44410 Federal Register / Vol. 71, No. 150 / Friday, August 4, 2006 / Rules and Regulations 

1Public Law 100–233, 101 Stat. 1568 (January 6, 

1988). 

2See 67 FR 17907. 

3See 71 FR 1704. 

FARM CREDIT ADMINISTRATION 

12 CFR Part 611 

RIN 3052–AC29 

Organization; Termination of System 

Institution Status 

AGENCY: Farm Credit Administration. 

ACTION: Final rule. 

SUMMARY: The Farm Credit 

Administration (FCA, Agency, we or 

our) issues this final rule amending our 

regulations that allow a Farm Credit 

System (FCS, Farm Credit, or System) 

bank or association to terminate its FCS 

charter and become a financial 

institution under another Federal or 

State chartering authority. The final rule 

updates the termination procedures for 

System banks and associations under 

sections 7.9, 7.10 and 7.11 of the Farm 

Credit Act of 1971, as amended, ensures 

that interested parties have sufficient 

time and opportunities to be fully 

informed about a termination proposal, 

and ensures that a significant proportion 

of equity holders are engaged in the 

termination process. 

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. 

FOR FURTHER INFORMATION CONTACT: 

Thomas Dalton, Senior Staff 

Accountant, Office of Regulatory Policy, 

Farm Credit Administration, McLean, 

VA 22102–5090, (703) 883–4414; TTY 

(703) 883–4434; or Rebecca S. Orlich, 

Senior Counsel, Office of General 

Counsel, Farm Credit Administration, 

McLean, VA 22102–5090, (703) 883– 

4020, TTY (703) 883–4020. 

SUPPLEMENTARY INFORMATION: 

I. Objectives 

Through this rulemaking it is our 

objective to: 

• Update the termination procedure 

for FCS banks and associations under 

sections 7.9, 7.10 and 7.11 of the Farm 

Credit Act of 1971, as amended (Act); 

• Ensure that the FCA, an 

institution’s board of directors, and the 

institution’s equity holders have 

sufficient time and opportunities to be 

fully informed about a termination 

proposal before deciding whether to 

approve the termination; 

• Provide that we may require a 

terminating institution to obtain 

independent analyses and rulings 

regarding a proposed termination; 

• Ensure that a significant proportion 

of stockholders are engaged in the 

termination process; and 

• Clarify existing requirements and 

ensure that stockholder disclosure 

materials are informative and easy to 

understand. 

II. Background 

The Agricultural Credit Act of 1987,1

among other things, amended the Act 

expressly to permit System institutions 

to terminate their Farm Credit status 

and become another type of financial 

institution. We first issued regulations 

governing terminations in 1991. At that 

time, the regulations covered only 

‘‘small’’ FCS associations. Our current 

termination rule, published on April 12, 

2002, covers all associations and banks.2

Since 1991, no FCS bank or association 

has terminated its charter under FCA 

regulations. However, in 2004 one 

System association adopted a 

commencement resolution to terminate 

its Farm Credit charter and 

subsequently be acquired by the 

subsidiary of a non-System bank. 

Ultimately, the association decided not 

to be acquired and not to terminate 

Farm Credit status. Although the 

association never submitted a 

termination application to us, the 

experience presented us with an actual 

event to evaluate the effectiveness and 

efficiency of our existing termination 

regulations. We found that, while the 

existing regulations provide the basic 

requirements to comply with the Act 

and effect a termination, certain 

revisions to the regulations would 

ensure a more orderly process for a FCS 

bank or association to terminate its 

charter. 

On January 11, 2006, we published a 

proposed termination regulation 3 to 

update the existing termination 

regulations to clarify our requirements. 

Our proposals included: (1) Separating 

our review of a terminating institution’s 

disclosure information, as required by 

section 7.11 of the Act (12 U.S.C. 

2279e), from our approval of the 

termination itself, as set forth in section 

7.10 of the Act (12 U.S.C. 2279d), (2) 

giving a terminating institution more 

flexibility in communicating with 

stockholders and the public during the 

termination process, (3) providing that 

we may require a terminating institution 

to obtain independent analyses of and 

rulings on matters related to the 

proposed termination, as well as to hold 

convenient informational meetings for 

stockholders, (4) strengthening 

protections for directors to obtain 

independent legal and financial advice 

and allow public or private expressions 

of their opinions about the termination, 

and (5) ensuring sufficient equity holder 

representation in voting processes by 

imposing a quorum requirement of 30 

percent of voting stockholders that must 

be present in person or by proxy at the 

stockholder meetings for the 

termination and reconsideration votes. 

III. Comments 

We received 51 comment letters on 

the proposed rule. Eight comment 

letters were from the Farm Credit 

Council (FCC) and seven System 

institutions (U.S. AgBank, CoBank, 

AgriBank, and four FCS associations) 

(collectively, System commenters). We 

also received 43 comment letters from 

non-System entities including Rabobank 

International (Rabobank), a 

cooperatively owned bank and financial 

services provider based in the 

Netherlands; the Independent 

Community Bankers of America (ICBA); 

the Independent Community Bankers of 

North Dakota; the American Bankers 

Association (ABA) and from 39 

commercial bankers. In its letter, 

Rabobank identified itself as the bank 

that attempted unsuccessfully to acquire 

a System institution in 2004 and stated 

that its comments were based on that 

experience. In general, System 

commenters supported the rule, 

whereas non-System commenters 

expressed opposition to portions of the 

rule that they believed would create 

barriers to the termination process and 

would be burdensome and costly. 

A. General Comments 

System commenters stated that: 

• They support revising the 

termination regulation to more properly 

reflect the conditions and circumstances 

that exist when an institution’s board 

votes to terminate. The facts and 

circumstances of any particular 

termination request must be carefully 

evaluated, and an independent analysis 

of various issues raised by the request 

may be appropriate. They encouraged 

FCA to require those studies as needed. 

• They are concerned about the 

impact of any proposed termination on 

the System while the matter is pending 

and encouraged timely action by the 

Agency. They encouraged FCA to begin 

substantive review of a proposed 

termination as soon as possible after 

receipt of a plan of termination. 

• They support the elimination of the 

termination authority from the Act. 

Non-System commenters stated that: 


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• The proposal creates obstacles and 

impediments that make termination 

difficult to achieve. 

• They support giving the terminating 

institution permission to communicate 

with equity holders and the public 

during the termination process. 

• The proposal restricts the 

institutions’ right to terminate which 

leads to diminished performance, weak 

or entrenched management, and 

inefficient operations. 

• The proposed amendments are 

complicated due to the fact that there 

are multiple requirements that are either 

redundant and/or unnecessary. 

• The proposal demonstrates a bias 

toward protecting the overall System by 

proposing unnecessary and unjustifiable 

burdens for an institution seeking to 

leave the System, to the detriment of its 

members-owners. 

• It is the right of the shareholders of 

a terminating institution to make this 

decision, not other institutions within 

the FCS or the FCA itself. 

• There is a contradiction between 

making termination nearly impossible 

and maintaining the status quo, and 

expanding System authorities to serve a 

broader market, as System institutions 

are currently promoting through their 

Horizons Project. 

• The proposal should be withdrawn 

because it is anti-termination, 

overwhelmingly complicated, and has 

provisions that are redundant, 

unnecessary, and arbitrary. 

B. Our Consideration of the Comments 

Received 

Upon consideration of all comments, 

the FCA Board has decided to make a 

number of changes to the regulations. 

We note that some of the comments are 

beyond the scope of this regulatory 

project. 

It is not our intention to put up 

barriers or create undue burden for an 

institution wanting to exit the System. 

The proposed changes are meant only to 

ensure that all important interests, 

including the interests of borrower/ 

stockholders, are protected and to 

ensure that the Agency has all the 

information needed to make a decision 

about whether or not to approve the 

termination request. 

One commenter suggested that 

restricting the right of an institution to 

exit the System and ‘‘compete in the 

private sector’’ could lead to a 

weakened financial condition, 

entrenched management and inefficient 

operations in that institution. We do not 

believe that the rule restricts an 

institution from exiting the System. 

Rather, it provides for a deliberative 

process to achieve a termination of 

System status by taking into 

consideration the interests of the 

institution, its stockholders, and the 

System. After careful consideration, we 

do not find that our regulatory 

framework for termination of System 

status has been detrimental to the 

financial well-being of the System and 

its member institutions. We note that 

System institutions continue to operate 

in a safe and sound manner under the 

authorities provided by the Act and 

FCA Regulations. 

In addition to the specific comments 

received on the proposed termination 

regulation, some non-System entities 

provided comments on areas outside of 

the proposed rule, including the 

objectives of the Horizons Project, the 

mission of the System, and certain FCS 

institutions’ patronage practices. 

Although these comments will be 

considered by the Agency generally, we 

will not respond to them in this final 

rule because they are beyond the scope 

of this rulemaking project. 

IV. Section-by-Section Analysis 

Section 611.1200—Applicability of This 

Subpart 

We did not propose any changes to 

this section and we received no 

comments. We adopt this section as 

final without changes. 

Section 611.1205—Definitions That 

Apply in This Subpart 

We proposed to define ‘‘days’’ to 

mean calendar days and ‘‘business 

days’’ to mean days on which the FCA 

is open for business. We also proposed 

to define ‘‘equity holders’’ to mean 

holders of stock, participation 

certificates, or other equities such as 

allocated equities. 

We did not receive any comments on 

this section and adopt § 611.1205 as 

final without changes. 

Section 611.1210—Advance Notices— 

Commencement Resolution and Notice 

to Equity Holders 

We proposed requiring a terminating 

institution to send us a draft of its notice 

to equity holders before the notice is 

sent. If we do not request modifications 

to the draft notice within 2 business 

days of receiving it, the terminating 

institution may mail the notice to its 

equity holders. We also proposed 

requiring the terminating institution to 

place the advance notice to equity 

holders on its Web site and to send us 

copies of all contracts and agreements 

related to the termination. The proposed 

rule also requires the board of the 

terminating institution to vote on the 

termination at three separate times 

during the termination process. 

We received comments from 

Rabobank, the ICBA, the ABA, and two 

groups of commercial bankers on the 

three votes required of the terminating 

institution’s board of directors during 

the termination process. The first two 

votes are already required by the 

existing regulations. The first vote is the 

commencement resolution required by 

existing § 611.1210(a), when the 

termination process begins. The second 

vote, required by existing § 611.1220, 

specifies that the board must adopt a 

termination resolution before mailing 

the disclosure and termination plan to 

the FCA. The third (the new vote) is 

required by new § 611.1235(a), which 

specifies that the board must adopt a 

reaffirmation resolution no more than 

14 days before mailing the plan of 

termination, including the disclosure 

information, to its equity holders. All 

comments received on the three board 

resolutions are summarized here. 

Rabobank commented that the threevote requirement does not support the 

stated purposes of the proposed rule, is 

burdensome, is not explained, and 

discourages a FCS institution from 

initiating a request. Rabobank asserted 

that the requirement is a ‘‘de facto 

prohibition’’ on exiting the System. The 

ICBA believed that the three-vote 

requirement is unreasonable and proves 

FCA’s intent to prevent any entity from 

leaving the System. The ICBA noted that 

other procedures will ensure that the 

terminating institution’s board will 

thoroughly ‘‘vet’’ its decision. The ICBA 

also pointed out that the regulation is 

arbitrary and capricious, and contrary to 

the clear statutory language, as well as 

unnecessary and inappropriate. The 

ABA stated that a third vote by the 

board, after FCA approves the plan, is 

needless and a potentially costly 

additional step that is meant to slow or 

derail the process. The ICBA and two 

groups of commercial bankers stated 

that a termination is not such an 

‘‘extraordinary event’’ that the board has 

to vote three times and that our purpose 

is to create obstacles. Another group of 

commercial bankers believed that the 

requirement creates hurdles on voting 

procedures not found in other 

businesses, diluting the principle of 

local control. One group of commercial 

bankers suggested that a more honest 

approach would be for FCA to withdraw 

the proposal and ask Congress to pass 

legislation preventing terminations from 

the System, even though it 

acknowledged it would not support 

such legislation. It also observed that a 

burdensome policy does not serve the 

public interest and reflects efforts on 


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behalf of the FCC, the System’s lobbying 

organization. 

We stated in the preamble to the 

proposed rule that our objectives were 

to update the termination procedure and 

to ensure that an institution’s board of 

directors, as well as FCA and the equity 

holders, have sufficient time to be fully 

informed about a termination proposal 

before deciding whether to approve the 

termination. The timing of each board 

resolution in the termination process is 

to ensure the directors are fully 

informed before taking the next 

significant step. A significant amount of 

time may elapse between adoption of 

the commencement resolution and 

submission of the termination plan to 

FCA for approval and distribution of the 

plan to stockholders prior to the 

stockholder vote. We believe that it is 

important and essential for the 

terminating board to validate its 

decision at these critical junctures and 

demonstrate continued support for the 

termination. The FCA and the 

terminating institution’s equity holders 

need reassurance that the board of 

directors remains fully supportive of 

and committed to the termination 

throughout the process because we 

believe that a termination is an 

‘‘extraordinary event’’ in the context of 

the System’s congressionally mandated 

mission. The concept of local control is 

reinforced each time the board resolves 

to proceed with the termination process. 

The board can easily include its 

reaffirmation resolution with the 

disclosure and plan of termination at 

the time of mailing to its equity holders 

with a certified copy provided to FCA. 

For these reasons, we make no changes 

to the rule and adopt the provisions of 

§§ 611.1210, 611.1220, and 611.1235(a) 

as proposed. 

A System bank (AgriBank) 

commented on the advance notice 

provision in § 611.1210(e) that allows a 

terminating bank to continue to 

participate in the issuance of 

consolidated and System-wide 

obligations through the termination 

date. The bank stated that once a System 

bank announces its intent to exit, the 

remaining banks should no longer be 

required to assume the joint and several 

liability for the debts of that exiting 

bank and that to do otherwise requires 

all remaining banks to ignore the reality 

of the transaction for the sole benefit of 

the exiting bank. The commenter added 

that, at a minimum, the exiting bank 

should be prohibited from issuing joint 

debt for any purpose other than the 

refinancing of joint debt that matures 

during the period prior to the exit. 

The FCA did not propose any change 

to the provision in § 611.1210(e). We 

believe we must continue to allow 

funding for a terminating bank because, 

from a practical standpoint, a System 

bank does not have other available 

alternative funding sources until it 

terminates its System status. 

Section 611.1211—Special 

Requirements 

We proposed a new section providing 

that we may require a terminating 

institution to obtain independent 

analyses or studies of and rulings on 

matters related to the proposed 

termination. We proposed that if expert 

analyses, studies, or rulings are needed, 

we will require a terminating institution 

to engage experts acceptable to us to 

perform such work. We further 

proposed that we may require such 

analyses, studies, or rulings, or 

summaries of them, be provided to 

equity holders as part of the plan of 

termination, or separately. We also 

proposed that we may require a 

terminating institution to hold regional 

or local informational meetings for 

equity holders during the time period 

after they receive notice of the proposed 

termination and before the stockholder 

vote on termination. Any meetings 

would be subject to the plain language 

requirements of proposed § 611.1217(b) 

regarding balanced statements of 

anticipated benefits and potential 

disadvantages. 

