5740 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

1Pub. L. 92–181, 85 Stat. 583. 

2Section 5.17(a)(8) to (10) of the Act (12 U.S.C. 

2001, et seq.). 

3Pub. L. 102–552, 106 Stat. 4131. 

4Pub. L. 107–204, July 30, 2002. 

5FCA Fall 2003 Unified Agenda, 68 FR 53168 

(September 9, 2003). 

6 70 FR 9016, February 24, 2005. 

FARM CREDIT ADMINISTRATION 

12 CFR Parts 611, 612, 614, 615, 618, 

619, 620, and 630 

RIN 3052–AC19 

Organization; Standards of Conduct 

and Referral of Known or Suspected 

Criminal Violations; Loan Policies and 

Operations; Funding and Fiscal 

Affairs, Loan Policies and Operations, 

and Funding Operations; General 

Provisions; Definitions; Disclosure to 

Shareholders; Disclosure to Investors 

in System-Wide and Consolidated 

Bank Debt Obligations of the Farm 

Credit System 

AGENCY: Farm Credit Administration. 

ACTION: Final rule. 

SUMMARY: The Farm Credit 

Administration (FCA, we, or our) issues 

this final rule amending our regulations 

affecting the governance of the Farm 

Credit System (System). The final rule 

enhances impartiality and disclosure in 

the election of directors; requires that 

Farm Credit banks and associations 

establish policies identifying desirable 

director qualifications; requires boards 

to have a director or an advisor who is 

a financial expert; requires System 

institutions to establish director training 

procedures; and ensures that boards 

conduct annual self-evaluations. The 

final rule addresses the term of service 

and removal of outside directors, while 

requiring all Farm Credit banks and 

associations with assets over $500 

million to have at least two outside 

directors. The rule also provides 

associations with small boards an 

exemption from having at least two 

outside directors. The rule further 

requires that Farm Credit banks and 

associations have nominating 

committees and that all System 

institutions have audit and 

compensation committees. The final 

rule clarifies the current rule on 

disclosure of conflicts of interest and 

compensation. The final rule does not 

apply to the Federal Agricultural 

Mortgage Corporation (FAMC). 

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 except for 

§§ 611.210(a)(2), 611.220(a)(2)(i) and 

(ii), 611.325, and 620.21(d)(2) which 

will be effective one year from the 

effective date of this rule. We will 

publish a notice of the effective date in 

the Federal Register. 

Compliance Date: Compliance with 

board composition requirements 

(§§ 611.210(a)(2) and 611.220(a)(2)(i) 

and (ii)) and establishment of bank 

nominating committees (§§ 611.325 and 

620.21(d)(2)) must be achieved 1 year 

from the effective date of this rule. All 

other provisions require compliance on 

the effective date of this rule. 

FOR FURTHER INFORMATION CONTACT: 

Gary Van Meter, Deputy Director, Office 

of Regulatory Policy, Farm Credit 

Administration, McLean, VA 22102– 

5090, (703) 883–4232, TTY (703) 883– 

4434, 

Or 

Laura D. McFarland, Senior Attorney, 

Office of General Counsel, Farm 

Credit Administration, McLean, VA 

22102–5090, (703) 883–4020, TTY 

(703) 883–4020. 

SUPPLEMENTARY INFORMATION: 

I. Objectives 

The objectives of this rule are to: 

• Protect the safety and soundness of 

System institutions by strengthening the 

independence of System institution 

boards and incorporating best 

governance practices; and 

• Support borrower participation in 

the management, control and ownership 

of their respective System institutions. 

II. Background 

The Farm Credit Act of 1971, as 

amended (Act),1 authorizes FCA to issue 

regulations implementing the provisions 

of the Act. FCA regulations ensure the 

safe and sound operations of System 

institutions and establish minimum 

disclosure levels of financial 

information to stockholders, investors, 

and potential investors in the System.2

Congress explained in section 514 of the 

Farm Credit Banks and Associations 

Safety and Soundness Act of 1992 (1992 

Act) that disclosure of financial 

information and the reporting of 

potential conflicts of interest by System 

directors, officers, and employees helps 

ensure the financial viability of the 

System.3

The System has continued to grow in 

complexity, with an increasing demand 

for System institutions to maintain 

qualified boards and provide 

transparency in reporting to 

stockholders and investors. Also, market 

expectations for investments, including 

System-wide debt obligations, have 

changed in response to passage of the 

Sarbanes-Oxley Act of 2002.4 Congress 

enacted Sarbanes-Oxley after revelation 

of accounting and financial management 

scandals involving public companies, to 

strengthened financial disclosure, 

reporting, and accountability 

requirements for publicly traded 

companies and other entities registered 

with the Securities and Exchange 

Commission (SEC). 

While Farm Credit banks and 

associations are not subject to the 

governance requirements of SarbanesOxley, the FCA Board determined in 

September 2003 that our regulatory 

governance provisions needed updating 

to reflect the changing environment in 

which the System operates.5 On January 

19, 2005, we published a proposed rule 

(70 FR 2963) to amend those parts of our 

regulations affecting governance of 

System institutions. The proposed rule 

addressed five governance areas: (1) 

Director training, qualifications, and 

self-evaluations, (2) board composition, 

(3) nominating committees, (4) conflicts 

of interest, and (5) audit and 

compensation committees. We extended 

the comment period for the proposed 

rule from March 21, 2005 to May 20, 

2005 at the request of several System 

institutions and the Farm Credit Council 

(FCC), acting for its membership.6

III. Comments and Our Response 

We received 348 comment letters on 

our proposed rule, all but two from 

individuals and entities associated with 

the System. Of the comments received, 

342 letters were from officers and 

directors of 85 System associations, 

each of the five Farm Credit banks, the 

Federal Farm Credit Banks Funding 

Corporation (Funding Corporation), and 

the FCC (System commenters). One 

borrower of the System and one member 

of the general public also provided 

comments on the rule. The majority of 

the System commenters supported the 

FCC comments, adding individual 

elaborations where they deemed 

appropriate. We also received five 

comments as part of our regulatory 

burden initiative addressing areas 

covered in the proposed rule and 

address them in this rule. We discuss 

the comments to our proposed rule and 

our responses below. Some commenters 

also responded to our request for 

comments on the existing rule for 

waiving the statutory compensation 

limit of Farm Credit bank directors, 

which we discuss separately below. 

Those areas of the proposed rule that 

did not receive comments are finalized 

as proposed. 


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Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 5741 

7Section 110 of the Agricultural Credit Act of 

1987, Pub. L. 100–233. 

8H. AMDT 425 on HR 3030 (August 4, 1987). In 

the Farm Credit Amendments Act of 1985 (Pub. L. 

99–205), Congress amended the Act to make us an 

arm’s-length regulator, while increasing our 

regulatory powers. 9 5 U.S.C. 601 et seq. 

10Statement on Regulatory Philosphy, 59 FR 

32189 (June 22, 1994). Updated May 16, 1995, 60 

FR 26034. 

IV. General Issues 

We received many comments on 

issues not directed to a single specific 

rule section. These comments are 

addressed here using the following nine 

categories: Our authority to regulate 

matters contained in System bylaws; the 

Regulatory Flexibility Act; our policy 

statement on rulemaking; nonregulatory 

approaches to governance; the extent of 

our examination and enforcement 

authorities; cooperative principles; 

independent directors; other general 

comments; and cost analysis. 

A. System Institution Bylaws 

A significant number of System 

commenters stated the proposed rule 

addressed issues reserved to System 

institutions through their bylaws and 

that we lack authority to regulate these 

issues. The commenters cited section 

5.17(b) of the Act as precluding FCA’s 

involvement in any area covered by 

institution bylaws. Some commenters 

acknowledged our previous assertion 

that the prohibition on bylaw approval 

doesn’t preclude rulemaking on matters 

affecting an institution’s bylaws, stating 

that our position applies to the 

operational conduct of System 

institutions, not board issues. The 

commenters explain that regulations in 

areas addressing boards of directors 

would directly supersede a subject 

Congress expressly left to an 

institution’s bylaws, making section 

5.17(b) meaningless. Commenters also 

suggested that any rule on governance is 

functionally equivalent to our approval 

of bylaws. 

The Act at section 5.17(b) states that 

we may not approve bylaws, either 

directly or indirectly. Congress added 

the prohibition on bylaw approval in 

1987 as a technical change.7 As 

explained by Congress, this technical 

change removed the ‘‘last vestiges of the 

former management role of the Farm 

Credit Administration.’’ 8 This statement 

was in reference to the then statutory 

requirement that System institutions 

send bylaws to our offices for review 

and approval. This practice stopped 

when section 5.17(b) was enacted. 

We recognize that section 5.17(b) 

removed our role in issuing prior 

approvals of bylaws. However, nothing 

in the language of 5.17(b) or its 

legislative history discusses our 

regulatory authority. Had Congress 

intended to limit our regulatory 

authority on any issue that may also be 

addressed in a System institution’s 

bylaws, the addition of section 5.17(b) 

would not have been characterized as a 

technical change and Congress would 

have also removed or amended section 

5.17(a)(9) of the Act. Section 5.17(a)(9) 

directs us to issue rules and regulations 

‘‘necessary or appropriate’’ to carry out 

the Act. Congress left this authority, and 

others, in place when prohibiting bylaw 

approval. Thus, Congress did not 

remove or limit our authority to issue 

regulations governing any matter 

affecting institution bylaws by adding 

section 5.17(b). 

In pursuit of ensuring a safe and 

sound System and carrying out the Act, 

institution bylaws are necessarily 

impacted by our rules. Issuing rules 

impacting bylaws does not mean we are 

approving bylaws in violation of section 

5.17(b) of the Act. If we took the 

comments to the fullest extent, a System 

institution could supersede any 

regulation simply by adding a contrary 

bylaw provision. This is clearly not 

what Congress intended when adding 

section 5.17(b) to the Act. Section 

5.17(b) went to a particular past practice 

and was not intended to exclude us 

from regulating all matters that may also 

be addressed by System bylaws. 

Additionally, while the authority of 

System institutions to establish bylaws 

is fairly broad, it is not without limits. 

Bylaws must be consistent with 

applicable laws and regulations and we 

retain the responsibility to examine 

institution bylaws to ensure 

compliance. Consequently, we may 

regulate the terms and conditions by 

which institutions exercise their powers 

through their bylaws, while not 

approving the bylaws themselves, and 

then examine compliance with our 

regulations. 

B. Regulatory Flexibility Act Analysis 

Commenters questioned our 

Regulatory Flexibility Act (RFA) 9

certification. In the proposed rule, we 

certified the rule will not have a 

significant economic impact on a large 

number of small entities. Our 

certification considered each Farm 

Credit bank together with ‘‘its affiliated 

associations.’’ The commenters objected 

to our combining associations with 

Farm Credit banks, stating that because 

each institution has to comply with the 

regulatory requirements each should be 

considered individually for purposes of 

identifying economic impact. 

Commenters from one association 

specifically objected to the implication 

that no ‘‘small entity’’ would be 

burdened by the rule. 

