Disclosure to Shareholders; Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System; Quarterly Report

FARM CREDIT ADMINISTRATION

12 CFR Parts 620 and 630

RIN 3052-AB62

Disclosure to Shareholders; Disclosure to Investors in Systemwide

and Consolidated Bank Debt Obligations of the Farm Credit System;

Quarterly Report

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA) proposes to amend its

regulations governing the preparation, filing, and distribution of Farm

Credit System (FCS or System) bank and association reports to

shareholders and investors. The proposal would implement the recent

statutory amendment that eliminates the regulatory requirement that FCS

institutions disseminate quarterly reports to shareholders. Routine

distribution of quarterly reports to shareholders would be voluntary

rather than mandatory, but FCS institutions would be required to make

quarterly reports available to shareholders on request. Associations

would no longer be required to distribute quarterly reports along with

their information statements regardless of the date of their annual

meetings.

However, to further promote shareholder access to timely

information and full disclosure regarding adverse events affecting

their institutions, the FCA proposes that FCS institutions prepare and

distribute a notice to shareholders when an institution's permanent

capital falls below the regulatory minimum standard. The proposal would

also remove the requirement that banks present their financial

statements on a combined basis with their related associations to

ensure that the preparation of FCS institutions' financial statements

is solely guided by generally accepted accounting principles (GAAP).

Lastly, the proposal would permit FCS debt securities offering

documents to be referenced in the System's report to investors to

reduce the repetition of information in documents provided to

investors.

DATES: Comments should be received on or before November 12, 1996.

ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio,

Associate Director, Regulation Development, Office of Examination,

McLean, Virginia 22102-5090, or sent by facsimile transmission to FAX

number (703) 734-5784. Copies of all communications received will be

available for examination by interested parties in the Office of

Examination, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

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

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

William L. Larsen, Senior Attorney, Office of General Counsel, Farm

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

(703)883-4444.

SUPPLEMENTARY INFORMATION:

I. Change From Mandatory to Voluntary Dissemination of Quarterly

Reports to Shareholders

On February 10, 1996, the President signed the Farm Credit System

Reform Act of 1996 (1996 Act) into law.1 Section 211 of the 1996

Act provides that ``the requirements of the Farm Credit Administration

governing the dissemination to stockholders of quarterly reports of

System institutions may not be more burdensome or costly than the

requirements applicable to national banks.'' Section 211 applies only

to dissemination requirements and does not affect the requirement that

FCS institutions continue to prepare and file quarterly reports with

the FCA in accordance with the quarterly report filing and content

requirements of part 620.

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\1\ See Pub. L. 104-105, 110 Stat. 162 (Feb. 10, 1996).

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Current Sec. 620.10 requires each Farm Credit Bank (FCB),

agricultural credit bank (ACB), bank for cooperative (BC) and direct

lender association to distribute quarterly reports to shareholders,

either by mail or by publication in newspapers or periodicals in a

trade area with circulation wide enough to be reasonably assured that

all of the institution's shareholders are reached on a timely basis.

Each FCB and ACB is also required to distribute its quarterly reports

to the shareholders of related associations under certain

circumstances. These quarterly report dissemination requirements

conflict with section 211 of the 1996 Act because they exceed the

requirements applicable to national banks, which are not required to

disseminate quarterly reports to shareholders.2 Accordingly, to

conform with the 1996 Act, the FCA proposes to amend Sec. 620.10 and

several related provisions.3

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\2\ National banks that meet the reporting threshold of the

Securities Exchange Act disclosure rules that are incorporated by

reference in the Office of the Comptroller of the Currency's (OCC)

rules at 12 CFR Part 11 must file quarterly reports with the OCC.

These quarterly reports, while publicly available, are not required

to be distributed to shareholders. Further, all national banks must

file quarterly call reports with the OCC pursuant to 12 U.S.C. 161

and 12 CFR 4.11. These quarterly reports of condition are available

from the OCC, but are not required to be distributed to

shareholders.

\3\ On April 10, 1996, the Board informed FCS institutions that

they did not have to comply with the quarterly report distribution

requirements in Sec. 620.10 pending amendment of FCA quarterly

report dissemination requirements to conform with the 1996 Act.

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Under the FCA's proposal, a substantial portion of existing

Sec. 620.10 would be removed.4 While FCS institutions would still

be required to prepare and file quarterly reports with the FCA under

proposed Secs. 620.2(a) and 620.10(a), they would no longer be required

to distribute quarterly reports to shareholders. Banks would no longer

have to distribute quarterly reports to shareholders of related direct

lender associations under Sec. 620.10(e) for quarters in which a

significant event has occurred or which occurred during the preceding

quarters that continues to materially affect the related associations.