System commenters supported the 

FCA’s proposal and encouraged FCA to 

require studies as needed. They asserted 

that the facts and circumstances of any 

particular termination request must be 

carefully evaluated and that an 

independent analysis of various issues 

raised by the request may be 

appropriate, including the impact on 

System-wide debt holders, the cost and 

credit rating of System-wide debt 

securities, tax aspects of the transaction, 

the valuation of dissenters’ rights, the 

impact on other System institutions, 

and all the costs associated with either 

chartering a new institution to serve the 

applicable territory or amending the 

charters of other System institutions to 

serve it. 

A non-System commenter (ICBA) 

stated that the broad scope of issues the 

FCA suggests studying are unwarranted 

and not reflective of the Act’s intent. 

They asserted that the impact of a 

departure upon the System would be 

minimal because the System is 

adequately capitalized, any exit fee 

would remain with the System, and 

because the FCA has the necessary 

authorities to re-charter territory vacated 

by the terminating institution. Other 

non-System commenters suggested that 

the FCA should not be able to impose 

special requirements, assessments, 

analyses, rulings or studies before 

approving a termination plan of a 

System institution without also having 

some time limit or limitation on the 

number of requests that FCA might 

make of an institution. 

Under section 7.10 of the Act, the 

FCA Board has broad regulatory 

authority to impose other conditions, as 

it considers appropriate, upon an 

institution seeking to terminate its 

System status. As discussed in the 

proposed rule, a termination raises 

issues for the FCA that are both 

significant and non-routine. Therefore, 

the FCA believes certain types of 

additional analysis or studies may be 

necessary or useful in evaluating a 

specific termination proposal. However, 

we believe that any requirements for 

special studies and analysis can be 

determined only on a case-by-case basis 

after considering the nature of the 

termination request and the extent of 

any studies already conducted by the 

terminating institution. The FCA agrees 

with the commenter’s assessment that 

the System is currently strongly 

capitalized, as well as the statement that 

the FCA would act to address any 

territorial void that may occur as the 

result of an approved termination. We 

disagree, however, with the assertion 

that the System and the terminating 

institution’s stockholders would not be 

impacted by a termination. While these 

capitalization and territorial issues are 

clearly factors that would be considered 

in any termination request, they are not 

the only factors that need to be 

considered or issues that may require 

additional study in evaluating the 

impact of a termination on the 

institution’s stockholders, the System 

and other parties. The FCA will act 

prudently in determining the nature and 

extent of any required studies or 

analyses but believes it is inappropriate 

to limit, by number or amount, the 

requirements that we may impose in 

this area. 

Another non-System commenter 

(Rabobank) objected to this proposal 

asserting that the additional 

requirements for studies and analyses 

and for holding informational meetings 

for stockholders could delay the 

termination process for a significant 

period of time and the requirements 

would impose substantial costs on the 

terminating institution. They assert that 

the FCA has not balanced the costs and 

benefits of these proposed new 

requirements or shown that the existing 

informational requirements are 

insufficient. The commenter suggested 

that, to the extent these required studies 

examine the System and parties other 


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than the terminating institution, these 

costs should be borne by the FCA, not 

by the institution. 

It is not the FCA’s intention to delay 

the termination process, nor do we 

believe that any delays resulting from 

these requirements would unduly 

extend the process. To the extent that 

special studies and analyses and 

informational stockholder meetings 

serve to extend the termination process, 

the FCA believes that this additional 

time is necessary to ensure that the 

stockholders of the terminating 

institution are fully informed as to the 

impact of the termination on their 

interests and that the FCA has the 

information it needs to deliberate 

appropriately on the issues and make a 

reasoned decision on the termination 

request. 

The FCA is mindful of the costs of 

performing certain studies and analyses 

contemplated by this provision. The 

FCA concludes that the costs of studies 

and analyses related specifically to the 

impact of the termination on the 

institution and its stockholders are 

legitimate termination expenses that 

should be paid for by the institution and 

should not be deducted from the exit 

fee. However, there is merit to the 

commenter’s suggestion that costs of 

studies that address issues regarding the 

impact of the termination on the System 

in general should be handled differently 

than studies that address the impact of 

the termination on the terminating 

institution and its stockholders. In 

response to this comment, in the final 

rule at §§ 611.1250 and 611.1255, we 

provide that a terminating institution 

required by the FCA to engage 

independent experts to conduct any 

assessments, analyses, or studies, or to 

request rulings that examine the impact 

of the termination on the System and 

parties other than the terminating 

institution and its stockholders may 

exclude such related expenses from the 

other termination expenses added back 

to assets under the requirements of 

existing §§ 611.1250(a)(4)(i) and 

611.1255(a)(4)(i) pertaining to 

associations, and §§ 611.1250(b)(5)(i)(A) 

and 611.1255(b)(5)(i)(A) pertaining to 

banks, when calculating the terminating 

institution’s preliminary and final exit 

fees. This means that the exit fee would 

be reduced by an amount approximately 

equal to the cost of such excluded 

expenses. We believe this change 

balances the responsibilities of 

termination expenses for the 

terminating institution (and the 

successor institution) with benefits that 

would be obtained from studies that 

examine System issues related to the 

termination request. 

Section 611.1215—Communications 

With the Public and Equity Holders 

We proposed a new section on 

communications. This section would 

permit a terminating institution to 

communicate with the public and with 

its equity holders during the 

termination process, provided that the 

written communications contain a 

legend urging equity holders to read the 

information statement and are filed with 

the FCA on the date of first use. If we 

believed any communications are 

inaccurate or misleading, we would 

require corrections to be made. We 

could also require a terminating 

institution to file written 

communications made by other 

participants in the termination and 

related transactions, such as a merger 

partner. The regulation contained a safe 

harbor for unintentional failures to 

make timely filings with the FCA and 

provided that communications that 

contain no new information from 

previously filed communications do not 

need to be filed. 

We received comments on this 

proposed section from Rabobank, the 

ICBA, and a number of commercial 

bankers. Both Rabobank and ICBA 

supported allowing a terminating 

institution to communicate more freely 

with the public and equity holders 

during the termination process. All the 

commenters on this section 

recommended that we extend our 

monitoring of communications to 

additional parties. Rabobank 

recommended that the FCA monitor 

public communications about the 

termination made by other System 

institutions. ICBA recommended that 

we review for accuracy any information 

sent to the terminating institution’s 

equity holders by parties opposed to the 

termination. The commercial bankers 

recommended that other System parties 

that oppose a termination should not be 

exempt from a requirement to 

disseminate accurate information. The 

FCA considered these recommendations 

but did not adopt them. While we do 

not support the dissemination of 

inaccurate information by any party, we 

believe that communications by the 

terminating institution require a higher 

level of scrutiny because of the 

disclosure requirements in section 7.11 

of the Act, the fiduciary duties owed by 

the institution’s management and 

directors to the institution’s equity 

holders, and the institution’s access to 

most all of the relevant facts 

surrounding a proposed termination. If 

a terminating institution believes other 

parties are making false and misleading 

statements, it will now be able to 

respond to such statements by means of 

public communications and direct 

correspondence with its equity holders. 

In addition, it is unlikely that parties 

other than the terminating institution’s 

own equity holders would communicate 

directly with other equity holders. 

Under section 4.12A of the Act (12 

U.S.C. 2184) and § 618.8310(b) of our 

regulations, the institution’s equity 

holders are the only parties entitled to 

obtain a stockholder list for 

communications about the termination. 

Furthermore, we do not believe it is 

necessary or practical to monitor 

communications between equity 

holders. 

The FCA adopts this section as 

proposed. 

Section 611.1216—Public Availability of 

Documents Related to the Termination 

Proposed § 611.1216 provides that we 

may post on our Web site, or require a 

terminating institution to post on its 

Web site, documents related to the 

termination. Disclosure of the 

documents will, at an early stage in the 

termination process, enable equity 

holders and others to understand the 

structure and ramifications of the plan 

of termination. We indicated in the 

preamble to the proposed rule that we 

expect the institution to post the board 

of directors’ resolution on its Web site 

to commence the termination process, 

in addition to the notice to equity 

holders. We could require the posting of 

other documents such as charter 

documents of the successor institution 

or contracts entered into with a merger 

or acquisition partner. In addition, we 

could require the posting of the results 

of any special assessments, analyses, 

studies, and rulings. We stated that it 

was not our intention to require the 

posting of confidential information, and 

the terminating institution could request 

us to keep specific documents 

confidential. 

The ICBA asserted that our proposal 

is designed to intimidate institutions 

from attempting to terminate and that 

the FCA does not have authority to deny 

a terminating institution’s request to 

keep documents confidential. A number 

of commercial bankers also stated they 

disagreed with publishing sensitive 

information on the internet at the 

discretion of the Agency. A System 

commenter (AgriBank) stated its belief 

that the FCA, rather than the 

terminating institution, should 

determine whether information is 

confidential, and also that the 

information should be published on the 

FCA Web site. 

After carefully considering the 

suggestions of the commenters, the FCA 


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has decided to adopt the final regulation 

without changes from the proposed rule. 

The purpose of this provision is to 

ensure a broad dissemination of the 

significant termination documents to 

equity holders and the public. We 

intend generally to accord confidential 

treatment to termination documents to 

the same extent we accord 

confidentiality to other documents we 

receive from System institutions. As for 

whether the information is on the FCA’s 

Web site or the terminating institution’s 

Web site, our intention is to ensure the 

availability of termination-related 

information. We will make the 

determination of which Web site is most 

appropriate for stockholders to obtain 

all relevant information on a case-bycase basis. 

Section 611.1217—Plain Language 

Requirements 

We proposed to move the plain 

language requirements in existing 

§ 611.1223(a) to new § 611.1217 and to 

apply them to all communications with 

equity holders required by these 

regulations, not just to the information 

statement. To help ensure a balanced 

presentation of the information, we also 

provided that communications 

describing the anticipated benefits of 

the proposed termination should also 

give similar prominence to the potential 

disadvantages of the termination. 

We did not receive any comments on 

this section and adopt it as proposed. 

Section 611.1218—Role of Directors 

In this proposed new section, we 

intended to emphasize the importance 

of directors in the termination process, 

not only when they take action on 

behalf of the terminating institution, but 

also when they act individually. First, 

we provided that directors could not be 

prohibited by confidentiality 

agreements or otherwise from publicly 

or privately commenting on a 

termination proposal and related 

transactions. In our view, such 

prohibitions would not be in the best 

interests of the equity holders because 

they prevent directors from consulting 

with the persons they represent and 

prevent equity holders from learning the 

opinions of those who should have the 

most detailed knowledge of the 

proposal. We noted that this provision 

would not permit directors to reveal 

trade secrets or confidential financial 

information that they would be 

prohibited from revealing in the absence 

of a confidentiality agreement or similar 

document. 

We further proposed to provide that 

one or more directors have the right to 

obtain legal and financial advice on the 

proposed termination, and that the 

institution must pay reasonable 

expenses for such advice. This was 

intended to ensure that each director 

has the opportunity to obtain 

independent advice on the proposed 

transaction. 

We received a number of comments 

on this proposal. AgriBank supported 

the provision on confidentiality 

agreements and suggested expanding it 

to prohibit curbs on communications by 

employees of the terminating 

institution, as well as to prohibit the 

terminating institution from requiring 

employees to express support for the 

termination as a condition of 

employment. AgriBank also stated that 

directors who obtain independent 

financial and legal advice should not be 

required to prove the reasonableness of 

their cost. Rabobank opposed permitting 

individual directors to seek 

independent legal and financial advice 

on a proposed termination and asserted 

that, if directors consulted outside 

parties for all board decisions, boards 

could no longer function. The ICBA 

found ‘‘particularly objectionable’’ our 

proposal to permit directors to obtain 

independent counsel and to permit 

directors to express their opinions about 

the termination publicly; the association 

also asserted that the Act does not 

authorize the FCA to override a legally 

binding confidentiality agreement. A 

number of commercial bankers 

expressed the view that our proposals in 

this section regarding directors’ rights 

and in § 611.1216 regarding the public 

availability of information about the 

termination have the sole purpose of 

placing hurdles in an institution’s way 

in order to prevent it from leaving the 

System. 

In response to these comments, the 

FCA has revised its proposal in 

§ 611.1218(b). In the final rule, we 

continue to provide that one or more 

directors of a terminating institution 

may seek independent advice on the 

termination, but we clarify when the 

board may deny payment of expenses 

for such advice. The board, by at least 

a two-thirds vote of the full board (the 

total number of current directors), may 

deny payment of such expenses if it 

determines that the expenses are 

unreasonable. If payment is denied, the 

board must specify why the expenses 

are unreasonable, notify the FCA within 

1 business day of the denial, and 

explain the reasons for its determination 

in the disclosure information submitted 

to equity holders. We believe that this 

revised procedure more appropriately 

balances the rights of directors to obtain 

independent advice with the rights of 

the institution to avoid using the 

institution’s assets for unreasonable 

expenses. 

We adopt the other provisions of this 

section as proposed. We disagree with 

the assertion that the Act does not 

authorize the FCA to override a ‘‘legally 

binding’’ confidentiality agreement. On 

the contrary, section 7.10(a)(7) 

specifically authorizes FCA to 

promulgate rules to govern the 

termination process. In addition, we do 

not support requiring employees, 

against their will or as a condition of 

employment, to express support for a 

termination to customers (who are also 

current or prospective equity holders of 

the institution). However, we are not 

persuaded that employees are likely to 

be coerced in that manner, and we note 

that employees are prohibited under 

§ 611.1219(a) from making 

misstatements or omissions of a material 

fact to equity holders. While we agree in 

principle that boards could not 

function, or would have difficulty 

functioning, if directors consulted 

outside parties for ‘‘all board decisions,’’

that is not what we proposed. 

Terminating status as a System 

institution is an extraordinary event, 

and it is likely to be equally 

extraordinary for the institution’s 

directors, who by and large are farmers 

and ranchers. In this circumstance, we 

believe that providing for 

reimbursement of reasonable expenses 

for independent advice will help ensure 

that the board members act with full 

knowledge and understanding of the 

termination and its consequences. 

Similarly, we believe that enabling 

directors who oppose termination to 

express their opinions to equity holders 

and the public is consistent with the 

directors’ duties to stockholders and 

will contribute to stockholders’ more 

complete understanding of the proposed 

transaction. 

Section 611.1219—Prohibited Acts 

We proposed to move existing 

§ 611.1215 to this new § 611.1219. In 

§ 611.1219, we proposed to delete the 

reference to our preliminary approval of 

the termination, because we proposed to 

eliminate the preliminary approval 

provision. We also proposed to prohibit 

the institution and any director, officer, 

employee, and agent from making any 

untrue or misleading statement of a 

material fact, or failing to disclose any 

material fact to the FCA about the 

proposed termination and any related 

transactions. This prohibition already 

applied to statements made to or 

withheld from current or prospective 

equity holders. 

Rabobank asserted that the FCA 

should also expressly prohibit untrue or 


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misleading statements or omissions of a 

material fact by any System institution 

and should sanction institutions that 

violate the prohibition, stating that 

‘‘anything less would allow an 

opponent of a termination to galvanize 

opposition based on falsehoods and 

deception.’’ Although the FCA strongly 

opposes the dissemination of 

misleading and deceptive information 

by any party, we have decided not to 

incorporate Rabobank’s 

recommendation in the regulation. The 

terminating institution’s directors, 

officers, employees and agents have 

specific legal duties to the terminating 

institution and, indirectly or directly, to 

its equity holders; other System 

institutions do not. Consequently, we 

will not extend the regulation’s 

prohibition to them. We note that, under 

the communications provisions, the 

terminating institution will be free to 

respond publicly, or in correspondence 

with equity holders, to statements made 

by other parties. 

We adopt this section in the final rule 

without any changes from the proposal. 

