[Federal Register Volume 77, Number 84 (Tuesday, May 1, 2012)]
[Rules and Regulations]
[Pages 25577-25587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-10356]



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Rules and Regulations
                                                Federal Register
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Federal Register / Vol. 77, No. 84 / Tuesday, May 1, 2012 / Rules and 
Regulations

[[Page 25577]]



FARM CREDIT ADMINISTRATION

12 CFR Part 618

RIN 3052-AC66


General Provisions; Operating and Strategic Business Planning

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) amends its 
regulation requiring the board of directors of each Farm Credit System 
(FCS or System) institution to adopt an operational and strategic 
business plan (business plan or plan) to include, among other things, 
outreach toward diversity and inclusion. Each business plan must 
contain a human capital plan that describes the institution's workforce 
and management and assesses their strengths and weaknesses; describes 
succession programs; and includes strategies and actions to strive for 
diversity and inclusion within the institution's workforce and 
management. In addition, the business plan of each direct lender 
institution must include a marketing plan that discusses how the 
institution will further the objective that the FCS be responsive to 
the credit needs of all eligible and creditworthy agricultural 
producers and other eligible persons, with specific outreach toward 
diversity and inclusion. Further, the regulation requires including 
skills and diversity as part of the required assessment of the needs of 
the board of directors and establishes annual reporting requirements to 
the board.

DATES: Effective Date: This regulation will be effective 30 days after 
publication in the Federal Register during which either or both Houses 
of Congress are in session. We will publish a notice of the effective 
date in the Federal Register.
    Compliance Date: System institutions must comply with this 
regulation no later than January 30, 2013.

FOR FURTHER INFORMATION CONTACT: 
Jacqueline R. Melvin, Policy Analyst, Office of Regulatory Policy, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TTY (703) 
883-4434, or
Jennifer A. Cohn, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this amendment are to ensure that:
    <bullet> Each System institution promotes diversity and inclusion 
as critical to its success in the long term and incorporates diversity 
and inclusion as a vital component of its corporate culture;
    <bullet> Skills and diversity are explicitly included in the 
assessment of the needs of the board of directors;
    <bullet> Each System institution assesses the strengths and 
weaknesses of its current workforce and management; addresses 
succession planning; and develops strategies and actions to strive for 
diversity and inclusion within its workforce and management;
    <bullet> Each System institution considers how it will further the 
objective of being responsive to the credit needs of all eligible and 
creditworthy agricultural producers and other eligible persons with 
specific outreach toward diversity and inclusion; and
    <bullet> Each System institution's board of directors receives 
reports on the institution's progress in accomplishing the strategies 
and actions in its human capital and marketing plans, which will help 
the board establish accountability and plan new strategies and actions.

II. Background and Overview of Comments

    On May 25, 2011, the FCA published a proposed rule to amend Sec.  
618.8440, which requires the board of directors of each System 
institution to adopt a business plan.\1\ The proposed rule required, 
among other things, human capital and marketing plans that include 
outreach toward diversity and inclusion.
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    \1\ See 76 FR 30280.
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    We received approximately 75 comment letters from 48 System 
institutions. We also received two letters from the Farm Credit Council 
(Council), the trade association for the System.\2\ Of the System 
letters, approximately eight opposed our proposed rule entirely and 
requested complete withdrawal of the proposal. Most of the remainder of 
the System commenters supported the premise of the proposed rule to 
consider human capital and marketing outreach, including diversity and 
inclusion, in the business plan, but they requested extensive revisions 
to the final rule or to the explanatory preamble to reduce what they 
viewed as undue burden. As discussed below, we are making a number of 
changes in the final rule in response to many of these comments. Many 
System commenters appeared to misunderstand some of the intended 
requirements of the proposed rule, because they opposed requirements 
that the rule would not have imposed. Throughout this preamble, we 
clarify the requirements of the final rule.
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    \2\ One Council letter was submitted on behalf of its 
membership, after soliciting input from all System institutions. The 
other Council letter was submitted on behalf of its President and 
CEO, with the endorsement and support of the Council Board of 
Directors.
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    We received approximately 325 comments from non-System commenters, 
including sustainable agriculture advocacy and assistance groups, 
academics in the field of sustainable agriculture, small farmers, 
consumers, and others. The vast majority of these commenters supported 
the proposed rule. Many of these commenters requested that FCA include 
a number of specific requirements in the marketing plan provision that 
would, among other things, require institutions to train potential 
customers in business planning and financing; develop infrastructure 
such as cooperatives and farmers' markets; partner with governmental 
and non-governmental entities and investors for funding local and 
regional food systems (LRFS); set numerical investment goals for 
lending to LRFS; and make their marketing goals and progress 
assessments public.
    We also received approximately 40 electronically submitted comment 
letters that contained the names and

[[Page 25578]]

addresses of the commenters but were otherwise blank.

III. Requirements of the Final Rule

    The final rule requires each institution to:
    <bullet> Determine the skills and diversity needs of its board of 
directors;
    <bullet> Study and know its workforce, labor market, and management 
succession plans;
    <bullet> Reach out to potential employees within its labor market 
who may not have previously been considered for reasons other than 
merit;
    <bullet> Study and know its marketplace, as applicable;
    <bullet> Reach out to potential borrowers who may not have 
previously been considered for reasons other than eligibility or 
creditworthiness; and
    <bullet> Report annually to its board of directors on the progress 
the institution has made in accomplishing planned outreach strategies 
and actions, as applicable.
    The rule does not require an institution to:
    <bullet> Establish quotas--it does not require specific outcomes in 
employment or lending;
    <bullet> Complete redundant plans or actions--an institution may 
use existing documents to satisfy these new planning requirements, 
provided the existing documents are approved annually by the board;
    <bullet> Disclose confidential or sensitive information in public 
documents;
    <bullet> Hire persons who are not the best qualified for the 
position for which they are applying;
    <bullet> Extend credit to any persons who are not eligible, 
creditworthy, or within the scope of financing rules;
    <bullet> Favor any type or group of agricultural producers in its 
underwriting of credit;
    <bullet> Gather or record data on customer or employee 
characteristics not currently legally gathered or recorded;
    <bullet> Implement strategies or actions that extend beyond its 
marketplace and labor market;
    <bullet> Develop marketing plans unless it is exercising title III 
lending authorities or is a direct lender association; or
    <bullet> Implement strategies or actions inconsistent with existing 
lending and employment laws and rules or with safety and soundness 
standards.

IV. What is diversity and inclusion?

    For purposes of this rule, we consider diversity and inclusion in 
employment to mean seeking out and using the talents of people of 
different backgrounds, experiences, and perspectives to improve the 
workforce environment and productivity. These differences have a strong 
influence on how individuals approach challenges and solve problems, 
make decisions, and identify opportunities.
    For purposes of this rule, we consider diversity and inclusion in 
lending to mean looking beyond the traditional customer base to ensure 
that all eligible and creditworthy persons have access to credit and 
related financial services. Where a particular institution needs to 
focus its outreach depends on the nature of its territory and what 
groups have traditionally been underrepresented or underserved.
    A diverse workforce could aid the System in gaining new customers. 
A diverse range of employees may more effectively reach a broader and 
more diverse base of producers, thereby widening the pool of potential 
customers. Moreover, diverse employees bring different perspectives to 
an organization and may influence the development of more creative and 
innovative products and services, which can also increase the customer 
base.