Under the RFA, an agency must 

certify that a rulemaking will not have 

a significant economic impact on a 

substantial number of small entities. If 

the rulemaking will have such an 

impact, then the agency must conduct a 

regulatory flexibility analysis. The RFA 

definition of a small entity incorporates 

the Small Business Administration 

(SBA) definition of a ‘‘small business 

concern,’’ including its size standards. 

A small business concern is one 

independently owned and operated, and 

not dominant in its field of operation. 

The SBA explains that ‘‘independently 

owned and operated’’ is determined, in 

part, by the entity’s affiliation with 

other businesses. Generally, an affiliate 

is one that is controlled by, or has 

control over, the entity. Businesses with 

ownership, management, and 

contractual relationships that make 

them economically dependent may also 

be affiliates. For purposes of the RFA, 

the interrelated ownership, control, and 

contractual relationship between 

associations and their funding banks are 

sufficient to permit them to be treated 

as a single entity. 

Further, System institutions fall under 

the SBA ‘‘Credit Intermediation and 

Related Activities’’ size category for 

small business concerns and the ‘‘All 

Other Non-Depository Credit 

Intermediation’’ subcategory. This 

subcategory defines a small entity as 

one with average annual assets less than 

$6 million. As affiliates, the combined 

average annual assets of each Farm 

Credit bank and its affiliated 

associations exceed $6 million. 

Therefore, System institutions do not 

satisfy the RFA definition of ‘‘small 

entities.’’

C. Compliance With FCA Policy 

Statement 59 ‘‘Regulatory Philosophy’’ 

The FCC board of directors sent a 

separate letter from the FCC letter 

commenting on the entire rule, stating 

that the proposed governance rule was 

inconsistent with FCA Board Policy 

Statement 59 (FCA–PS–59 (1994)).10

Two other commenters also stated that 

we violated FCA–PS–59 (1994). This 

policy statement sets out our 

philosophy on issuing regulations 

necessary to carry out the Act and 

promote the safety and soundness of the 

System. The FCA Board, independent of 

the comment letters received on the 

proposed governance rule, issued a 


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5742 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

revised FCA–PS–59 (1994) on June 8, 

2005. 

The FCC board asserted the proposed 

rule violates the guidelines contained in 

FCA–PS–59 (1994) in five areas. First, 

they claimed they found no reasoned 

determination on the beneficial value of 

the proposed rule relative to the cost, 

stating the rule will impose greater costs 

on System institutions. A separate 

commenter also stated we had not 

completed a cost-benefit analysis before 

proposing the rule. While we did 

consider the proposed rule’s cost to 

System institutions, the proposed rule 

did not explain clearly our cost-benefit 

consideration. We have included our 

cost-benefit review at section IV.I. of 

this preamble. 

Second, the FCC board remarked that 

we did not specifically identify risks or 

problems needing to be addressed in a 

rule. The provisions in FCA–PS–59 

(1994) are not intended to limit us to 

issuing regulations only when there is 

an existing problem. The proposed rule 

explained that recent corporate scandals 

led us to reevaluate the preventive 

safeguards in our regulations. No 

existing problem of the nature leading to 

passage of Sarbanes-Oxley presently 

exists in the System, but our 

responsibility as a safety and soundness 

regulator requires us to be proactive, as 

well as reactive. 

Third, the FCC board stated the 

proposed rule contained ‘‘explicit 

operational direction’’ instead of 

performance criteria as stated in FCA–

PS–59 (1994). FCA–PS–59 (1994) states 

that we will, to the extent feasible, 

specify performance criteria and 

objectives, but does not preclude the use 

of operational constraints. FCA–PS–59 

(1994) states that any operational 

constraints we regulate will be based on 

specific statutory requirements or 

achieving regulatory objectives. The rule 

provides performance criteria in many 

areas, most notably in director 

qualifications, training, and elections. 

Some operational direction was 

provided for board committees and for 

director removal to ensure these actions 

occurred in a manner considered 

suitable for safety and soundness or to 

protect the cooperative structure of the 

System. To address commenter 

concerns, we have more clearly 

explained our reason for each provision 

of this final rule in the section-bysection portion of this preamble. 

Fourth, the FCC board challenged the 

statutory basis for the proposed rule 

because they did not find specific 

statutory provisions for most of the rule. 

We issued our proposed rule under our 

general authority at section 5.17(a)(9) 

and (10) of the Act, which empowers us 

to issue regulations for the safety and 

soundness of the System and to carry 

out provisions of the Act. Further, 

section 5.17(a)(8) authorizes us to 

regulate the preparation and 

distribution of information on the 

financial condition of System 

institutions to stockholders and 

investors. Many of the provisions in the 

rule relate to the financial condition of 

System institutions, such as the Annual 

Meeting Information Statement (AMIS), 

disclosure of conflicts of interest, and 

the role of audit committees in 

preparing financial reports. 

Fifth, the FCC board claimed we did 

not consider the approach taken by 

other financial regulators, stating we 

inconsistently followed their approach 

and that we were applying SarbanesOxley to the System, a law they state 

‘‘Congress specifically chose not to 

apply to the System.’’ They also stated 

that events in the community of 

publicly traded companies are ‘‘tenuous 

justification’’ for updating our 

regulations. We stated in the preamble 

to the proposed rule that Farm Credit 

banks and associations are not subject to 

the governance provisions of SarbanesOxley. We do not agree that our 

proposed rule is inconsistent with what 

other regulators require. We used 

Sarbanes-Oxley as a guide, along with 

the governance rules of the SEC, the 

Federal Housing Finance Board (FHFB) 

and other regulators, as well as the 

System’s own governance efforts. The 

FCA, as an independent regulator of the 

System, is not required to follow the 

actions of other regulators. Instead, 

FCA–PS–59 (1994) states that we will 

consider the policy positions of other 

regulators to decide if we should follow 

them or take a different approach, 

which we did in the proposed 

governance rule. 

Finally, the FCC board’s letter 

discussed our use of the disclosure and 

conflict of interest provisions in section 

514 of the Safety and Soundness Act of 

1992. They stated that governance is 

unrelated to disclosures and conflicts of 

interest. They also commented that our 

last review of regulations implementing 

the 1992 Act, conducted more than 10 

years ago, is sufficient absent a formal 

study or ‘‘reliable source’’ suggesting 

our regulations are inadequate. Good 

governance involves accountability and 

transparency, thus disclosing conflicts 

of interest and reporting to stakeholders 

directly responds to those issues. We are 

charged with examining and regulating 

the System. As part of that 

responsibility, we periodically review 

our regulations in response to changes 

within the System, the financial 

community, or agriculture. Proposals to 

modify rules are based on our careful 

study, research and analysis. A 

requirement that we hire a consultant to 

study the regulations before we amend 

them would be inappropriate. 

D. Nonregulatory Approach to 

Governance 

Most of the System commenters 

supported our objective of improving 

System governance, but questioned the 

need for regulations. Of these, 194 

commenters asked that we withdraw the 

rule and work with the System to find 

nonregulatory ways to strengthen 

institution governance. These 

commenters remarked that System 

institutions are working to improve 

governance independent of FCA 

regulatory requirements and should be 

allowed to continue their efforts without 

having to incorporate potentially 

different governance standards. Some 

commenters suggested the rule should 

be withdrawn until the System 

completes its own self-governance 

efforts. Others explained that voluntary 

governance policies, incorporating both 

the spirit and intent of governance, are 

more appropriate for the System rather 

than prescriptive regulations designed 

to make the System conform to publicly 

traded companies. 

We are not withdrawing the rule, but 

have withdrawn or amended certain 

provisions based on specific comments. 

Our governance rule sets a minimum 

level of performance that is mandatory 

for all System institutions, including 

those that may not endorse the System’s 

voluntary initiatives. While voluntary 

governance is valuable, it does not 

replace the stability that rules provide 

in assuring System stakeholders of the 

safety and soundness of the System. We 

have a responsibility to address these 

issues given the importance of strong 

governance to the safe and sound 

operations of the System and the current 

business climate in which the System 

operates. Our intent is to ensure that 

appropriate governance standards exist 

for all System institutions. As we 

discuss in section IV.F. of this preamble, 

the cooperative structure of the System 

was a prime consideration in our 

governance rulemaking, and we 

reviewed the rules for public companies 

for information purposes and 

identification of the evolving practices 

of the marketplace. We believe the 

assurances derived from a regulatory 

minimum standard and the System’s 

voluntary governance efforts will benefit 

the System by increased stockholder, 

investor, and public confidence. 

Commenters stated that the rule seeks 

consistency across the System without 

explanation and does not appropriately 


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Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 5743 

11Pub. L. 100–233 (January 6, 1988). 

12Pub. L. 104–105, 110 Stat. 162 (February 10, 

1996). 

consider the different management 

needs of each institution. System 

commenters asked that each institution 

be allowed to determine how to address 

governance areas based on the 

institution’s size, complexity, risks, and 

resources. Some System commenters 

questioned if we recognized the 

different operational behaviors of the 

institutions. Another commenter stated 

that our governance rule tries to 

centralize a decentralized System. This 

commenter also remarked that the rule 

may inhibit growth due to its rigidity. 

As an alternative, many commenters 

asked that we rely on our examination 

and enforcement authorities or issue 

rules that require institutions to 

establish governance policies within 

identified areas and examine 

implementation of those policies based 

on individual institution operations. 

While we believe it is important to 

preserve individual institution 

operating flexibility wherever and 

whenever possible, our responsibility as 

regulator requires us to issue regulations 

we determine appropriate for safety and 

soundness reasons. We carefully 

consider the size, complexity, risks, and 

resources of System institutions when 

developing our rules, and incorporate 

variations and flexibility as appropriate. 

Regulations necessarily place limits on 

individual institution flexibility to 

ensure appropriate business practices 

are consistently followed in all 

operating environments. The final rule 

includes regulatory relief in certain 

provisions, particularly for smaller 

institutions, where complexity and risks 

are limited. Further, we believe that this 

rule does not centralize the System but 

facilitates our ongoing examinations of 

System compliance with governance 

activities. 

The FCC also stated that governance 

rules are not necessary because the 

System is the only governmentsponsored enterprise (GSE) with a fully 

independent safety and soundness 

regulator having full enforcement 

powers and an entirely self-funded 

insurance fund under the direction of 

another independent regulator. They 

further commented that there are 

enough regulations already in place to 

address governance of System 

institutions. They also cited ‘‘extensive 

self-regulating’’ practices in place such 

as the general financing agreements 

(GFA), market access agreement (MAA), 

and contractual interbank performance 

agreement (CIPA). Commenters also 

highlighted the System-wide disclosure 

program managed by the Funding 

Corporation. One commenter claimed 

the System as a whole implemented the 

creation of the insurance fund, the 

System-wide disclosures, the GFA, the 

MAA, and other internal controls on a 

voluntary basis so governance rules are 

not needed. 