Section 611.1220—Termination 

Resolution 

Proposed § 611.1220 was an 

expansion of the requirement in existing 

§ 611.1220(a) for the board to adopt a 

termination resolution. We proposed 

that the board must adopt a resolution 

no more than 1 week before submitting 

the plan of termination to us. The 

resolution must: Indicate the board’s 

continuing support for termination; 

authorize submission of the plan of 

termination to us; and (if we approve or 

take no action) authorize submission of 

the plan of termination to voting 

stockholders. 

Except for comments on the three 

required board resolutions, we did not 

receive any comments on this specific 

provision and adopt § 611.1220 as final 

without changes. 

Section 611.1221—Submission to FCA 

of Plan of Termination and Disclosure 

Information; Other Required 

Submissions 

Proposed § 611.1221 revised the 

existing regulation to provide that a 

terminating institution may not file a 

plan of termination until at least 30 days 

after the institution has sent the notice 

to equity holders under § 611.1210(b). 

We also proposed to remove references 

to the Financial Assistance Corporation 

(FAC) because all outstanding FAC debt 

has been repaid. 

We received one comment from the 

ICBA on the requirement that the 

terminating institution may not file its 

termination plan with FCA until at least 

30 days after it mails the advance notice 

to its equity holders. The ICBA objected 

to FCA’s applying an additional 30-day 

waiting period and stated this 

requirement is unnecessary because 

FCA will determine when the 60-day 

clock will begin and end for FCA’s 

review and approval of the termination 

plan for submission to stockholders. 

The ICBA contended that the additional 

30 days shifts the approval process from 

60 to 90 days. 

We disagree that the 30-day time 

period is unnecessary. In our 

experience, it is likely that an 

institution will take longer than 30 days 

to assemble a complete plan of 

termination after a decision is made to 

terminate. The 30-day waiting period 

will also encourage an institution to 

promptly inform us of its intention to 

terminate. The 30-day time period gives 

FCA time to prepare for receipt and 

review of the request. FCA will still be 

obligated to review and take action on 

the proposed termination plan and 

disclosure for submission to 

stockholders within 60 days of the filing 

of a complete plan of termination or, if 

we take no action within 60 days, the 

institution can submit the plan of 

termination to its voting stockholders. 

We adopt § 611.1221 as final without 

changes from the proposal. 

Section 611.1223—Plan of 

Termination—Contents 

We proposed numerous changes to 

this section including renaming this 

section ‘‘Plan of termination—

contents.’’ We proposed a requirement 

at § 611.1223(b)(7) for a terminating 

institution to explain in the summary to 

the plan of termination whether the 

successor institution expects to engage 

in a corporate restructuring in the 18 

months following termination. 

We received comment letters from 

Rabobank and the ICBA on this section. 

Rabobank stated that the proposal does 

not explain why we would need this 

information or how we would use it, 

and that the requirement would 

inappropriately assert FCA oversight of 

a non-System entity. Rabobank further 

noted that if the terminating institution 

did not disclose a possible future 

restructuring, the successor institution 

may be discouraged from such a 

restructuring, despite potential benefits 

to equity holders, due to fear of 

interference from the FCA. Rabobank 

recommended that this requirement be 

eliminated. Rabobank stated that once 

an FCS institution has terminated its 

System charter and becomes a different 

type of financial institution, the 

institution is no longer regulated by 

FCA. The ICBA believed that this 

provision was without merit and should 

be deleted from the rule. The ICBA 

noted that an appropriate Federal or 

State authority charters the successor 

institution as a bank, savings and loan 

association, or other financial 

institution, so it is likely that this 

information will already be disclosed to 

voters. The commenters further stated 

that FCA is adding another legal 

roadblock, suggesting the successor 

institution could be sued after 

termination if an additional charter 

conversion was to occur. 

We believe that this requirement 

benefits the equity holders who are 

entitled to know what the future plans 

of the terminating institution could 

include. If the terminating institution’s 

conversion to another financial 

institution involves its acquisition by 

another financial services company or 

corporation, stockholders need to be 

fully informed before voting on the 

termination proposal. In addition, FCA 

could not interfere with the actions of 

the successor institution because the 

successor institution will not be subject 

to FCA oversight and regulation. Our 

principal concern is the right of 

stockholders to know if the successor 

institution, within the space of 18 

months or less, will undergo further 

reorganization based on business 

planning underway at the time the 

termination application is filed with 

FCA. If the terminating institution has 

no such plans or is unaware of any 

future events that might result in its 

subsequent reorganization within the 

18-month period following termination, 

no such disclosure will be required. 

Consequently, we are not changing this 

provision of the rule and adopt it as 

proposed. 

We also proposed in paragraph (c)(7) 

to require a terminating institution to 

include summaries or copies of 

termination-related contracts and 

agreements, including copies of 

contracts and agreements in connection 

with the termination and operations of 

the successor institution; in paragraph 

(c)(13) to require the institution to 

disclose employment, retirement, and 

severance agreements; in paragraph 

(c)(26) that we may require a 

terminating institution to disclose 

assessments, analyses, studies, or 

rulings that we require the institution to 

obtain under proposed § 611.1211; in 

paragraph (c)(29) that we will require 

the terminating institution to include 

statements by directors that desire to 

make individual or group statements 

regarding the proposed termination and 

related transactions; and in paragraph 

(c)(3) that we would require the 

terminating institution to include a copy 


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of the reaffirmation resolution, a 

proposed new requirement set forth in 

proposed § 611.1235. 

We did not receive any comments on 

these other provisions and adopt them, 

except for paragraph (c)(30), as final 

without changes. We have deleted 

paragraph (c)(30) in the final rule 

because the institution must send us the 

disclosure information before the board 

votes on the reaffirmation resolution. 

Section 611.1230—FCA Review and 

Approval—Plan of Termination 

Proposed new § 611.1230 separated 

our approval of the plan of termination 

and the related disclosure to 

stockholders, as required by section 

7.11(a)(1) of the Act, from our decision 

on the termination as required by 

section 7.10(a)(2) of the Act. We 

proposed to retain provisions on our 

section 7.11 approval in this section and 

to move the section 7.10 approval to 

proposed § 611.1247. Our review of the 

disclosure information will precede the 

submission of the information to equity 

holders, as in the existing regulation, 

and we will begin the statutory review 

period on the date the disclosure 

information is complete, as determined 

by us. We proposed to review and 

approve or disapprove the termination 

itself after the equity holders have voted 

to approve the termination. 

We received comments on this 

provision from all commenters. The 

FCC, three System banks, and four 

System associations stated they 

recognized the need for FCA to separate 

the approval of the termination plan, for 

purposes of distribution for a 

stockholder vote, from approval of the 

termination itself. At the same time, 

System commenters urged us to begin 

our substantive review as soon as 

possible after the application is received 

and to retain flexibility to make a 

decision as early as possible in the 

process so that the matter is not pending 

for a lengthy period. One bank noted 

that while improved information, 

analysis, and transparency are 

important objectives, FCA must be 

prepared to act when circumstances 

warrant, because failure to act could 

affect the System’s investors and 

customers. One non-System commenter, 

the ABA, agreed that separating the 

review of the disclosure information 

from the review of the termination itself 

is appropriate. However, it expressed 

concern about FCA’s ability to delay the 

process by requiring an unending level 

of information before the plan is 

deemed complete and argued that we 

should impose a reasonable cut-off 

point so that the institution can move 

forward. Rabobank stated that FCA’s 

two approvals of the termination reduce 

clarity and impose costs and 

administrative burdens that outweigh 

the benefits. Rabobank believed that 

FCA burdens and encumbers the 

process to a degree that Congress 

explicitly did not intend and that we 

lack the authority to give ourselves 

intermediate approval steps. Rabobank 

also stated that requiring preliminary 

FCA review of the disclosure would 

delay the termination process without 

contributing a significant benefit to that 

process or to the stakeholders. One 

group of commercial bankers objected to 

this provision because it specifies no 

time limit for the conclusion of the 

process. Another group of commercial 

bankers argued that we create 

unnecessary barriers, legal 

impediments, time delays, and other 

obstacles for any FCS institution that 

may want to exit the System and that 

these obstacles are unparalleled in the 

financial services industry. 

We agree with commenters that we 

should make a decision on the 

termination itself as early in the process 

as possible. Our separation of approval 

of the termination plan and disclosure 

for submission to stockholders from our 

approval (or disapproval) on the 

termination is not meant to delay 

unnecessarily the termination decision. 

We acknowledge that failure to act 

promptly and decisively may affect 

stockholders and investors’ confidence. 

We will begin our substantive review as 

soon as possible and make a decision as 

early as possible. We disagree with 

other commenters that we are creating 

time delays and other obstacles by our 

process. We have always had the 

discretion, in our review and approval 

of other corporate applications (such as 

mergers and consolidations), to 

determine whether the application is 

complete before beginning the 60-day 

review. We have used our discretion by 

communicating promptly with 

institutions whose applications were 

incomplete and working closely with 

them to ensure completion. We will 

follow this approach as well for a 

termination request in determining 

whether it is complete and in notifying 

the terminating institution when the 60- 

day review period begins. In the 

alternative, FCA could reject a plan 

because it was incomplete, but the 

institution would need to begin the 

process anew. The proposal permits a 

more streamlined process. Once FCA 

notifies the institution that the 

termination plan and disclosure is 

complete, we are bound by the statutory 

requirement of section 7.11(a)(1) to act 

on the plan within 60 days. Should the 

FCA Board fail to act within the 60-day 

period, the institution may submit the 

plan and related disclosure to its 

stockholders for a vote. Accordingly, we 

adopt this provision as proposed. 

Section 611.1235—Plan of 

Termination—Distribution 

We proposed requiring the 

terminating institution’s board of 

directors to adopt a reaffirmation 

resolution approving the termination 

not more than 14 days before mailing 

the plan to stockholders in order to 

ensure the continuing support of the 

board for the termination. Comments 

received on this provision and our 

response are included with the 

discussions of required board 

resolutions under § 611.1210. 

We also proposed to require the 

terminating institution to provide the 

plan of termination to equity holders at 

least 45 days (instead of the existing 

regulation’s 30 days) before the 

stockholder vote will occur. 

One non-System commenter, the 

ABA, disagreed with our extension for 

the stockholder review period from 30 

days in the current rule to 45 days, 

arguing that it is a needless delay and 

that 30 days is sufficient for 

stockholders to review and question any 

termination plan. 

On the contrary, stockholders will 

need to thoroughly review an expected 

extensive disclosure and may have a 

number of questions to ask the 

institution’s board and management. 

The additional 15 days will permit 

informational meetings to be held 

throughout the institution’s territory, as 

proposed in § 611.1211(b), so that 

stockholders can have their questions 

answered and can discuss the pros and 

cons with other member-borrowers and 

with institution directors. These 

meetings will also give management an 

opportunity to explain the termination 

plan and procedures. We are finalizing 

this provision as proposed, except that 

we have made a non-substantive change 

to paragraph (a) to remove redundant 

language. 

Section 611.1240—Voting Record Date 

and Stockholder Approval 

Except for existing § 611.1240(c), 

which we proposed to move to 

§ 611.1235, we proposed to retain the 

remainder of existing § 611.1240 with 

the following revisions. In paragraph (a), 

we proposed to require the stockholder 

vote to take place at least 60 days after 

we have approved the plan of 

termination (or 60 days after the end of 

our review period) instead of no more 

than 60 days after. We proposed this 

change to ensure that voters have 


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enough time to review and evaluate the 

proposal. In paragraph (c), we proposed 

a quorum requirement of 30 percent of 

voting stockholders that must be present 

(in person or by proxy) at the meeting. 

This would not require 30 percent of 

voting stockholders to cast a vote but 

would require their presence (in person 

or by proxy) at the meeting. We made 

this proposal because we believe an 

issue of such importance to all equity 

holders should be deliberated upon by 

a significant number of the voting 

stockholders, regardless of the number 

who ultimately vote. In paragraph (d), 

we restated the requirement in section 

7.10(a)(6) of the Act that a majority vote 

by voting stockholders present and 

voting in person or by proxy at a duly 

authorized meeting is needed to 

approve the termination. 

We also proposed to add a reference 

in new paragraph (e) to § 611.340, to 

clarify that the voting security 

regulation applies to this stockholder 

vote as well as § 611.330, which covers 

confidentiality in voting. 

We received comments on the 

proposed 30-percent quorum 

requirement from a number of 

commenters. The System commenters 

supported the quorum requirement in 

this section for the first vote but not for 

the reconsideration vote in § 611.1245, 

as discussed below. About half of the 

commercial bankers recommended a 

simpler, more convenient voting 

process, stating that, ‘‘in the day of 

emails and the internet,’’ we should not 

require 30 percent of stockholders to be 

physically present for the meeting. The 

ICBA, ICB of ND, and ABA also objected 

to requiring 30 percent of stockholders 

to be physically present during a 

termination vote because of the 

difficulty and cost to the stockholders, 

some of whom live in remote rural 

areas. In addition, the ABA asserted that 

requiring at least 60 days between FCA 

approval of the plan of termination and 

the stockholder vote caused an 

unnecessary delay in the termination 

process. 

The proposed rule does not require 

voting stockholders to be physically 

present at the stockholders’ meeting in 

order to meet the quorum. As the rule 

says, voting stockholders must be 

present ‘‘in person or by proxy.’’ Voting 

stockholders have the option of 

attending the meeting in person, giving 

their proxies to another voting 

stockholder of their choice who will 

attend the meeting in person, or sending 

their proxies to the institution with (or 

without) instructions as to how to vote. 

Moreover, a voting process that permits 

voting via the Internet is not prohibited, 

provided the institution complies with 

the voting security and confidentiality 

requirements of the Act and FCA 

regulations. 

As for the 60-day minimum period 

between FCA approval and the 

stockholder vote, we disagree that this 

will cause unnecessary delay in the 

termination process. We believe that at 

least 2 months are necessary for 

scheduling any pre-vote or 

‘‘information’’ meetings for stockholders 

that we require or that the terminating 

institution wishes to hold, and for 

printing and distributing the disclosure 

information for stockholders. 

We adopt this section in the final rule 

without any changes from the proposal. 

Section 611.1245—Stockholder 

Reconsideration 

In paragraph (b) of this section, we 

proposed adding a quorum requirement 

of at least 30 percent of voting 

stockholders for the same reasons we 

proposed a quorum requirement for the 

first stockholder vote. The stockholder 

reconsideration vote is provided for in 

section 7.9 of the Act (12 U.S.C. 2279c–

2), which gives stockholders opposing 

an intra-System merger, transfer of 

lending authority, or termination the 

right to petition their institution for a revote (reconsideration vote) following 

any approval of the transaction. The 

petition must be signed by at least 15 

percent of the voting stockholders and 

must be delivered to the FCA within 35 

days after the mailing of the notice to 

stockholders of the results of the first 

vote. If a majority of the voting 

stockholders votes against the 

transaction in the reconsideration vote, 

the transaction cannot take place. 

All of the System commenters 

objected to having a 30-percent quorum 

requirement for the reconsideration 

vote, even though they supported the 

30-percent quorum requirement for the 

first vote. They asserted that it was 

unduly burdensome and contrary to the 

Act. They did not specify how they 

believed it was contrary to the Act, but 

they said that the quorum requirement 

could create an incentive for 

stockholders supporting termination to 

boycott the reconsideration vote 

meeting. Non-System commenters 

opposed what they believed was a 

requirement that stockholders be 

physically present to count towards the 

quorum for the reconsideration vote; as 

we explain above, this interpretation is 

incorrect, and there is no requirement 

for stockholders to be physically present 

to make up the quorum for either vote. 