V. Why Outreach Toward Diversity and Inclusion Is Necessary

    As discussed in the preamble to the proposed rule, agriculture in 
America is becoming increasingly diverse. However, some non-System 
commenters believe that the System is not serving diverse agricultural 
producers. For example, the Rural Coalition, an alliance of more than 
70 rural community-based organizations of African-American, Asian-
American, American-Indian, Euro-American, Latino and women farmers, 
farmworkers and rural communities in the United States, commented that 
among its members who were contacted, ``there exists a universal 
perception that the Farm Credit System institutions are not accessible 
to the underserved farmer and have failed to conduct outreach to these 
communities to educate them regarding the institutions' programs and 
services.''
    Section 1.1(b) of the Farm Credit Act of 1971, as amended (Act), 
requires the System to be inclusionary in its lending. Section 1.1(b) 
provides that the System was established as a ``permanent system of 
credit for agriculture which will be responsive to the credit needs of 
all types of agricultural producers having a basis for credit. * * *'' 
If some producers, including those who would bring diversity to an 
institution's customer base, have a perception that the System is not 
available to serve them, then greater outreach is needed. While not 
every farmer is creditworthy (under any reasonable standard), has 
credit needs that are within FCA's scope of financing regulations, or 
is interested in financing his or her operations with debt, unless 
System institutions reach out to underserved farmers there is no way to 
know whether they might become customers.
    As strong and vibrant supporters of agriculture in America, System 
direct lender institutions must develop specific marketing plans to 
reach all potential customers, including those in diverse market 
segments that may currently be underserved. Institutions must ensure 
that there are no unnecessary barriers in place, such as lack of 
employee training, lack of appropriate loan products, or lack of 
appropriate creditworthiness standards. They must consider programs 
such as grassroots outreach activities and education efforts that 
market to diverse and underserved populations regarding business and 
financial planning and leadership and loan programs for persons who are 
eligible and creditworthy. In addition, to more effectively reach and 
serve these potential customers, institutions must continue to strive 
for diversity and inclusion among their employees, management, and 
boards of directors, because diverse perspectives within institutions 
can help increase diversity among customers. Unless System institutions 
commit to embracing diversity and inclusion in lending, employment, and 
governance, they may not be able, or understand how, to provide 
sufficient access to the System's products for all potential eligible 
and creditworthy customers, and they may risk losing market share and 
relevance in the marketplace in the long run.

VI. Comments on Proposed Rule and FCA's Responses

A. Premise of Rule

    The Council, as well as many System institutions that submitted 
their own comments, generally endorsed the premise of the proposed 
rule. Specifically, they recognized that human capital and marketplace 
outreach, along with diversity and inclusion, are important and 
appropriate topics to address in business plans.
    Several System institutions, as well as one non-System commenter, 
disagreed with our premise that diversity and inclusion are beneficial 
for the System and the nation as a whole. These commenters stated that 
mandating diversity will inevitably result in decisions based on race, 
sex, and other inappropriate characteristics and toward quotas or 
measurable results, which the

[[Page 25579]]

commenters state are illegal, divisive, unfair, and inefficient; these 
commenters state that the System's focus should simply be on 
``nondiscriminatory inclusion''--that is, on equal opportunity and on 
decision-making unbiased by race, sex, or other inappropriate 
characteristics; that favoring certain groups over other groups is 
discriminatory and will make the former feel entitled and the latter 
feel aggrieved; and that demographic imbalances often result from 
factors other than overt or covert discrimination.
    As discussed throughout this preamble and as evident in the 
regulation language itself, this rule does not mandate particular 
hiring or lending decisions or specific results. We do not require 
institutions to make employment or lending decisions based on any 
factors other than qualifications and creditworthiness. We will not 
examine for quotas or specific results in employment or lending, and we 
do not require institutions to establish quotas. We do not require 
institutions to favor any groups over any other groups. We recognize 
that to do so would be illegal.
    We agree with the commenters that demographic imbalances often 
result from factors other than overt or covert discrimination. A lack 
of diversity in a System institution could occur for a whole host of 
non-discriminatory reasons, many of which are beyond the control of the 
institution. We do want to be sure, however, that institutions do not 
have barriers in place that could contribute to such imbalances, even 
if these barriers are in place for non-discriminatory reasons. Such 
barriers could include, for example, a lack of employee training, lack 
of appropriate loan products, lack of appropriate creditworthiness 
standards, or lack of outreach toward certain populations.
    For this reason, we disagree that it is sufficient for System 
institutions to focus only on ``nondiscriminatory inclusion'' and equal 
opportunity. This rule requires institutions to reach out to potential 
employees within their labor markets who may not have previously been 
aware of the opportunities to work for the System or whom institutions 
may not have considered for reasons other than merit. It also requires 
institutions to reach out to potential customers who may not have been 
previously aware of the System's services or whom institutions may not 
have considered for reasons other than eligibility and 
creditworthiness. This outreach is necessary even if an institution's 
previous failure to consider these potential customers is not due to 
discrimination.

B. FCA Authority, Burden, and Relationship With Other Legal 
Requirements

    A number of System commenters questioned the legal authority of FCA 
to impose human capital and marketing plan requirements. Some stated 
that FCA has authority only over safety and soundness matters. Some 
stated that the regulation is inconsistent with a 1996 congressional 
mandate that FCA must eliminate regulations that are ``unnecessary, 
unduly burdensome or costly, or not based on law.'' And some stated 
that because Congress has imposed diversity requirements on the housing 
Government-sponsored enterprises (GSEs) but not on the System, there is 
no authority for FCA to impose such requirements on the System.
    FCA is not limited to regulating safety and soundness matters. FCA 
has broad authority over all matters relating to the System and the 
Act. As part of implementing the Act and for safety and soundness 
reasons, FCA has authority to adopt regulations governing the business 
planning of System institutions. Moreover, section 1.1(b) of the Act 
states that the FCS was established as a ``permanent System of credit 
for agriculture which will be responsive to the credit needs of all 
types of agricultural producers having a basis for credit. * * *'' 
While this provision does not expressly mention diversity and 
inclusion, it does state Congress' desire that the FCS be responsive to 
all types of creditworthy agricultural producers. Moreover, the passage 
of a law imposing diversity requirements on the housing GSEs does not 
limit FCA's authority to impose business planning requirements, 
including in the area of diversity and inclusion, on System 
institutions.
    Regarding the 1996 congressional mandate to review and eliminate 
unnecessary regulations, we have discussed above why this regulation is 
necessary. With the clarifications we have made to the regulation text 
and throughout this preamble, we believe compliance with the rule will 
not be unduly burdensome or costly.
    Several System commenters requested that we modify proposed Sec.  
618.8440(b)(7) and (b)(8) to each be one-sentence requirements. They 
suggested that Sec.  618.8440(b)(7) should simply require that the 
business plan include a summary of the human capital plan that 
addresses diversity, inclusion, affirmative action, and management 
succession. And they suggested that Sec.  618.8440(b)(8) should simply 
require that the business plan include a summary of the marketing plan 
that addresses diversity, inclusion, and marketplace outreach.
    We believe, in order to fulfill the objectives of this rule, the 
human capital and marketing plans must include all the items that we 
have required. We do not believe a requirement that the human capital 
plan simply address diversity, inclusion, affirmative action, and 
management succession, or that the marketing plan simply address 
diversity, inclusion, and marketplace outreach, is sufficient.
    To eliminate unnecessary burden, we have revised Sec.  
618.8440(b)(7) and (b)(8) to provide that items required to be included 
in the human capital plan and marketing plan may be contained in other 
documents that are approved by the board and adopted annually, as long 
as those items are summarized in, and incorporated by reference into, 
the human capital plan and marketing plan, respectively.
    Accordingly, if an institution has separate documents (such as 
section 4.38 affirmative action program (AAP) plans or Young, 
Beginning, and Small (YBS) farmer and rancher program documents) that 
contain the items that are required to be included in the human capital 
plan or marketing plan component of the business plan, the institution 
can use those other documents to satisfy the business plan 
requirements, as long as the other documents are approved by the board 
annually (as the business plan itself is) and the items are summarized 
in, and incorporated by reference into, the human capital plan or 
marketing plan components of the business plan. If the separate 
documents do not include these items, however, or if the board does not 
approve these separate documents, then the board will have to include 
the required items in the human capital plan and marketing plan 
components of the business plan.
    Additionally, to further address concerns about burden, we have 
made a number of changes to the regulation in response to specific 
requests made by commenters. For example, among other changes, we have 
revised language that was viewed as requiring redundant plans or 
actions. We have removed language that was viewed as requiring quotas 
or quantifiable results. We have added language allowing confidential 
or sensitive information to be contained in non-public documents. And 
we have limited the marketing plan requirements to System institutions 
in their exercise of title III lending authorities and to direct lender 
associations.
    In addition, we clarify in this preamble other areas where 
commenters