We recognize the System has taken 

steps to enhance market discipline and 

transparency in its reporting and 

disclosures, but this rule is necessary to 

provide clear guidelines that will 

facilitate our on-going examinations of, 

and System compliance with, 

governance activities. The GFAs, MAA, 

and CIPA mentioned by commenters are 

supported by, and operate within, 

statutory authorities and regulatory 

constraints. While these System 

agreements support consistent and 

sound financial conditions, they do not 

focus directly on the governance 

practices of individual institutions. 

Additionally, we note that the insurance 

fund was created by Congress as part of 

the Agricultural Credit Act of 1987 11

and is available to cover losses when an 

institution fails. Insurance funds are 

generally not considered governance 

tools. Proper governance helps prevent 

loss through better operations, thereby 

avoiding the need to use insurance 

funds and enforcement authorities to 

resolve problems. 

Commenters remarked that the 

proposed rule implements no new 

statutory provision and does not 

respond to a specifically identified 

safety and soundness issue. The FCC 

also referenced the instructions of the 

Farm Credit System Reform Act of 1996 

(1996 Act) 12 to reduce regulatory 

burdens, stating that any rulemaking 

after 1996 is held to a higher ‘‘burden 

of proof’’ that a need exists for a rule. 

One commenter specifically stated that 

a rule increasing reporting and 

disclosures to stockholders will not 

result in a more informed or involved 

membership. Another commenter stated 

that increasing regulations takes away 

the control of the board and 

management to effectively run their 

operations. Several commenters 

expressed concern that we were making 

changes just for the sake of change. 

Some stated the proposition that we 

should only issue rules when there is a 

problem, real or perceived. They also 

remarked that the rule might send the 

message to the marketplace that we, as 

the regulator, consider the System to 

have a governance problem. Another 

commenter stated we had gone beyond 

our role as a safety and soundness 

regulator. 

We disagree that this rule is not 

needed or is a change for the sake of 

change. We believe the rule will result 

in a better informed and more involved 

membership. Congress charged us to 

issue regulations to ensure the safety 

and soundness of the System. With the 

recent growth of the System, increased 

sophistication in financial markets, and 

on-going scrutiny of public and agency 

financial activities and related reporting 

practices, we are obligated to review 

current practices and regulatory 

standards to ensure the continuing 

safety and soundness of System 

institutions both collectively and 

individually. As explained in section 

IV.C. of this preamble, we have 

flexibility to issue rules in response to 

a problem or proactively to ensure 

continued safe and sound business 

operation. Our proactive rulemaking in 

the area of governance should make it 

clear to the marketplace that we do not 

see a governance problem in the System, 

but instead are acting to update 

regulatory requirements that preserve 

the good standing of the System. We 

also disagree that the rule takes over or 

reduces board control. The rule clarifies 

existing board responsibilities and 

authorities while providing boards with 

more tools to carry out their fiduciary 

and oversight responsibilities. Finally, 

this rule complies with the 1996 Act. 

Section 212(b) of the 1996 Act requires 

us to continuously review our 

regulations to eliminate rules that are 

unnecessary, unduly burdensome, 

costly, or not based on law. The 1996 

Act specifies that we are to make these 

eliminations only if they would be 

consistent with law, safety, and 

soundness. As explained throughout 

this preamble, this rule is consistent 

with the law, safety, and soundness 

concerns. 

E. Examination and Enforcement 

Authority 

Many System commenters cited our 

examination and enforcement 

authorities as a reason why regulations 

are unnecessary. The FCC explained 

that board members must certify receipt 

of an examination report, which is 

presented to an institution’s board, and 

our examiners may then meet in 

executive session with the board to 

explain the report. Commenters also 

stated that we have all the enforcement 

powers necessary to correct any unsafe 

or unsound governance practice without 

this rule. A commenter stated that we 

may examine for governance, not 

impose operating procedures, and the 

examination process allows us to 

address specific issues as they arise 

instead of applying a rule to the entire 

System. 


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5744 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

We examine to ensure the safety and 

soundness of System institutions and 

their compliance with laws and 

regulations. This role is not a substitute 

for our responsibility to issue 

regulations implementing the Act and 

ensuring the safety and soundness of 

System institutions. Our regulations 

provide minimum standards of 

performance by System institutions. Our 

examiners use our rules as the basis for 

compliance determinations and to 

require any necessary corrective actions. 

Regulations reduce the likelihood that 

exams will uncover unsafe and unsound 

practices and provide a minimum 

standard of performance to assure 

stakeholders of the safe and sound 

operations of the System. While we 

agree with the commenters that we have 

a high level of enforcement authority, 

we do not view them as our primary 

tool for ensuring the safety and 

soundness of the System. This is 

ensured by a clear set of rules and 

thorough regular examinations. 

F. Cooperative Structure of the System 

Most System commenters expressed 

the opinion that we did not give enough 

consideration to the cooperative nature 

of the System in our proposed rule. 

Some stated that the cooperative 

ownership of the System provides more 

extensive safeguards than noncooperative businesses. Commenters 

also stated that we were trying to change 

the cooperative nature of the System. 

Other commenters stated that we do not 

understand that they, as fellow owners, 

are also directly affected by institution 

operations and stand to gain or lose by 

how it is run, unlike public companies. 

One commenter pointed out that System 

directors do not have the same 

motivations and temptations as 

corporate directors since System stock is 

not publicly traded and has no market 

value. 

We drafted our rule with full 

consideration of the System’s 

cooperative structure. In developing 

both the proposed and final rule, we 

first relied on the requirements of the 

Act, safety and soundness concerns, 

overriding public policy, and the 

cooperative structure of the System. We 

agree that a cooperative structure may 

provide greater safeguards than other 

structures for many of the reasons given 

by the commenters. However, the 

cooperative structure of the System 

relies on owner control and 

participation, supported by accurate and 

timely information to owner 

stockholders, as well as their directors, 

who act in stockholders’ behalf. The 

rule provides flexibility for individual 

System institutions, while establishing 

standards for governance that support 

cooperative principles and complies 

with applicable statutory requirements. 

Commenters also stated that issuing a 

regulation to implement best practices is 

unwise. Commenters pointed out that 

best practices change often while 

regulations change slowly. Another 

commenter remarked that using 

regulations to implement best practices 

inhibits System institutions from 

adjusting their governance practices in a 

timely manner. Still another commenter 

questioned the rationale in adopting 

best practices that may not be in the best 

interest of System stockholders. Others 

remarked that by issuing a rule on best 

practices, we demonstrate little respect 

for the ability of each institution’s board 

to put best practices into place on its 

own. 

We believe it is appropriate to use 

best practices in our rule. We used those 

best practices of System institutions and 

other corporations that we considered 

appropriate for the long-term safety and 

soundness of the System. We used 

corporate best practices because System 

institutions are, by requirements of the 

Act, incorporated and considered 

corporate entities for specific purposes. 

We do not feel this creates a conflict 

with the cooperative nature of the 

System, as most non-System 

cooperatives are corporate entities. 

While we recognize that details 

associated with best practices may 

change over time, the underlying 

principles have been identified in the 

rule with sufficient flexibility in their 

application to accommodate most 

changes in best practices. 

One commenter said that our 

authority as a regulator to establish 

governance practices was transferred to 

the System in 1987 and we were 

establishing governance practices in 

conflict with SEC rules. The commenter 

also stated that our rule could hinder 

progress and we should not exceed the 

governance requirements of other 

regulators. Another commenter stated 

that our rule went beyond reasonable or 

appropriate regulatory guidance, instead 

becoming burdensome and interfering. 

This commenter also stated that our rule 

exceeds non-System regulatory 

schemes, which often only require 

companies to disclose whether or not a 

particular practice is adopted. 

Our authority to regulate governance 

matters was not transferred to the 

System in 1987. To the extent that the 

commenter making this statement is 

referring to our authority to approve 

bylaws, we address that issue in section 

IV.A. of this preamble. We disagree with 

the commenters that our rule is 

inconsistent with, or more burdensome 

than, what other regulators require. 

Although we are not required to follow 

the actions of other regulators, we did 

consider their governance actions. We 

considered the governance actions of 

the FHFB and the cooperative lending 

institutions it regulates, because of the 

similarity in structure to the System. We 

also paid close attention to the SEC as 

the issuer of regulations carrying out 

Sarbanes-Oxley but relied less on the 

Office of the Comptroller of the 

Currency (OCC), Office of Thrift 

Supervision (OTS) and Office of Federal 

Housing Enterprise Oversight (OFHEO) 

individual governance rules because a 

portion of the entities they regulate 

register with the SEC and therefore fall 

under certain SEC governance rules. 

Many of the provisions in our proposed 

rule are similar to the rules of other 

regulators, deviating where we 

determined their rules were not 

consistent with our role as an arm’slength regulator or with the cooperative 

structure of the System. 

G. Independent Directors 

Several System commenters stated 

that our use of the word ‘‘independent’’

in the rule was inappropriate. They 

explained that director independence 

means that management does not serve 

on the board of directors and most 

System directors are independent. The 

FCC further stated that the Act, our 

existing regulations, and institution 

bylaws already mandate independence 

as defined by the commenters. Other 

System commenters stated we were 

misrepresenting all System directors, 

whom they stated have ‘‘absolute 

independence from management.’’ One 

commenter stated that the institutions’

boards should develop a charter 

defining independence and operate 

accordingly. 

We do not agree with the commenters’

definition of independent when 

discussing System boards. The 

commenters rely on the corporate 

community’s use of the term. We 

deliberately chose not to use the 

common corporate understanding of 

‘‘independent’’ for the very reasons 

cited by the commenters. We instead 

used the term based on our existing 

conflict of interest rules at part 612 and 

certain sections of the Act. Our use of 

the word ‘‘independent’’ for committee 

memberships precludes employment, 

contractual business relationships, and 

lending relationships that would 

interfere with a director’s ability to 

exercise disinterested and objective 

judgment. The term as applied to the 

outside director is restricted to the Act 

and legislative history of the Act 

discussing ‘‘disinterested’’ directors and 


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is based on a lack of ownership interest 

in the institution or System, thereby 

offering a different perspective from the 

owner-directors. 

H. Other General Comments 

We received comments on portions of 

the proposed rule preamble language 

that do not address regulatory 

provisions and result in no change to 

the rule. Specifically, commenters 

stated that we proposed a requirement 

for a Code of Ethics without considering 

existing safeguards, that institutions 

should be allowed to adopt a Code in a 

manner they determine appropriate, and 

that we should not suggest a Code of 

Ethics for directors and all employees. 

In the preamble to the proposed rule, we 

encouraged each System institution to 

adopt a Code of Ethics; we made no 

proposal requiring a Code of Ethics. We 

explained that we were not regulating a 

Code of Ethics, but encouraging System 

institutions to follow current best 

practices. 

Several System commenters also 

criticized us for indicating our 

willingness to participate in System 

training. The commenters stated that 

such participation was inappropriate for 

an arm’s-length regulator and an 

unwarranted intrusion into System 

affairs and activities. We are now 

clarifying that our preamble statement 

reaffirmed our long-standing 

commitment to support System training, 

which does not compromise our role as 

arm’s-length regulator. 

