Organization; Balloting and Stockholder Reconsideration Issues

FARM CREDIT ADMINISTRATION

12 CFR Part 611

RIN 3052-AB71

Organization; Balloting and Stockholder Reconsideration Issues

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA or Agency), through the

FCA Board (Board), proposes to amend its regulations concerning Farm

Credit System (System or FCS) voting ballots and the effective dates

for mergers, consolidations, or transfers of direct lending authority

from a Farm Credit Bank (FCB) or agricultural credit bank (ACB) to a

Federal land bank association (FLBA). The proposed amendments would

allow the use of identity codes on ballots, as long as the votes are

tabulated by an independent third party, and would conform the scope of

the regulation to statutory requirements. The amendments would also

reduce the earliest effective date of a merger, consolidation, or

transfer of lending authority from 50 days to 35 days after stockholder

notification, or 15 days after submission of documents to the FCA for

final approval, whichever occurs later. The effects of the amendments

are to provide more flexibility to institutions regarding the conduct

of stockholder votes, to extend security and confidentiality

requirements to all stockholder votes, and to accelerate the effective

date of the above-described corporate actions.

DATES: Written comments must be received on or before April 20, 1998.

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

Director, Regulation and Policy Division, Office of Policy and

Analysis, 1501 Farm Credit Drive, McLean, VA, 22102-5090 or sent by

facsimile transmission to (703) 734-5784. Comments may also be

submitted via electronic mail to ``[email protected]''. Copies of all

communications received will be available for review by interested

parties in the Office of Policy and Analysis, Farm Credit

Administration.

FOR FURTHER INFORMATION CONTACT:

Alan Markowitz, Senior Policy Analyst, Office of Policy and Analysis,

Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4479;

or

Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm

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

883-4444.

SUPPLEMENTARY INFORMATION:

I. Background

The FCA is continuing its efforts to reduce regulatory burdens on

System institutions and to retain only regulations that: (1) Implement

or interpret the Farm Credit Act of 1971, as amended (Act); or (2)

protect the safety and soundness of the System. See 58 FR 34003 (June

23, 1993); 60 FR 57913 (November 24, 1995). The FCA has previously

deleted a number of unnecessary or obsolete regulations and has

modified others to reduce the burden of compliance. This rule is

proposed in response to requests by several System institutions to

revise the secret ballot procedures and to accelerate the effective

date of certain corporate actions, as more fully described below.

II. Maintaining Secrecy of Ballots

Three institutions have requested that the FCA amend Sec. 611.330

to allow FCS institutions to use identity codes on election ballots.

The commenters stated that, in some elections, many stockholders who

were confused by the procedures for voting by mail or proxy sent back

incomplete or improperly completed ballots or proxies. As a result,

their votes were not counted. The associations stated that, if the

forms had contained identity codes, the stockholders in question could

have been contacted before the stockholders' meeting and permitted to

submit properly completed ballots or proxies. The commenters asserted

their belief that identity codes, printed names on ballots, or other

means of identification would not violate a voter's right to a secret

ballot under section 4.20(2) of the Act, if an FCS institution: (1)

Ensures that members of an independent tellers' committee abide by

confidentiality restrictions; and (2) establishes ballot custody

requirements.

Section 4.20 of the Act, which was amended by the Agricultural

Credit Act of 1987 (1987 Act), prohibits the use of signed ballots in

connection with any election or merger vote or other proceeding subject

to a stockholder vote. Section 4.20 also requires FCS institutions to

implement measures to protect voters' rights to a secret ballot

process. In 1988, the FCA published a final rule that, among other

provisions, established standards for the election of directors to

comply with section 4.20. See 53 FR 50381 (December 15, 1988). Section

611.330 of that rule requires System institutions to adopt policies and

procedures that assure confidentiality in the election of board members

and prohibits the use of ballots

[[Page 13565]]

or proxy ballots that must be signed or that contain an identifying

character or mark that can be used to identify how an individual

stockholder's vote is cast.

The FCA proposes to amend Sec. 611.330(b) to allow System

institutions to use identity codes on ballots, provided that an

independent third party tabulates the votes. The proposed regulation

would also require that, in all votes in which an independent third

party tabulates the votes, the independent third party must certify in

writing that no information regarding how or whether a particular

stockholder has voted will be disclosed to any person. However, the

independent third party would be required to disclose such information

to the FCA, if requested, in the event a vote is contested or

otherwise.

The Agency agrees with the commenters that the use of an

independent third party to review and count the votes will carry out

the purpose of section 4.20 of the Act to preserve the secrecy of

stockholder votes in relation to the institution, its directors,

employees, and other stockholders. Examples of such third parties are

outside auditors, accounting firms, or outside counsel. Tellers'

committees that include stockholders or employees would not qualify as

independent third parties. This proposed change will provide

institutions with the opportunity to address the problem of incorrect

ballots.