[[Page 25580]]

were concerned about burden. For example, among other clarifications, 
we have explained what we mean by the term ``diversity.'' We have made 
clear that institutions are not required to: Hire persons who are not 
considered the best qualified for the position for which they are 
applying; extend credit to persons who are not eligible, creditworthy, 
or within the scope of financing rules; favor any type or group of 
agricultural producers in their credit underwriting; gather or record 
data on customer or employee characteristics not currently legally 
gathered or recorded; or implement strategies or actions inconsistent 
with existing lending and employment rules and laws or with safety and 
soundness standards.
    A number of System commenters stated that they would be at legal 
risk if they were required to ask potential job applicants or potential 
customers about demographic information. Because the rule does not 
require institutions to collect this information, the rule does not 
create this legal risk.
    A number of System commenters also questioned how the requirements 
of this rule fit in with other requirements, including AAP planning, 
YBS activities, the various equal employment laws, the Equal Credit 
Opportunity Act (ECOA), and the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act).\3\ As we now explain, this 
rule should not be interpreted to impose requirements that are 
redundant or inconsistent with any other laws.
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    \3\ Public Law 111-203.
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    System commenters expressed concern that this rule imposes 
requirements that are already included among AAP planning and YBS 
program requirements. As we explained in the preamble to the proposed 
rule,\4\ there may be some overlap between the information that is 
contained in existing AAP plans and YBS programs and the information 
that is required to be in the human capital and marketing plans.
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    \4\ 76 FR 30282, May 25, 2011.
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    To eliminate this redundancy, as discussed above, we have revised 
Sec.  618.8440(b)(7) and (b)(8) to provide that items required to be 
included in the human capital plan and marketing plan may be contained 
in other documents that are approved by the board and adopted annually, 
as long as those items are summarized in, and incorporated by reference 
into, the human capital plan and marketing plan, respectively. These 
other documents could include an AAP plan or YBS program documents.
    System commenters also expressed concern that compliance with this 
regulation would require violation of the equal employment laws and the 
ECOA, and they pointed out that the Dodd-Frank Act does not yet have 
implementing regulations authorizing activity they believe the proposed 
rule would require. These commenters were primarily focused on what 
they believed was a requirement to collect demographic data from job 
applicants/employees and credit applicants/borrowers.
    As discussed throughout this preamble, the rule does not require 
institutions to collect any data on employee or customer 
characteristics. Therefore, the rule does not conflict with any 
prohibition on data gathering in the equal employment laws or the ECOA. 
Moreover, these laws actually require the collection of data in some 
situations. Consistent with these laws, an institution can choose to 
use the data collected as required to assess its employment of diverse 
employees, the diversity needs of its board of directors, and its 
lending to diverse borrowers.
    In addition, as discussed in the preamble to the proposed rule, 
once the Consumer Financial Protection Bureau (CFPB) issues 
implementing regulations,\5\ the Dodd-Frank Act will require financial 
institutions to ask all business applicants applying for credit whether 
they are women-owned, minority-owned, or small businesses. While 
applicants may choose to withhold this information, institutions can 
choose to use any information received to assess their lending to 
diverse borrowers.
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    \5\ The CFPB is an independent bureau in the Federal Reserve 
System that regulates the offering and provision of consumer 
financial products or services under the Federal consumer finance 
laws. See section 1011(a) of the Dodd-Frank Act.
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C. Meaning of ``Diversity''

    The proposed regulation itself did not define diversity. In the 
preamble to the proposed rule, we stated that diversity is best thought 
of as the inclusion of all individuals rather than as simply a list of 
demographic criteria, and we listed several characteristics that might 
indicate diversity.
    We did not intend to limit diversity to these characteristics or to 
suggest that these characteristics are more important than any others. 
Instead, our intent was to demonstrate that diversity is all-inclusive 
and is broader than the characteristics protected by the various equal 
employment and fair lending laws.\6\
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    \6\ Title VII of the Civil Rights Act of 1964, as amended, 
prohibits employment discrimination because of race, color, 
religion, national origin, or sex; the Age Discrimination in 
Employment Act of 1967 prohibits employment discrimination because 
of age; the Americans with Disabilities Act of 1990, as amended, 
prohibits employment discrimination because of disability; and the 
Genetic Information Nondiscrimination Act of 2008 prohibits 
employment discrimination because of genetic information. The ECOA 
prohibits discrimination in the extension of credit on the bases of 
race, color, religion, national origin, sex, marital status, or age 
(provided the applicant has the capacity to contract). The ECOA also 
prohibits discrimination because all or part of an applicant's 
income derives from a public assistance program or because an 
applicant has in good faith exercised any right under the Consumer 
Credit Protection Act.
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    Many System commenters questioned this definition. They wondered 
whether and how we expected them to determine the listed 
characteristics and whether we expected them to make employment or 
lending decisions on the basis of those characteristics. They stated 
that asking this information of potential employees or borrowers or 
making decisions on these bases is, in many cases, offensive or even 
illegal.
    As stated above, our intent was to show that diversity is broad and 
all-inclusive, not to create a list of characteristics to be given 
special focus. Also, the rule does not require the gathering or 
recording of data on employee or borrower characteristics that are not 
currently legally gathered or recorded and does not require specific 
outcomes or the favoring of particular persons in employment or 
lending. What the rule does require institutions to do, in pertinent 
part, is to strive for diversity and inclusion within their workforce 
and management and to market their products and services to all 
eligible and creditworthy persons, with specific outreach toward 
diversity and inclusion.
    Like the proposed rule, the final rule itself does not define 
diversity. As discussed above, for purposes of this rule, we consider 
diversity and inclusion in employment to mean seeking out and using the 
talents of people of different backgrounds, experiences, and 
perspectives to improve the workforce environment and productivity. We 
consider diversity and inclusion in lending, for purposes of this rule, 
to mean looking beyond the existing customer base to ensure that all 
eligible and creditworthy persons have access to System credit and 
related financial services.
    Accordingly, each institution must ensure that it has plans to 
reach out to all potential employees and customers as is appropriate 
for its territory. Institutions are not required to gather data that is 
not legal to gather, favor persons in particular groups, or satisfy 
quotas in employment or lending.

