Organization; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Stock Issuances

FARM CREDIT ADMINISTRATION

12 CFR Parts 611 and 615

RIN 3052-AB91

Organization; Funding and Fiscal Affairs, Loan Policies and

Operations, and Funding Operations; Stock Issuances

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration is proposing to amend

regulations to allow Farm Credit System (System) service corporations

to sell stock to non-System entities; and System institutions to adopt

bylaws allowing the issuance of unlimited amounts of certain classes of

equities.

The purpose of our proposal is to provide System institutions

additional opportunities to fulfill their borrowers' needs through

service corporations and more efficient issuance of equities related to

earnings distributions and transfers of capital. We are also taking

this opportunity to make a technical change to one of our regulations

pertaining to disclosure requirements.

DATES: Please send your comments to us by January 24, 2000.

ADDRESSES: You may send comments by electronic mail to ``reg-

[email protected]'' through the Pending Regulations section of our website at

``www.fca.gov.'' You may also mail or deliver written comments to

Patricia W. DiMuzio, Director, Regulation and Policy Division, Office

of Policy and Analysis, Farm Credit Administration, 1501 Farm Credit

Drive, McLean, Virginia 22102-5090 or fax them to (703) 734-5784. You

may review copies of all comments we receive in the Office of Policy

and Analysis, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT: Dale Aultman, Policy Analyst, Office

of Policy and Analysis, Farm Credit Administration, McLean, VA 22102-

5090, (703) 883-4498, TDD (703) 883-4444, or Joy Strickland, Senior

Counsel, or Howard Rubin, Attorney, Office of General Counsel, Farm

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

883-4444.

SUPPLEMENTARY INFORMATION:

I. Objectives

The objectives of our proposed rule are to:

Increase the flexibility and usefulness of service

corporations;

Provide adequate disclosures to investors in service

corporations organized to exercise the authorities

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granted by title VIII of the Farm Credit Act of 1971, as amended (Act);

and

Provide flexibility for the efficient distribution of a

System institution's earnings and timely transfers of capital to a

System association.

II. Background

A. Incorporation of Service Corporations

On August 18, 1998, we published a notice in the Federal Register

that invited System institutions to identify existing regulations and

policies that impose unnecessary burdens on the FCS. (See 63 FR 44176,

Aug. 18, 1998.) \1\ We received comments from an agricultural credit

bank (ACB) and a Farm Credit Bank (FCB) on Sec. 611.1135, which allows

only System banks and associations to own stock in service

corporations. CoBank, ACB, commented that we should allow more

flexibility in creating and operating service corporations to allow

non-System institutions to own part of the service corporation. CoBank,

ACB, asserted that this flexibility would foster joint endeavors and

alliances and create more products and services for System borrowers.

The FCB of Texas commented that the Act does not limit service

corporation stock ownership to only banks or associations. The FCB

further commented that limiting stock ownership may lessen the

usefulness of these corporations to System institutions.

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\1\ On November 18, 1998, we extended the comment period to

January 19, 1999. See 63 FR 64013 (Nov. 18, 1998).

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B. Capitalization Bylaws

Section 615.5220(a)(3) of our regulations requires that System

institutions' bylaws specify the number of shares that will be issued

for each class of equities.\2\ As System institutions merge, change

their charters, or modify their bylaws, we note they experience

difficulty in quantifying in their bylaws the amounts of certain

equities that may be issued. Those equities include non-voting equities

that may be issued in the event the institution requires financial

assistance and equities issued to distribute earnings. Several

institutions have indicated that the requirements of

Sec. 615.5220(a)(3) often result in burden on System institutions'

boards because they must estimate the number of these equities

necessary in the future. They point out that since these types of

equities do not dilute a System institution's shareholder equity, the

bylaws should not be required to specify the number authorized.

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\2\ There are two current exceptions to this requirement: (1)

Stock that is required to be purchased when obtaining a loan; and

(2) non-voting stock that is converted from voting stock after the

repayment of a loan.