The FCA also proposes to modify Secs. 611.330 and 611.340 to extend

the confidentiality and security requirements to all stockholder votes,

not just director elections. These changes will conform the scope of

the regulations to section 4.20 of the Act, as described above. A

provision is added requiring a 5-year retention period for records

related to a vote other than a director election. The existing

regulation provides for the retention of director election records

until the end of the term of office of the director.

In addition, the FCA proposes nonsubstantive changes to

Sec. 611.330 regarding the confidentiality of mail or proxy ballots.

These changes would clarify that, in mail or proxy balloting,

institution procedures must provide for a marked mail ballot or proxy

ballot to be returned to the institution in a separate sealed envelope

that is placed inside of another envelope for mailing. In proxy voting,

the stockholder must return the proxy authorization form along with the

sealed envelope containing the proxy ballot. In mail balloting,

institutions may, but are not required to, provide for stockholders to

verify their eligibility to vote, as long as such verification is not

on the ballot or on the sealed envelope containing the ballot. The

verification could, for example, be on a separate piece of paper placed

in the outside envelope or could be on the outside envelope itself.

III. Change of Effective Date for Merger, Consolidation, or

Transfer of Lending Authority

Two institutions suggested that the FCA amend Sec. 611.1122, which

establishes timing and disclosure requirements for mergers of FCS

institutions. One of the institutions asserted that the regulation

mandates excessive periods for review and unnecessarily delays the

effective date of such mergers beyond the required stockholder

reconsideration period. This institution suggested that the FCA develop

new procedures to expedite effective dates of mergers of FCS

institutions.

Section 7.9 of the Act, as amended by the 1987 Act, provides for

stockholder reconsideration of mergers or consolidations, the transfer

of direct lending authority from a bank to an FLBA, and terminations of

FCS status. The statute provides that, if the FCA receives a

stockholder petition from at least 15 percent of the stockholders for

reconsideration of a vote in favor of any such action within 30 days of

the date on which stockholders are notified of the results of the vote,

the institution in question must call a special stockholders' meeting

to vote again on the proposed action. If a petition that meets the

statutory requirements is filed, the proposed action (if approved in

the second vote) cannot take effect until the expiration of 60 days

after the date on which stockholders were notified of the result of the

first vote.

Sections 611.505(e) and 611.1122(k), promulgated in 1988 pursuant

to section 7.9 of the Act, provide that, in the case of an association

merger or a transfer of direct lending authority, the effective date of

the merger or transfer must be at least 50 days after the date of

mailing of the notification to stockholders of the first vote. In the

preamble to those regulations, the FCA explained that the period of 50

days was specified to allow for: (1) A 5-day period for delivery of the

notice to stockholders; (2) a 30-day period during which stockholders

may file a petition for reconsideration; and (3) fifteen (15) days

after the end of the reconsideration period for the FCA to receive and

review the institution's documents for final approval. See 53 FR 50389

(December 15, 1988).

At the time of the promulgation of the regulation, the FCA was of

the view that a 50-day period was necessary to ensure that the Agency

had adequate time to process final approval documents. However, the

FCA's experience in processing the final approval documents is that its

review and approval can occur during the 30-day reconsideration period

if the institutions timely submit such documents to the FCA. Therefore,

the FCA proposes to eliminate the additional 15 days intended for

Agency review following the end of the reconsideration period and to

provide that the effective date of an association merger or a transfer

of lending authority may be 35 days after stockholder notification, or

15 days after submission of final documents to the FCA, whichever

occurs later.

The FCA also proposes, for purposes of clarification, to restate in

Secs. 611.505(e) and 611.1122(k) the provision in section 7.9(b)(3)(A)

of the Act that, if a valid petition for reconsideration is timely

filed with the FCA, the merger or transfer of lending authority cannot

take effect until the expiration of 60 days after the date on which

stockholders were notified of the final result of the first vote.

List of Subjects in 12 CFR Part 611

Agriculture, Banks, banking, Rural areas.

For the reasons stated in the preamble, part 611 of chapter VI,

title 12 of the Code of Federal Regulations is proposed to be amended

to read as follows:

PART 611--ORGANIZATION

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

follows:

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

4.20, 4.21, 5.9, 5.10, 5.17, 7.0--7.13, 8.5(e) of the Farm Credit

Act (12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2208,

2209, 2243, 2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and

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

Pub. L. 100-399, 102 Stat. 989, 1003, and 1004.