A public commenter stated that we 

had left out the general public as a 

stakeholder when explaining the 

purpose of our rule. The commenter 

also suggested more public 

representation on System boards of 

directors. We disagree; we gave 

appropriate consideration to the public 

stakeholders when drafting our rule. 

The System is composed of private 

cooperative entities and, although its 

GSE status gives it a public policy 

purpose, it does not convert System 

institutions into governmental entities 

or public companies. As to public 

representation on System boards, the 

Act provides clear direction on System 

board composition. The cooperative 

nature of the System requires, at a 

minimum, a System board to be 

comprised primarily of stockholderborrowers, thus preventing a majority 

public representation as requested by 

the commenter. 

One commenter stated our rule was 

forcing associations to merge or 

consolidate into larger entities. Another 

commenter remarked that we did not 

acknowledge the legitimacy of small 

institutions, placing pressure on smaller 

associations to merge, similar to the 

pressure they receive from their district 

bank. We are not directly or indirectly 

forcing any institution to merge. The 

rule provides several small institution 

exemptions to primary governance 

issues out of concern for the economic 

burden smaller associations might 

encounter if required to follow all 

aspects of the rule. 

I. Cost Analysis 

Several commenters objected to our 

use of the word ‘‘believe’’ in the 

preamble out of concern that our 

proposal might be based more on 

conjecture than demonstrated need or 

facts. Commenters also questioned our 

consideration of the implementation 

cost of the rule. Use of the word 

‘‘believe’’ expresses our conclusion that 

aspects of the proposed rule are needed, 

are in accordance with our careful study 

of the issues, and are based on our 

research, analysis, and statutory 

requirements or authorities. As most 

System commenters noted, while they 

objected to the added regulatory 

requirements, they supported the 

improved governance standards and, in 

fact, had already implemented many of 

them. This factored significantly in our 

consideration of the rule’s cost to 

System institutions. We identified three 

provisions having potential cost 

implications: (1) The addition of a 

second outside director; (2) the 

implementation of director orientation 

and training programs; and (3) the 

inclusion of a financial expert on the 

board. 

A second outside director will result 

in increased salary and benefit expenses 

for those institutions without two 

outside directors. Given its small 

percentage of overall System expenses, 

we do not believe this cost is significant 

enough to override the policy benefits of 

additional outside directors. However, 

we noted the impact to smaller 

associations could exceed our average 

cost computation and amended the rule 

accordingly. Likewise, director training 

and orientation may result in increased 

costs if an institution does not already 

have such a program. Based on 

comments received, most institutions 

already have strong training programs 

and our rule would likely result in 

changes to the types of courses taken 

rather than increasing the number of 

courses taken, thereby minimizing costs. 

There may be added costs to locate a 

financial expert if none are currently on 

an institution’s board. We considered 

the nature of an institution, its 

complexity, risks, and location to 

provide more flexibility and board 

discretion in how to meet this 

requirement. In doing so, we believe we 

have minimized the costs for most 

institutions. Since these added 

requirements and the minimally related 

costs associated with them are designed 

to enhance the safety and soundness of 

System institutions, we conclude the 

resulting benefits, including improved 

investor and stockholder confidence, 

will exceed the added costs. 

V. Section-by-Section Analysis 

A. Definitions 

1. Entity [§ 612.2130] 

We received 12 letters on the 

definition of ‘‘entity’’ in part 612 of our 

regulations. Eight generally objected to 

the change and four commented that 

they had no objection. One commenter 

disagreed with removing the exception 

for System institutions, explaining that 

transactions between institutions should 

not be treated differently from other 

non-System financial institutions under 

our standards of conduct rules. We 

make no changes to this provision in the 

final rule, but make a clarifying 

technical change to § 612.2150(d). 

Without this clarification, § 612.2150(d) 

may have been read to affect intraSystem transactions. 

2. Outside Director [New § 619.9235] 

We received 23 System comment 

letters on our use of the terms ‘‘outside’’

and ‘‘inside’’ to identify director 

positions. Commenters stated that these 

terms were not found in the Act and 

suggested we use the terms 

‘‘Nonaffiliated Board Selected Director’’

and ‘‘Affiliated Board Selected 

Director.’’ One commenter pointed out 

that agents may serve as outside 

directors for banks under the Act, but 

did not disagree with the definition 

excluding agents from serving as outside 

directors for any institution. We final 

this provision as proposed because there 

were no comments disagreeing with the 

actual definition of ‘‘outside director.’’

We also note that Congress uses and 

defines the term ‘‘outside director’’ in 

section 7.12 of the Act, so our use of the 

term is appropriate. 

3. Senior Officer [§§ 611.1223, 612.2155, 

620.1, 620.5, and New 619.9265] 

We received nine System letters 

objecting to issuing a specific definition 

of ‘‘senior officer’’ instead of allowing 

each institution’s board to define the 

term. Two commenters asked for 

clarification on the meaning of ‘‘major 

policy-making function,’’ explaining 

that only the board makes policy 

decisions. One commenter asked that 

we use the SEC definition of ‘‘senior 

officer’’ instead of the one proposed. 


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13SEC Rule 3b–7 defines an ‘‘executive officer’’

as the president, any vice president of the registrant 

in charge of a principal business unit, division or 

function (such as sales, administration or finance), 

any other officer who performs a policy making 

function or any other person who performs similar 

policy making functions for the registrant. 

Another commenter expressed concern 

that the definition may end up 

including all officers. 

Our definition of senior officer is 

similar to, but less inclusive than, the 

SEC definition of ‘‘executive officer.’’ 13

We included deviations from the named 

positions in the SEC definition based on 

System occupations and also limited the 

use of ‘‘policy making’’ to major policy 

making. We clarify that while the rule 

identifies the titles of the senior officers 

included in this definition, System 

institutions are not required to use these 

titles. Officers accomplishing the 

functions of these offices while using 

other titles are regarded as senior 

officers for purposes of our regulations. 

Each institution board retains the ability 

to designate who is a senior officer 

through their hiring practices and the 

extent to which they include officers, 

not named in our definition, in major 

policy making. 

B. Bank and Association Boards of 

Directors 

1. Director Qualifications and Training 

[New § 611.210] 

a. Qualifications 

We received 100 System letters on the 

requirement for boards to establish 

director qualifications. Of the comments 

received, 48 objected to being required 

to establish director qualifications and 

to our identifying specific areas of 

experience. Other commenters 

expressed concern that establishing 

qualifications would eliminate many 

people who are able to run a successful 

business or would fail to consider 

broader qualities that determine a 

candidate’s ability to serve. They also 

stated that establishing director 

qualifications makes it difficult to 

attract qualified stockholders willing to 

serve on the board. Still other 

commenters stated that directors lacking 

established qualifications under this 

provision, especially young, beginning, 

and small (YBS) borrowers, are capable 

of learning the information they need to 

know after election to the board. A 

separate commenter stated that true 

cooperative principles mean that any 

borrower of the institution with an 

acceptable loan should have the right to 

be nominated. Seven commenters 

remarked on the conflict between 

established qualifications and floor 

nominations. Two thought the 

requirement was compatible with the 

outside director selection process but 

was not consistent with the cooperative 

principles of electing a board from its 

membership. A commenter said that 

associations already struggle with 

locating willing candidates with loans 

in good standing and our rule will make 

this task more difficult. 

One commenter noted that a 

qualification for a director should be 

integrity, not knowledge of financial 

reporting or risk management. Others 

said that it is the board’s responsibility 

to decide what qualifications are 

needed. A few other commenters said 

the criteria in the rule were too narrow, 

making it more difficult to fill director 

positions. These commenters expressed 

concern that we could establish a 

standard that was either irrelevant or 

could not be met by some institutions. 

Another commenter remarked that it is 

difficult to regulate meaningful 

standards for candidate education 

because candidate evaluations are 

subjective. The commenter further 

explained that production agriculture 

generally offers fewer titles and 

certifications for professional 

verification, not withstanding strong 

educational backgrounds. This same 

commenter concluded that our rule 

would impose an unnecessary burden 

on the nominating committee. Other 

commenters also objected to the 

inference that institutions conduct 

director recruitment. One of these 

commenters further stated that we 

demonstrated a lack of respect for the 

ability of stockholders to select qualified 

directors. One commenter said that we 

should encourage better 

communications between the board and 

the nominating committee within the 

confines of the Act. 

Two commenters suggested that the 

institution identify in their bylaws the 

desirable areas of knowledge and 

expertise and have the nominating 

committee consider these attributes in 

searching for suitable candidates. 

Another commenter suggested replacing 

the standards with guidelines, 

recognizing that the necessary 

qualifications would vary depending on 

the size, strength, and complexity of the 

institution. We were asked to explain 

who will set the standards and how they 

will be applied. Commenters stated that 

stockholders must have the ability to 

determine who among the eligible 

candidates are best qualified to serve. 

Other commenters suggested that the 

regulatory language be revised to give 

latitude to the directors to articulate 

their own standards. 

We agree that it is the board’s 

responsibility to establish director 

qualifications. The Act requires bank 

and association boards to identify 

director qualifications in their bylaws 

and we proposed regulations to 

implement this provision of the Act. We 

have clarified the rule to clearly state 

institutions must establish policies 

addressing director qualifications. We 

also require the policy be periodically 

updated and provided to the 

institution’s nominating committee. We 

make this change in response to 

commenter concerns for flexibility and 

the cooperative election process. 

We also modified our rule by 

requiring identification of desirable 

director qualifications as opposed to 

prescribing them. In preserving the 

board’s authority to determine relevant 

and needed qualifications, the identified 

qualifications must be adequate to meet 

the board’s needs but broad enough to 

allow the nominating committee to 

identify at least two willing and 

qualified candidates for each open 

position without undue burden or 

difficulty. We have confidence that 

boards can identify relevant director 

qualifications for their respective 

institutions even though there is an 

element of subjectivity. We expect that 

the board’s training program will be 

sufficient to enhance directors’ skills 

and qualifications, such as for potential 

YBS directors, so that they can acquire 

needed skills and qualifications for 

board service. We also removed the 

suggested areas of experience from the 

final rule. While we proposed them as 

suggested areas, not requirements, 

commenters generally viewed them as 

obligatory. We address the comment 

that institutions do not engage in 

recruitment of directors in V.B.3. of this 

preamble. 

Commenters objected generally to our 

interpreting the Act, looking at 

legislative history and issuing 

regulations on board composition, 

remarking that Congress spoke 

unambiguously and directly to director 

requirements. The FCC pointed out that 

institutions and their nominating 

committees are obligated to consider all 

eligible stockholders. A few commenters 

remarked that the Act reflects the 

Congressional intent that the System be 

governed by popularly elected directors 

without regard to expertise or other 

qualifications. 

We do not agree that Congressional 

intent precludes consideration of 

expertise or other qualifications for 

directors. The Act specifies that director 

qualifications be included in an 

institution’s bylaws. While it is the 

responsibility of the nominating 

committee to find candidates who meet, 

or potentially will meet through director 


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training, board-identified qualifications, 

this does not preclude the nomination 

of director candidates from the floor or 

any other eligible stockholder from 

seeking nomination without regard to 

desirable director qualifications. In the 

end, it is the stockholders who have the 

right to decide, through the balloting 

process, which candidates will best 

serve their needs. 