[[Page 25581]]

D. Flexibility in Implementation

    A number of System commenters requested that FCA allow institutions 
to exercise flexibility and discretion in how they implement the 
requirements of the rule. Institutions differ in terms of size, 
employment needs, demographics in their territory, and nature of 
farming in their territory. Therefore, diversity will not look the same 
across the System.
    A number of System commenters were also concerned that FCA and its 
examiners would impose requirements that are not found in the rule or 
would use FCA's suggestions in the preamble to the proposed rule 
regarding tools institutions could use to assist in complying with 
their planning requirements as a checklist for determining compliance.
    Moreover, a number of commenters stated that some of FCA's 
suggestions are not relevant to the System or are too rigid. Commenters 
stated, for example, that data from the Census of Agriculture, which 
FCA had suggested as a possible source of information about potential 
customers, does not accurately represent the System's relevant markets 
because it includes data pertaining to ineligible persons, non-
creditworthy persons, persons who would be disqualified based on scope 
of financing regulations, and persons who do not use debt to finance 
their operations.
    As another example, several System commenters objected to some of 
FCA's specific suggestions for how to overcome barriers for advancing 
diversity and inclusion within the corporate culture, such as including 
diversity and inclusion in the mission statement.
    FCA recognizes that System institutions vary widely in their size, 
needs, and demographics, among other areas of difference. A one-size-
fits-all approach to compliance with this rule is not appropriate 
either for System institutions or for FCA.\7\ The rule requires 
institutions to engage in business planning in the specified areas. 
Accordingly, FCA examiners will determine whether institutions have 
engaged in this planning and will evaluate institutions' good faith 
efforts in implementing the strategies and actions identified in the 
plans. Nevertheless, the rule permits institutions to engage in the 
required business planning in any reasonable manner, and we will not 
examine for specific outcomes or results in employment or lending.
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    \7\ For example, we recognize that approximately 10 percent of 
associations have fewer than 20 employees and, therefore, are not 
required to engage in the AAP planning requirements of section 4.38 
of the Act. While, as discussed above, an institution that is 
subject to section 4.38 may be able to use its AAP plan to satisfy 
the human capital plan requirement, institutions can also satisfy 
this requirement without relying on section 4.38-compliant plans.
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    In addition, our suggestions in the preamble to the proposed rule 
regarding tools institutions can use to assist with their compliance 
are not requirements. We included them in our preamble to the proposed 
rule to provide ideas and to share actions that other institutions have 
taken. We encourage institutions to use the suggestions that are 
appropriate, to set aside the suggestions that are not, and to come up 
with their own approaches to fit their own characteristics.
    Finally, as discussed throughout this preamble, it is important to 
keep in mind that this rule does not require specific goals or 
quantifiable results, and our compliance examination will be 
qualitative rather than quantitative. We suggested the use of the 
Census of Agriculture data not so institutions could compare their 
lending against that data but so they could know and would be able to 
describe the characteristics of their chartered territories by market 
segment, including the characteristics of demography, geography, and 
types of agriculture practiced, as the regulation requires. With this 
information, institutions can determine whether there may be potential 
eligible customers who may be better reached with a different type of 
marketing strategy. If institutions believe other reliable data would 
better provide this information, they may use that data instead.

E. Local Food Systems

    In the preamble to our proposed rule, we noted that the pool of 
potential eligible and creditworthy FCS customers is becoming 
increasingly diverse. We observed that agriculture today consists of 
men and women, the old and the young, and a variety of racial and 
ethnic backgrounds. We urged institutions to look to all kinds of 
farming operations--from large farmers, to small farmers, to farmers 
who operate within local food systems--to find potential eligible and 
creditworthy borrowers who may not be part of the institution's 
customer base and who may be underserved.
    We received a number of comments responding specifically to our 
reference to local food systems, from both System and non-System 
commenters. Commenters identified four major areas of concern.
    First, many System commenters were concerned that the term ``local 
food systems'' was undefined. A number of non-System commenters 
suggested that we should adopt the definition of ``local and regional 
food producers'' from the 2008 Farm Bill. In the preamble to the 
proposed rule, we stated that local food systems typically involve 
small farmers producing heterogeneous organic or specialty crops, and 
short supply chains in which farmers also perform marketing functions, 
including storage, packaging, transportation, distribution, and 
advertising.\8\ In the context of this rule, however, it is unnecessary 
to specifically define ``local food systems,'' because this rule does 
not require specific marketing targeted toward local food systems. 
Rather, the rule requires strategies and actions to market to all 
eligible and creditworthy persons, with specific outreach toward 
diversity and inclusion. Our reference to local food systems was to 
provide an example of a potentially underserved market segment where 
diversity in farming may be found. Reaching out to persons who operate 
in local food systems is one of many potential approaches to finding 
new eligible and creditworthy customers. Consistent with this effort, 
FCA's regulatory performance plan specifically includes a project to 
consider changes to our policy guidance for providing credit and 
related services to all eligible and creditworthy agricultural 
producers, including identifying any barriers to efficiently and cost-
effectively providing credit for newer products or marketing systems 
such as local foods and organic agriculture.\9\
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    \8\ 76 FR 30281, May 25, 2011.
    \9\ FCA's Spring 2012 Regulatory Performance Plan, approved 
February 9, 2012 (available on FCA's Web site at www.fca.gov/law/perf_plan.html).
---------------------------------------------------------------------------

    Second, many System commenters stated that FCA should not favor a 
particular type of agriculture and should not suggest that lending to a 
particular type of agricultural practice increases diversity. They 
commented that FCA should not distinguish between types of crops 
produced or the methods or location of production. As just discussed, 
the rule requires institutions to develop plans as to how they reach 
out to and serve all eligible and creditworthy persons in their 
territories. This means outreach and service to all market segments and 
to all persons within those segments, looking at characteristics that 
include demography, geography, and types of agriculture practiced. Our 
use of the term ``local food systems'' was meant to

[[Page 25582]]

illustrate an example of a potentially underserved market segment where 
diversity in farming may be found. There may be diverse, eligible, and 
creditworthy persons operating within local food systems--as well as 
within other types of agricultural operations--who are not currently 
being served.
    Third, many System commenters stated that many persons who are 
involved in local food systems may not be eligible for System credit, 
or that much of their credit needs may not be within FCA's scope of 
financing regulations, because they may not be full-time, bona fide 
agricultural producers. Farmers who produce agricultural products for 
sale directly to consumers or local intermediaries (restaurants, 
schools, hospitals, etc.) comply with the definition of bona fide 
farmer in Sec.  613.3000(a)(1) by virtue of growing an agricultural 
product, and they need not be full-time producers to be considered bona 
fide.\10\ System institutions are authorized to serve only persons who 
are eligible, and this rule does not require marketing plans to address 
service toward persons who are not eligible.
---------------------------------------------------------------------------

    \10\ Section 613.3000(a)(1) of our regulations defines a bona 
fide farmer or rancher as ``a person owning agricultural land or 
engaged in the production of agricultural products, including 
aquatic products under controlled conditions.''
---------------------------------------------------------------------------

    The scope of financing that a System institution can provide to a 
particular borrower is governed by Sec.  613.3005. Under that 
provision, all bona fide farmers and ranchers may receive full credit, 
to the extent of creditworthiness, for agricultural needs. The degree 
of a borrower's involvement in agricultural production determines the 
amount of non-agricultural credit (also referred to as ``other credit 
needs'') that a System institution may extend to the borrower. FCA has 
previously addressed the issue of scope of financing in Examination 
Bulletin: FCA 2006-2 \11\ and Revised Bookletter BL-040 (interpreting 
``sound and constructive credit'' for YBS farmers).\12\ We encourage 
System institutions to review these documents for guidance in 
determining the scope of financing for all types of agricultural 
producers.
---------------------------------------------------------------------------

    \11\ ``Lending Programs for Farmers' Other Credit Needs,'' dated 
October 2006. This document is available on FCA's Web site. From our 
home page at www.fca.gov, click on the Exam Guidance tab; then click 
on Examination Bulletins.
    \12\ ``Providing Sound and Constructive Credit to Young, 
Beginning, and Small Farmers, Ranchers, and Producers or Harvesters 
of Aquatic Products,'' dated August 10, 2007. This document is 
available on FCA's Web site. From our home page at www.fca.gov, 
click on Bookletters from the Quick Links menu.
---------------------------------------------------------------------------