We have considered the 

recommendation to eliminate the 

quorum requirement for the 

reconsideration vote and have decided 

to retain it. The quorum requirements 

for the reconsideration vote, as well as 

for the first stockholder vote, are 

consistent with our authorities under 

the Act to regulate the termination 

process. If we were to incorporate the 

System commenters’ recommendation, 

it would be more difficult for the 

terminating institution to obtain the first 

vote than for stockholders to obtain a 

reconsideration vote. Furthermore, 

without the same quorum requirement 

for the reconsideration vote, there 

would be a possibility that a termination 

could be blocked by a significantly 

smaller number of stockholders in a 

reconsideration vote than the number of 

stockholders who originally voted in 

favor of it. We believe this result would 

be unfair. Under our proposal, it will be 

no more difficult to achieve a quorum 

for the reconsideration vote than for the 

first vote. 

We adopt this section in the final rule 

without any changes from the proposal. 

Section 611.1246—Filing of 

Termination Application and Its 

Contents 

Proposed new § 611.1246 provides 

that, within 90 days of notifying us that 

voting stockholders have approved the 

plan of termination, a terminating 

institution may submit a termination 

application containing the information 

that is required by the termination 

regulations and any additional 

information that we request or that the 

terminating institution’s board wishes to 

submit. 

We received no comments that 

directly relate to the filing of the 

termination application with FCA 

following the stockholder vote. We 

adopt the provision as proposed. 

Section 611.1247—FCA Review and 

Approval—Termination 

We proposed new § 611.1247 that 

would provide for a separate approval of 

the termination application. As we 

noted above in the preamble discussion 

of § 611.1230, we proposed to review 

the termination application after our 

review of the plan of termination 

required by section 7.11(a)(1) of the Act 

and after a stockholder vote approving 

the termination. In this proposed new 

section, paragraph (a) stated that, after 

we receive the termination application, 

we will review it and either approve or 

disapprove the termination. Paragraph 

(b) stated that we will disapprove the 

termination if we determine that there 

are one or more appropriate reasons for 

disapproval, consistent with our 

statutory and regulatory authorities. We 

proposed to delete existing 

§ 611.1230(b), which provides that we 


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may disapprove a termination if we 

determine it would have a ‘‘material 

adverse effect on the ability of the 

remaining System institutions to fulfill 

their statutory purpose.’’ While we did 

not rule out disapproval of a 

termination based on its ‘‘material 

adverse effect’’ on the remaining System 

institutions, we stated that we may 

disapprove a termination for any 

appropriate reason. 

Proposed paragraph (c) set forth 

conditions required for our approval of 

the termination. In proposed paragraph 

(d), we provided that, when we approve 

a termination, we will also determine an 

effective date for the termination. Such 

date could be no earlier than the last to 

occur of the following events: (1) 

Fulfillment of the conditions in 

paragraph (c) of this section; (2) the 

terminating institution’s proposed 

termination date; (3) 90 days after we 

received the termination application; or 

(4) 15 days after any reconsideration 

vote. 

We received 33 comment letters on 

this provision of the proposed rule. In 

their comments on proposed § 611.1230, 

eight System commenters urged FCA to 

begin our substantive review as soon as 

possible after the application is received 

and to retain flexibility to make a 

decision as early as possible in the 

process so the matter is not pending for 

a lengthy period. One System bank 

noted that while improved information, 

analysis, and transparency are 

important objectives, FCA must be 

prepared to act when circumstances 

warrant, because failure to act could 

affect the System’s investors and 

customers. In our response above to the 

comments on § 611.1230, we agreed on 

the importance of decisive action as 

early as possible. One System bank 

commented that we should approve a 

termination only if the institution’s exit 

further fulfills the congressionally 

mandated mission and, at a minimum, 

any approval of a request should not be 

detrimental to the remaining 

institutions’ ability to fulfill the 

mission. Rabobank stated that FCA’s 

second vote, which would follow 

stockholder approval and three votes by 

the board of directors, is unfair to 

stockholders because it would veto the 

equity holders’ mandate and undercut 

the democratic principles that give the 

stockholder-owners the right to make 

decisions governing their institution. 

Rabobank commented that our failure to 

impose a timeframe for FCA’s vote 

could delay the process indefinitely. 

Rabobank also objected to our removal 

of all references to criteria that we may 

use or reasons we may give for 

disapproval, giving System institutions 

no way to ascertain whether a 

termination will be approved until an 

extraordinary amount of time and 

money has been expended. In 

particular, Rabobank objected to our 

removal of the criterion of ‘‘material 

adverse effect’’ from the regulation that 

governs our review, and argued that it 

is the only reason for disapproving a 

termination request, assuming all 

regulations were satisfied. It asked that 

this criterion be preserved from the 

current rule and that FCA clarify that 

we will disapprove a termination only 

based on a determination that the 

termination would have a material 

adverse effect. In the alternative, 

Rabobank asked FCA to identify 

additional criteria for disapproval and 

then republish its proposed rule with 

criteria for public comment. Rabobank 

stated that FCA owes System 

institutions greater transparency in how 

it will evaluate termination requests and 

recommended that we articulate clear 

standards for how we would review the 

request and make the decision after 

board and stockholder approval. The 

ICBA commented that the ‘‘material 

adverse effect’’ criterion should stay in 

the regulation as it is the one that makes 

the most sense in directing our approval 

process, and that all other issues, such 

as impact on stockholders, would have 

already been thoroughly vetted during 

the disclosure review process. The ICBA 

further noted that the payment of the 

exit fee and debt obligations will 

already ensure there is not an adverse 

effect on System institutions. The ABA 

noted that FCA retains the right to deny 

a termination if it has a materially 

adverse impact on the rest of the System 

even though the proposed rule 

eliminated this as a specified reason for 

denial. Also, the ABA expressed 

concern that ‘‘materially adverse effect’’

is not quantified in the proposed rule 

and suggested that FCA set forth a rule 

for public comment on the level of 

impact that we would consider material. 

In addition, the ABA criticized us for 

setting no time limit for approval or 

disapproval and establishing no criteria 

by which we would make the decision, 

noting that the grounds for rejection, if 

already approved by the stockholder 

owners, should be extremely restricted 

because we have numerous options for 

maintaining FCS services in the 

territory. The ABA recommended that 

FCA set out its potential reasons for 

rejection of a termination for notice and 

public comment. One group of 

commercial bankers commented that 

FCA may reject any termination plan 

even after the local institution has 

followed all procedures. It noted that 

FCA, as the System’s regulator and 

surety of stockholder rights, should 

clearly spell out in advance the basis 

and timeframes for any such 

determination (of approval or 

disapproval). A second group of 

commercial bankers stated that the 

proposal should set clear deadlines for 

various stages of the approval process 

but that the proposal leaves many of the 

decision deadlines open-ended. 

We believe that the System bank’s 

suggestion that we should approve a 

termination only if the exit furthers 

fulfillment of the System’s mission or, at 

minimum, approve a termination only if 

it is not detrimental to the remaining 

System institutions’ ability to fulfill the 

mission is too narrow a reading of our 

statutory authority. The Act provides 

FCA with discretion to approve or 

disapprove a termination application 

and does not restrict our reasons for 

disapproving a proposed termination. 

With respect to our decision on the 

termination, FCA has statutory authority 

to approve or disapprove the 

termination, whether before or after a 

stockholder vote. Therefore, FCA 

disapproval would not be a ‘‘veto’’ of a 

stockholders’ ‘‘mandate,’’ but would be 

an exercise of FCA’s approval authority. 

In making our decision, we will 

consider all relevant factors, including 

stockholder actions on the termination 

proposal. 

As explained in the preamble to the 

proposed rule, we have determined that 

a clear separation of the two approvals 

will ensure the proper level of scrutiny 

as to the merits of the proposal apart 

from the adequacy of the disclosure 

materials. Termination of System status 

raises numerous issues for the 

terminating institution’s stockholders, 

the affiliated funding bank or remaining 

affiliated associations (as applicable), 

investors, and the public, all of whom 

must be considered. Three non-System 

commenters (Rabobank, ICBA, ABA) 

stated their belief that the only basis for 

our denial is if the termination has a 

material adverse effect on the ability of 

the remaining System institutions to 

fulfill their statutory purpose. Their 

intense focus on this one criterion 

supports our rationale for deleting this 

language from the rule because it diverts 

attention from any other reason(s) that 

we may need to consider. We may still 

decide that a termination should be 

denied based on the material adverse 

effect that it has on the remaining 

System institutions; however, it may not 

be the only reason or the principal 

reason. There are many factors that we 

will consider, including, but not limited 

to, the results of any stockholder vote on 

the termination. Under the law, we are 


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4See the preamble discussion of ‘‘Section 

611.1240—Exit Fee’’ in our proposed termination 

rule, 55 FR 28639 (July 12, 1990). 

obligated to provide reasons for any 

disapproval, and our reasons cannot be 

arbitrary or capricious. Enumerating 

specific reasons for disapproval before 

we know the details of a termination 

application would not be appropriate 

and would unnecessarily limit our 

reasons for disapproval. Thus, we adopt 

this section as proposed. 

Section 611.1250—Preliminary Exit Fee 

Estimate and § 611.1255—Exit Fee 

Calculation 

We proposed several parallel 

revisions to these sections, which 

explain how to calculate the 

preliminary exit fee estimate that must 

be included in the plan of termination, 

and how to calculate the final exit fee. 

In §§ 611.1250(a)(4)(i) and 

611.1255(a)(4)(i) pertaining to 

associations, and in 

§§ 611.1250(b)(5)(i)(A) and 

611.1255(b)(5)(i)(A) pertaining to banks, 

we added expenditures for tax services, 

studies, and equity holder meetings as 

examples of expenses an institution may 

incur that are related to a termination. 

In § 611.1250(c), which contains the 3- 

year look-back adjustment provision, we 

expressly include real property and 

servicing rights as assets that may be 

undervalued, overvalued, or not 

recorded on the institution’s books. We 

did not receive any comments on these 

provisions and adopt the proposed as 

final without any changes. 

We also proposed to require a 

terminating institution to add to assets 

any tax benefit that arises due to the 

termination. The proposed rule noted 

that we already have discretionary 

authority under existing 

§ 611.1250(c)(1)(vi) to require such an 

adjustment, but that we decided to 

expressly apply it to all terminations. 

This requirement is intended to balance 

existing and continuing provisions 

allowing for the deduction of tax 

expenses, due to termination, from 

assets in the preliminary and final exit 

fee calculations. A non-System 

commenter (Rabobank) suggested that 

FCA was attempting to incorporate ‘‘all 

historical tax benefits,’’ however 

derived, into the exit fee calculation. In 

proposing this provision, it was not our 

intention to go back through all the 

years of the terminating institution’s 

existence and attempt to assess and 

recapture past tax benefits. Rather, the 

intent of the provision is only to ensure 

that any tax benefit that arises as a result 

of the termination itself be included in 

assets and in the calculation of the exit 

fee. FCA believes this would be on par 

with existing regulations at 

§§ 611.1250(a)(4)(ii)(B) and 

611.1255(a)(4)(ii)(B) pertaining to 

associations, and in 

§§ 611.1250(b)(5)(iii)(C) and 

611.1255(b)(5)(iii)(C) pertaining to 

banks, that address adjustments to 

assets for tax expenses resulting from 

the termination. The non-System 

commenter stated that the calculation of 

the exit fee should be based on financial 

statements prepared in accordance with 

generally accepted accounting 

principles (GAAP). We agree that this 

should be the starting point for 

determining the exit fee. However, the 

FCA has long held the position that 

strict application of GAAP may not 

result in the fairest treatment of certain 

types of transactions. For example, the 

existing rule provides that the final exit 

fee must be calculated based on the 

average daily balances of assets and 

liabilities for the 12-month period 

preceding the termination date. In the 

development of the existing rule, we 

stated that using average daily balances 

mitigates the problem of widely 

fluctuating account balances that occur 

and the variability that would result 

from the timing of the exit fee 

computation date. The FCA has stated 

that some individual transactions can 

increase or decrease the exit fee to such 

a degree that average balances are not 

sufficient to offset their impact. As such, 

the existing rule also provides that the 

FCA may require certain adjustments 

that we deem necessary to ensure that 

the terminating institution appropriately 

values its assets and liabilities. The 

required adjustments are solely for the 

purpose of calculating the exit fee, and 

the institution would not be required to 

restate its financial statements to reflect 

these adjustments. The FCA believes 

that these provisions for adjustments are 

necessary in order to ensure that the 

terminating institution does not engage 

in activities that weaken its capital 

position in order to diminish or 

eliminate the exit fee.4 As a result, we 

are finalizing this provision as 

proposed. 

In the proposed rule, we solicited 

comments on whether we should limit 

the tax expense deductions from, and 

tax benefit additions to, assets in the 

exit fee calculation to Federal taxes. We 

were also interested in whether we 

should more narrowly draw the tax 

provision so that it includes only 

income taxes, or unavoidable tax 

expenses, or both. We received no 

comments on these issues. In 

consideration of this, we have opted not 

to limit the various types of taxes that 

may be included in the calculation of 

the exit fee and, as a result, make no 

changes in the final rule. 

In § 611.1250(c), we proposed to 

replace references to ‘‘tax liability’’ with 

the term ‘‘tax expense’’ to clarify that we 

intend to refer to both current and 

deferred taxes. In paragraphs (a) and (b) 

of §§ 611.1250 and 611.1255, we 

proposed to remove outdated references 

to the FAC. We received no comments 

on these provisions and adopt as final 

the proposed changes. 

Section 611.1260—Payment of Debts 

and Assessments—Terminating 

Association 

Section 611.1265—Retirement of a 

Terminating Association’s Investment in 

Its Affiliated Bank 

Section 611.1270—Repayment of 

Obligations—Terminating Bank 

Section 611.1275—Retirement of 

Equities Held by Other System 

Institutions 

Section 611.1280—Dissenting 

Stockholder’s Rights 

We proposed to remove outdated 

references to the FAC in all the above 

sections except § 611.1265, to which we 

did not propose any changes. We did 

not receive any comments on the 

proposed changes and adopt the 

provisions as proposed. 

We also received comments from 

System commenters on provisions we 

did not propose to amend. We would 

not consider adopting any of the 

commenters’ suggestions on these 

provisions without publishing them for 

public comment; however, we would 

like to respond to the comments here. A 

System bank recommended that, in 

§ 611.1260, we require a terminating 

association to reimburse its affiliated 

bank for any termination-related 

expenses incurred by the bank, so that 

the remaining associations will not be 

‘‘burdened’’ with the costs of the 

termination. We note that the affiliated 

bank will keep any unallocated retained 

earnings attributable to the terminating 

association, and those earnings will 

indirectly benefit the remaining 

associations. The System bank also 

objected to our existing requirement in 

§ 611.1265 that, if a terminating 

association’s equities in its affiliated 

bank are not subject to a revolvement 

plan or an agreement between the 

association and the bank, those equities 

must be retired by the bank upon 

repayment of the direct loan. The bank 

asserted that the equities in question 

should be retirable only at the bank’s 

discretion. In our view, such a provision 

could make it possible for a bank to 

frustrate the termination plan of an 


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association. Since the Act permits an 

association to terminate without its 

bank’s approval, we do not believe it 

would be appropriate to give the bank 

the power to impede the termination by 

refusing to retire equities. Of course, 

should retirement of the association’s 

investment in its bank cause the bank to 

fall below its minimum capital 

requirements or to be in an unsafe or 

unsound condition, we would prohibit 

the bank from retiring the equities at 

that time. 