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C. Technical Change

Currently Sec. 615.5250(c)(2) regarding disclosure statements for

issuance of stock contains a typographical reference error. The correct

reference is to paragraph Sec. 615.5250(c)(1) rather than

Sec. 615.5250(d)(1).

III. Analysis of Proposed Changes by Section

A. Section 611.1135

We are proposing to amend Sec. 611.1135 to allow service

corporations formed by System banks or associations to issue equity to

persons or entities who are not System institutions. We propose that

non-voting stock may be issued in unlimited amounts as long as the

issuance is consistent with the service corporation's bylaws. We are

proposing a limit, however, on the amount of voting stock that can be

issued to non-System persons.

We believe that as federally chartered instrumentalities, System

institutions should control their service corporations because they are

also federally chartered instrumentalities. Therefore, we are proposing

that System institutions hold at least 80 percent of the voting stock

of their service corporations at all times. We considered various other

percentages in deciding what voting stock control percentage to

propose. However, we arrived at this proposed percentage for the

following reasons:

An 80 percent voting stock requirement, rather than a

simple majority, provides more assurance of System control even when

not all System stockholders vote in the same manner.

It is consistent with voting stock control requirements in

Sec. 611.1137, which pertain to service corporations that act as

agricultural mortgage marketing facilities.

Control of a service corporation or subsidiary is also

consistent with other banking laws governing non-System service

corporations and operating subsidiaries.\3\

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\3\ Under the Bank Services Company Act, all of the stock of a

bank service company must be owned by one or more insured banks. 12

U.S.C. 1861(b). Federal savings associations may also invest in

service corporations only if 100 percent of the corporation's stock

is held by other savings associations having offices in the same

state. 12 U.S.C. 1464(b)(4)(B). A national bank may establish or

acquire an operating subsidiary as long as the parent bank owns more

than 50 percent of the voting stock or the parent bank controls the

subsidiary and no other party owns more than 50 percent of the

voting stock. 12 CFR 5.34. A Federal savings association can have an

operating subsidiary as long as the association owns more than 50

percent of the voting shares and no other person exercises effective

operating control. 12 CFR 559.2. In addition, pursuant to 12 U.S.C.

1841, which defines terms in connection with bank holding companies,

a company has control over a bank or other entity if the company has

power to vote 25 percent or more of any class of voting stock.

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We seek your comments on the voting stock control requirement and

the appropriate amount of System control that also provides adequate

flexibility and usefulness of service corporations.

Congress originally provided authority for formation of corporate

subsidiaries in 1980. Congress wanted System institutions to be able to

develop the most efficient and effective means for delivery of services

to borrowers and other System entities.\4\ We have noted that in recent

years there has been an increase in System institutions forming

alliances to offer a variety of services to their borrowers. This

proposed rule will allow System institutions, for example, to purchase

an existing service entity and charter it as a service corporation

under the Act as a means of offering a new service. This rule would

permit the existing service provider to retain an ownership interest.

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\4\ See H.R. Rep. No. 1287, 96th Cong., 2nd Sess., 23 (1980).

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We are further proposing that service corporations must provide

adequate disclosure when issuing stock to persons other than System

institutions. The proposed regulations would apply the requirements of

Sec. 615.5250(c) and (d) to such stock issuances.

B. Section 611.1137

We are proposing to amend Sec. 611.1137, which allows service

corporations to be organized to act as agricultural mortgage marketing

facilities by selling loans in the secondary market. We are proposing

that these service corporations that issue stock to non-System persons

provide adequate disclosures pursuant to the disclosure requirements in

Sec. 615.5250(c) and (d).

Section 611.1137 requires that System institutions hold at least 80

percent of the voting stock of their title VIII service corporations at

all times. We seek your comments on the voting stock control

requirement and the appropriate System control amount that also

provides adequate flexibility and usefulness of title VIII service

corporations.

While amending Secs. 611.1135 and 611.1137, we are taking the

opportunity to write them in plain language using a question and answer

format. Additionally, we are writing Sec. 611.1136 in plain language.

That section pertains to our regulation and examination of

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incorporated service corporations and unincorporated service

organizations.