    There may be loans that an institution cannot practically make 
because of FCA's scope of lending regulations. Institutions should, 
however, evaluate their lending practices to ensure that there are no 
unnecessary barriers in place, such as lack of employee training or 
lack of appropriate loan products. As discussed above, FCA's regulatory 
performance plan specifically includes a project to consider changes to 
our policy guidance for providing credit and related services to all 
eligible and creditworthy agricultural producers, including identifying 
any barriers to efficiently and cost-effectively providing credit for 
newer products or marketing systems such as local foods.
    Finally, many System commenters stated that certain potential 
customers, including some involved in local food systems, are not 
creditworthy and that loans to them could create safety and soundness 
concerns. FCA recognizes that, as with farmers practicing other types 
of agriculture, some farmers involved in the local food system may not 
be creditworthy. The rule does not impose any lending requirements, and 
institutions are not required to make loans that pose safety and 
soundness risks. Other farmers in the local food system may well be 
creditworthy based on their background and experience. Institutions 
should ensure that their credit standards are appropriate and do not 
impose unnecessary barriers to producers in the local food system.
    Some farmers who operate within the local food system are also YBS 
farmers. The methods suggested in Sec.  614.4165(c)(4), as further 
explained in BL-040, to ensure that credit and services offered to YBS 
farmers are provided in a safe and sound manner and within an 
institution's risk-bearing capacity could benefit YBS borrowers within 
the local food system.
    We received hundreds of comments from non-System commenters 
supporting small- and mid-sized farmers and ranchers producing for 
local and regional food markets, farmers' markets, organic markets, and 
community-supported agriculture. These commenters stated that these 
farmers--many of whom are socially disadvantaged, are nontraditional 
producers, or are from non-farming backgrounds--promote healthy farming 
and eating and environmental responsibility. These commenters stated 
that these producers are crucial for both public health and national 
security. Traditional lending models may not fit these producers, 
however, and limited access to capital is a crucial barrier to their 
success.
    These commenters suggested that FCA include a number of specific 
requirements in our marketing plan regulation that would require 
institutions to do the following:
    <bullet> Train potential borrowers on how to obtain funding;
    <bullet> Develop and refer potential borrowers to programs to 
assist them with business planning;
    <bullet> Develop infrastructure such as cooperatives, farmers' 
markets, and training programs;
    <bullet> Increase their knowledge of sustainable agriculture and 
LRFS;
    <bullet> Partner with governmental and non-governmental entities 
and investors to fund LRFS;
    <bullet> Examine their policies to identify areas where rules may 
be unnecessarily shutting out potential borrowers;
    <bullet> Analyze the characteristics of current borrowers to 
provide baseline data for assessments of achieving diversity and 
inclusion of LRFS and socially disadvantaged producers;
    <bullet> Set minimum investment goals for LRFS;
    <bullet> Make marketing goals and progress assessments public; and
    <bullet> Add LRFS producers to their boards.
    We are not imposing these specific requirements in our regulation. 
Consideration of requirements such as these is beyond the scope of this 
regulation project. System institutions may choose to implement these 
measures as appropriate for the types of agriculture in their 
territories. Moreover, as discussed above, we are committed to studying 
these ideas further and to considering future guidance for System 
institutions.

F. Outreach Efforts or Quotas and Quantifiable Results

    Many System commenters urged FCA to clarify the final rule to 
ensure it promotes efforts toward outreach rather than requiring quotas 
or quantifiable results in employment and lending. On the other hand, 
many non-System commenters urged FCA to require institutions to collect 
and quantify baseline data and, among other things, to evaluate to what 
extent their borrower base reflects their marketplace and to set 
minimum investment goals for lending to certain groups. As discussed 
throughout this preamble, this final rule does not contemplate quotas 
or quantifiable results in either employment or lending. We agree with 
the System commenters that this is inappropriate because it is legally 
problematic and may be difficult both to achieve and to measure.\13\
---------------------------------------------------------------------------

    \13\ We note, however, that section 4.38 of the Act requires all 
System institutions with more than 20 employees to establish and 
maintain an AAP plan that applies the affirmative action standards 
otherwise applied to contractors of the Federal government. These 
standards, which are established by the U.S. Department of Labor 
(DOL), are always changing and may impose hiring goals. For example, 
in December 2011, the DOL proposed a rule that would require 
Government contractors to establish a 7-percent utilization goal for 
hiring employees with disabilities. See 76 FR 77056 (Dec. 7, 2011). 
Because the Act requires compliance with applicable affirmative 
action standards, FCA examines for compliance with these standards.

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[[Page 25583]]

    What the final rule does require, in pertinent part, is outreach to 
potential employees who may not have previously been aware of the 
opportunities or considered for reasons other than merit, and to 
potential customers who may not have previously been aware of the 
System's services or considered for reasons other than eligibility and 
creditworthiness. We are revising the language in the final rule to 
clarify what it does and does not require.
    Proposed Sec.  618.8440(b)(7)(i) would have required the human 
capital plan to include, in relevant part, ``strategies and actions to 
achieve diversity and inclusion within the institution's workforce 
[and] management and an assessment of the progress the institution has 
made in accomplishing these strategies and actions. * * *'' A number of 
System institutions requested that we replace ``achieve'' with ``strive 
for.'' They expressed concern that the word ``achieve'' implies quotas 
or quantifiable results. They stated that a requirement that they 
``strive for'' diversity and inclusion is more appropriate, because it 
would require institutions to seek qualified, diverse candidates for 
employment through appropriate recruiting and communications driven by 
market conditions and current hiring needs but would not require them 
to achieve specific, quantifiable results in hiring.
    We agree with this comment and make the requested change. The 
relevant provision (which we have renumbered as Sec.  
618.8440(b)(7)(iii)) requires human capital plans to include 
``strategies and actions to strive for diversity and inclusion within 
the institution's workforce and management.''
    A number of System commenters also expressed concern that the word 
``assessment'' in proposed Sec.  618.8440(b)(7)(i), which would have 
required the human capital plan to include ``an assessment of the 
progress the institution has made in accomplishing these strategies and 
actions,'' also implied that the rule contemplated data-driven results. 
We did not mean data-driven results with our use of the word 
``assessment''. Nevertheless, to avoid confusion, the final rule does 
not use that word. Instead, Sec.  618.8440(c) requires a report on the 
progress the institution has made in accomplishing the required 
strategies and actions.\14\
---------------------------------------------------------------------------

    \14\ As discussed in the section-by-section analysis, the final 
rule requires that the institution report to its board on its 
progress rather than requiring the human capital plan to include an 
assessment of its progress, as the proposed rule would have 
provided.
---------------------------------------------------------------------------

    Section 618.8440(b)(8)(ii) of the proposed rule would have required 
the marketing plan to include, in relevant part, ``strategies and 
actions to provide the institution's products and services to all 
eligible and creditworthy persons with specific attention toward 
diversity and inclusion within each market segment, and an assessment 
of the progress the institution has made in accomplishing these 
strategies and actions.'' A number of System commenters stated that 
this requirement could lead to quotas or quantifiable expectations on 
the lending side.
    First, System commenters questioned the requirement to have 
strategies and actions to ``provide'' the institution's products and 
services to all eligible and creditworthy persons. They stated that 
requiring them to have strategies and actions to ``provide'' their 
products and services, combined with the requirement that they must 
assess their progress in accomplishing these strategies and actions, 
suggests that they must quantify their progress in providing their 
products and services. To clarify this requirement, we replace 
``provide'' with ``market,'' thus requiring institutions to have 
strategies and actions to market their products and services and, to 
ensure accountability, to report on their marketing progress.
    Second, System commenters expressed concern with requiring 
``specific attention'' toward diversity and inclusion. To reflect that 
this rule is intended to address outreach, these commenters suggested 
that we require ``specific outreach'' rather than ``specific 
attention'' toward diversity and inclusion. We agree with this comment 
and make this change in the final rule.
    Finally, as on the human capital side, a number of System 
commenters expressed concern that the word ``assessment'' in proposed 
Sec.  618.8440(b)(8)(ii), which would have required the marketing plan 
to include ``an assessment of the progress the institution has made in 
accomplishing these strategies and actions,'' implied that the rule 
contemplated data-driven results. We did not mean data-driven results 
with our use of the word assessment. Nevertheless, to avoid confusion, 
the final rule does not use that term. Instead, Sec.  618.8440(c) 
requires a report on the progress the institution has made in 
accomplishing the required strategies and actions to ensure 
accountability.\15\
---------------------------------------------------------------------------