The System bank further commented 

that, under § 611.1270, a terminating 

bank should be required to enter into an 

agreement with the remaining System 

banks for payment of its primary 

liability on System-wide debt, and also 

that the terminating bank must make a 

provision for payment of joint and 

several liability that is acceptable to the 

other banks. In previous rulemakings on 

this issue of repayment of System-wide 

debt, we proposed for public comment 

and considered a range of options. We 

believe the existing regulation is a fair 

balance of the interests of a terminating 

bank and the banks remaining in the 

System and will not give the remaining 

banks a de facto veto over the 

terminating bank’s termination. In the 

case of primary liability, the terminating 

bank must propose a plan after 

consulting with the other System banks, 

the Federal Farm Credit Banks Funding 

Corporation, and the Farm Credit 

System Insurance Corporation (FCSIC). 

The FCA must then decide whether the 

plan is acceptable. In the case of joint 

and several liability, the FCA will 

specify how the terminating bank will 

provide for this only in the event that 

the terminating bank and the remaining 

banks are unable to reach agreement. 

The FCC and several System 

institutions suggested that we consider 

revising § 611.1280, which specifies 

how to calculate the value of the 

equities of a dissenting stockholder. One 

commenter suggested that a dissenting 

stockholder’s interest be calculated 

without any deduction of the amount of 

the exit fee from the terminating 

institution’s assets. On November 5, 

1999, we published a proposed rule in 

the Federal Register that provided for 

such a calculation prior to deduction of 

the exit fee. (See 64 FR 60370.) 

However, the FCA did not adopt the 

proposal but instead reproposed the rule 

in 2001. (See 66 FR 43536, August 20, 

2001.) In the preamble to that 

reproposal, we stated our view that, 

under the Act, payment of the exit fee 

was a prerequisite to a terminating 

institution’s exercise of its authority to 

terminate. Consequently, the exit fee 

must be calculated and set aside before 

the dissenting stockholders’ interests are 

valued. We note that, under this 

formula, dissenting stockholders will 

receive approximately the same 

proportionate value for their equities, 

whether they dissent or choose to be 

stockholders of the successor 

institution. 

Section 611.1285—Loan Refinancing by 

Borrowers 

We did not propose any changes to 

this section and we received no 

comments. 

Section 611.1290—Continuation of 

Borrower Rights 

We did not propose any changes to 

this section and we received no 

comments. 

V. Regulatory Flexibility Act 

Pursuant to section 605(b) of the 

Regulatory Flexibility Act (5 U.S.C. 601 

et seq.), FCA hereby certifies this final 

rule will not have a significant 

economic impact on a substantial 

number of small entities. Each of the 

Farm Credit banks, considered with its 

affiliated associations, has assets and 

annual income over the amounts that 

would qualify them as small entities. 

Therefore, System institutions are not 

‘‘small entities’’ as defined in the 

Regulatory Flexibility Act. 

List of Subjects in 12 CFR Part 611 

Agriculture, Banks, Banking, Rural 

areas. 

■ For the reasons stated in the preamble, 

part 611 of chapter VI, title 12 of the 

Code of Federal Regulations is amended 

as follows: 

PART 611—ORGANIZATION 

■ 1. The authority citation for part 611 

is revised to read as follows: 

Authority: Secs. 1.3, 1.4, 1.13, 2.0, 2.1, 

2.10, 2.11, 3.0, 3.2, 3.21, 4.12, 4.12A, 4.15, 

4.20, 4.21, 5.9, 5.10, 5.17, 6.9, 6.26, 7.0–7.13, 

8.5(e) of the Farm Credit Act (12 U.S.C. 2011, 

2012, 2021, 2071, 2072, 2091, 2092, 2121, 

2123, 2142, 2183, 2184, 2203, 2208, 2209, 

2243, 2244, 2252, 2278a–9, 2278b–6, 2279a—

2279f–1, 2279aa–5(e)); secs. 411 and 412 of 

Public Law 100–233, 101 Stat. 1568, 1638; 

secs. 409 and 414 of Public Law 100–399, 

102 Stat. 989, 1003, and 1004. 

■ 2. Revise subpart P to read as follows: 

Subpart P—Termination of System 

Institution Status 

Sec. 

611.1200 Applicability of this subpart. 

611.1205 Definitions that apply in this 

subpart. 

611.1210 Advance notices—

commencement resolution and notice to 

equity holders. 

611.1211 Special requirements. 

611.1215 Communications with the public 

and equity holders. 

611.1216 Public availability of documents 

related to the termination. 

611.1217 Plain language requirements. 

611.1218 Role of directors. 

611.1219 Prohibited acts. 

611.1220 Termination resolution. 

611.1221 Submission to FCA of plan of 

termination and disclosure information; 

other required submissions. 

611.1223 Plan of termination—contents. 

611.1230 FCA review and approval—plan 

of termination. 

611.1235 Plan of termination—distribution. 

611.1240 Voting record date and 

stockholder approval. 

611.1245 Stockholder reconsideration. 

611.1246 Filing of termination application 

and its contents. 

611.1247 FCA review and approval—

termination. 

611.1250 Preliminary exit fee estimate. 

611.1255 Exit fee calculation. 

611.1260 Payment of debts and 

assessments—terminating association. 

611.1265 Retirement of a terminating 

association’s investment in its affiliated 

bank. 

611.1270 Repayment of obligations—

terminating bank. 

611.1275 Retirement of equities held by 

other System institutions. 

611.1280 Dissenting stockholders’ rights. 

611.1285 Loan refinancing by borrowers. 

611.1290 Continuation of borrower rights. 

Subpart P—Termination of System 

Institution Status 

§ 611.1200 Applicability of this subpart. 

The regulations in this subpart apply 

to each bank and association that 

desires to terminate its System 

institution status and become chartered 

as a bank, savings association, or other 

financial institution. 

§ 611.1205 Definitions that apply in this 

subpart. 

Assets means all assets determined in 

conformity with GAAP, except as 

otherwise required in this subpart. 

Business days means days the FCA is 

open for business. 

Days means calendar days. 

Equity holders means holders of 

stock, participation certificates, or other 

equities such as allocated equities. 

GAAP means ‘‘generally accepted 

accounting principles’’ as that term is 

defined in § 621.2(c) of this chapter. 

OFI means an ‘‘other financing 

institution’’ that has a funding and 

discount agreement with a Farm Credit 

bank under section 1.7(b)(1) of the Act. 

Successor institution means the bank, 

savings association, or other financial 

institution that the terminating bank or 

association will become when we 

revoke its Farm Credit charter. 


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§ 611.1210 Advance notices—

commencement resolution and notice to 

equity holders. 

(a) Adoption of commencement 

resolution. Your board of directors must 

begin the termination process by 

adopting a commencement resolution 

stating your intention to terminate Farm 

Credit status under section 7.10 of the 

Act. Immediately after you adopt the 

commencement resolution, send a 

certified copy by overnight mail to us 

and to the Farm Credit System 

Insurance Corporation (FCSIC). If your 

institution is an association, also send a 

copy to your affiliated bank. If your 

institution is a bank, also send a copy 

to your affiliated associations, the other 

Farm Credit banks, and the Federal 

Farm Credit Banks Funding Corporation 

(Funding Corporation). 

(b) Advance notice. Within 5 business 

days after adopting the commencement 

resolution, you must: 

(1) Send us copies of all contracts and 

agreements related to the termination. 

(2) Subject to paragraph (b)(2)(ii) of 

this section: 

(i) Send an advance notice to all 

equity holders stating you are taking 

steps to terminate System status. 

Immediately upon mailing the notice to 

equity holders, you must also place it in 

a prominent location on your Web site. 

The advance notice must describe the 

following: 

(A) The process of termination; 

(B) The expected effect of termination 

on borrowers and other equity holders, 

including the effect on borrower rights 

and the consequences of any stock 

retirements before termination; 

(C) The type of charter the successor 

institution will have; and 

(D) Any bylaw creating a special class 

of borrower stock and participation 

certificates under paragraph (f) of this 

section. 

(ii) Send us a draft of the advance 

notice by facsimile or electronic mail 

before mailing it to your equity holders. 

If we have not contacted you within 2 

business days of our receipt of the draft 

notice regarding modifications, you may 

mail the notice to your equity holders. 

(c) Bank negotiations on joint and 

several liability. If your institution is a 

terminating bank, within 10 days of 

adopting the commencement resolution, 

your bank and the other Farm Credit 

banks must begin negotiations to 

provide for your satisfaction of 

liabilities (other than your primary 

liability) under section 4.4 of the Act. 

The Funding Corporation may, at its 

option, be a party to the negotiations to 

the extent necessary to fulfill its duties 

with respect to financing and 

disclosure. The agreement must comply 

with the requirements in § 611.1270(c). 

(d) Disclosure to loan applicants and 

equity holders after commencement 

resolution. Between the date your board 

of directors adopts the commencement 

resolution and the termination date, you 

must give the following information to 

your loan applicants and equity holders: 

(1) For each loan applicant who is not 

a current stockholder, describe at the 

time of loan application: 

(i) The effect of the proposed 

termination on the prospective loan; 

and 

(ii) Whether, after the proposed 

termination, the borrower will continue 

to have any of the borrower rights 

provided under the Act and regulations. 

(2) For any equity holders who ask to 

have their equities retired, explain that 

the retirement would extinguish the 

holder’s right to exchange those equities 

for an interest in the successor 

institution. In addition, inform holders 

of equities entitled to your residual 

assets in liquidation that retirement 

before termination would extinguish 

their right to dissent from the 

termination and have their equities 

retired. 

(e) Terminating bank’s right to 

continue issuing debt. Through the 

termination date, a terminating bank 

may continue to participate in the 

issuance of consolidated and Systemwide obligations to the same extent it 

would be able to participate if it were 

not terminating. 

(f) Special class of stock. 

Notwithstanding any requirements to 

the contrary in § 615.5230(b) of this 

chapter, you may adopt bylaws 

providing for the issuance of a special 

class of stock and participation 

certificates between the date of adoption 

of a commencement resolution and the 

termination date. Your voting 

stockholders must approve the special 

class before you adopt the 

commencement resolution. The equities 

must comply with section 4.3A of the 

Act and be identical in all respects to 

existing classes of equities that are 

entitled to the residual assets of the 

institution in a liquidation, except for 

the value a holder will receive in a 

termination. In a termination, the holder 

of the special class of stock receives 

value equal to the lower of either par (or 

face) value, or the value calculated 

under § 611.1280(c) and (d). A holder 

must have the same right to vote (if the 

equity is held on the voting record date) 

and to dissent as holders of similar 

equities issued before the 

commencement resolution. If the 

termination does not occur, the special 

classes of stock and participation 

certificates must automatically convert 

into shares of the otherwise identical 

equities. 

§ 611.1211 Special requirements. 

(a) Special assessments, analyses, 

studies, and rulings. At any time after 

we receive your commencement 

resolution, and as we deem necessary or 

useful to evaluate your proposal, we 

may require you to engage independent 

experts, acceptable to us, to conduct 

assessments, analyses, or studies, or to 

request rulings, including, but not 

limited to: 

(1) Assessments of fair value; 

(2) Analyses and rulings on tax 

implications; and 

(3) Studies of the effect of your 

proposal on equity holders (including 

the effect on holders in their capacity as 

borrowers), the System, and other 

parties. 

(b) Informational meetings. After the 

advance notice, but before the 

stockholder vote, we may require you to 

hold regional or local informational 

meetings in convenient locations, at 

convenient times, and in a manner 

conducive to accommodating all equity 

holders that wish to attend, to discuss 

equity holder issues and answer 

questions. These meetings are subject to 

the plain language requirements of 

§ 611.1217(b) regarding balanced 

statements. 

§ 611.1215 Communications with the 

public and equity holders. 

(a) Communications after 

commencement resolution and before 

termination. The terminating institution 

may communicate with equity holders 

and the public regarding the proposed 

termination, as long as written 

communications (other than non-public 

communications among participants, 

i.e., persons or entities that are parties 

to a proposed corporate restructuring 

involving the successor institution, or 

their agents) made in connection with or 

relating to the proposed termination and 

any related transactions are filed in 

accordance with paragraph (c) of this 

section and the conditions in this 

section are satisfied. 

(b) To rely on this section, you must 

include the following legend in each 

communication in a prominent location: 

Equity holders should read the plan of 

termination that they have received or will 

receive (as appropriate) because it contains 

important information, including an 

enumerated statement of the anticipated 

benefits and potential disadvantages of the 

proposal. 

(c) All your written communications 

and all written communications by your 

directors, employees, and agents in 


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connection with or relating to the 

proposed termination or any related 

transactions must be filed with us under 

this section on or before the date of first 

use. 

(d) We will require you to correct 

communications that we deem are 

misleading or inaccurate. 

(e) In addition to the filings we 

require under paragraph (c) of this 

section, we may require you to file 

timely any written communications you 

have knowledge of that are made by any 

other participants or their agents in 

connection with or related to the 

proposed termination or to any 

transaction related to the proposed 

termination. 

(f) An immaterial or unintentional 

failure to file or a delay in filing a 

written communication described in 

this section will not result in a violation 

of this section, as long as: 

(1) A good faith and reasonable effort 

was made to comply with the filing 

requirement; and 

(2) The written communication is 

filed as soon as practicable after 

discovery of the failure to file. 

(g) Communications that exist in 

electronic form must be filed 

electronically with the FCA as we 

direct. For communications that do not 

exist in electronic form, you must 

timely notify us by electronic mail and 

send us a copy by regular mail. 

(h) You do not need to file a written 

communication that does not contain 

new or different information from that 

which you have previously publicly 

disclosed and filed under this section. 

§ 611.1216 Public availability of 

documents related to the termination. 

(a) We may post on our Web site, or 

require you to post on your Web site: 

(1) Results of any special assessments, 

analyses, studies, and rulings required 

under § 611.1211; 

(2) Documents you submit to us or file 

with us under § 611.1215; and 

(3) Documents you submit to us under 

section 7.11 of the Act that are related 

directly or indirectly to the proposed 

termination, including but not limited 

to contracts entered into in connection 

with or relating to the proposed 

termination and any related 

transactions. 

(b) We will not post confidential 

information on our Web site and will 

not require you to post it on your Web 

site. 

(c) You may request that we treat 

specific information as confidential 

under the Freedom of Information Act, 

5 U.S.C. 552 (see 12 CFR part, 602 

subpart B). You should draft your 

request for confidential treatment 

narrowly to extend only to those 

portions of a document you consider to 

be confidential. If you request 

confidential treatment for information 

that we do not consider to be 

confidential, we may post that 

information on our Web site after 

providing notice to you. On our own 

initiative, we may determine that 

certain information should be treated as 

confidential and, if so, we will not make 

that information public. 

§ 611.1217 Plain language requirements. 

(a) Plain language presentation. All 

communications to equity holders 

required under §§ 611.1210, 611.1223, 

611.1240, and 611.1280 must be clear, 

concise, and understandable. You must: 

(1) Use short, explanatory sentences, 

bullet lists or charts where helpful, and 

descriptive headings and subheadings; 

(2) Minimize the use of glossaries or 

defined terms; 

(3) Write in the active voice when 

possible; and 

(4) Avoid legal and highly technical 

business terminology. 

(b) Balanced statements. 

Communications to equity holders that 

describe or enumerate anticipated 

benefits of the proposed termination 

should also describe or enumerate the 

potential disadvantages to the same 

degree of detail. 