We moved the requirement for a 

board financial expert from § 611.220 on 

outside directors to this section of the 

rule. We address comments made on the 

financial expert proposal and resulting 

changes in the rule in the outside 

director section of this preamble at 

V.B.3.a.i. 

b. Director Training 

We received 17 System comments on 

this provision of the rule. Three 

commenters supported the requirement 

for director training and nine others 

suggested that we require each 

institution to adopt a policy on director 

training. Three commenters 

recommended we allow the institutions 

to determine appropriate training and 

one asked that training topics be 

suggested, not mandatory. Several 

others suggested we simply require 

director training and development 

programs, instead of specific topics, 

stating that the rule curtails flexibility in 

determining training needs. One 

commenter said that the provision is 

unnecessary because director training is 

already an accepted responsibility of the 

System. Another commenter remarked 

on the difficulty in making a director 

take training. One commenter agreed 

that training for new directors and their 

role should be completed within the 

year, but training for other directors 

should be left to the board’s discretion. 

Two commenters stated we have 

sufficient ability to evaluate training 

when conducting our Capital, Asset 

quality, Management, Earnings, 

Liquidity, and Sensitivity to market risk 

(CAMELS) review and we can make 

recommendations when those findings 

occur, eliminating the need for a rule. 

We continue to believe that director 

training is an essential component of 

good governance and the System’s 

safety and soundness. However, we are 

persuaded by commenters that the facts 

and circumstances of each institution 

vary sufficiently to make specific 

training requirements useful in some 

instances and possibly irrelevant in 

others. Consequently, we have amended 

the rule by eliminating reference to 

specific training topics. We have further 

modified the rule to require the 

establishment of director training 

policies and implementing procedures. 

We believe it is more appropriate for 

institutions to identify their own 

training needs, becoming more 

proactive in considering how to 

improve their CAMELS review, rather 

than waiting for examiners to identify 

training deficiencies. We encourage 

institutions to coordinate director 

training with desired director 

qualifications to facilitate the ability of 

incumbent directors and YBS borrowerdirector candidates to meet those 

qualifications. The rule retains the 

requirement that new directors receive 

orientation training within the first year 

of becoming a director and that 

incumbent directors receive periodic 

training. 

2. Board Evaluations [§§ 615.5200 and 

618.8440] 

We received 62 System letters 

generally supporting board selfevaluations, but 38 stated that a 

regulatory requirement was 

unnecessary. Fourteen of these stated 

that institution boards should determine 

their own best practices for selfevaluations, or be allowed the flexibility 

to choose the type and breadth of selfevaluations based on local needs. 

Another 10 commenters were against a 

rule requiring board evaluations, stating 

that their boards already conduct selfevaluations, which are an internal 

matter, making a regulation unnecessary 

and burdensome. Some commenters 

also claimed self-evaluations are 

redundant since the composition of 

boards does not significantly change. 

Two expressed concern that the 

regulatory requirement does not specify 

how board self-evaluations are to be 

conducted, and so may not adequately 

measure the performance of the board. 

Another commenter expressed concern 

that the evaluations will expose those 

directors who are slow to catch on or 

refuse to seek training. The FCC 

characterized the provision as 

‘‘arbitrary’’ as self-evaluations alone will 

not improve a board’s effectiveness. 

They also challenged the necessity for 

the provision based on the actions of 

other regulators, stating they knew of no 

other regulator requiring selfevaluations. They further objected to the 

provision since no recognition of 

existing safeguards already in place was 

given, such as FCA Standards of 

Conduct regulations. The FCC contends 

that without this recognition, an 

implication that ‘‘something more is 

needed’’ is made. 

We agree that the institutions should 

determine the manner of conducting 

self-evaluations, which is why we did 

not specify the method and manner of 

conducting evaluations. Whatever 

method is selected, the goal of selfevaluations is to help a board identify 

its strengths and weaknesses and 

improve its own performance, 

especially in light of current and 

anticipated economic circumstances. 

Board self-evaluations are a tool for 

boards to enhance their effectiveness 

and should be conducted in a manner 

that best supports the board’s strategic 

planning and oversight responsibilities. 

In our view, whether or not a board’s 

composition changes does not alter a 

board’s performance and does not make 

evaluations of that performance 

redundant. Even if the board 

composition does not change, the 

economic circumstances and related 

risks facing each institution change each 

year, sometimes dramatically. We also 

do not agree that System institution 

boards should not undertake selfevaluations because other regulators do 

not have similar standards; nor do we 

agree that a regulatory provision is not 

needed. Board self-evaluations are 

recognized as a best practice and we 

find that board evaluations are a 

necessary and essential component to 

an institution’s strategic plan. 

Evaluations identifying board strengths 

and weaknesses, opportunities and 

challenges, and how the board plans to 

address those issues add value to the 

strategic planning process. 

Commenters stated that regulations on 

this issue are not necessary because 

FCA already evaluates the effectiveness 

of management and the board in our 

examination process. These commenters 

also stated that we have the authority to 

recommend actions when an 

institution’s board of directors is not 

functioning properly without a 

regulatory provision. The fact that we 

examine a board’s effectiveness during 

an examination does not relieve each 

institution board of the responsibility 

for its own review of its performance. 

While there are existing safeguards 

present in System operations, none are 

designed to replicate or obviate the need 

for board self-evaluations as evidenced 

by the significant number of 

commenters who stated that their 

institutions are already conducting 

board evaluations. These evaluations are 

a useful planning tool for salaries, board 

committee membership, training, and 

other areas. 

Other commenters stated that board 

evaluations do not belong in the 

business plan, but should remain under 

the control of the board. Some of these 

commenters explained that because the 

business plan is a tool for 

communicating with senior managers 

and others, candor in the evaluations 

may be lost. One commenter stated that 


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our rule language could be read to be a 

requirement that the self-evaluations 

themselves be included in the strategic 

plan, expressing concern that the value 

of the evaluations would be lost if 

widely circulated. Others asked us to 

clarify if the evaluations must be 

included in business plans or if the 

board can make a general statement 

verifying the evaluations were done. 

The rule at § 618.8440(b) has been 

modified to clarify that the strategic 

plan must assess board needs based on 

a review of the annual board selfevaluations. The plan does not have to 

include the self-evaluation itself. We do, 

however, require at § 611.325(c) that a 

summary of the evaluations be given to 

the institution’s nominating committee 

when requested. 

Thirty-three System commenters 

expressed concern with the requirement 

that the self-evaluations occur annually. 

Many suggested conducting evaluations 

every 3 years or, at the most, every other 

year. Others suggested allowing boards 

to use their discretion to determine 

when and how often self-evaluations are 

needed. One commenter suggested 

delaying implementation of the rule to 

give boards time to develop meaningful 

programs, while another explained time 

was needed to implement findings from 

the previous year. A separate 

commenter advocated a cyclical format 

instead of a date-specific rule. We 

continue to believe that an annual 

evaluation is best because it coincides 

with an institution’s annual planning 

and reporting cycle. It was for this 

reason we included consideration of the 

annual board self-evaluations as part of 

the 3-year operational and strategic 

business plan. This combined review is 

appropriate to ensure a complete 

assessment of the institution’s risk 

environment, its strategic and operating 

plans, and its fiduciary and oversight 

responsibilities. 

3. Outside Directors [New § 611.220] 

In our proposed rule, we referred to 

recruiting outside directors. Several 

commenters said that System 

institutions do not recruit directors as 

System institutions must keep a neutral 

position in electing directors. The 

process for selecting outside directors is 

not subject to the referenced constraints 

on institution neutrality because outside 

directors are not elected by the voting 

stockholders but appointed by an 

institution’s board. Therefore, referring 

to recruitment of outside directors, as 

well as conducting recruitments, is 

acceptable. Despite this, we have 

replaced the term ‘‘recruit’’ with 

‘‘select’’ in the outside director 

provision of the rule in response to 

these comments. 

One commenter said our language on 

outside director eligibility could be 

interpreted as forbidding a current 

outside director from being reappointed 

for a second term, suggesting we amend 

the rule to state that no candidate for an 

outside director position may be a 

director of any other System institution. 

We are not changing our rule, but clarify 

that an outside director may be 

reappointed for a second term as long as 

he or she has not acquired any of the 

prohibited affiliations with the System 

beyond that of his or her existing role 

as an outside director for that 

institution. 

a. Expertise and Number 

i. Financial Expertise 

We received 161 System comments on 

requiring an outside director to be a 

financial expert. Thirty commenters 

agreed with the rule based on the 

current business environment. 

Commenters agreeing with the rule 

stated, however, the authority of each 

institution board to decide its own 

needs must be preserved. Most of the 

commenters disagreed with some aspect 

of the proposed requirements and others 

requested clarifications. Of the 

comments disagreeing with the 

provision, 79 stated there was no need 

for a financial expert on the board or to 

name any director as an expert. Some 

commenters considered a financial 

expert as unnecessary, stating boards 

don’t need directors who are 

accountants. Other commenters stated 

that all directors become financial 

experts during their service on the board 

or have some financial understanding. 

Additional commenters expressed 

concern that a financial expert may not 

be suitable as he or she would not be 

familiar with a cooperative lending 

operation. A few other commenters 

stated that outside directors are needed 

for other areas of expertise besides 

financial skills, stating we should not 

restrict the requirement to financial 

expertise. One commenter questioned 

the value of a director expert while 

others said the requirement ‘‘insults’’

existing board members. Another 

commenter stated that a director’s duty 

of care cannot be legislated and there is 

little sound logic in requiring financial 

expertise, while yet another commented 

that general business expertise is more 

valuable because good directors are 

generalists. A few other commenters 

stated that having a director with 

financial expertise is an attempt to add 

a sixth layer of review on financial 

operations. These commenters stated 

the audit committee, external auditor, 

and FCA exams all serve as reviewers of 

finances, making a financial expert on 

the board redundant and unnecessary. A 

separate 13 commenters stated that we 

should not be dictating board 

composition. Two commenters 

explained that too many specific 

qualifications cuts out too many good 

candidates. One remarked that because 

of the cooperative process, it will be 

difficult to find financial expertise in 

membership, making it difficult for 

elected members to meet our proposed 

definition. 

We continue to believe that a 

financial expert is a necessary resource 

for System institution boards given the 

financial focus of System business 

activities and the increasingly 

sophisticated business environment in 

which they operate. Having financial 

expertise available within each board 

broadens the board’s collective 

knowledge, improves its independence 

from management, and promotes its 

ability to carry out its fiduciary 

responsibilities for System stockholders 

and investors. Boards of directors need 

financial skills to carry out their 

fiduciary duties, as well as monitor 

management’s reporting and disclosure 

responsibilities and treatment of the 

institution’s assets. Boards must have 

information available to them that is not 

from the individuals or firms producing 

the financial information being 

reviewed. A board should, from its own 

resources, be able to question and 

evaluate the reports prepared by 

accounting firms and management. 