    \15\ As discussed in the section-by-section analysis, the final 
rule requires that the institution report to its board on its 
progress rather than requiring the marketing plan to include an 
assessment of its progress, as the proposed rule would have 
provided.
---------------------------------------------------------------------------

G. Governance

    The proposed rule would have required the human capital plan to 
include strategies and actions to achieve diversity and inclusion 
within the institution's workforce, management, and governance 
structure, and an assessment of the progress the institution has made 
in accomplishing these strategies and actions. It would also have 
required the human capital plan to include a description of the 
institution's current workforce, management, and governance structure 
and an assessment of their strengths and weaknesses.
    In the preamble to the proposed rule, we noted that FCA Revised 
Bookletter BL-009 \16\ states that bank and association boards of 
directors may appoint directors--both outside directors and ``other 
appointed directors'' (stockholders who are appointed)--for specific 
public policy purposes, such as facilitating diversity, and we 
encouraged all institutions to consider appointing directors for this 
purpose when feasible.\17\ We also noted that Sec.  611.325(d)(1) of 
FCA regulations, which implements a specific requirement of section 
4.15 of the Act, directs institution nominating committees, which 
submit slates of eligible borrowers wishing to run for stockholder-
elected director positions, to ``endeavor to ensure representation from 
all areas of [an institution's territory] and as nearly as possible, 
all types of agriculture practiced within the territory.'' As an 
institution's borrower base becomes more diverse, we encouraged 
nominating committees to consider seeking out qualified and 
representative borrowers of diverse backgrounds.
---------------------------------------------------------------------------

    \16\ ``Farm Credit Bank and Association Appointed Directors,'' 
dated December 15, 2006. This document is available on FCA's Web 
site. From our home page at www.fca.gov, click on Bookletters under 
the Quick Links menu.
    \17\ 76 FR 30284, May 25, 2011.
---------------------------------------------------------------------------

    Some System commenters objected to including governance 
requirements in their human capital planning. They stated that board 
diversity and inclusion is a different issue than diversity and 
inclusion within their workforce. They

[[Page 25584]]

stated that boards of directors are responsible for governance and 
therefore should ``own'' the issue, which should not be integrated into 
a human capital plan that focuses on the workforce and is developed by 
the institution's leadership. These commenters urged FCA to remove the 
governance references from human capital planning and instead 
incorporate these references into existing Sec.  618.8440(b)(2)(ii), as 
part of the existing requirement that the board's business plan must 
include an assessment of the needs of the board, based on the annual 
self-evaluation of the board's performance.
    We agree with this comment and suggestion. Accordingly, we are 
removing all references to governance in the human capital plan 
requirements in new Sec.  618.8440(b)(7), and we are revising existing 
Sec.  618.8440(b)(2)(ii) to require that the board specifically must 
assess whether its needs include improved diversity, as well as the 
addition of particular skills. This revision clarifies the existing 
requirement that the board must assess its needs to specifically 
include diversity as one of its potential needs.
    Some System commenters stated that the Act gives nominating 
committees the responsibility for determining the candidates for 
director elections and that it would be challenging to provide the 
nominating committee with information on potential candidates in an 
attempt to make the board more diverse. System commenters were also 
concerned that the rule would require institutions to improperly 
influence the nominating committee in violation of the existing 
requirement that management must remain impartial in governance 
matters.
    If a board determines, based on its assessment, that it needs to 
increase its diversity, it may do so directly, without involving the 
nominating committee, by appointing diverse directors--either outside 
directors or other appointed (stockholder) directors. Moreover, FCA 
regulations permit directors or other institution personnel to provide 
the names of qualified, diverse persons for consideration by the 
nominating committee. FCA Revised Bookletter BL-043 \18\ contains 
substantial discussion of the extensive assistance institution boards, 
officers, employees, and agents may provide to nominating committees 
without violating FCA regulations. This assistance includes, but is not 
limited to, providing lists of qualified persons from which nominating 
committees may identify potential candidates.\19\ Assistance of this 
nature does not constitute improper interference with the work of the 
nominating committee.
---------------------------------------------------------------------------

    \18\ ``Farm Credit Bank and Association Nominating Committees,'' 
issued March 8, 2007. This document is available on FCA's Web site. 
From our home page at www.fca.gov, click on Bookletters from the 
Quick Links menu.
    \19\ Directors, officers, employees, and agents must avoid any 
activity that could be construed as influencing the nominating 
committee's vote on its slate of candidates.
---------------------------------------------------------------------------

    Some System commenters stated that there is little diversity in 
their territory \20\ or that stockholders have not elected diverse 
boards even when candidates were nominated who would have contributed 
to diversity. We understand that some institution boards may find it 
difficult to increase diversity among their elected board members. 
However, if a board determines that it needs additional diversity, and 
diverse members are not being elected, it should consider appointing 
qualified directors, either as outside directors or as other appointed 
(stockholder) directors.
---------------------------------------------------------------------------

    \20\ We note that large numbers of women are present even in 
areas that may lack other characteristics of diversity.
---------------------------------------------------------------------------

    Some System commenters stated that FCA should not suggest that 
boards should appoint additional directors, whether or not they are 
qualified, only to achieve board diversity. We are not suggesting this. 
We note that BL-009 states that institution boards may appoint 
directors for specific public policy purposes, such as facilitating 
diversity or acquiring needed skills. This regulation complements that 
Bookletter by requiring boards to assess whether their needs include 
additional skills or increased diversity.
    A number of System commenters stated that FCA already has enough 
regulations in the area of governance, that the process is working 
well, and that any more regulation in this area would pose an undue 
burden. System commenters also stated that FCA has no authority over 
governance because the Act provides that board qualifications are set 
forth in institution bylaws and FCA has no authority, whether direct or 
indirect, to approve bylaws.
    This rule does not specify board qualifications, nor does it impose 
board composition requirements. The existing rule required boards to 
assess their needs, and the new requirements specify that diversity is 
among the needs that must be assessed. Requiring boards to assess a 
need for diversity does not constitute approval of bylaws. And, since 
boards are already required to assess all of their needs, whether or 
not those needs are itemized, expressly identifying certain needs in 
the regulation does not pose an extra burden.
    A number of non-System commenters urged FCA to require System 
boards to include members of historically underserved farming 
communities, community-based organizations that serve socially 
disadvantaged or limited resource farmers, and local and regional 
farmers and producers. They stated that in order to bring about 
transformative change toward diversity and inclusion in the corporate 
culture of System institutions, boards must actively incorporate the 
unique perspective of these markets.
    Consideration of this requirement is beyond the scope of this 
rulemaking. Institutions may choose to seek out such potential 
directors, as appropriate.