However, to ensure that shareholders who wish to obtain a copy of their

association's or related bank's quarterly report can continue to do so,

the FCA proposes to modify Sec. 620.2 relating to preparing and filing

reports.

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\4\ Existing paragraphs (d), (e), (f), and (g) would be removed

and paragraphs (a) and (c) would be modified and redesignated as new

paragraphs (a) and (b).

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Proposed Sec. 620.2(h)(1) would require each FCS institution to

include a statement in a prominent location within its annual report

that the

[[Page 53332]]

institution's quarterly financial information is available on request

to shareholders free of charge. In addition, the proposed regulation

would require that the statement include approximate dates of

availability of the quarterly financial information and the telephone

numbers and addresses where shareholders may obtain a copy of the

reports. Proposed Sec. 620.2(h)(2) would further require each

association to include a statement in a prominent location within each

annual and quarterly report that the shareholders' investments in the

association may be affected materially by the financial condition and

results of operations of the association's related bank and that a copy

of the bank's most recent financial report, if not otherwise provided,

will be made available on request free of charge. The statement must

also include the telephone numbers and addresses where shareholders may

obtain copies of the related bank's financial reports.

Current Sec. 620.20 requires each association to prepare and

distribute to its shareholders, at least 10 days prior to any meeting

at which directors are to be elected, an information statement that

contains information pertinent to the annual meeting and incorporates

by reference the association's annual report. Section 620.20(c) further

requires that any association that holds its annual meeting of

shareholders more than 134 days after the end of its fiscal year must

also provide shareholders with its most recent quarterly report, either

preceding or accompanying the information statement.5 Under the

proposal, Sec. 620.20(c) would be removed and associations would not be

required to provide shareholders with quarterly statements along with

or prior to the information statement, regardless of the date of the

association's annual meeting. Nevertheless, the FCA encourages

associations that hold annual meetings significantly after the end of

the fiscal year to provide shareholders with the most recent financial

information. In particular, current financial information may be

essential when the shareholders are voting on matters of significant

financial interest to the association.

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\5\ In comparison, national banks must prepare and make

available to shareholders and others an annual disclosure statement.

The annual disclosure statement must be made available by March 31

of each year, or by an earlier date as necessary to be made

available to security holders in advance of the annual meeting of

shareholders. National banks must make the annual disclosure

statement continually available until the annual disclosure

statement for the succeeding year becomes available, but there is no

requirement that the statement be updated with subsequent periodic

report information. National banks having a class of securities

registered pursuant to section 12 of the Securities Exchange Act of

1934 may satisfy the annual disclosure statement requirement using

either their annual reports to shareholders or their annual report

filed with the Comptroller. See 12 CFR Part 18.

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Section 620.20(b) would continue to require each association, in

its information statement, to incorporate by reference the annual

report to shareholders and include other information necessary to make

the information statement, in light of the circumstances under which it

is made, not misleading. Under this requirement, for example, if a

significant event (as defined by redesignated Sec. 620.1(r)) has

occurred subsequent to the annual report distribution, this provision

would require an association to include sufficient current financial

information about the significant event in the information statement so

that the annual report incorporated by reference is not misleading.

No changes are proposed to Sec. 615.5250(a)(2) of this chapter,

which requires institutions to provide prospective borrowers with a

copy of the institution's most recent quarterly report (if more recent

than the annual report) prior to loan closing when the borrower must

purchase equities as a condition for obtaining a loan. By providing

updated financial information that may be important to the prospective

shareholder's decision to purchase equity in the institution as a

condition of obtaining a loan, in this situation, the quarterly report

functions as a prospectus rather than a periodic disclosure report. FCS

institution reports to shareholders thus serve the dual purpose of

providing current financial information regarding an institution to

both existing shareholders and to prospective borrowers/

shareholders.6 Since national banks are subject to extensive

securities offering disclosure rules and prospectus delivery

requirements under 12 CFR part 16, the FCA considers the quarterly

report delivery requirement of Sec. 615.5250(a)(2) of the FCA

regulations to be compatible with the 1996 Act. Furthermore, this

requirement is unlikely to cause an undue burden because the updated

financial information can be furnished to prospective borrowers along

with other loan documents.

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\6\ See 51 FR 21336, June 12, 1986.

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Lastly, although the proposed amendments eliminate routine

distribution of quarterly reports to shareholders, the FCA emphasizes

that FCS institutions are not prohibited by the 1996 Act from

continuing to distribute or publish quarterly reports to their

shareholders. The FCA recognizes that the quarterly report may be used

to promote and maintain borrower/shareholder interest and participation

in the institution, and supports the continued distribution or

publication of the report for such purposes.