C. Section 615.5220

We are proposing to amend Sec. 615.5220(a)(3) to allow System

institutions to adopt bylaws that provide for issuance of certain

equities in unlimited amounts. Current law requires that bylaws,

approved by voting shareholders, set forth the number of each class of

equities that can be issued, with two exceptions. Those equities that

can be issued in unlimited amounts are:

Equities required to be purchased as a condition of

obtaining a loan; and

Non-voting stock that results when voting stock is

converted after the repayment of a loan.

We are proposing to also allow bylaws to provide for the issuance

of unlimited amounts of:

Non-voting stock that an association issues to its funding

bank in exchange for the bank transferring capital pursuant to

Sec. 615.5171; and

Equities that institutions provide to borrowers for the

sole purpose of distributing that institution's earnings.

We are proposing this change to assure timely transfers of capital

to an association as well as the flexibility for the efficient

distribution of an institution's earnings. This proposal will not

dilute a shareholder's voting rights in an institution or affect a

shareholder's preference in the event of an institution liquidation.

Any issuance of preferred stock would still require that all

shareholders affected by the preference vote on the issuance as

described in Sec. 615.5230(b)(1). We note that this proposal does not

prevent System institutions' boards and shareholders from stipulating

in their institutions' bylaws the amount of capital that may be

transferred and earnings distribution equities authorized to be issued.

List of Subjects in 12 CFR Parts 611 and 615

Accounting, Agriculture, Banks, banking, Government securities,

Investments, Rural areas.

For the reasons stated in the preamble, we propose to amend parts

611 and 615 of chapter VI, title 12 of the Code of Federal Regulations

as follows:

PART 611--ORGANIZATION

1. The authority citation for part 611 continues 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. Revise subpart I to read as follows:

Subpart I--Service Organizations

Sec.

611.1135 Incorporation of service corporations.

611.1136 Regulation and examination of service organizations.

611.1137 Title VIII service corporations.

Subpart I--Service Organizations

Sec. 611.1135 Incorporation of service corporations.

(a) What is the process for chartering a service corporation? A

Farm Credit bank or association (you or your) may organize a

corporation with other Farm Credit banks or associations to perform,

for you or on your behalf, any function or service that you are

authorized to perform under the Act and Farm Credit Administration (we,

us, or our) regulations, with two exceptions. Those exceptions are that

your corporation may not extend credit or sell insurance services. To

organize a service corporation, you must submit an application to us

following the applicable requirements of paragraph (c) of this section.

If what you propose in your application meets the requirements of the

Act, our regulations, and any other conditions we may impose, we may

issue a charter for your service corporation making it a federally

chartered instrumentality of the United States. Your service

corporation will be subject to examination, supervision, and regulation

by us.

(b) Who may own equities in your service corporation? All Farm

Credit banks and associations are eligible to become stockholders in

your service corporation. Your service corporation may also issue non-

voting and voting stock to persons that are not Farm Credit

institutions, provided that at least 80 percent of the voting stock is

at all times held by Farm Credit institutions. For the purposes of this

subpart, we define persons as individuals or legal entities organized

under the laws of the United States or any State or territory thereof.

(c) What must be included in your application to form a service

corporation? Your application for a corporate charter must include:

(1) The certified resolution of the board of each organizing bank

or association authorizing the incorporation;

(2) A request signed by the president(s) of the organizing bank(s)

or association(s) to us to issue a charter, supported by a detailed

statement demonstrating the need and the justification for the proposed

entity; and

(3) The proposed articles of incorporation addressing, at a

minimum, the following:

(i) The name of your corporation;

(ii) The city and State where the principal offices of your

corporation are to be located;

(iii) The general purposes for the formation of your corporation;

(iv) The general powers of your corporation;

(v) The procedures for a Farm Credit bank or association or persons

that are not Farm Credit institutions to become a stockholder;

(vi) The procedures to adopt and amend your corporation's bylaws;

(vii) The title, par value, voting and other rights, and authorized

amount of each class of stock that your corporation will issue and the

procedures to retire each class;

(viii) The notice and quorum requirement for a meeting of

shareholders, and the vote required for shareholder action on various

matters;

(ix) The procedures and shareholder voting requirements for the

merger, voluntary liquidation, or dissolution of your corporation or

the distribution of corporate assets;

(x) The standards and procedures for the application and

distribution of your corporation's earnings; and

(xi) The length of time your corporation will exist.