H. Redundancy in Requirement To Assess Management Capabilities

    A number of System commenters stated that the preamble to the 
proposed rule specified that institutions must perform a SWOT analysis 
(strengths, weaknesses, opportunities, threats) as part of their human 
capital and marketing planning. They stated that this requirement was 
redundant because they believe that existing Sec.  618.8440(b)(2), 
which requires the business plan to include an annual review of the 
internal and external factors likely to affect the institution, already 
requires a SWOT analysis.\21\
---------------------------------------------------------------------------

    \21\ FCA regulations do not use the term ``SWOT analysis.''
---------------------------------------------------------------------------

    However, neither the preamble to the proposed rule nor the proposed 
rule itself required an overall analysis in either the human capital or 
marketing plans. The proposed rule, therefore, is not redundant in this 
respect, and we make no change in the final rule in that regard.\22\
---------------------------------------------------------------------------

    \22\ In both Sec.  618.8440(b)(7) and (b)(8), however, we revise 
the language in the final rule to provide that the items required in 
the human capital plan and the marketing plan may be contained in 
other board-approved documents that are adopted annually, provided 
the items are summarized in, and incorporated by reference into, the 
human capital plan and the marketing plan, respectively. Therefore, 
if an institution believes that an analysis it is conducting under 
the existing rule satisfies the requirements of the final rule, it 
does not need to conduct another, redundant analysis, as long as the 
analysis is approved by the board, adopted annually, and summarized 
in and incorporated into the human capital plan and marketing plan, 
as appropriate.
---------------------------------------------------------------------------

    We agree, however, that proposed Sec.  618.8440(b)(7)(ii), which 
would have required the human capital plan to include a description of 
the institution's workforce and management and an assessment of their 
strengths and weaknesses, was redundant; existing Sec.  
618.8440(b)(2)(i), which requires the business plan to include an 
annual review of the internal and external

[[Page 25585]]

factors likely to affect the institution, already includes an 
assessment of management capabilities.
    We are finalizing the proposed human capital plan requirement, 
which we are renumbering as Sec.  618.8440(b)(7)(i), without any 
changes in the management assessment requirement.\23\ To eliminate the 
redundancy, however, in the final rule we revise the existing business 
plan requirement at Sec.  618.8440(b)(2)(i). The existing provision 
requires the business plan to include an assessment of management 
capabilities, while the revised provision requires the business plan to 
incorporate the description and assessment of workforce and management 
strengths and weaknesses required by Sec.  618.8440(b)(7)(i). The 
existing business plan requirement as revised, therefore, no longer 
requires an assessment of management capabilities; instead, it requires 
incorporation of the description and assessment of workforce and 
management strengths and weaknesses required by the human capital plan 
requirement.
---------------------------------------------------------------------------

    \23\ We are making an unrelated change to this provision, which 
we discuss elsewhere in this preamble.
---------------------------------------------------------------------------

I. Confidentiality

    A number of System commenters stated they should not be required to 
include sensitive and confidential information pertaining to human 
capital and marketing planning in their business plans, because 
business plans are not privileged and may be disseminated to a broader 
audience. These commenters requested that the regulation require that 
business plans must incorporate a high-level summary of this 
information. Many non-System commenters, on the other hand, suggested 
that FCA should require institutions to make their marketing goals and 
progress reports public.
    The objectives of this rule are, in pertinent part, to ensure that 
institution boards consider diversity and inclusion in their human 
capital and marketing planning. These requirements are intended to 
provide information for boards to consider candidly as they engage in 
planning, not for public disclosure. Accordingly, both Sec.  
618.8440(b)(7), governing human capital planning, and Sec.  
618.8440(b)(8), governing marketing planning, provide that the items 
that are to be included in the plans may be contained in other board-
approved documents that are adopted annually, provided the items are 
summarized in, and incorporated by reference into, the plans. This will 
enable boards to address sensitive and confidential information in more 
confidential documents while still ensuring that summaries are included 
in business plans.

J. Marketing Plan Requirements for Banks and Service Corporations

    Several System commenters stated that requiring marketing outreach 
is problematic for Farm Credit Banks (FCBs), which do not engage in 
direct lending operations but instead provide loan funds to the direct 
lender associations. Moreover, service corporations chartered under 
section 4.25 of the Act typically also do not engage directly with 
retail customers. We agree with these comments and revise Sec.  
618.8440(b)(8) to apply to System institutions in their exercise of 
title III lending authorities \24\ as well as to direct lender 
associations.
---------------------------------------------------------------------------

    \24\ Currently, there is one agricultural credit bank, which has 
the authority of an FCB and also the title III authority of a bank 
for cooperatives; in addition to providing loan funds to direct 
lender associations, it makes loans to agricultural, aquatic, and 
public utility cooperatives.
---------------------------------------------------------------------------

    Although FCBs and service corporations are not subject to the 
marketing plan requirements of Sec.  618.8440(b)(8), they should ensure 
that they do not do anything to impede the objectives of this 
regulation nor the ability of subject System institutions to comply 
with the regulation.

K. Compliance Date for Requirements

    Several System commenters requested that FCA not require compliance 
with these requirements in the middle of the planning year. We agree 
with this request. Accordingly, we will require compliance beginning 
with the 2013 business plan.\25\
---------------------------------------------------------------------------

    \25\ Under Sec.  618.8440(a), each institution board must adopt 
a business plan no later than 30 days after the commencement of each 
calendar year.
---------------------------------------------------------------------------

VII. Section-by-Section Analysis

A. Section 618.8440(a)

    For clarity and ease of reference, we are adding a heading, 
``Business Plan Requirement,'' to this paragraph. Also for clarity, we 
are changing ``shall'' to ``must.''

B. Section 618.8440(b)

    For clarity and ease of reference, we are adding a heading, 
``Content of Business Plan,'' to this paragraph.
1. Section 618.8440(b)(2)
    Existing Sec.  618.8440(b)(2) provides that the business plan must 
include an annual review of the internal and external factors likely to 
affect the institution during the planning period; this provision is 
unchanged in the revised rule.
    As discussed above in our response to comments, we revise Sec.  
618.8440(b)(2)(i) to eliminate the redundancy created by the new human 
capital plan provision. Existing Sec.  618.8440(b)(2)(i) provides that 
the required review must include an assessment of management 
capabilities. The new human capital plan provision (discussed below) 
requires a description of the institution's workforce and management 
and an assessment of their strengths and weaknesses. We revise Sec.  
618.8440(b)(2)(i) to provide that the review must incorporate the 
description and assessment of workforce and management strengths and 
weaknesses required in the human capital plan.
    Also, as discussed above in our response to comments, we revise 
Sec.  618.8440(b)(2)(ii) to explicitly require that the assessment of 
board needs included in the business plan must specifically include 
skills and diversity. Existing Sec.  618.8440(b)(2)(ii) provides that 
the required review must include an assessment of the needs of the 
board, based on the annual self-evaluation of the board's performance. 
This revision clarifies that the board's assessment must specifically 
include diversity and skills as potential needs.
    We are making several minor grammatical changes to this provision 
that are necessary because of the revisions we have discussed.
2. Section 618.8440(b)(6)
    We are correcting an erroneous citation in this section.
3. Section 618.8440(b)(7)
    New Sec.  618.8440(b)(7) requires each institution to include a 
human capital plan, which must include specified items, in its business 
plan. As explained above, the specified items may be contained in other 
board-approved documents that are adopted annually, provided the items 
are summarized in, and incorporated by reference into, the human 
capital plan. Accordingly, if an institution has a separate human 
capital plan, AAP plan, or other document that contains the items that 
are required to be included in the human capital plan component of the 
business plan, the institution can use that other document to satisfy 
the business plan requirement, as long as the other document is 
approved by the board annually, as the business plan itself is, and the 
items are summarized in, and incorporated by reference into, the human 
capital plan component of the business plan. If the other document does 
not include these items, however, or if the board does not approve the 
other document, then the board will have to include the required

[[Page 25586]]

items in the human capital plan component of the business plan.
    New Sec.  618.8440(b)(7)(i) requires the human capital plan to 
include a description of the institution's workforce and management and 
an assessment of their strengths and weaknesses. New Sec.  
618.8440(b)(7)(ii) requires the human capital plan to include a 
description of the institution's workforce and management succession 
programs. New Sec.  618.8440(b)(7)(iii) requires the human capital plan 
to include strategies and actions to strive for diversity and inclusion 
within the institution's workforce and management. In consideration of 
comments that we received, these provisions contain several changes 
from what was proposed. We discuss the reasons for these changes above, 
in our response to comments.
4. Section 618.8440(b)(8)
    New Sec.  618.8440(b)(8) requires each institution in its exercise 
of title III lending authorities \26\ and direct lender association to 
include a marketing plan, which must include specified items, in its 
business plan. The requirement does not apply to FCBs, which do not 
engage in direct lending operations but instead provide loan funds to 
the direct lender associations, or to service corporations chartered 
under section 4.25 of the Act, which typically also do not engage 
directly with retail customers. However, FCBs and service corporations 
should ensure that they do not do anything to impede the objectives of 
this regulation nor the ability of subject System institutions to 
comply with this regulation.
---------------------------------------------------------------------------