II. Proposed Notice to Shareholders

In conformance with the cooperative structure of the System and as

a matter of law, borrowers must become stockholders of FCS

institutions. The Farm Credit Act of 1971, as amended (Act), encourages

borrower/shareholder participation in management, control, and

ownership of FCS institutions.7 In the Farm Credit Amendments Act

of 1985,8 Congress expressly authorized the FCA to regulate

disclosure to shareholders. Unlike shareholders of companies subject to

Securities and Exchange Commission (SEC) disclosure requirements who

have access to an established marketplace for financial information

based on SEC filings,9 System shareholders rely primarily on FCS

institutions to provide them with current information regarding their

institutions. The FCA believes that it is critical that shareholders

receive timely notice of material changes in the capital position of

the institutions they own so that they are equipped to exercise their

ownership role. For these reasons, the FCA proposes to add a new

subpart D relating to the preparation and distribution of a notice to

shareholders.

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\7\ See 12 U.S.C. 2001(b).

\8\ Pub. L. 99-205, 99 Stat. 1678 (Dec. 23, 1985). See section

5.19(b)(1) of the Act.

\9\ In addition to annual and quarterly filings, under sections

13 or 15(d) of the Securities Exchange Act of 1934, registrants are

required to file with the SEC a current report within 5-15 days

(depending on the event) upon determination of the occurrence of any

of the following events: (1) Changes in control of registrant, (2)

significant acquisition or disposition of assets, (3) bankruptcy or

receivership, (4) changes in registrant's certifying accountant, (5)

other events that the registrant deems of significant importance to

security holders, and (6) resignations of registrant's directors

because of a disagreement with the registrant on any matter relating

to the registrant's operation, policies, or practices. The SEC does

not require current reports to be distributed to shareholders.

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The FCA has previously noted that one of the reasons that the FCS

institutions need sufficient capital is to protect the ownership,

investment, and rights of shareholders.10 The FCA continues to

believe shareholders have the right to timely notice that their

institution's capital is at such a critical level that it may threaten

the institution's viability, the value of its stock, or its ability to

meet the future credit needs of its borrowers. Furthermore, since 1986,

the Act has

[[Page 53333]]

required the FCA to ``cause institutions to achieve and maintain

adequate capital by establishing minimum levels of capital for such

System institutions and by using such other methods as the [FCA] deems

appropriate.'' 11 One method to promote the maintenance of

adequate capital is through informed shareholder participation in

System institutions. While the FCA has the statutory authority to

establish regulatory minimum capital standards, shareholders and their

elected directors play an important role in making certain that

institutions achieve and maintain adequate capital.

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\10\ See proposed capital regulations at 60 FR 38521, July, 27,

1995. Amendments to the capital regulations were reproposed in June

1996. See 61 FR 42092, August 13, 1996.

\11\ See 12 U.S.C. 2154.

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Accordingly, the FCA proposes that notice be provided to

shareholders when an institution's capital falls below the regulatory

minimum permanent capital standard. Proposed Sec. 620.15(a) would

require each FCS bank and direct lender association to prepare, file

with the FCA, and distribute to shareholders, a notice within 20 days

following the month-end that the institution initially determines that

it is not in compliance with the minimum permanent capital standards

established in part 615 of the FCA regulations.

Under certain circumstances, reporting institutions would be

required to prepare and distribute a subsequent notice to shareholders.

If the reporting institution's permanent capital ratio decreases by

one-half of 1 percent or more from the level reported in a notice, the

reporting institution would be required to distribute to shareholders

another notice within 20 days of the end of the current month. The FCA

believes that such subsequent notices are necessary in circumstances

when an institution's capital position continues to deteriorate.

Proposed Sec. 620.15(c) would stipulate that each FCS institution

required to prepare a notice under Sec. 620.15(a) or (b) must

distribute the notice to shareholders by mail or otherwise furnish the

information required in the notice by publishing it in any publication

with circulation wide enough to be reasonably assured that all of the

institution's shareholders have access to the information in a timely

manner.

The contents of notices need not be extensive, but must provide

sufficient information to apprise shareholders of the institution's

permanent capital position. Proposed Sec. 620.17(a) requires reporting

institutions to present the required information in any format that is

conspicuous, easily understandable, and not misleading.

Proposed Sec. 620.17(b) establishes the following minimum

information requirements for notices:

(1) A statement that (i) briefly describes the regulatory minimum

permanent capital standard established by the FCA and the notice

requirement of proposed Sec. 620.15(a); (ii) indicates the

institution's current level of permanent capital; and (iii) notifies

shareholders that the institution's permanent capital is below the FCA

regulatory minimum standard.