§ 611.1218 Role of directors. 

(a) Statements by directors. Directors 

may not be prohibited by confidentiality 

agreements or otherwise from publicly 

or privately commenting orally or in 

writing on the termination proposal and 

related matters. 

(b) Directors’ right to obtain 

independent advice. One or more 

directors of a terminating institution or 

an institution that is considering 

terminating have the right to obtain 

independent legal and financial advice 

regarding the proposed termination and 

related transactions. The institution 

must pay for such advice and related 

expenses as are reasonable in light of 

the circumstances. A request by a 

director or directors for the institution 

to pay such expenses cannot be denied 

unless the board of directors, by at least 

a two-thirds vote of the full board (the 

total number of current directors), 

denies the request. The institution must 

act on any request in a timely manner. 

For any denial of payment, the board 

must provide notice to the FCA within 

1 business day of the denial, fully 

document the reasons for such a denial, 

and ensure that the institution discloses 

the nature of the request and the reasons 

for any denial to the terminating 

institution’s equity holders in the plan 

of termination. 

§ 611.1219 Prohibited acts. 

(a) Statements about termination. 

Neither the institution nor any director, 

officer, employee, or agent may make 

any untrue or misleading statement of a 

material fact, or fail to disclose any 

material fact, to the FCA or a current or 

prospective equity holder about the 

proposed termination and any related 

transactions. 

(b) Representations regarding FCA 

approval. Neither the institution nor 

any director, officer, employee, or agent 

may make an oral or written 

representation to anyone that our 

approval of the plan of termination or 

the termination is, directly or indirectly, 

either a recommendation on the merits 

of the proposal or an assurance that the 

information you give to your equity 

holders is adequate or accurate. 

§ 611.1220 Termination resolution. 

No more than 1 week before you 

submit your plan of termination to us, 

your board of directors must adopt a 

termination resolution stating its 

support for terminating your status as a 

System institution and authorizing: 

(a) Submission to us of a plan of 

termination and other required 

submissions that comply with 

§ 611.1223; and 

(b) Submission of the plan of 

termination to the voting stockholders if 

we approve the plan of termination 

under § 611.1230 or, if we take no 

action, after the end of our approval 

period. 

§ 611.1221 Submission to FCA of plan of 

termination and disclosure information; 

other required submissions. 

(a) Filing. Send us an original and five 

copies of the plan of termination, 

including the disclosure information, 

and other required submissions. You 

may not file the plan of termination 

until at least 30 days after you mail the 

equity holder notice under 

§ 611.1210(b). If you send us the plan of 

termination in electronic form, you 

must send us at least one hard copy 

with original signatures. 

(b) Plan contents. The plan of 

termination must include your equity 

holder disclosure information that 

complies with § 611.1223. 

(c) Other submissions. You must also 

submit the following: 

(1) A statement of how you will 

transfer assets to, and have your 

liabilities assumed by, the successor 

institution; 

(2) A copy of the charter application 

for the successor institution, with any 


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exhibits or other supporting 

information; and 

(3) A statement, if applicable, whether 

the successor institution will continue 

to borrow from a Farm Credit bank and 

how such a relationship will affect your 

provision for payment of debts. You 

must also provide evidence of any 

agreement and plan for satisfaction of 

outstanding debts. 

§ 611.1223 Plan of termination—contents. 

(a) Disclaimer. Place the following 

statement in boldface type in the 

material to be sent to equity holders, 

either on the notice of meeting or the 

first page of the plan of termination: 

The Farm Credit Administration has not 

determined if this information is accurate or 

complete. You should not rely on any 

statement to the contrary. 

(b) Summary. The first part of the 

plan of termination must be a summary 

that concisely explains: 

(1) Which stockholders have a right to 

vote on the termination and related 

transactions; 

(2) The material changes the 

termination will cause to the rights of 

borrowers and other equity holders; 

(3) The effect of those changes; 

(4) The anticipated benefits and 

potential disadvantages of the 

termination; 

(5) The right of certain equity holders 

to dissent and receive payment for their 

existing equities; and 

(6) The estimated termination date. 

(7) If applicable, an explanation of 

any corporate restructuring that the 

successor institution expects to engage 

in within 18 months after the date of 

termination. 

(c) Remaining requirements. You 

must also disclose the following 

information to equity holders: 

(1) Termination resolution. Provide a 

certified copy of the termination 

resolution required under § 611.1220. 

(2) Plan of termination. Summarize 

the plan of termination. 

(3) Benefits and disadvantages. 

Provide an enumerated statement of the 

anticipated benefits and potential 

disadvantages of the termination. 

(4) Recommendation. Explain the 

board’s basis for recommending the 

termination. 

(5) Exit fee. Explain the preliminary 

exit fee estimate, with any adjustments 

we require, and estimated expenses of 

termination and organization of the 

successor institution. 

(6) Initial board of directors. List the 

initial board of directors and senior 

officers for the successor institution, 

with a brief description of the business 

experience of each person, including 

principal occupation and employment 

during the past 5 years. 

(7) Relevant contracts and 

agreements. Include copies of all 

contracts and agreements related to the 

termination, including any proposed 

contracts in connection with the 

termination and subsequent operations 

of the successor institution. The FCA 

may, in its discretion, permit or require 

you to provide a summary or summaries 

of the documents in the disclosure 

information to be submitted to equity 

holders instead of copies of the 

documents. 

(8) Bylaws and charter. Summarize 

the provisions of the bylaws and charter 

of the successor institution that differ 

materially from your bylaws and 

charter. The summary must state: 

(i) Whether the successor institution 

will require a borrower to hold an 

equity interest as a condition for having 

a loan; and 

(ii) Whether the successor institution 

will require equity holders to do 

business with the institution. 

(9) Changes to equity. Explain any 

changes in the nature of equity 

investments in the successor institution, 

such as changes in dividends, 

patronage, voting rights, preferences, 

retirement of equities, and liquidation 

priority. If equities protected under 

section 4.9A of the Act are outstanding, 

the plan of termination must state that 

the Act’s protections will be 

extinguished on termination. 

(10) Effect of termination on statutory 

and regulatory rights. Explain the effect 

of termination on rights granted to 

equity holders by the Act and FCA 

regulations. You must explain the effect 

termination will have on borrower 

rights granted in the Act and part 617 

of this chapter. 

(11) Loan refinancing by borrowers. 

(i) State, as applicable, that borrowers 

may seek to refinance their loans with 

the System institutions that already 

serve, or will be permitted to serve, your 

territory. State that no System 

institution is obligated to refinance your 

loans. 

(ii) If we have assigned the chartered 

territory you serve to another System 

institution before the plan of 

termination is mailed to equity holders, 

or if another System institution is 

already chartered to make the same type 

of loans you make in the chartered 

territory, identify such institution(s) and 

provide the following information: 

(A) The name, address, and telephone 

number of the institution; and 

(B) An explanation of the institution’s 

procedures for borrowers to apply for 

refinancing. 

(iii) If we have not assigned the 

territory before you mail the plan of 

termination, give the name, address, and 

telephone number of the System 

institution specified by us and state that 

borrowers may contact the institution 

for information about loan refinancing. 

(12) Equity exchanges. Explain the 

formula and procedure to exchange 

equity in your institution for equity in 

the successor institution. 

(13) Employment, retirement, and 

severance agreements. Describe any 

employment agreement or arrangement 

between the successor institution and 

any of your senior officers or directors. 

Describe any severance and retirement 

plans that cover your employees or 

directors and state the costs you expect 

to incur under the plans in connection 

with the termination. 

(14) Final exit fee and its calculation. 

Explain how the final exit fee will be 

calculated under § 611.1255 and how it 

will be paid. 

(15) New charter. Describe the nature 

and type of financial institution the 

successor institution will be and any 

conditions of approval of the new 

chartering authority or regulator. 

(16) Differences in successor 

institution’s programs and policies. 

Summarize any differences between you 

and the successor institution on: 

(i) Interest rates and fees; 

(ii) Collection policies; 

(iii) Services provided; and 

(iv) Any other item that would affect 

a borrower’s lending relationship with 

the successor institution, including 

whether a stockholder’s ability to 

borrow from the institution will be 

restricted. 

(17) Capitalization. Discuss expected 

capital requirements of the successor 

institution, and the amount and method 

of capitalization. 

(18) Sources of funding. Explain the 

sources and manner of funding for the 

successor institution’s operations. 

(19) Contingent liabilities. Describe 

how the successor institution will 

address any contingent liability it will 

assume from you. 

(20) Tax status. Summarize the 

differences in tax status between your 

institution and the successor institution, 

and explain how the differences may 

affect equity holders. 

(21) Regulatory environment. Describe 

briefly how the regulatory environment 

for the successor institution will differ 

from your current regulatory 

environment, and any effect on the cost 

of doing business or the value of 

stockholders’ equity. 

(22) Dissenters’ rights. Explain which 

equity holders are entitled to dissenters’

rights and what those rights are. The 


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explanation must include the estimated 

liquidation value of the stock, 

procedures for exercising dissenters’

rights, and a statement of when the 

rights may be exercised. 

(23) Financial information. 

(i) Present the following financial 

data: 

(A) A balance sheet and income 

statement for each of the 3 preceding 

fiscal years; 

(B) A balance sheet as of a date within 

90 days of the date you send the plan 

of termination to us, presented on a 

comparative basis with the 

corresponding period of the previous 2 

fiscal years; 

(C) An income statement for the 

interim period between the end of the 

last fiscal year and the date of the 

balance sheet required by paragraph 

(d)(23)(i)(B) of this section, presented on 

a comparative basis with the 

corresponding period of the previous 2 

fiscal years; 

(D) A pro forma balance sheet of the 

successor institution presented as if 

termination had occurred as of the date 

of the most recent balance sheet 

presented in the plan of termination; 

and 

(E) A pro forma summary of earnings 

for the successor institution presented 

as if the termination had been effective 

at the beginning of the interim period 

between the end of the last fiscal year 

and the date of the balance sheet 

presented under paragraph (d)(23)(i)(D) 

of this section. 

(ii) The format for the balance sheet 

and income statement must be the same 

as the format in your annual report and 

must contain appropriate footnote 

disclosures, including data on high-risk 

assets, other property owned, and 

allowance for losses. 

(iii) The financial statements must 

include either: 

(A) A statement signed by the chief 

executive officer and each board 

member that the various financial 

statements are unaudited but have been 

prepared in all material respects in 

conformity with GAAP (except as 

otherwise disclosed) and are, to the best 

of each signer’s knowledge, a fair and 

accurate presentation of the financial 

condition of the institution; or 

(B) A signed opinion by an 

independent certified public accountant 

that the various financial statements 

have been examined in conformity with 

generally accepted auditing standards 

and included such tests of the 

accounting records and other such 

auditing procedures as were considered 

necessary in the circumstances, and, as 

of the date of the statements, present 

fairly the financial position of the 

institution in conformity with GAAP 

applied on a consistent basis, except as 

otherwise disclosed. 

(24) Subsequent financial events. 

Describe any event after the date of the 

financial statements, but before the date 

you send the plan of termination to us, 

that would have a material impact on 

your financial condition or the 

condition of the successor institution. 

(25) Other subsequent events. 

Describe any event after you send the 

plan of termination to us that could 

have a material impact on any 

information in the plan of termination. 

(26) Other material disclosures. 

Describe any other material fact or 

circumstance that a stockholder would 

need to know to make an informed 

decision on the termination, or that is 

necessary to make the disclosures not 

misleading. We may require you to 

disclose any assessments, analyses, 

studies, or rulings we require under 

§ 611.1211. 

(27) Ballot and proxy. Include a ballot 

and proxy, with instructions on the 

purpose and authority for their use, and 

the proper method for the stockholder to 

sign the proxy. 

(28) Board of directors certification. 

Include a certification signed by the 

entire board of directors as to the truth, 

accuracy, and completeness of the 

information contained in the plan of 

termination. If any director refuses to 

sign the certification, the director must 

inform us of the reasons for refusing. 

(29) Directors’ statements. You must 

include statements, if any, by directors 

regarding the proposed termination. 

(d) Requirement to provide updated 

information. After you send us the plan 

of termination, you must immediately 

send us: 

(1) Any material change to 

information in the plan of termination, 

including financial information, that 

occurs between the date you file the 

plan of termination and the termination 

date; 

(2) Copies of any additional written 

information on the termination that you 

have given or give to current or 

prospective equity holders before 

termination; and 

(3) A description of any subsequent 

event(s) that could have a material 

impact on any information in the plan 

of termination or on the termination. 

§ 611.1230 FCA review and approval—plan 

of termination. 

(a) FCA review period. No later than 

60 days after we receive the plan of 

termination, we will review it and either 

approve or disapprove the plan for 

submission to your equity holders. If we 

take no action on the plan of 

termination within the 60 days, you 

may submit the plan to your equity 

holders. The 60-day review period 

under section 7.11 of the Act will begin 

on the date we receive a complete plan 

of termination. We will advise you in 

writing when the 60-day period begins. 

(b) FCA approval of the plan of 

termination. Our approval of the plan of 

termination for submission to your 

equity holders: 

(1) Is not our approval of the 

termination; and 

(2) May be subject to any condition 

we impose. 

§ 611.1235 Plan of termination—

distribution. 

(a) Reaffirmation resolution. Not more 

than 14 days before mailing the plan of 

termination to your equity holders, your 

board of directors must adopt a 

resolution reaffirming support of the 

termination. A certified copy of the 

resolution must be sent to us and must 

accompany the plan of termination 

when it is distributed to stockholders. 

(b) Notice of meeting and distribution 

of plan. You must provide all equity 

holders with a notice of meeting and the 

plan of termination at least 45 days 

before the stockholder vote. You must 

also provide a copy of the plan to us 

when you provide it to your equity 

holders. 

§ 611.1240 Voting record date and 

stockholder approval. 

(a) Stockholder meeting. You must 

call the meeting by written notice in 

compliance with your bylaws. The 

stockholder meeting to vote on the 

termination must occur at least 60 days 

after our approval of the plan of 

termination (or, if we take no action, at 

least 60 days after the end of our 

approval period). 

(b) Voting record date. The voting 

record date may not be more than 70 

days before the stockholders’ meeting. 

(c) Quorum requirement for 

termination vote. At least 30 percent, 

unless your bylaws provide for a higher 

quorum, of the voting stockholders of 

the institution must be present at the 

meeting either in person or by proxy in 

order to hold the vote on the 

termination. 

(d) Approval requirement. The 

affirmative vote of a majority of the 

voting stockholders of the institution 

present and voting or voting by proxy at 

the duly authorized meeting at which a 

quorum is present as prescribed in 

paragraph (c) of this section is required 

for approval of the termination. 

(e) Voting procedures. The voting 

procedures must comply with 

§§ 611.330 and 611.340. You must have 


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an independent third party count the 

ballots. If a voting stockholder notifies 

you of the stockholder’s intent to 

exercise dissenters’ rights, the tabulator 

must be able to verify to you that the 

stockholder voted against the 

termination. Otherwise, the votes of 

stockholders must remain confidential. 

(f) Notice to FCA and equity holders 

of voting results. Within 10 days of the 

termination vote, you must send us a 

certified record of the results of the vote. 

You must notify all equity holders of the 

results within 30 days after the 

stockholder meeting. If the stockholders 

approve the termination, you must give 

the following information to equity 

holders: 

(1) Stockholders who voted against 

termination and equity holders who 

were not entitled to vote have a right to 

dissent as provided in § 611.1280; and 

(2) Voting stockholders have a right, 

under § 611.1245, to file a petition with 

the FCA for reconsideration within 35 

days after the date you mail to them the 

notice of the results of the termination 

vote. 