(4) The proposed bylaws, which must include the provisions required

by Sec. 615.5220(b) of this chapter;

(5) A statement of the proposed amounts and sources of

capitalization and operating funds;

(6) Any agreements between the organizing banks and associations

relating to the organization or the operation of the corporation; and

(7) Any other supporting documentation that we may request.

(d) What will we do with your application? If we approve your

completed application, we will issue a charter for your service

corporation as a corporate body and a federally chartered

instrumentality. We may condition the issuance of a charter, including

imposing minimum capital requirements, as we deem appropriate. For good

cause, we may deny your application.

(e) Once your service corporation is formed, how are its articles

of incorporation amended? Your service corporation's articles of

incorporation may be amended in either of two ways:

(1) The board of directors of the corporation may request that we

amend

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the articles of incorporation by sending us a certified resolution of

the board of directors of the service corporation and stating:

(i) The section(s) to be amended;

(ii) The reason(s) for the amendment;

(iii) The language of the articles of incorporation provision, as

amended; and

(iv) That the requisite shareholder approval has been obtained. The

request will be subject to our approval as stated in paragraphs (a) and

(c) of this section.

(2) We may at any time make any changes in the articles of

incorporation of your service corporation that are necessary and

appropriate for the accomplishment of the purposes of the Act.

(f) When your service corporation issues equities, what are the

disclosure requirements? Your service corporation must provide the

disclosures described in Sec. 615.5250(c) and (d) of this chapter.

Sec. 611.1136 Regulation and examination of service organizations.

(a) What regulations apply to a service organization? Because a

service organization is formed by banks and associations, it is subject

to applicable Farm Credit Administration (we, our) regulations.

(b) Who examines a service organization? We examine service

organizations.

(c) What types of service organizations are subject to our

regulations and examination? Incorporated service corporations and

unincorporated service organizations formed by banks and associations

are subject to our regulations and examination.

Sec. 611.1137 Title VIII service corporations.

(a) What is a title VIII service corporation? A title VIII service

corporation is a service corporation organized for the purpose of

exercising the authorities granted under title VIII of the Act to act

as an agricultural mortgage marketing facility.

(b) How do I form a title VIII service corporation? A title VIII

service corporation is formed and regulated in the same manner as a

service corporation formed under Sec. 611.1135, with one exception. The

Federal Agricultural Mortgage Corporation or its affiliates may not

form or own stock in a title VIII service corporation.

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,

AND FUNDING OPERATIONS

4. The authority citation for part 615 continues to read as

follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,

2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,

6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm

Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,

2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,

2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,

2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of

Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart I--Issuances of Equities

5. Amend Sec. 615.5220 by revising paragraph (a)(3) to read as

follows:

Sec. 615.5220 Capitalization bylaws.

* * * * *

(a) * * *

(3) The number of shares and par value of equities authorized to be

issued for each class of equities. However, the bylaws need not state a

limit for these equities:

(i) Equities that are required to be purchased as a condition of

obtaining a loan.

(ii) Non-voting stock resulting from the conversion of voting stock

due to repayment of a loan.

(iii) Non-voting equities that are issued to an association's

funding bank in conjunction with any agreement for a transfer of

capital between the association and the bank.

(iv) Equities issued solely for the purpose of distributing an

institution's earnings.

* * * * *

Sec. 615.5250 [Amended]

6. Amend Sec. 615.5250(c)(2) by removing the reference to

``(d)(1)'' and adding in its place, the reference ``(c)(1)''.

Dated: December 16, 1999.

Vivian L. Portis,

Secretary, Farm Credit Administration Board.

[FR Doc. 99-33104 Filed 12-22-99; 8:45 am]

BILLING CODE 6705-01-P