(2) A statement of the effect that noncompliance has had on the

institution and its shareholders, including whether the institution is

currently prohibited by statute or regulation from retiring stock or

distributing earnings or whether the FCA has issued a capital directive

or other enforcement action to the institution.

(3) A complete description of any event(s) that may have

significantly contributed to the institution's noncompliance with the

minimum regulatory permanent capital standard.

(4) A statement that the institution is required by regulation to

distribute another notice to shareholders if the institution's

permanent capital ratio decreases by one-half of 1 percent or more from

the level reported in the notice.

In addition, pursuant to proposed Sec. 620.2(h)(1), the notice must

include a statement in a prominent location that the institution's

quarterly reports are available free of charge on request. The

statement shall include approximate dates of availability of the

quarterly reports and the telephone numbers and addresses where

shareholders may obtain a copy of the reports.

Although the proposed regulation would require a reporting

institution to distribute a notice to shareholders for noncompliance

with the permanent capital standard, the FCA is considering using

noncompliance with the total surplus to risk-adjusted assets ratio

proposed by the FCA in June, 1996,12 to trigger distribution of a

notice to shareholders. Thus, if an institution's total surplus ratio

falls below the regulatory standard, the institution would be required

to notify shareholders of the noncompliance. The FCA specifically

invites comments on the use of the total surplus to risk-adjusted

assets standard as the point at which shareholders would be informed

that their institution is experiencing financial difficulties.

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\12\ See proposed capital regulations at 60 FR 38521, July 27,

1995. Amendments to the capital regulations were reproposed in June

1996. See 61 FR 42092, August 13, 1996.

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In addition, the FCA proposes to amend Sec. 620.2(b)(3)(i) to allow

the same alternatives FCS institutions have for director certification

of quarterly reports to be applied to notices to shareholders. Thus,

each notice need only be dated and manually signed by one board member

on behalf of the individual board members, the person designated by the

board to certify reports of condition and performance, and the chief

executive officer.13

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\13\ Section 620.2(b)(3)(i) provides three certification

signature alternatives for individual board members: the chairperson

of the board, the chairperson of the audit committee; or a board

member designated by the chairperson of the board.

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In proposing these regulations, the FCA seeks to balance the

competing considerations of providing adequate notice to shareholders

concerning their investments and the potential for regulatory burden on

the FCS institutions. The FCA believes that the notice requirement will

accentuate the importance of achieving and maintaining institutional

viability through adequate capital and stress director and management

accountability to shareholders who are interested in protecting their

investment and maintaining their source of credit. The FCA recognizes

that FCS institutions required to file and distribute a notice may

incur costs associated with preparing and distributing the materials.

On balance, the notice would be required only in those extraordinary

circumstances where an institution is not in compliance with the FCA's

minimum permanent capital standard.14 Thus, the FCA does not

believe the regulations will impose an undue regulatory burden.

Moreover, given the cooperative structure of the System, the FCA

believes such notifications are essential for timely and adequate

disclosure to shareholders/members who have investments at risk and

rely on the dependable credit services of the FCS institutions.

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\14\ All FCS institutions were in compliance with the regulatory

minimum permanent capital standard as of June 30, 1996. In addition,

as noted in the proposed capital regulations, most FCS institutions

would be able to meet the total surplus ratio requirement, if the

standard was in effect today. See proposed capital regulations at 60

FR 38521, July 27, 1995.

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III. Combined Financial Statement Presentation Requirements

A. Background

Each FCS institution is required by statute to make and publish an

annual report of condition as prescribed by the FCA. The law and FCA

regulations require that such reports contain

[[Page 53334]]

financial statements prepared in accordance with GAAP, except as

otherwise directed by statute, and any additional information required

by the FCA. With regard to consolidation/combination policy, GAAP

provides that ``the aim should be to make the financial presentation

which is most meaningful in the circumstances.'' 15 Under GAAP,

readers of the financial statements should be given information that is

suitable to their needs without unnecessary detail.

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\15\ See American Institute of Certified Public Accountants

Accounting Research Bulletin 51.