Regulatory examinations are not a 

substitute for a board’s financial 

management and oversight. The safety 

and soundness of the institution’s 

operations directly relates to the 

financial management of resources. The 

board’s oversight of those same 

resources must come from a 

knowledgeable base. Requiring 

institution boards to have a financial 

expert provides a necessary, constant 

on-site source of financial information. 

We also point out that we do not require 

a board be comprised solely of financial 

experts. System institution boards need 

a broad mix of skills and expertise to 

adequately carry out their duties and we 

recognize the important contribution 

each board member makes. We agree 

with commenters that the institution 

boards are in the best position to decide 

these other areas of need. Therefore, we 

have changed the rule to require that all 

outside directors have some or all of the 

desired director qualifications identified 

by each institution’s board under 

§ 611.210(a) of this rule. 


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Twenty commenters objected to the 

term ‘‘financial expert’’ and two others 

expressed concern that our definition 

was more restrictive than the SEC and 

not an objective standard. Commenters 

also stated that no other regulator 

requires a financial expert on the board, 

asking why the System should be 

subject to a different standard. One of 

these commenters specifically remarked 

that the SEC only requires disclosure of 

whether there is an expert and does not 

require there to be one on the board. 

Another commenter questioned whether 

we had a compelling policy reason for 

requiring board expertise when other 

regulators do not. Another 20 

commenters challenged our authority to 

issue regulations on the subject, stating 

the requirement goes beyond statutory 

requirements as the intent of the Act 

was to allow the institution, not the 

regulator, to decide what expertise is 

needed. Two commenters stated there 

was no need for us to interpret or issue 

regulations on board expertise to carry 

out the Act, nor to look at the legislative 

history of the Act. Many commenters 

stated that expertise may be more 

valuable to some institutions than to 

others, so selection of an expert should 

be done without regulatory 

qualifications. An additional 54 

commenters suggested that expertise not 

be limited to outside directors, 

explaining that elected directors should 

be allowed to satisfy the requirement. 

We recognize that other regulators 

only require disclosure of whether there 

is a financial expert on a registered 

entity’s board, with an explanation of 

why one is not there. We point out that 

the entities subject to these regulations 

have boards that are predominantly 

composed of company management 

rather than stockholders. This is an 

important distinction, as these boards 

are more likely to include directors with 

financial experience due to their dual 

role within the company. Also, the 

December 2004 Moody’s Investors 

Service’s ‘‘Corporate Governance 

Assessment: Update’’ on the System 

identified the low level of financial 

expertise among System directors as a 

key area of concern. Our objective is to 

ensure each board has the tools 

necessary to carry out its oversight of 

financial reporting responsibilities. 

Thus, we continue to require each 

institution board have a financial expert 

on, or available to, the board. However, 

we agree that any director with financial 

expertise should be able to fill this role 

and have amended the final rule by 

removing the requirement that at least 

one outside director be a financial 

expert. Instead, § 611.210(a)(2) requires 

that each board have a director who is 

a financial expert as defined in the rule. 

In consideration of the difficulties 

smaller associations may have in 

locating available director-candidates 

who satisfy the definition of a financial 

expert, we have given these institutions 

the alternative of retaining an outside 

advisor. Those institutions with less 

than $500 million in total assets may, at 

their choice, retain an outside advisor to 

the board who is a financial expert. The 

financial advisor must report to the 

board and not institution management. 

Further, the financial advisor must have 

no affiliation with the institution’s 

management or its external auditor. We 

believe this option for small institutions 

provides an acceptable source of 

financial expertise given the 

institution’s size and financial 

complexity, without compromising our 

efforts to protect the safe and sound 

operations of the System. 

Two commenters requested we 

reconcile the definition of financial 

expertise with the term financial expert 

used for the audit committee proposals. 

Another commenter asked that we 

reduce the requirement from expert to 

expertise, allowing greater recruitment 

opportunity. This same commenter 

asked us to define what constitutes 

financial expertise. Ten other 

commenters requested we define 

expertise more broadly, with seven 

suggesting we include business 

experience in the definition. One 

commenter stated our definition was too 

broad. Another commenter suggested 

expertise should be determined by an 

association’s credit quality, capital 

position or other CAMELS rating factors 

instead of the manner of selection to the 

board. 

We are modifying our definition of a 

‘‘financial expert’’ and removing the 

definition of ‘‘financial expertise’’ from 

the audit committee provision for banks 

and associations. We are also removing 

the definition of ‘‘financial expert’’ from 

the outside director provision based on 

other changes to the rule. When 

proposing the rule, we intended the 

terms to be comparable, but no longer 

require the separate reference in the 

audit committee section. Instead, we 

include a definition in § 611.210(a)(2) of 

this rule, dealing with board 

qualifications. This definition replaces 

the definitions we proposed for a 

second outside director and Farm Credit 

bank and association audit committees. 

We have also adjusted our proposed 

definition of financial expert by linking 

expertise to the accounting and 

financial reporting issues that may 

occur within the individual institution. 

Each institution will now determine 

who is a financial expert based on its 

own specific financial complexities, 

resulting in a higher degree of expertise 

for institution’s with more complex 

financial operations. We believe the 

modified definition clarifies that we 

aren’t trying to place accountants on the 

board, but seeking to assure each board 

has an appropriate level of financial 

expertise available to it. We decline the 

request to expand the definition of 

‘‘financial expert’’ to include business 

experience because it is not in keeping 

with our safety and soundness concerns. 

We point out that we have not used this 

definition for the System Audit 

Committee (SAC). As explained in 

section V.E.1.b. of the preamble, the 

SAC requires greater financial expertise 

because of its role on behalf of the entire 

System. 

Twelve comments were made on the 

impact to board size that would occur 

from requiring an expert director; with 

11 stating that incumbent directors 

would have to resign to keep the current 

board size. Some commenters pointed 

out that by requiring an outside director 

be a financial expert, the proposed small 

institution exemption for having two 

outside directors is canceled. A further 

34 System commenters requested the 

size of the institution be a consideration 

in making such a requirement, 

suggesting a $500 million threshold. We 

are not providing a small institution 

exemption to the requirement for board 

financial expertise. Because of the 

changing nature and increasing 

complexity of the financial services 

marketplace, we believe all System 

institution boards must have at least one 

financial expert available to it. This 

promotes an institution’s ability to carry 

out its fiduciary responsibilities to its 

stockholder-owners, helps to ensure the 

institution is functioning in a safe and 

sound manner, and creates greater 

confidence in a board’s ability to 

exercise its financial oversight 

responsibilities. We also believe the 

changes we have made in who may 

qualify as a financial expert sufficiently 

address concerns on board size. 

The remaining commenters expressed 

neither agreement nor disagreement for 

the provision, but remarked on the cost 

of complying with the requirement, 

questioning the benefit received or 

explaining it would be expensive and 

difficult for smaller institutions to 

comply. One commenter expressed 

concern that recruitment may be more 

difficult as the label ‘‘expert’’ holds a 

director to a higher level of safety and 

soundness and most candidates are not 

willing to assume the higher risk, at 

least not without higher compensation. 

We recognize that for those institutions 


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14Section 4.9(d) of the Act (12 U.S.C. 2160). 

that do not already have some financial 

expertise on their board this may 

impose some extra cost, but believe the 

benefits of an added financial expert 

will more than offset the costs incurred. 

We also believe allowing any director to 

fill this requirement and providing 

smaller institutions the opportunity to 

use an advisor, as well as the change in 

defining financial expertise, will 

mitigate some of the costs of this 

requirement, particularly for smaller 

institutions. Further, we do not agree 

that the requirement for a financial 

expert increases or alters existing board 

responsibility or liability. Since boards 

already have oversight and financial 

reporting responsibilities, we see the 

requirement for board financial 

expertise as an essential cost of doing 

business, a protection of stockholder, 

investor, and public interests, and a 

means of potentially mitigating board 

liability. 

One commenter asked us to clarify if 

this section applies to the Funding 

Corporation. The rule clearly reads that 

the provision applies only to Farm 

Credit banks and associations. We did 

not extend the requirement for a 

financial expert to the Funding 

Corporation because the Act already 

places sufficient expertise requirements 

on the Funding Corporation board.14

ii. Number of Outside Directors 

We received 146 letters on our 

proposal to require institutions with 

more than $150 million in assets to have 

at least two outside directors. Two 

System commenters agreed with our 

proposal, stating that all System 

institutions would benefit from 

increasing the number of outside 

directors. One member of the public 

supported increasing the number of 

outside directors on the board, stating 

that 50 percent of board members 

should be members of the public who 

have no financial ties to the System. 

One commenter asked that we suggest 

increasing the number of outside 

directors, not mandate it, while another 

asked that we remove the small 

institution exemption. One commenter 

asked us to explain the benefit of having 

two outside directors. Another 

commenter asked that the rule allow 

exceptions to ensure all director terms 

are staggered. One commenter expressed 

concern that a requirement to have two 

outside directors would create a 

significant non-elected director 

presence on the board. A couple of 

commenters stated that we arbitrarily 

picked a number instead of considering 

the costs and talent of existing boards. 

Many commenters disagreeing with 

the provision stated that requiring 

smaller institutions to increase the 

minimum number of outside directors 

could be costly, pose recruitment 

difficulties, and dilute the influence of 

stockholder-elected directors. Most of 

these commenters requested we increase 

the small institution exemption to $500 

million, similar to that of other financial 

regulators. Several other commenters 

suggested a $750 million or $1 billion 

exemption. A public commenter stated 

the $150 million exemption is too low, 

that a better level would be $1 billion. 

A System commenter stated our 

exemption was too low, referencing the 

RFA small entity definition and the 

Federal Deposit Insurance Corporation 

(FDIC) asset-size criteria. The 

commenter stated the RFA has size 

categories of $0–100 million, $500 

million to $1 billion, $1–5 billion, and 

over $5 billion in recognition that one 

standard is not equitable for all. The 

commenter claimed smaller associations 

would be penalized if they had to 

comply with the same requirements of 

a $7 billion institution. A separate 

commenter suggested that we use a 

percentage of membership rather than 

asset size, explaining only 10 percent of 

the board should be outside directors. 

Another commenter suggested we have 

boards comprised of 70-percent elected 

directors. A couple of commenters 

asked us to consider the differences 

among institutions in product and 

service areas before requiring more 

directors. Two commenters objected to 

an exemption, with one explaining that 

one small association that is unstable 

could represent more of a threat to the 

System than a larger institution in 

sound condition. The other expressly 

objected to a requirement being 

applicable solely because of asset size or 

loan volume. 

We do not believe that suggesting, 

instead of requiring, an increase in 

outside directors is sufficient to satisfy 

our objectives. System institutions 

operate in a rapidly changing economic 

environment, requiring more skills and 

broader board representation. We are 

convinced that a regulatory requirement 

for greater outside director 

representation is necessary to preserve 

the System’s safety and soundness. 