(g) Requirement to notify new equity 

holders. You must provide the 

information described in paragraph 

(f)(1) of this section to each person that 

becomes an equity holder after the 

termination vote and before termination. 

§ 611.1245 Stockholder reconsideration. 

(a) Right to reconsider termination. 

Voting stockholders have the right to 

reconsider their approval of the 

termination if a petition signed by at 

least 15 percent of the voting 

stockholders is filed with us within 35 

days after you mail notices to 

stockholders that the termination was 

approved. If we determine that the 

petition complies with the requirements 

of section 7.9 of the Act, you must call 

a special stockholders’ meeting to 

reconsider the vote. The meeting must 

occur within 60 days after the date on 

which you mailed to stockholders the 

results of the termination vote. 

(b) Quorum requirement for 

termination reconsideration vote. At 

least 30 percent, unless your bylaws 

provide for a higher quorum, of the 

voting stockholders of the institution 

must be present at the stockholders’

meeting either in person or by proxy in 

order to hold the reconsideration vote. 

If a majority of the voting stockholders 

voting in person or by proxy vote 

against the termination, the termination 

may not take place. 

(c) Stockholder list and expenses. You 

must, at your expense, timely give 

stockholders who request it a list of the 

names and addresses of stockholders 

eligible to vote in the reconsideration 

vote. The petitioners must pay all other 

expenses for the petition. You must pay 

expenses that you incur for the 

reconsideration vote. 

§ 611.1246 Filing of termination 

application and its contents. 

(a) Filing of termination application. 

Send us your termination application no 

later than 90 days after you send us 

notice of the stockholder vote approving 

the termination. Please send us an 

original and five copies of the 

termination application for review and 

approval. If you send us the termination 

application in electronic form, you must 

send us at least one hard copy with 

original signatures. 

(b) Contents of termination 

application. The application must 

contain: 

(1) A certified copy of the termination 

and reaffirmation resolutions; 

(2) A certification signed by the board 

of directors that the board continues to 

support the termination, there has been 

no material change to any of the 

information contained in the plan of 

termination or information statement 

after the FCA approved the plan of 

termination, and there have not been 

any subsequent events that could have 

a material impact on any of the 

information in the plan of termination 

or the termination; and 

(3) Any additional information that is 

required under this subpart, that we 

request or that your board of directors 

wishes to submit in support of the 

application. 

§ 611.1247 FCA review and approval—

termination. 

(a) FCA action on application. After 

we receive the termination application, 

we will review it and either approve or 

disapprove the termination. 

(b) Basis for disapproval. We will 

disapprove the termination if we 

determine that there are one or more 

appropriate reasons for disapproval 

consistent with our authorities under 

the Act and our regulations. We will 

inform you of our reason(s) for 

disapproval in writing. 

(c) Conditions of FCA approval. We 

will approve your termination 

application only if: 

(1) Your stockholders have voted in 

favor of termination in the termination 

vote and in any reconsideration vote; 

(2) You have given us executed copies 

of all contracts, agreements, and other 

documents submitted under §§ 611.1221 

and 611.1223; 

(3) You have paid or made adequate 

provision for payment of debts, 

including responsibility for any 

contingent liabilities, and for retirement 

of equities; 

(4) A Federal or State chartering 

authority has granted a new charter to 

the successor institution; 

(5) You deposit into escrow an 

amount equal to 110 percent of the 

estimated exit fee plus 110 percent of 

the estimated amount you must pay to 

retire equities of dissenting stockholders 

and Farm Credit institutions, as 

described in § 611.1255(c); and 

(6) You have fulfilled any condition of 

termination we impose. 

(d) Effective date of termination. If we 

approve the termination, we will revoke 

your charter, and the termination will 

be effective on the date that we provide, 

but no earlier than the last to occur of: 

(1) Fulfillment of all conditions listed 

in or imposed under paragraph (c) of 

this section; 

(2) Your proposed termination date; 

(3) Ninety (90) days after we receive 

your termination application described 

in § 611.1246; or 

(4) Fifteen (15) days after any 

reconsideration vote. 

§ 611.1250 Preliminary exit fee estimate. 

(a) Preliminary exit fee estimate—

terminating association. You must 

provide a preliminary exit fee estimate 

to us when you submit the plan of 

termination under § 611.1221. Calculate 

the preliminary exit fee estimate in the 

following order: 

(1) Base your exit fee calculation on 

the average daily balances of assets and 

liabilities for the 12-month period as of 

the quarter end immediately before the 

date you send us your plan of 

termination. 

(2) Any amounts we refer to in this 

section are average daily balances 

unless we specify that they are not. 

Amounts that are not average daily 

balances will be referred to as ‘‘dollar 

amount.’’

(3) Compute the average daily 

balances based on financial statements 

that comply with GAAP. The financial 

statements, as of the quarter end 

immediately before the date you send us 

your plan of termination, must be 

independently audited by a qualified 

public accountant, as defined in 

§ 621.2(i) of this chapter. We may, in 

our discretion, waive the audit 

requirement if an independent audit 

was performed as of a date less than 6 

months before you submit the plan of 

termination. 

(4) Make adjustments to assets as 

follows: 

(i) Add back expenses you have 

incurred related to termination. Related 

expenses include, but are not limited to, 

legal services, accounting services, tax 

services, studies, auditing, business 

planning, equity holder meetings, and 


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application fees for the termination and 

reorganization. Do not add back to 

assets expenses related to a requirement 

by the FCA to engage independent 

experts to conduct assessments, 

analyses, or studies, or to request 

rulings that solely address the impact of 

the termination on the System or parties 

other than the terminating institution 

and its stockholders. 

(ii) Subtract the dollar amount of 

estimated current and deferred tax 

expenses, if any, due to the termination. 

(iii) Add the dollar amount of 

estimated current and deferred tax 

benefits, if any, due to the termination. 

(iv) Adjust for the dollar amount of 

significant transactions you reasonably 

expect to occur between the quarter end 

before you file your plan of termination 

and date of termination. Examples of 

these transactions include, but are not 

limited to, gains or losses on the sale of 

assets, retirements of equity, loan 

repayments, and patronage 

distributions. Do not make adjustments 

for future expenses related to 

termination, such as severance or 

special retirement payments, or stock 

retirements to dissenting stockholders 

and Farm Credit institutions. 

(5) Subtract from liabilities any 

liability that we treat as regulatory 

capital under the capital or collateral 

requirements in subparts H and K of 

part 615 of this chapter. 

(6) Make any adjustments we require 

under paragraph (c) of this section. 

(7) After making these adjustments to 

assets and liabilities, subtract liabilities 

from assets. This is your preliminary 

total capital for purposes of termination. 

(8) Multiply assets as adjusted above 

by 6 percent, and subtract this amount 

from preliminary total capital. This is 

your preliminary exit fee estimate. 

(b) Preliminary exit fee estimate—

terminating bank. 

(1) Affiliated associations that are 

terminating with you must calculate 

their individual preliminary exit fee 

estimates as described in paragraph (a) 

of this section. 

(2) Base your exit fee calculation on 

the average daily balances of assets and 

liabilities for the 12-month period as of 

the quarter end immediately before the 

date you send us your plan of 

termination. 

(3) Any amounts we refer to in this 

section are average daily balances 

unless we specify that they are not. 

Amounts that are not average daily 

balances will be referred to as ‘‘dollar 

amount.’’

(4) Compute the average daily 

balances based on bank-only financial 

statements that comply with GAAP. The 

financial statements, as of the quarter 

end immediately before the date you 

send us your plan of termination, must 

be independently audited by a qualified 

public accountant, as defined in 

§ 621.2(i) of this chapter. We may, in 

our discretion, waive this requirement if 

an independent audit was performed as 

of a date less than 6 months before you 

submit the plan of termination. 

(5) Make adjustments to assets and 

liabilities as follows: 

(i) Add back to assets the following: 

(A) Expenses you have incurred 

related to termination. Related expenses 

include, but are not limited to, legal 

services, accounting services, tax 

services, studies, auditing, business 

planning, equity holder meetings, and 

application fees for the termination and 

reorganization. Do not add back to 

assets expenses related to a requirement 

by the FCA to engage independent 

experts to conduct assessments, 

analyses, or studies, or to request 

rulings that solely address the impact of 

the termination on the System or parties 

other than the terminating institution 

and its stockholders. 

(B) Any specific allowance for losses, 

and a pro rata portion of any general 

allowance for loan losses, on direct 

loans to associations that you do not 

expect to incur before or at termination. 

(ii) Subtract from your assets and 

liabilities an amount equal to your 

direct loans to your affiliated 

associations that are not terminating. 

(iii) Subtract the following from 

assets: 

(A) Equity investments in your 

institution that are held by 

nonterminating associations and that 

you expect to transfer to another System 

bank before or at termination. A 

nonterminating association’s investment 

consists of purchased equities, allocated 

equities, and a share of the bank’s 

unallocated surplus calculated in 

accordance with the bank’s bylaw 

provisions on liquidation. We may 

require a different calculation method 

for the unallocated surplus if we 

determine that using the liquidation 

provision would be inequitable to 

stockholders; and 

(B) The dollar amount of estimated 

current and deferred tax expenses, if 

any, due to the termination. 

(iv) Add the dollar amount of current 

and deferred estimated tax benefits, if 

any, due to the termination. 

(v) Subtract from liabilities any 

liability that we treat as regulatory 

capital under the capital or collateral 

requirements in subparts H and K of 

part 615 of this chapter. 

(vi) Adjust for the dollar amount of 

significant transactions you reasonably 

expect to occur between the quarter end 

before you file your plan of termination 

and date of termination. Examples of 

these transactions include, but are not 

limited to, retirements of equity, loan 

repayments, and patronage 

distributions. Do not make adjustments 

for future expenses related to 

termination, such as severance or 

special retirement payments, or stock 

retirements to dissenting stockholders 

and Farm Credit institutions. 

(6) Make any adjustments we require 

under paragraph (c) of this section. 

(7) After the above adjustments, 

combine your balance sheet with the 

balance sheets of your terminating 

associations after they have made the 

adjustments required in paragraph (a) of 

this section. Subtract liabilities from 

assets. This is your preliminary total 

capital estimate for purposes of 

termination. 

(8) Multiply the assets of the 

combined balance sheet after the above 

adjustments by 6 percent. Subtract this 

amount from the preliminary total 

capital estimate of the combined 

balance sheet. The remainder is the 

preliminary exit fee estimate of the bank 

and terminating affiliated associations. 

(9) Your preliminary exit fee estimate 

is the amount by which the preliminary 

exit fee estimate for the combined entity 

exceeds the total of the individual 

preliminary exit fee estimates of your 

affiliated terminating associations. 

(c) Adjustments. 

(1) We will review your account 

balances, transactions over the 3 years 

before the date of the termination 

resolution under § 611.1220, and any 

subsequent transactions. Our review 

will include, but not be limited to, the 

following: 

(i) Additions to or subtractions from 

any allowance for losses; 

(ii) Additions to assets or liabilities, or 

subtractions from assets or liabilities, 

due to transactions that are outside your 

ordinary course of business; 

(iii) Dividends or patronage refunds 

exceeding your usual practices; 

(iv) Changes in the institution’s 

capital plan, or in implementing the 

plan, that increased or decreased the 

level of borrower investment; 

(v) Contingent liabilities, such as losssharing obligations, that can be 

reasonably quantified; and 

(vi) Assets, including real property 

and servicing rights, that may be 

overvalued, undervalued, or not 

recorded on your books. 

(2) If we determine the account 

balances do not accurately show the 

value of your assets and liabilities 

(whether the assets and liabilities were 

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back adjustment period), we will make 

any adjustments we deem necessary. 

(3) We may require you to reverse the 

effect of a transaction if we determine 

that: 

(i) You have retired capital outside 

the ordinary course of business; 

(ii) You have taken any other actions 

unrelated to your core business that 

have the effect of changing the exit fee; 

or 

(iii) You incurred expenses related to 

termination prior to the 12-month 

average daily balance period on which 

the exit fee calculation is based. 

(4) We may require you to make these 

adjustments to the preliminary exit fee 

estimate that is disclosed in the 

information statement, the final exit fee 

calculation, and the calculations of the 

value of equities held by dissenting 

stockholders, Farm Credit institutions 

that choose to have their equities retired 

at termination, and reaffiliating 

associations. 

§ 611.1255 Exit fee calculation. 

(a) Final exit fee calculation—

terminating association. Calculate the 

final exit fee in the following order: 

(1) Base your exit fee calculation on 

the average daily balances of assets and 

liabilities for the 12-month period 

preceding the termination date. Assume 

for this calculation that you have not 

paid or accrued the items described in 

paragraph (a)(4)(ii) and (iii) of this 

section. 

(2) Any amounts we refer to in this 

section are average daily balances 

unless we specify that they are not. 

Amounts that are not average daily 

balances will be referred to as ‘‘dollar 

amount.’’

(3) Compute the average daily 

balances based on financial statements 

that comply with GAAP. The financial 

statements, as of the termination date, 

must be independently audited by a 

qualified public accountant, as defined 

in § 621.2(i) of this chapter. 

(4) Make adjustments to assets and 

liabilities as follows: 

(i) Add back expenses related to the 

termination. Related expenses include, 

but are not limited to, legal services, 

accounting services, tax services, 

studies, auditing, business planning, 

payments of severance and special 

retirements, equity holder meetings, and 

application fees for the termination and 

reorganization. Do not add back to 

assets expenses related to a requirement 

by the FCA to engage independent 

experts to conduct assessments, 

analyses, or studies, or to request 

rulings that solely address the impact of 

the termination on the System or parties 

other than the terminating institution 

and its stockholders. 

(ii) Subtract from assets the dollar 

amount of current and deferred tax 

expenses, if any, due to the termination. 

(iii) Add to assets the dollar amount 

of current and deferred tax benefits, if 

any, due to the termination. 

(iv) Subtract from liabilities any 

liability that we treat as regulatory 

capital under the capital or collateral 

requirements in subparts H and K of 

part 615 of this chapter. 

(v) Make the adjustments that we 

require under § 611.1250(c). For the 

final exit fee, we will review and may 

require additional adjustments for 

transactions between the date you 

adopted the termination resolution and 

the termination date. 

(5) After making these adjustments to 

assets and liabilities, subtract liabilities 

from assets. This is your total capital for 

purposes of termination. 

(6) Multiply assets by 6 percent, and 

subtract this amount from total capital. 

This is your final exit fee. 

(b) Final exit fee calculation—

terminating bank. 

(1) The individual exit fees of 

affiliated associations that are 

terminating with you must be calculated 

as described in paragraph (a) of this 

section. 

(2) Base your exit fee calculation on 

the average daily balances of assets and 

liabilities for the 12-month period 

preceding the termination date. Assume 

for this calculation that you have not 

paid or accrued the items described in 

paragraph (b)(5)(iii)(B) and (b)(5)(iv) of 

this section. 

(3) Any amounts we refer to in this 

section are average daily balances 

unless we specify that they are not. 

Amounts that are not average daily 

balances will be referred to as ‘‘dollar 

amount.’’

(4) Compute the average daily 

balances based on bank-only financial 

statements that comply with GAAP. The 

financial statements, as of the 

termination date, must be 

independently audited by a qualified 

public accountant, as defined in 

§ 621.2(i) of this chapter. 