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In 1985, the System and its external auditor examined the issue of

combining the financial statements of the banks and their related

associations. After considering the financial and operational

interdependence of the banks and their related associations, they

concluded that presentation of combined financial statements would

provide the most meaningful information to shareholders under the

circumstances, and thus was the preferred disclosure approach under

GAAP. Subsequently, in response to a request for clarification by the

System, the FCA included a provision in its disclosure to shareholders

regulations that required banks to present their financial statements

on a combined basis with their related associations in reports to

shareholders.16

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\16\ The FCA fully supported the concept of combined bank and

related association financial statements as the principal statements

to be prepared by a district bank. The FCA believed excluding the

associations from the banks' statements would result in publication

of financial statements that did not show the true financial

condition of the district bank, and that, under the circumstances,

combined reporting was the preferred method of presentation under

GAAP. See 51 FR 21336, June 12, 1986.

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After careful consideration of the appropriate accounting guidance

in light of the structural changes that have occurred within the

System, the FCA concludes that GAAP standards pertaining to combined

financial statements do not require combined bank and association

financial statements in all cases.17 For instance, presentation of

the financial statements of an ACB and its related associations (which

represent only a minority interest in the bank) on a combined basis may

not be the most appropriate reporting format because combined financial

statements may obscure the financial strength and standing of the bank

and confuse the majority of the bank's non-System cooperative

shareholders.

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\17\ In the fall of 1995, CoBank, ACB (CoBank), petitioned the

FCA to amend its regulations to allow it to prepare its general

purpose financial statements on a bank-only basis. CoBank stated

that, due to its recent corporate restructuring, combining the bank

and association financial statements would not be the most

meaningful presentation of its financial position and results of

operations for the majority of stockholders. Among other things,

CoBank asserted that combining the financial statements of a class

of customers/stockholders to the exclusion of other customers/

stockholders would result in a confusing financial presentation for

all readers of the financial statements. In December 1995, the FCA

Board informed CoBank that, subject to specific conditions and

pending review and consideration of whether to amend existing

Sec. 620.2(g), the FCA would not criticize the bank for preparing

its financial statements on a stand-alone basis, separate from its

related associations, or for distributing its financial statements

to the stockholders of the related associations only on request.

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However, with respect to FCBs and related associations, the FCA

continues to believe that GAAP supports presentation of combined

financial statements as the most appropriate method of disclosure to

shareholders. This conclusion is based on the closer bilateral effect

of the results of operations on the banks and their respective

associations and the majority voting control of the FCB by its related

associations. Similarly, the FCA believes that GAAP supports the FCA's

conclusion that financial statements for the Report to Investors of the

Farm Credit System (Report to Investors) prepared on a combined basis

continue to provide the most meaningful disclosure under current

circumstances because of the financial and operational interdependence

of the banks and their associations, and the banks' joint and several

liability for Systemwide debt securities.

B. Proposed Amendments

The FCA proposes to amend its regulations by removing the

requirement that banks must present the financial statements of the

bank and its related associations on a combined basis. Under the

proposal, FCS institutions would be exclusively guided by GAAP in

making their determination of whether stand-alone, consolidated, or

combined financial statement presentation is the preferred method. The

FCA believes the proposed change will facilitate the presentation of

financial statements by FCS institutions in a manner that conforms with

GAAP and is the most appropriate under the institutions' prevailing

circumstances.

Proposed Sec. 620.2(g) would require each FCS institution to

present its reports in accordance with GAAP and in a manner that

provides the most meaningful disclosure to shareholders. Proposed

Sec. 620.2(g)(1) would further require that any FCS institution that

presents its annual and quarterly financial statements on a combined or

consolidated basis shall also include, in the footnotes to the primary

financial statements in the report, the statement of condition and

statement of income of the institution on a stand-alone basis. The

stand-alone statements may be in summary form and shall disclose the

basis of presentation if different from accounting policies of the

combined or consolidated statements. Conversely, proposed

Sec. 620.2(g)(2) would require banks that prepare bank-only financial

statements to provide, in the footnotes to the primary statements, a

condensed statement of condition and statement of income for its

related associations, if any, on a combined basis.

The relationship between a bank and its related associations is an

important one that warrants discussion in the financial statements to

achieve full and complete disclosure regardless of how the bank

presents its financial statements. Therefore, the FCA believes that the

condensed association statements required to be prepared by a bank

presenting bank-only statements should be accompanied by supplemental

disclosures, either as a part of the footnotes or the Management's

Discussion and Analysis section of the bank's financial statements. The

FCA believes such supplemental disclosures are consistent with existing

Sec. 620.5(a)(9), which requires reporting entities to disclose the

nature of business relationships with related FCS institutions.

Pursuant to Sec. 620.5(a)(9), the supplemental disclosures should

address the bank's statutory and regulatory authority to supervise or

take actions that may affect the operating and financial policies of

the associations, and any operational and financial interdependency of

the bank and its related associations. Under Sec. 620.5(e)(1) the

supplemental disclosures should also address the statutory limitations

on the associations' access to funds from sources other than the bank.