However, we agree the proposed $150 

million exemption level is too low given 

the costs and recruitment difficulties in 

smaller associations. We adjusted this 

rule to increase the exemption to $500 

million, specifying that this exemption 

applies only to associations. All Farm 

Credit banks must have at least two 

outside directors. We selected a 

minimum number of two outside 

directors because we have observed the 

positive effect that two outside directors 

can have in System institutions, 

outweighing the added costs for larger 

institutions. By increasing the small 

institution exemption to $500 million, 

10 percent of the System’s assets are not 

covered by the requirement for a second 

outside director. We considered the 

other levels suggested by commenters 

when raising the exemption to $500 

million. We do not believe a $750 

million to $1 billion exemption would 

produce significant benefits, especially 

since a $1 billion exemption would 

exclude almost 75 percent of System 

institutions. We also do not believe 

using business activity is adequate, 

given normal business fluctuations or 

current changes in board size. We also 

do not agree with the commenter that 

suggested 50 percent of the board be 

members of the public. Congress 

expressly created the System as a 

cooperative, which requires borrowercontrolled boards. In addition, no 

association is required to create a 

second outside director position when 

doing so would reduce the stockholderelected director membership to less than 

75 percent. For example, an association 

with over $500 million in assets and a 

five-member board would only have to 

have one outside director. Each Farm 

Credit bank and association is required 

by the Act to have at least one outside 

director; our rule is not to be construed 

to allow otherwise. 

Many commenters objected to the 

proposed change on the basis that we 

exceeded our regulatory authority. One 

commenter stated that we were 

amending the Act by our rule. Still 

another commenter stated that the Act’s 

sole check on outside directors is that 

there be one and our rule infringes on 

the flexibility provided by Congress. A 

commenter stated the Act does not 

direct or allow us to fix the number of 

outside directors. A few commenters 

questioned whether we had a 

compelling policy reason for taking the 

determination of board size and 

composition away from institutions. We 

have sufficient authority to regulate the 

number of outside directors. The Act 

establishes a minimum number of 

outside directors and directs us to issue 

rules necessary to protect the safety and 

soundness of the System. As explained 

above, requiring at least two directors of 

Farm Credit bank and large System 

association boards to be independent of 

the System is desirable and proper given 

the increasing complexity of today’s 

business environment and the size of 


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the System institutions that are 

involved. 

As mentioned earlier, some 

commenters suggested that only 10 

percent of the board should be outside 

directors. One commenter expressed 

concern against creating a significant 

non-elected director presence on the 

board, while another commenter 

suggested we have boards comprised of 

70-percent elected directors. We 

proposed requiring the majority of a 

board be composed of stockholderelected directors, but agree with specific 

comments on this area that more than a 

simple majority is required to preserve 

the cooperative structure of the System. 

We are therefore finalizing the provision 

to require at least a 60-percent 

stockholder-elected director board 

composition. 

b. Terms of Service and Removal 

We received 133 letters on the terms 

of service and removal of outside 

directors. One commenter objected to 

the terms of service provision, stating 

that it is a matter left to the boards, 

while the remaining 132 commenters 

objected to requiring a majority vote of 

all voting stockholders to effect removal 

of an outside director. A few 

commenters expressed concern that 

removal for cause might conflict with 

the existing requirements of 

§ 611.310(b), which mandates removal 

of any director under events prescribed 

in that section. One commenter agreed 

with the reasons for removing an 

outside director outlined in the rule, but 

stated that a rule is not necessary since 

the Act is clear on the issue. Another 

remarked that if cause exists for any 

director, the director should be removed 

automatically. The commenter 

explained that the outside director 

should be subject to the same removal 

provisions as stockholder-elected 

directors and not be provided more 

protection for wrongdoing. One 

commenter stated that the board should 

be able to remove any director at will, 

while another commenter asked if we 

meant a director could not be removed 

at the end of their term absent cause. 

Still another commenter asked why the 

System was being held to a different 

standard than the commercial banks. 

We are finalizing the rule without the 

removal for cause provision. The rule 

requires those institutions seeking to 

remove a director before the expiration 

of his or her term to document the 

reason for removal. We believe our 

changes elsewhere in this section, and 

the existing requirements of 

§ 611.310(b), provide sufficient 

protection to the independence of 

outside directors discussed in the 

preamble to the proposed rule. 

Moreover, we reaffirm our position that 

the terms of service and basis for the 

removal of an outside director be the 

same as those for directors elected by 

the stockholders. 

A significant number of commenters 

noted that holding a stockholder vote 

for removal could produce a chilling 

effect, unwanted publicity, and possible 

lawsuits. They remarked that the 

requirement does not advance the 

cooperative principles of the System 

and that a regulatory requirement is 

unnecessary. Other System commenters 

remarked that due to the requirement 

that a director be removed for cause, the 

further protection of a stockholder vote 

is unnecessary. One commenter stated 

that stockholder votes for removal do 

not necessarily protect the interest of 

the institution and another commenter 

stated that any stockholder involvement 

in the removal of outside directors is 

inappropriate under basic cooperative 

principles. Another commenter stated 

that presenting a director to 

stockholders for removal and having 

stockholders reject the effort would 

create unmanageable tension on the 

board. Some commenters noted that the 

requirement for removal of the outside 

director by stockholder vote was more 

onerous than removal of an elected 

director, suggesting that removal 

requirements should be similar for both 

types of board members. A public 

commenter stated that requiring a 

majority vote of voting stockholders for 

removal is excessive; instead suggesting 

that removal for cause be done by 

elected directors and that stockholders 

should be able to remove an outside 

director for any reason. Other 

commenters pointed out that under 

corporate law the one hiring a director 

has the authority to fire a director. 

Others suggested requiring a board 

supermajority vote of two-thirds, stating 

it should be sufficient to provide 

protections against unjustifiable 

removal, while still others 

recommended a simple majority vote of 

elected directors. One commenter, when 

discussing their objections to the 

provision, suggested disclosing the 

reason for director removal in the AMIS 

as a means of accountability to 

stockholders. Many commenters asked 

us to clarify if we meant a majority of 

stockholders voting. 

We are not withdrawing from the rule 

the authority of stockholders to remove 

a director. While we agree with 

commenters that corporate law 

generally recognizes the authority of the 

hiring official to fire those hired, we 

note that corporate law also recognizes 

a board gains its authorities from the 

stockholders it represents. However, we 

agree that restricting removal of an 

outside director to stockholder action in 

all cases may be excessive and could 

produce undesirable and unintended 

consequences. The final rule allows for 

the removal of an outside director by 

either stockholder action or by a twothirds vote of the full board of directors. 

We caution that no institution may 

forbid stockholder action to remove any 

director, elected or otherwise, nor make 

burdensome procedural requirements 

on such stockholder action. Further, we 

make it clear that a full board vote 

includes all directors, no matter what 

their means of selection to the board, 

except for the individual outside 

director the board is seeking to remove. 

Any director, other than the outside 

director up for removal, must be 

allowed to vote in the removal action. 

We are not adopting the suggestion that 

board removals be disclosed in the 

AMIS. 

In response to several comments, we 

have clarified in all appropriate areas of 

the rule that voting stockholders mean 

all voting stockholders voting in person 

or by proxy. We did not intend for the 

proposed language to be interpreted as 

requiring a majority vote of all 

stockholders eligible to vote, regardless 

of whether they actually voted. 

However, commenters read the language 

as requiring such, leading to our 

clarification. We also received one letter 

from an association asking we rescind 

Bookletter 009 (BL–009) on outside 

director terms of service. We will 

review, and possibly revise, BL–009 

after publication of this rule. 

4. Board-Selected Inside Directors 

The proposed rule would have 

created a board-appointed inside 

director position, without requiring an 

institution to have such a position. We 

received 89 System comments on this 

provision, with most indicating various 

levels of support, but objecting to limits 

being placed on the position. A minority 

of commenters objected to creating the 

position, stating it violated the 

cooperative principles of the System 

and was not needed as the board has 

enough authority to satisfy diversity 

with current elected and outside 

director positions. Commenters stated 

that such a position carries a significant 

cost to smaller associations. 

Commenters supporting the position 

requested less stockholder involvement 

and more board control in determining 

board composition. Thirty commenters 

objected to requiring a stockholder vote 

on a bylaw provision creating the 

position, stating bylaws are the 

prerogative of the board and stockholder 


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direct involvement will not further 

cooperative principles. Alternatively, 

some commenters agreed with a bylaw 

vote by stockholders. Thirty-three 

commenters asked that the 5-year 

cooling-off period be removed or 

reduced, with a few suggesting reduced 

cooling-off periods to 1, 2, or 3 years. 

While many commenters agreed with 

the proposed requirement that the 

number of appointed inside directors be 

limited to no more than two, others 

objected to a limitation. Twelve 

comments asked that the position be 

open to more than just stockholders. 

We are not including the boardappointed inside director provision in 

the rule. The System’s cooperative 

nature is designed to ensure that the 

stockholders elect the board, with 

minority representation from appointed 

directors. We proposed the restrictions 

on board-appointed inside directors as a 

means of balancing the public policy 

goal for diversity in board 

representation with the stockholdercontrolled structure of the System. 

However, we believe our stated public 

policy purpose of facilitating diversity 

on institution boards is achievable 

through stockholder action, using 

existing authorities in the Act, and does 

not require FCA to adopt this provision. 

In conformance with our removal of the 

proposed board-selected inside director 

position, we are also withdrawing the 

proposed technical changes on this 

issue from § 615.5230. 

C. Election of Directors 

1. Director Candidate Campaigns 

a. Director Candidate Campaign 

Material [§ 611.320] 

We received 13 System comments, 

with 10 supporting the clarifications we 

made to our existing rule, explaining the 

importance of institution impartiality in 

the election process. The remaining 

commenters suggested exceptions to the 

rule, including allowing institutions to 

pay for one mailing of campaign 

material on behalf of each director 

candidate and allowing a candidate 

statement to accompany the director 

election materials, provided all 

candidates have equal opportunity to 

submit statements. One commenter 

asked for clarification on whether the 

existing rule allowed associations to pay 

the expenses of its candidates to bank 

boards. Another commenter asked if 

releases from the impartiality provisions 

of our rule could be requested from 

candidates, thereby allowing 

institutions to distribute candidate 

campaign material. 

We final this section of the rule as 

proposed. We believe the rule is clear 

that no Farm Credit institution is 

allowed to distribute campaign 

materials, regardless of who bears the 

expense or the equality of access to the 

opportunity. An institution must also 

maintain neutrality in distributing the 

director-candidate disclosures required 

by § 620.21. To comply with § 611.320, 

those disclosures must not contain 

campaign materials, nor may they 

contain candidate statements. The 

election process must be free from even 

the appearance of an institution 

endorsing a director-candidate. 

Institutions are stockholder-owned and 

controlled; therefore, candidate 

endorsements are inappropriate. 