(5) Make adjustments to assets and 

liabilities as follows: 

(i) Add back the following to your 

assets: 

(A) Expenses you have incurred 

related to termination. Related expenses 

include, but are not limited to, legal 

services, accounting services, tax 

services, studies, auditing, business 

planning, payments of severance and 

special retirements, equity holder 

meetings, and application fees for the 

termination and reorganization. Do not 

add back to assets expenses related to a 

requirement by the FCA to engage 

independent experts to conduct 

assessments, analyses, or studies, or to 

request rulings that solely address the 

impact of the termination on the System 

or parties other than the terminating 

institution and its stockholders. 

(B) Any specific allowance for losses, 

and a pro rata share of any general 

allowance for losses, on direct loans to 

associations that are paid off or 

transferred before or at termination. 

(ii) Subtract from your assets and 

liabilities your direct loans to affiliated 

associations that were paid off or 

transferred in the 12-month period 

before termination or at termination. 

(iii) Subtract from your assets the 

following: 

(A) Equity investments held in your 

institution by affiliated associations that 

you transferred at termination or during 

the 12 months before termination; and 

(B) The dollar amount of current and 

deferred tax expenses, if any, due to the 

termination; 

(iv) Add to assets, the dollar amount 

of estimated current and deferred tax 

benefits, if any, due to the termination. 

(v) Subtract from liabilities any 

liability that we treat as regulatory 

capital (or that we do not treat as a 

liability) under the capital or collateral 

requirements in subparts H and K of 

part 615 of this chapter. 

(vi) Make the adjustments that we 

require under § 611.1250(c). For the 

final exit fee, we will review and may 

require additional adjustments for 

transactions between the date you 

adopted the termination resolution and 

the termination date. 

(6) After the above adjustments, 

combine your balance sheet with the 

balance sheets of terminating 

associations after making the 

adjustments required in paragraph (a) of 

this section. 

(7) Subtract combined liabilities from 

combined assets. This is the total capital 

of the combined balance sheet. 

(8) Multiply the assets of the 

combined balance sheet after the above 

adjustments by 6 percent. Subtract this 

amount from the total capital of the 

combined balance sheet. This amount is 

the combined final exit fee for your 

institution and the terminating affiliated 

associations. 

(9) Your final exit fee is the amount 

by which the combined final exit fee 

exceeds the total of the individual final 

exit fees of your affiliated terminating 

associations. 

(c) Payment of exit fee. On the 

termination date, you must: 

(1) Deposit into an escrow account 

acceptable to us and the FCSIC an 


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amount equal to 110 percent of the 

preliminary exit fee estimate, adjusted 

to account for stock retirements to 

dissenting stockholders and Farm Credit 

institutions, and any other adjustments 

we require. 

(2) Deposit into an escrow account 

acceptable to us an amount equal to 110 

percent of the equity you must retire for 

dissenting stockholders and System 

institutions holding stock that would be 

entitled to a share of the remaining 

assets in a liquidation. 

(d) Pay-out of escrow. Following the 

independent audit of the institution’s 

account balances as of the termination 

date, we will determine the amount of 

the final exit fee and the amounts owed 

to stockholders to retire their equities. 

We will then direct the escrow agent to: 

(1) Pay the exit fee to the Farm Credit 

Insurance Fund; 

(2) Pay the amounts owed to 

dissenting stockholders and Farm Credit 

institutions; and 

(3) Return any remaining amounts to 

the successor institution. 

(e) Additional payment. If the amount 

held in escrow is not enough to pay the 

amounts under paragraph (d)(1) and 

(d)(2) of this section, the successor 

institution must pay any remaining 

liability to the escrow agent for 

distribution to the appropriate parties. 

The termination application must 

include evidence that, after termination, 

the successor institution will pay any 

remaining amounts owed. 

§ 611.1260 Payment of debts and 

assessments—terminating association. 

(a) General rule. If your institution is 

a terminating association, you must pay 

or make adequate provision for the 

payment of all outstanding debt 

obligations and assessments. 

(b) No OFI relationship. If the 

successor institution will not become an 

OFI, you must either: 

(1) Pay debts and assessments owed to 

your affiliated Farm Credit bank at 

termination; or 

(2) With your affiliated Farm Credit 

bank’s concurrence, arrange to pay any 

obligations or assessments to the bank 

after termination. 

(c) Obligations to other Farm Credit 

institutions. You must pay or make 

adequate provision for payment of 

obligations to any Farm Credit 

institution (other than your affiliated 

bank) under any loss-sharing or other 

agreement. 

§ 611.1265 Retirement of a terminating 

association’s investment in its affiliated 

bank. 

(a) Safety and soundness restrictions. 

Notwithstanding anything in this 

subpart to the contrary, we may prohibit 

a bank from retiring the equities you 

hold in the bank if the retirement would 

cause the bank to fall below its 

regulatory capital requirements after 

retirement, or if we determine that the 

bank would be in an unsafe or unsound 

condition after retirement. 

(b) Retirement agreement. Your 

affiliated bank may retire the purchased 

and allocated equities held by your 

institution in the bank according to the 

terms of the bank’s capital revolvement 

plan or an agreement between you and 

the bank. 

(c) Retirement in absence of 

agreement. Your affiliated bank must 

retire any equities not subject to an 

agreement or revolvement plan no later 

than when you or the successor 

institution pays off your loan from the 

bank. 

(d) No retirement of unallocated 

surplus. When your bank retires equities 

you own in the bank, the bank must pay 

par or face value for purchased and 

allocated equities, less any impairment. 

The bank may not pay you any portion 

of its unallocated surplus. 

(e) Exclusion of equities from capital 

ratios. If another Farm Credit institution 

makes an agreement to retire equities 

you hold in that institution after 

termination, we may require that 

institution to exclude part or all of those 

equities from assets and capital when 

the institution calculates its capital and 

net collateral ratios under subparts H 

and K of part 615 of this chapter. 

§ 611.1270 Repayment of obligations—

terminating bank. 

(a) General rule. If your institution is 

a terminating bank, you must pay or 

make adequate provision for the 

payment of all outstanding debt 

obligations, and provide for your 

responsibility for any probable 

contingent liabilities identified. 

(b) Satisfaction of primary liability on 

consolidated or System-wide 

obligations. After consulting with the 

other Farm Credit banks, the Funding 

Corporation, and the FCSIC, you must 

pay or make adequate provision for 

payment of your primary liability on 

consolidated or System-wide obligations 

in a method that we deem acceptable. 

Before we make a final decision on your 

proposal and as we deem necessary, we 

may consult with the other Farm Credit 

banks, the Funding Corporation, and the 

FCSIC. 

(c) Satisfaction of joint and several 

liability and liability for interest on 

individual obligations. 

(1) You and the other Farm Credit 

banks must enter into an agreement, 

which is subject to our approval, 

covering obligations issued under 

section 4.2 of the Act and outstanding 

on the termination date. The agreement 

must specify how you and your 

successor institution will make 

adequate provision for the payment of 

your joint and several liability to 

holders of obligations other than those 

obligations on which you are primarily 

liable, in the event we make calls for 

payment under section 4.4 of the Act. 

You and your successor institution must 

also provide for your liability under 

section 4.4(a)(1) of the Act to pay 

interest on the individual obligations 

issued by other System banks. As a part 

of the agreement, you must also agree 

that your successor institution will 

provide ongoing information to the 

Funding Corporation to enable it to 

fulfill its funding and disclosure duties. 

The Funding Corporation may, at its 

option, be a party to the agreement to 

the extent necessary to fulfill its duties 

with respect to financing and 

disclosure. 

(2) If you and the other Farm Credit 

banks are unable to reach agreement 

within 90 days before the proposed 

termination date, we will specify the 

manner in which you will make 

adequate provision for the payment of 

the liabilities in question and how we 

will make joint and several calls for 

those obligations outstanding on the 

termination date. 

(3) Notwithstanding any other 

provision in these regulations, the 

successor institution will be jointly and 

severally liable for consolidated and 

System-wide debt outstanding on the 

termination date (other than the 

obligations on which you are primarily 

liable). The successor institution will 

also be liable for interest on other banks’

individual obligations as described in 

section 4.4(a)(1) of the Act and 

outstanding on the termination date. 

The termination application must 

include evidence that the successor 

institution will continue to be liable for 

consolidated and System-wide debt and 

for interest on other banks’ individual 

obligations. 

§ 611.1275 Retirement of equities held by 

other System institutions. 

(a) Retirement at option of equity 

holder. If your institution is a 

terminating institution, System 

institutions that own your equities have 

the right to require you to retire the 

equities on the termination date. 

(b) Value of equity holders’ interests. 

You must retire the equities in 

accordance with the liquidation 

provisions in your bylaws unless we 

determine that the liquidation 

provisions would result in an 


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inequitable distribution to stockholders. 

If we make such a determination, we 

will require you to distribute the equity 

in accordance with another method that 

we deem equitable to stockholders. 

Before you retire any equity, you must 

make the following adjustments to the 

amount of stockholder equity as stated 

in the financial statements on the 

termination date: 

(1) Make deductions for any taxes due 

to the termination that have not yet been 

recorded; 

(2) Deduct the amount of the exit fee; 

and 

(3) Make any adjustments described 

under § 611.1250(c) that we may require 

as we deem appropriate. 

(c) Transfer of affiliated association’s 

investment. As an alternative to equity 

retirement, an affiliated association that 

reaffiliates with another Farm Credit 

bank instead of terminating with its 

bank has the right to require the 

terminating bank to transfer its 

investment to its new affiliated bank 

when it reaffiliates. If your institution is 

a terminating bank, at the time of 

reaffiliation you must transfer the 

purchased and allocated equities held 

by the association, as well as its share 

of unallocated surplus, to the new 

affiliated bank. Calculate the 

association’s share before deduction of 

the exit fee as of the month end 

preceding the reaffiliation date (or the 

termination date if it is the same as the 

reaffiliation date) in accordance with 

the liquidation provisions of your 

bylaws, unless we determine that the 

liquidation provisions would result in 

an inequitable distribution. If we make 

such a determination, we will require 

you to distribute the association’s share 

of your unallocated surplus in 

accordance with another method that 

we deem equitable to stockholders. 

Before you distribute any unallocated 

surplus, you must make the following 

adjustments to stockholder equity as 

stated in the financial statements as of 

the month end preceding the 

reaffiliation date (or the termination 

date if it is the same as the reaffiliation 

date): 

(1) Add back any taxes due to the 

termination, and the exit fee; and 

(2) Make any adjustments described 

under § 611.1250(c) that we may require 

as we deem appropriate. 

(d) Prohibition on certain affiliations. 

No Farm Credit institution may retain 

an equity interest otherwise prohibited 

by law in a successor institution 

§ 611.1280 Dissenting stockholders’

rights. 

(a) Definition. A dissenting 

stockholder is an equity holder (other 

than a System institution) in a 

terminating institution on the 

termination date who either: 

(1) Was eligible to vote on the 

termination resolution and voted against 

termination; 

(2) Was an equity holder on the voting 

record date but was not eligible to vote; 

or 

(3) Became an equity holder after the 

voting record date. 

(b) Retirement at option of a 

dissenting stockholder. A dissenting 

stockholder may require a terminating 

institution to retire the stockholder’s 

equity interest in the terminating 

institution. 

(c) Value of a dissenting stockholder’s 

interest. You must pay a dissenting 

stockholder according to the liquidation 

provision in your bylaws, except that 

you must pay at least par or face value 

for eligible borrower stock (as defined in 

section 4.9A(d)(2) of the Act). If we 

determine that the liquidation provision 

is inequitable to stockholders, we will 

require you to calculate their share in 

accordance with another formula that 

we deem equitable. 

(d) Calculation of interest of a 

dissenting stockholder. Before you retire 

any equity, you must make the 

following adjustments to the amount of 

stockholder equity as stated in the 

financial statements on the termination 

date: 

(1) Deduct any taxes due to the 

termination that you have not yet 

recorded; 

(2) Deduct the amount of the exit fee; 

and 

(3) Make any adjustments described 

under § 611.1250(c) that we may require 

as we deem appropriate. 

(e) Form of payment to a dissenting 

stockholder. You must pay dissenting 

stockholders for their equities as 

follows: 

(1) Pay cash for the par or face value 

of purchased stock, less any 

impairment; 

(2) For equities other than purchased 

equities, you may: 

(i) Pay cash; 

(ii) Cause or otherwise provide for the 

successor institution to issue, on the 

date of termination, subordinated debt 

to the stockholder with a face value 

equal to the value of the remaining 

equities. This subordinated debt must 

have a maturity date of 7 years or less, 

must have priority in liquidation ahead 

of all equity, and must carry a rate of 

interest not less than the rate (at the 

time of termination) for debt of 

comparable maturity issued by the U.S. 

Treasury plus 1 percent; or 

(iii) Provide for a combination of cash 

and subordinated debt as described 

above. 

(f) Payment to holders of special class 

of stock. If you have adopted bylaws 

under § 611.1210(f), you must pay a 

dissenting stockholder who owns shares 

of the special class of stock an amount 

equal to the lower of the par (or face) 

value or the value of such stock as 

determined under § 611.1280(c) and (d). 

(g) Notice to equity holders. The 

notice to equity holders required in 

§ 611.1240(f) must include a form for 

stockholders to send back to you, stating 

their intention to exercise dissenters’

rights. The notice must contain the 

following information: 

(1) A description of the rights of 

dissenting stockholders set forth in this 

section and the approximate value per 

share that a dissenting stockholder can 

expect to receive. State whether the 

successor institution will require 

borrowers to be stockholders or whether 

it will require stockholders to be 

borrowers. 

(2) A description of the current book 

and par value per share of each class of 

equities, and the expected book and 

market value of the stockholder’s 

interest in the successor institution. 

(3) A statement that a stockholder 

must return the enclosed form to you 

within 30 days if the stockholder 

chooses to exercise dissenters’ rights. 

(h) Notice to subsequent equity 

holders. Equity holders that acquire 

their equities after the termination vote 

must also receive the notice described 

in paragraph (g) of this section. You 

must give them at least 5 business days 

to decide whether to request retirement 

of their stock. 

(i) Reconsideration. If a 

reconsideration vote is held and the 

termination is disapproved, the right of 

stockholders to exercise dissenters’

rights is rescinded. If a reconsideration 

vote is held and the termination is 

approved, you must retire the equities of 

dissenting stockholders as if there had 

been no reconsideration vote. 

§ 611.1285 Loan refinancing by borrowers. 

(a) Disclosure of credit and loan 

information. At the request of a 

borrower seeking refinancing with 

another System institution before you 

terminate, you must give credit and loan 

information about the borrower to such 

institution. 

(b) No reassignment of territory. If, at 

the termination date, we have not 

assigned your territory to another 

System institution, any System 

institution may lend in your territory, to 

the extent otherwise permitted by the 

Act and the regulations in this chapter. 


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44430 Federal Register / Vol. 71, No. 150 / Friday, August 4, 2006 / Rules and Regulations 

§ 611.1290 Continuation of borrower 

rights. 

You may not require a waiver of 

contractual borrower rights provisions 

as a condition of borrowing from and 

owning equity in the successor 

institution. Institutions that become 

other financing institutions on 

termination must comply with the 

applicable borrower rights provisions in 

the Act and part 617 of this chapter. 

Dated: July 27, 2006. 

Roland E. Smith, 

Secretary, Farm Credit Administration Board. 

[FR Doc. 06–6648 Filed 8–3–06; 8:45 am] 

BILLING CODE 6705–01–P 


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