Pursuant to Sec. 620.5(e) (2) and (3), the FCA would expect a bank

presenting financial statements on a bank-only basis to disclose the

provisions of its capital-sharing agreements with related associations,

if any, and the ability of the bank to gain access to the capital of

the associations.

The FCA also proposes to amend existing Sec. 620.4. The amendments

would continue to require any bank that presents its financial

statements on a combined basis to distribute its annual report to the

shareholders of related associations. In such circumstances, FCS

association borrowers/shareholders need the financial statements of

both the bank and association to properly

[[Page 53335]]

evaluate the operations and financial position of the association. In

contrast, however, where GAAP supports bank preparation of bank-only

financial statements, the FCA believes that the relationship between

the bank and its related associations would no longer necessitate that

the bank distribute its annual report to the shareholders of related

associations in ordinary circumstances. Proposed Sec. 620.4(b)(2)

provides, however, that for periods where the bank has experienced a

significant event that has a material effect on the associations, the

bank's annual report must be distributed to the related associations'

shareholders.

The FCA expects all reporting institutions to continue to prepare

combined financial statements in accordance with part 630 of this

chapter, which covers the Report to Investors of the Farm Credit

System.

IV. Proposed Technical Changes to Part 620

The FCA proposes technical changes to part 620 to clarify the

reporting requirements of related organizations. Proposed Sec. 620.2(i)

delineates the reporting requirements for the reporting institution

when a significant event has materially affected a related

organization. Specifically, any events that have affected one or more

related organizations of the reporting institution that are likely to

have a material effect on the financial condition, results of

operations, cost of funds, or reliability of sources of funds of the

reporting institution, would be considered significant events for the

reporting institution and would require disclosure in the annual and

quarterly reports under proposed Secs. 620.5(g)(2)(vi) and 620.10(b).

In addition, any events affecting a related organization that occurred

during the preceding fiscal quarters that continue to have a material

effect on the reporting institution would be considered significant

events of the current fiscal quarter and would require disclosure in

the annual and quarterly reports under proposed Secs. 620.5(g)(2)(vi)

and 620.10(b).

V. Report to Investors

The Farm Credit Banks Funding Corporation (Funding Corporation)

petitioned the FCA to amend its regulations to allow it to incorporate

by reference information contained in the Federal Farm Credit Banks

Consolidated Systemwide Bonds and Discount Notes Offering Circular

(Offering Circular) into the Report to Investors. Since incorporation

by reference to another document is not currently provided for in the

Report to Investors regulations (12 CFR part 630), the Funding

Corporation must provide some of the same disclosures in its annual and

quarterly information statements as it does in its Offering Circular.

The Funding Corporation asserts that allowing the use of incorporation

by reference is a prudent and practical approach to disseminating

information to investors because it improves the readability of the

offering documents made available to investors by eliminating

duplicative information.

The Report to Investors originally served as both the System's

financial report and a prospectus for investors in Systemwide debt

obligations issued by the Funding Corporation on behalf of the banks.

The FCA recognizes that the dual purpose of the report has diminished

due to the Funding Corporation's increased usage of offering circulars

as the primary method to distribute prospectus information to

investors. The FCA also recognizes that incorporation by reference is

an accepted practice and is routinely permissible in reports filed with

the SEC. Accordingly, the FCA proposes to amend its regulations by

adding a new Sec. 630.3(f),18 which would permit the Funding

Corporation to incorporate by reference information contained in

offering documents for Farm Credit debt securities into the Systemwide

financial reports to investors.

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\18\ Under the proposed rule, existing Sec. 630.3(f) and (g)

would be redesignated as new paragraphs (g) and (h), respectively.

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VI. Regulatory Impact

The FCA has determined that the proposed regulations would not have

a significant effect on the general economy and would not be a

significant regulatory action under Executive Order 12866. In addition,

the proposed regulations pertain only to FCS institutions, and,

therefore, would not present a conflict with the rules and regulations

of other financial regulatory agencies. Due to the nature of the

regulations, it is unlikely that the regulations would have any

material impact on governmental entitlements, grants, user fees, or

loan programs.

List of Subjects

12 CFR Part 620

Accounting, Agriculture, Banks, banking, Reporting and

recordkeeping requirements, Rural areas.

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, parts 620 and 630 of

chapter VI, title 12 of the Code of Federal Regulations are proposed to

be amended to read as follows:

PART 620--DISCLOSURE TO SHAREHOLDERS

1. The authority citation for part 620 is revised 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).

Subpart A--General

2. Section 620.1 is amended by redesignating paragraphs (o), (p),

and (q) as new paragraphs (p), (q), and (r), respectively, and adding

new paragraph (o) to read as follows:

Sec. 620.1 Definitions.

