomination is considered.''

The FCA believed that these regulatory changes would afford members

more opportunity to nominate candidates from the floor when voting by

mail ballot after the annual meeting is concluded and make it easier

for floor nominees to provide the required disclosures without any

significant inconvenience to management or other nominees.

The FCA received four comment letters on the proposed rule during

the comment period that expired on October 13, 1993. One letter was

submitted by a Farm Credit bank, two letters by associations, and one

by the Farm Credit Council (Council) on behalf of its membership.

Commenters were generally supportive of the proposed changes. The

Council commented that its membership applauded the FCA's

responsiveness to Farm Credit System institutions' concerns.

The final regulation allows persons to be nominated from the floor

at any sectional session when the director election is conducted by

mail balloting following the final session of the annual meeting.

However, in response to a comment from the Council, the FCA has changed

the regulation so that associations can specify in their bylaws that

nominations from the floor will be accepted only at the first session.

The final rule requires persons nominated from the floor to provide

associations with the written disclosure information for mailing with

the ballot. The final rule also allows associations using mail

balloting after the last session the latitude to prescribe in their

bylaws the time period for floor nominees to submit the required

disclosures. [[Page 20012]]

Response to Comments

The Council asserted that some associations interpreted the

proposed regulation to require a change in their current method of

nominating and electing directors because their stockholders have the

option of voting by mail or in person at each association's annual

meeting. Therefore, the Council requested that the proposed regulation

be modified to permit associations that hold annual meetings in

sectional sessions and conduct elections by mail ballot after the final

sectional session to require in their bylaws that all floor nominations

be made at the first sectional session. Section 4.15 of the Farm Credit

Act of 1971 (Act), concerning the nomination of association directors,

states ``Nominations shall also be accepted from the floor.'' To comply

with Sec. 4.15 of the Act, associations must continue to afford a full,

fair, and meaningful opportunity for members to make viable nominations

from the floor. Section 620.21(d)(3) has been revised to emphasize this

requirement.

The FCA believes allowing nominations at any session of an

association annual meeting when mail balloting occurs after those

sessions is the best method of ensuring members an opportunity to

nominate candidates from the floor. Nevertheless, the FCA is aware that

some associations may wish to retain bylaw provisions that provide for

the acceptance of floor nominations only at the first session. The FCA

is engaged in a continuing effort to reduce regulatory burden by

eliminating regulations that prescribe specific operational or

managerial practices1 and amending regulations to provide

flexibility, so long as the requirements of the Act are satisfied.

Accordingly, the FCA has revised the final Sec. 620.21(d)(3) to allow

associations to prescribe that nominations from the floor will be

accepted only at the first session. Further, the FCA notes that, if an

association uses a combination of voting in person and voting by mail

ballot, nominations from the floor can only be made at the first

session so that every stockholder has the opportunity to vote on floor

nominees.

\1\The FCA Board's Policy Statement on Regulatory Philosophy (59

FR 32189, June 22, 1994).

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One commenter suggested that the regulations be modified to

expressly accommodate a pre-annual meeting mail balloting process. The

commenter argued that it is impossible for associations employing a

pre-annual meeting mail balloting process to comply with the floor

nomination and disclosure requirements of the proposed regulations

because many stockholders have already voted by mail at the time a

floor nomination is made. The commenter suggested that the FCA allow

associations to accept nominations by mail. The suggestions were not

incorporated in the final regulation for several reasons.

The FCA does not believe the use of mail ballots prior to an

association's annual meeting is legally permissible. In addition to the

slate of eligible candidates presented by the nominating committee,

Sec. 4.15 of the Act expressly requires associations to accept

nominations ``from the floor.'' A stockholder voting by mail prior to

the annual meeting would not be able to vote for floor nominees because

their candidacy would not be known until the meeting. In addition, a

stockholder who has voted by mail prior to the annual meeting would not

be able to revoke his or her mail ballot and vote in person at the

meeting. Consequently, stockholders who vote by mail ballot prior to

the annual meeting relinquish their rights to vote for candidates

nominated from the floor at the meeting.

The FCA believes that accepting nominations solely by mail would

discourage the borrowers' active participation in the management and

control of System institutions. Mail nominations do not foster

borrowers' active involvement in the director nomination and election

process but rather may minimize the stockholders' role. Nominations by

mail restrict stockholders' opportunity to discuss potential candidates

for director positions. If nominations by mail were employed, the

absence of consideration and discussion by members at the annual

meeting would also inhibit the origination of viable nominations from

the floor. Accordingly, the FCA has not modified the regulation to

include a procedure to accept floor nominations by mail so that

associations may conduct mail balloting prior to the annual meeting.

The FCA notes that proxy voting in director elections is a permissible

alternative voting method, although it is not specifically mandated by

the Act.2 A secret proxy ballot allows a stockholder who will be

absent from the meeting to designate another person to cast his vote.

Although proxies must be returned to the association prior to the start

of the annual meeting, a stockholder attending the meeting can revoke

his or her proxy prior to the balloting at the annual meeting and vote

in person for a floor nominee.