2. Subpart C is amended by revising the heading to read as follows:

Subpart C--Election of Directors and Other Voting Procedures

3. Section 611.330 is amended by removing the word ``election'' and

adding in its place, the word ``voting'' in the first sentence of

paragraph (a); by removing the words ``an election'' and adding in

their place, the words ``a vote'' and by removing the comma after the

word ``contested'' in the last sentence of paragraph (a); and by

revising the section heading and paragraph (b) to read as follows:

[[Page 13566]]

Sec. 611.330 Confidentiality in voting.

* * * * *

(b) Except as provided in this paragraph, System institutions shall

not use ballots or proxy ballots that must be signed by the stockholder

or that contain an identifying character or mark that can be used to

identify how an individual stockholder's vote is cast.

(1) Institutions may use a form of identity code on the ballot if

they also provide for tabulation of the votes by an independent third

party.

(2) In mail balloting, institutions may adopt procedures that

require the stockholders to sign or otherwise verify their eligibility

to vote, so long as the marked ballot is in a separate sealed envelope

that accompanies any document that identifies the stockholder.

(3) In proxy voting, an institution's procedures shall provide that

the proxy ballot be returned in a separate sealed envelope, which

envelope is accompanied by a signed proxy authorization form.

(4) Where the identity of the voting stockholders is necessary to

determine the voting weight of ballots, the institution shall use a

form of identity code on the ballot and shall require that the votes

are tabulated by an independent third party.

(5) In a vote in which identity codes are used on the ballots, the

independent third party that tabulates the votes shall certify in

writing that such party will not disclose to any person (including the

institution, the directors, stockholders, or employees) any information

regarding how or whether any stockholder has voted. However, the

independent third party shall disclose such information to the Farm

Credit Administration, if requested, in the event a vote is contested

or otherwise.

* * * * *

4. Section 611.340 is amended by removing the words ``the election

of directors'' and adding in their place, the word ``voting'' in the

heading; by removing the words ``the election of board members'' and

adding in their place, the words ``a stockholder vote'' in paragraph

(a); by removing the word ``election'' and adding in its place, the

word ``voting'' the first and last place it appears in the first

sentence of paragraph (d); by removing the words ``an election'' and

adding in their place, the words ``a stockholder vote'' in the last

sentence of paragraph (d); by removing the word ``election'' and adding

in its place, the word ``vote'' the last place it appears in the last

sentence of paragraph (d); and by revising paragraph (c) to read as

follows:

Sec. 611.340 Security in voting.

* * * * *

(c) Ballots and proxy ballots shall be physically safeguarded

before the time of distribution or mailing to voting stockholders and

after the time of receipt by the banks and associations until disposal.

In an election of directors, ballots, proxy ballots and election

records shall be retained until the end of the term of office of the

director and promptly destroyed thereafter. In other stockholder votes,

ballots, proxy ballots, and records shall be retained for at least 5

years after the vote.

* * * * *

Subpart E--Transfer of Authorities

5. Section 611.505 is amended by revising paragraph (e) to read as

follows:

Sec. 611.505 Farm Credit Administration review.

* * * * *

(e) The effective date of a transfer shall be not less than 35 days

after mailing of the notification to stockholders of the results of the

stockholder vote, or 15 days after the date of submission to the Farm

Credit Administration of all required documents for the Agency's

consideration of final approval, whichever occurs later. If a petition

for reconsideration is filed within 35 days after the date of mailing

of the notification of stockholder vote, the constituent institutions

shall agree on a second effective date to be used in the event the

transfer is approved on reconsideration. The second effective date

shall be not less than 60 days after stockholder notification of the

results of the first vote, or 15 days after the date of the

reconsideration vote, whichever occurs later.

Subpart G--Mergers, Consolidations, and Charter Amendments of

Associations

6. Section 611.1122 is amended by revising paragraph (k) to read as

follows:

Sec. 611.1122 Requirements for mergers or consolidations.

* * * * *

(k) The effective date of a merger or consolidation shall be a date

which is not less than 35 days after the date of mailing of the

notification to stockholders of the results of the stockholder vote, or

15 days after the date of submission to the Farm Credit Administration

of all required documents for the Agency's consideration of final

approval, whichever occurs later. If a petition for reconsideration is

filed within 35 days after mailing of the notification to stockholders

of the results of the stockholder vote, the constituent institutions

shall agree on a second effective date to be used in the event the

merger or consolidation is approved on reconsideration. The second

effective date shall be not less than 60 days after stockholder

notification of the results of the first vote, or 15 days after the

date of the reconsideration vote, whichever occurs later.

Dated: March 17, 1998.

Nan P. Mitchem,

Acting Secretary, Farm Credit Administration Board.

[FR Doc. 98-7342 Filed 3-19-98; 8:45 am]

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