* * * * *

(o) Report refers to the annual report, quarterly report, notice,

or information statement required by this part unless otherwise

specified.

* * * * *

3. Section 620.2 is amended by revising paragraphs (a), (b)(3)(i),

and (f) through (i) to read as follows:

Sec. 620.2 Preparing and filing the reports.

* * * * *

(a) Three copies of each report required by this section, including

financial statements and related schedules, exhibits, and all other

papers and documents that are part of the report shall be filed with

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

5090, or with such other Farm Credit Administration offices as the

Chief Examiner designates. The Farm Credit Administration must receive

the report within the period prescribed under applicable subpart

sections. The reports shall be available for public inspection at the

issuing institution and the Farm Credit Administration office with

which the reports are filed. Bank reports shall also be available for

public inspection at each related association office.

(b) * * *

(3)(i) For each quarterly report or notice filed under this

section, each member of the board or one of the following board members

formally designated by action of the board to certify reports of

condition and performance on behalf of the individual board members:

The chairperson of the board; the chairperson of the audit committee;

or a board member

[[Page 53336]]

designated by the chairperson of the board.

* * * * *

(f) No disclosure required by subparts B and E of this part shall

be deemed to violate any regulation of the Farm Credit Administration.

(g) Each Farm Credit institution shall present its reports in

accordance with generally accepted accounting principles and in a

manner that provides the most meaningful disclosure to shareholders.

(1) Any Farm Credit institution that presents its annual and

quarterly financial statements on a combined or consolidated basis

shall also include in the report the statement of condition and

statement of income of the institution on a stand-alone basis. The

stand-alone statements may be in summary form and shall disclose the

basis of presentation if different from accounting policies of the

combined or consolidated statements.

(2) Any bank that prepares its financial statements on a stand-

alone basis shall provide supplemental information in the accompanying

footnotes containing a condensed statement of condition and statement

of income for the bank's related associations on a combined basis. The

condensed statements shall disclose the basis of presentation if

different from accounting policies of the bank-only statements.

(h)(1) Each annual report or notice shall include a statement in a

prominent location within the report or notice that the institution's

quarterly reports are available free of charge on request. The

statement shall include approximate dates of availability of the

quarterly reports and the telephone numbers and addresses where

shareholders may obtain a copy of the reports.

(2) Each association shall include a statement in a prominent

location within each report that the shareholders' investment in the

association may be materially affected by the financial condition and

results of operations of the related bank and that a copy of the bank's

financial reports to shareholders, if not otherwise provided, will be

made available free of charge on request. The statement shall also

include the telephone numbers and addresses where shareholders may

obtain copies of the related bank's financial reports.

(3) Each institution shall, after receiving a request for a report,

mail or otherwise furnish the report to the requestor. The first copy

of the requested report shall be provided to the requestor free of

charge.

(i) Any events that have affected one or more related organizations

of the reporting institution that are likely to have a material effect

on the financial condition, results of operations, cost of funds, or

reliability of sources of funds of the reporting institution shall be

considered significant events for the reporting institution and shall

be disclosed in the reports. Any significant event affecting the

reporting institution that occurred during the preceding fiscal

quarters that continues to have a material effect on the reporting

institution shall be considered significant events of the current

fiscal quarter and shall be disclosed in the reports.

Subpart B--Annual Report to Shareholders

4. Section 620.4 is amended by revising paragraph (b) to read as

follows:

Sec. 620.4 Preparing and distributing the annual report.

* * * * *

(b)(1) Any bank that presents its financial statements on a

combined basis shall distribute its annual report to the shareholders

of related associations within the period required by paragraph (a) of

this section. Each bank shall coordinate such distribution with its

related associations.

(2) Any bank that presents its financial statements on a bank-only

basis shall distribute its annual report to the shareholders of related

associations within the period required by paragraph (a) of this

section in all instances where the bank experiences a significant event

that has a material effect on the associations. Each bank shall

coordinate such distribution with its related associations.

* * * * *

5. Section 620.5 is amended by revising paragraph (g)(2)(vi) to

read as follows:

Sec. 620.5 Contents of the annual report to shareholders.

* * * * *

(g) * * *

(2) * * *

(vi) Discuss any events affecting a related organization that are

likely to have a material effect on the reporting institution's

financial condition, results of operations, cost of funds, or

reliability of sources of funds.