    \26\ Currently, there is one agricultural credit bank which, in 
pertinent part, exercises title III authority by making loans to 
agricultural, aquatic, and public utility cooperatives.
---------------------------------------------------------------------------

    As explained above, the specified items that must be included in 
the marketing plan may be contained in other board-approved documents 
that are adopted annually, provided the items are summarized in, and 
incorporated by reference into, the marketing plan. Accordingly, if an 
institution has a separate marketing plan, YBS plan, or other document 
that contains the items that are required to be included in the 
marketing plan component of the business plan, the institution can use 
that other document to satisfy the business plan requirement, as long 
as the other document is approved by the board annually, as the 
business plan itself is, and the items are summarized in, and 
incorporated by reference into, the marketing plan component of the 
business plan. If the other document does not include these items, 
however, or if the board does not approve the other document, then the 
board will have to include the required items in the marketing plan 
component of the business plan.
    The marketing plan must strategically address how the institution 
will further the objective of the Act, set forth in section 1.1(b), 
that the System be responsive to the credit needs of all types of 
agricultural producers having a basis for credit. The marketing plan 
must include, at a minimum, the following:
    <bullet> A description of the institution's chartered territory by 
market segment, including the characteristics of demography, geography, 
and types of agriculture practiced; and
    <bullet> Strategies and actions to market the institution's 
products and services to all eligible persons, with specific outreach 
toward diversity and inclusion within each market segment.
    To be able to describe its chartered territory, and to understand 
whom it should be striving to reach, an institution must know the 
market segmentation of its territory. Market segmentation is the 
identification of portions of the market that are different from one 
another and can include, but is not limited to, characteristics such as 
demography, geography, and types of agriculture practiced. Market 
segmentation allows a business to better satisfy the needs of its 
potential customers.
    A vast amount of demographic information, down to the county level, 
is available on the Web sites of the Census of Agriculture,\27\ the 
U.S. Census Bureau,\28\ and the U.S. Department of Agriculture's 
Economic Research Service.\29\ As discussed above, because this rule 
does not require specific outcomes or quantifiable results, an 
institution should not compare its lending against this demographic 
data. Rather, the institution should use this data to gain knowledge of 
the characteristics of its chartered territory. With this knowledge, 
the institution can determine whether there may be potential eligible 
borrowers it can reach out to through better marketing and outreach 
methods. If an institution believes other reliable data would better 
provide this information, it may use that data instead.
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    \27\ www.agcensus.usda.gov.
    \28\ www.census.gov.
    \29\ www.ersusda.gov/data/ruralatlas.
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    In consideration of comments we received on these provisions, the 
revised rule contains several changes from what was proposed. We 
discuss the reasons for these changes above in our response to 
comments.
    We are also making several minor, nonsubstantive changes to this 
provision for clarity.

C. Section 618.8440(c)

    Section 618.8440(c) is titled ``Board Reporting Requirements.'' 
This provision requires each institution to report annually to its 
board of directors on the progress the institution has made in 
accomplishing the strategies and actions in the human capital plan and, 
as applicable, the marketing plan.
    This provision was not in the proposed rule. Instead, the proposed 
rule would have required the human capital and marketing plans to 
include an assessment of the progress the institution had made in 
accomplishing the strategies and actions in the plans. We made this 
change for several reasons. First, as discussed above in our response 
to comments, a number of System commenters were concerned that the word 
``assessment'' implied data-driven results. We did not mean data-driven 
results with our use of the term assessment; therefore, to avoid 
confusion, we do not use that term here. Second, we believe it is more 
appropriate for the institution to provide progress reports to the 
board rather than for the board to include progress reports in its 
human capital and marketing plans. Although it is not stated explicitly 
in the rule, we expect that boards will use the information in the 
progress reports they receive to establish accountability and to 
formulate the strategies and actions contained in their human capital 
and marketing plans for the following year.

VIII. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the final rule will not 
have a significant economic impact on a substantial number of small 
entities. Each of the banks in the Farm Credit System, considered 
together with its affiliated associations, has assets and annual income 
in excess of the amounts that would qualify them as small entities. 
Therefore, Farm Credit System institutions are not ``small entities'' 
as defined in the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 618

    Agriculture, Archives and records, Banks, banking, Insurance, 
Reporting and recordkeeping requirements, Rural areas, Technical 
assistance.

    For the reasons stated in the preamble, part 618 of chapter VI, 
title 12

[[Page 25587]]

of the Code of Federal Regulations is amended as follows:

PART 618--GENERAL PROVISIONS

0
1. The authority citation for part 618 continues to read as follows:

    Authority:  Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 
3.7, 4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act 
(12 U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 
2183, 2200, 2211, 2218, 2243, 2244, and 2252).

Subpart J--Internal Controls

0
2. Section 618.8440 is revised to read as follows:


Sec.  618.8440  Planning.

    (a) Business plan requirement. No later than 30 days after the 
commencement of each calendar year, the board of directors of each Farm 
Credit System institution must adopt an operational and strategic 
business plan for at least the succeeding 3 years.
    (b) Content of business plan. The plan must include, at a minimum, 
the following:
    (1) A mission statement.
    (2) An annual review of the internal and external factors likely to 
affect the institution during the planning period. The review must:
    (i) Incorporate the description and assessment of workforce and 
management strengths and weaknesses required by paragraph (b)(7)(i) of 
this section;
    (ii) Include an assessment of the needs of the board, including 
skills and diversity, based on the annual self-evaluation of the 
board's performance; and
    (iii) Include strategies for correcting identified weaknesses.
    (3) Quantifiable goals and objectives.
    (4) Pro forma financial statements for each year of the plan.
    (5) A detailed operating budget for the first year of the plan.
    (6) The capital adequacy plan adopted pursuant to Sec.  615.5200(b) 
of this chapter.
    (7) A human capital plan that includes, at a minimum, the items 
specified in this paragraph (b)(7). These items may be contained in 
other board-approved documents that are adopted annually, provided the 
items are summarized in, and incorporated by reference into, the human 
capital plan.
    (i) A description of the institution's workforce and management and 
an assessment of their strengths and weaknesses;
    (ii) A description of the institution's workforce and management 
succession programs; and
    (iii) Strategies and actions to strive for diversity and inclusion 
within the institution's workforce and management.
    (8) For each Farm Credit System institution in its exercise of 
title III lending authorities and direct lender association, a 
marketing plan that strategically addresses how the institution will 
further the objective of the Act, set forth in section 1.1(b) of the 
Act, that the System be responsive to the credit needs of all types of 
agricultural producers having a basis for credit. The marketing plan 
must include, at a minimum, the items specified in this paragraph 
(b)(8). These items may be contained in other board-approved documents 
that are adopted annually, provided the items are summarized in, and 
incorporated by reference into, the marketing plan.
    (i) A description of the institution's chartered territory by 
market segment, including the characteristics of demography, geography, 
and types of agriculture practiced; and
    (ii) Strategies and actions to market the institution's products 
and services to all eligible and creditworthy persons, with specific 
outreach toward diversity and inclusion within each market segment.
    (c) Board reporting requirements.
    (1) Each institution must report annually to its board of directors 
on the progress the institution has made in accomplishing the 
strategies and actions required by paragraph (b)(7)(iii) of this 
section.
    (2) Each institution subject to paragraph (b)(8) of this section 
must report annually to its board of directors on the progress the 
institution has made in accomplishing the strategies and actions 
required by paragraph (b)(8)(ii) of this section.

    Dated: April 19, 2012.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2012-10356 Filed 4-30-12; 8:45 am]
BILLING CODE 6705-01-P