\2\The rights of stockholders to vote by proxy is mandated by

the Act in certain situations. See Secs. 4.3A(c)(2), 7.8(a)(3), and

7.13(a)(3) of the Act.

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Commenters raised concerns about the appropriateness of the 10-day

timeframe prescribed in proposed Sec. 620.21(d)(5) for floor nominees

to provide written disclosure information. Three commenters suggested

that the 10-day period be shortened to 5 business days. Commenters

argued that this would give floor nominees sufficient time to prepare

and submit the required disclosure information without unduly delaying

the mailing of ballots after the last sectional session. The Council

stated that its members suggested a time period of 3 days or no more

than 5 days, and it recommended that associations be allowed to set an

appropriate timeframe in their bylaws. Consistent with its role as an

arm's-length regulator, the FCA has revised the regulation to allow

associations the latitude to prescribe in their bylaws the time period

for floor nominees to submit the required disclosure. Associations

should provide a sufficient time for floor nominees to compile the

information necessary to comply with the regulatory requirements and

ensure that the election process is completed expeditiously. Therefore,

the time period for floor nominees to submit the required disclosure

information was changed in the final rule from ``within 10 days of

nomination'' to ``within the time period prescribed by the

association's bylaws.'' If the bylaws do not address this issue, the

regulation requires that this information be submitted within 5

business days.

The Council also requested that the regulation, as proposed, be

changed by adding the words ``upon conclusion of all sessions'' after

``mail ballot'' in Sec. 620.21(d)(5). The FCA agrees that the suggested

change clarifies the meaning of paragraph (d)(5) and modified the

regulation accordingly.

The final regulation makes a technical correction to

Sec. 620.21(c)(3). (See 51 FR 8644, March 13, 1986). The technical

correction deletes the words ``during the last year fiscal year to

date'' and inserts the words ``since the last annual meeting'' to

clarify that associations are required to disclose in the Statement any

resignations by directors that stem from disagreements with the board

that occurred during the time period between annual meetings.

List of Subjects in 12 CFR Part 620

Accounting, Agriculture, Banks, banking, Reporting and

recordkeeping requirements, Rural areas.

For the reasons stated in the preamble, part 620 of chapter VI,

title 12 [[Page 20013]] of the Code of Federal Regulations is amended

to read as follows:

PART 620--DISCLOSURE TO SHAREHOLDERS

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

follows:

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

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

Stat. 1568, 1656.

Subpart D--Association Annual Meeting Information Statement

2. Section 620.21 is amended by revising the heading and paragraphs

(c)(3), (d)(1), (d)(3), (d)(5), and (d)(6) to read as follows:

Sec. 620.21 Contents of the information statement and other

information to be furnished in connection with the annual meeting.

* * * * *

(c) * * *

(3) If any director resigned or declined to stand for reelection

since the last annual meeting because of a policy disagreement with the

board, and if the director has furnished a letter requesting disclosure

of the nature of the disagreement, state the date of the director's

resignation and summarize the director's description of the

disagreement contained in the letter. If the institution holds a

different view of the disagreement, the institution's view may be

summarized.

* * * * *

(d) * * *

(1) If directors are nominated by region, describe the regions and

state the number of voting shareholders entitled to vote in each

region. Any nominee from the floor must be an eligible candidate for

the director position for which the person has been nominated.

* * * * *

(3) State that nominations shall be accepted from the floor.

(i) If the annual meeting is to be held in more than one session

and mail balloting will be conducted upon the conclusion of all

sessions, state that nominations from the floor may be made at any

session or, if the association's bylaws so provide, state that

nominations from the floor shall be accepted only at the first session.

(ii) If shareholders will not vote solely by mail ballot upon

conclusion of all sessions, state that nominations from the floor may

be made only at the first session.

* * * * *

(5) For each nominee who is not an incumbent director, except a

nominee from the floor, provide the information referred to in

Sec. 620.5 (j) and (k) and Sec. 620.21(d)(4). If shareholders will vote

by mail ballot upon conclusion of all sessions, each floor nominee must

provide the information referred to in Sec. 620.5 (j) and (k) and

Sec. 620.21(d)(4) in writing to the association within the time period

prescribed by the association's bylaws. If the association's bylaws do

not prescribe a time period, state that each floor nominee must provide

the written disclosure to the association within 5 business days of the

nomination. The association shall ensure that the information is

distributed to the voting shareholders with the mailing of the ballots

for the election of directors in the same format as the comparable

information contained in the association's annual meeting information

statement. If shareholders will not vote by mail ballot upon conclusion

of all sessions, each floor nominee must provide the information

referred to in Sec. 620.5 (j) and (k) and Sec. 620.21(d)(4) in writing

at the first session at which voting is held.

(6) No person may be a nominee for director who does not make the

disclosures required by this subpart.

* * * * *

Dated: April 13, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 95-10008 Filed 4-21-95; 8:45 am]

BILLING CODE 6705-01-P