* * * * *

Subpart C--Quarterly Report

6. The heading for subpart C is revised as set forth above.

7. Section 620.10 is revised to read as follows:

Sec. 620.10 Preparing the quarterly report.

(a) Each Farm Credit bank and direct lender association shall

prepare a quarterly report within 45 days after the end of each fiscal

quarter, except that no report need be prepared for the fiscal quarter

that coincides with the end of the fiscal year of the institution.

(b) The report shall contain, at a minimum, the information

specified in Sec. 620.11 and, in addition, such other material

information (including significant events) as is necessary to make the

required disclosures, in light of the circumstances under which they

are made, not misleading.

8. Part 620 is amended by redesignating subparts D, E, and F as new

subparts E, F, and G, respectively, and adding a new subpart D to read

as follows:

Subpart D--Notice to Shareholders

Sec. 620.15 Notice.

(a) Each Farm Credit bank and direct lender association shall

prepare, file with the Farm Credit Administration, and distribute a

notice to shareholders, within 20 days following the month-end that the

institution initially determines that it is not in compliance with the

minimum permanent capital standard prescribed under Sec. 615.5205 of

this chapter.

(b) An institution that has given notice to shareholders pursuant

to paragraph (a) of this section or subsequent notice pursuant to this

paragraph shall also prepare, file with the Farm Credit Administration,

and distribute to shareholders a notice within 20 days following any

subsequent month-end at which the institution's permanent capital ratio

decreases by one-half of 1 percent or more from the level reported in

the most recent notice distributed to shareholders.

(c) Each institution required to prepare a notice under Sec. 620.15

(a) or (b) shall distribute the notice to shareholders by mail or

otherwise furnish the information required in the notice by publishing

it in any publication with circulation wide enough to be reasonably

assured that all of the institution's shareholders have access to the

information in a timely manner.

Sec. 620.17 Contents of the notice.

(a) The information required to be included in a notice must be

conspicuous, easily understandable, and not misleading.

[[Page 53337]]

(b) A notice, at a minimum, shall include:

(1) A statement that:

(i) Briefly describes the regulatory minimum permanent capital

standard established by the Farm Credit Administration and the notice

requirement of Sec. 620.15(a);

(ii) Indicates the institution's current level of permanent

capital; and

(iii) Notifies shareholders that the institution's permanent

capital is below the Farm Credit Administration regulatory minimum

standard.

(2) A statement of the effect that noncompliance has had on the

institution and its shareholders, including whether the institution is

currently prohibited by statute or regulation from retiring stock or

distributing earnings or whether the Farm Credit Administration has

issued a capital directive or other enforcement action to the

institution.

(3) A complete description of any event(s) that may have

significantly contributed to the institution's noncompliance with

minimum regulatory capital standard.

(4) A statement that the institution is required by regulation to

distribute another notice to shareholders if the institution's

permanent capital ratio decreases by one half of 1 percent or more from

the level reported in the notice.

Subpart E--Association Annual Meeting Information Statement

9. Section 620.20 is amended by removing paragraph (c) and revising

paragraph (b) to read as follows:

Sec. 620.20 Preparing and distributing the information statement.

* * * * *

(b) The statement shall incorporate by reference the annual report

to shareholders required by subpart B of this part and contain the

information specified in Sec. 620.21 and such other material

information as is necessary to make the required statement, in light of

the circumstances under which it is made, not misleading.

PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED

BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

10. The authority citation for part 630 is revised to read as

follows:

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

2252, 2254).

Subpart A--General

11. Section Sec. 630.3 is amended by redesignating existing

paragraphs (f) and (g) as new paragraphs (g) and (h), respectively, and

adding new paragraph (f) to read as follows:

Sec. 630.3 Publishing and filing the report to investors.

* * * * *

(f) Information in documents prepared for investors in connection

with the offering of debt securities issued through the Federal Farm

Credit Banks Funding Corporation may be incorporated by reference in

the annual and quarterly reports in answer or partial answer to any

item required in the reports under this part. A complete description of

any offering documents referenced must be clearly identified in the

report (e.g., Federal Farm Credit Banks Consolidated Systemwide Bonds

and Discount Notes--Offering Circular issued on [insert date]).

Offering documents referenced in either an annual or quarterly report

prepared under this part must be filed with the Chief Examiner, Farm

Credit Administration, McLean, Virginia 22102-5090, either prior to or

at the time of submission of the report under paragraph (h) of this

section. Any referenced offering document is subject to the delivery

and availability requirements set forth in Sec. 630.4(a)(5) and (6).

* * * * *

Dated: October 3, 1996.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 96-25818 Filed 10-10-96; 8:45 am]

BILLING CODE 6705-01-P