Additionally, candidates may not be 

asked to waive the requirement for 

impartiality provisions, nor may an 

institution pay its director-candidate’s 

election expenses. 

b. Release of Stockholder Lists 

[§ 618.8310] 

We received 21 System letters 

expressing concern with confidentiality, 

identity theft, and enforcement in 

releasing stockholder lists to 

stockholders, even if for permissible 

purposes. Some commenters remarked 

that without further controls, the 

recipient’s agreement to use the list only 

for permissible purposes is 

unenforceable. One commenter 

suggested an institution be allowed to 

add conditions to the release of a list, 

such as requiring its return after the 

need has been met, to protect 

confidentiality. Another commenter 

stated that it is not in the best interest 

of all stockholders to release the lists 

without further controls or 

confidentiality agreements because the 

list could be sold for financial gain. 

Some commenters asked that the 

requirement be removed entirely. Yet 

another commenter asked that the list 

not include the classes of stock held, 

explaining it won’t make a difference to 

the requester what type of stock is held 

by others. A separate commenter stated 

that a stockholder list should refer only 

to voting stockholders, and not all 

stockholders, because banks cannot 

ascertain what outside institutions 

might be holding their preferred stock at 

any given time. 

Stockholders have a right under the 

Act to obtain a list of the stockholders 

in their institution(s). Section 4.12A of 

the Act requires banks and associations 

to provide a current list of stockholders 

within 7 days of the request. 

Additionally, the Act provides for 

restrictions on the use of the lists, which 

we further clarified in our rule. We 

continue to believe that the certification 

a requesting stockholder must sign 

sufficiently addresses the 

confidentiality and privacy concerns 

raised. Further, because section 4.12A 

does not distinguish between voting and 

nonvoting stockholders, the rule 

specifies that a list of stockholders 

consists of each stockholder’s name, 

address, and classes of stock held. 

One commenter asked for clarification 

on who is included in the list of Farm 

Credit bank stockholders. The 

commenter remarked that banks, in 

providing lists of their stockholders, 

should also provide a list of directors of 

each association rather than just a list of 

the associations in the district. Section 

4.12A of the Act does not require a bank 

to provide a list of their affiliated 

associations’ stockholders to a 

requesting bank stockholder. However, 

§ 620.5(h) requires each association to 

disclose in its annual report the names 

of all its directors. Anyone wishing to 

obtain these names may request a copy 

of the report from the association. 

2. Director Candidate Disclosure 

[§§ 615.5230, 620.20, 620.21, 620.30, 

and 620.31] 

We received 33 System letters 

addressing this provision. Many of the 

commenters objected to standardizing 

election procedures for banks and 

associations, specifically as it relates to 

floor nominations and the frequency of 

director elections. A few also objected to 

the perceived requirement that 

nominating committee reports be 

disclosed. Still others objected to 

detailed candidate disclosures. Eight 

commenters objected to imposing the 

election requirements of the AMIS on 

banks, with several suggesting that we 

reevaluate the need for election 

consistency between banks and 

associations. One specifically objected 

to requiring banks to accept floor 

nominations as banks do not currently 

permit floor nominations. The 

commenter went on to ask that if we 

issue the rule with this requirement, 

that the rule be reproposed and 

additional comments allowed. Another 

commenter expressed concern that the 

proposal would limit the open 

nomination process it currently 

employs. We also received, through our 

regulatory burden initiative, suggestions 

that we reduce the reporting 

requirements of the AMIS and eliminate 

requirements linking director elections 

to annual meetings. A commenter stated 

that the considerable costs in preparing 

and mailing the AMIS are not justified 

by the marginal benefits derived by 

shareholders. 

We agree, in part, that the banks 

should not be required to follow all of 

the director election procedures that 


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associations follow. As such, we have 

amended our rule to restore the existing 

floor nomination requirements for 

associations, but added language 

requiring Farm Credit banks to state in 

the AMIS whether they are allowing 

floor nominations. We also make 

clarifications that an AMIS must be 

issued prior to any director elections or 

any annual meeting. We make this 

change because not all director elections 

occur at the annual meeting, such as 

interim elections held to fill vacancies 

on a board. 

Eight commenters stated that the full 

report of the nominating committee 

should not be included in the AMIS 

because it reveals too much of the 

deliberative process of the committee. 

We are not requiring that the full 

nominating committee report be 

released. The rule at § 620.21(d)(2) 

requires a description of the nominating 

committee efforts to locate two 

candidates; it does not require that the 

full nominating committee report be 

provided to voting stockholders. It is up 

to the institution to decide the manner 

in which that information is included in 

the AMIS. We only require distribution 

of complete nominating committee 

reports to the board of directors in 

§ 611.325. 

Three commenters objected to 

candidate disclosure statements being 

included in the election materials sent 

to voting stockholders, but two other 

commenters supported it. One 

commenter limited their objection to the 

prohibitive costs involved in complying 

with the requirement. This commenter 

asked that we keep the existing 

provision allowing associations to 

summarize candidate disclosures. 

Although our existing rule requires 

Farm Credit banks to provide complete 

signed copies of candidate disclosure 

statements, we find the argument 

regarding the prohibitive costs 

persuasive and are amending our rule to 

give institutions the option of providing 

complete copies or standardized 

summaries. The rule, however, clearly 

states that candidate disclosures, in full 

or summary form, must be distributed 

with the ballots. 

Seven commenters expressed 

concerns on the specificity of candidate 

disclosures, suggesting we limit 

personal addresses to the town and state 

of residence. One commenter stated that 

the AMIS should not include 

identification of any candidate’s familial 

relationships reportable under part 612. 

We agree that a candidate’s residential 

city and state are sufficient for voting 

stockholders to consider geographic and 

regional representation. We have 

replaced the requirement for personal 

mailing addresses with a requirement 

for the city and state of residence. 

However, we disagree with the 

commenter requesting no disclosure of 

potential conflicts of interest. Because 

director candidates are seeking a 

position of trust in representing 

stockholders’ interests, this information 

is clearly within stockholders’ right to 

know. This disclosure of possible 

conflicts of interest by candidates 

outweighs the inconvenience and 

privacy concerns stated by the 

commenter. 

One comment made under our 

regulatory burden initiative asked that 

we allow director candidate disclosures 

to be made in the AMIS or the annual 

report. We are not using this suggestion 

because annual reports and elections do 

not always coincide. The AMIS updates 

director and financial information 

provided in the annual report and 

includes candidate disclosure 

information that may not have been 

prepared when the annual report was 

published. We believe the AMIS, in 

order to be a valuable source of 

information for voting stockholders, 

must contain current information. We 

also make minor technical and 

grammatical changes to this area of the 

rule due to creating distinctions in 

association and bank election 

procedures. 

3. Nominating Committees [New 

§ 611.325] 

We received a total of 104 System 

letters on this issue. Generally, most 

commenters supported the need for an 

open and fair nominating procedure; 

however, comments on how to achieve 

that objective varied widely. The 

majority of comments focused on bank 

nominating procedures. Commenters 

focusing on association nominating 

procedures generally sought 

clarification of existing requirements or 

modifications to suit their particular 

needs and interests. Other commenters 

were generally satisfied with existing 

procedures and could see no benefit to 

the proposed changes. 

a. Bank Nominating Committees 

Several commenters supported the 

need for changes in the current 

nominating process for both banks and 

associations. Many expressed 

dissatisfaction with existing bank 

nominating procedures, making it clear 

that nominating procedures vary widely 

from one bank to another. Other 

commenters specifically supported a 

defined district bank nomination 

process allowing all associations to 

participate in selecting candidates. 

These commenters asked that the 

process not be too regulated though. Yet 

others supported current bank 

nominating processes and expressed 

concern that our rule would place 

power with the larger associations. The 

FCC stated that the Act does not require 

nominating committees for banks and 

we should not require such as each bank 

has adopted its own process that ‘‘works 

well for them.’’ Other commenters 

stated that Farm Credit banks should 

not have to conform to the same 

nominating procedures as associations. 

Reasons ranged from Farm Credit banks 

not electing directors at annual meetings 

to banks requiring flexibility to choose 

from several different election 

processes, such as committees selected 

by the board or nominating ballots. 

Another reason given by commenters 

was that banks are treated differently in 

the Act so our rules should treat them 

differently. One commenter stated that 

the current regulations on nominating 

committees were appropriate, remarking 

that the rule might restrict access to the 

nomination process. Another 

commenter objected to requiring 

nominating committees for banks, 

stating the rule would limit all 

associations from participating in 

nominating candidates. This commenter 

further stated that the rule would put 

the nominating process in the hands of 

individuals who are not stockholders of 

the bank and have little or no stake in 

ensuring a highly qualified board. The 

commenter then asked that we craft the 

rule to make nominating committees 

permissible for banks, not mandatory. 

One commenter stated we should not 

require banks to use nominating 

committees at all since commercial 

banks are not required to have them. 

We continue to be convinced that 

Farm Credit bank nominating 

committees are appropriate and enhance 

the process for identifying stockholders 

to run for bank director positions. 

Section 4.15 of the Act tasks us to issue 

regulations governing the election of 

bank directors to assure a choice of 

nominees for each elective office to be 

filled. Although we crafted our rule in 

more general terms to allow banks some 

flexibility in bank director nominations, 

we are concerned that an incumbent 

bank director may run unopposed for reelection because there is no central 

accountability point in the bank 

nomination process. We also note that 

while the current director nomination 

and election practices of the banks vary, 

some stockholders in the banks may not 

be given equal opportunity to nominate 

viable candidates. Therefore, the rule 

requires banks to have nominating 

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stockholders voting, in person or by 

proxy. We also encourage Farm Credit 

Banks to address the selection of 

nominating committee members to 

alleviate the concerns about unequal 

opportunity expressed by some 

commenters. 

b. Term and Selection of Committee 

A commenter asked that we not 

require the selection of nominating 

committees at annual meetings. The 

commenter stated that the committees 

should be selected at any time, and in 

any manner, that suits the institution. 

Some commenters requested more than 

a 1-year term of service for nominating 

committee members as a way to 

improve efficiency for the nominating 

process; a few suggested staggered terms 

of 2–3 years. One commenter also asked 

that nominating committee members 

face opposition to prevent unwarranted 

re-nomination and that committees 

receive training. Another commenter 

remarked that our rule gave very little 

attention to the process of selecting the 

nominating committee. One commenter 

stated that nominating committee 

members should be eligible to be 

nominated from the floor. 

We recognize that some banks do not 

conduct all director elections at annual 

meetings and have removed this 

provision from the final rule. We also 

removed language from the rule 

requiring all nominating committees to 

serve for 1 year. This, however, does not 

relieve associations of the requirements 

of section 4.15 of the Act. Section 4.15 

of the Act requires each association to 

elect a nominating committee at the 

annual meeting to serve for the 

following year. We are declining to 

issue rules on the manner of selecting a 

nominating committee or requiring 

training for committee members. We 

believe this is best left to the judgment 

of each institution. We note, however, 

that the rule does not prohibit floor 

nominations for a person’s candidacy to 

the nominating committee. 

One commenter stated that the 

requirement prohibiting elected 

directors to serve on the nominating 

committee is counterproductive and 

overreaching, particularly at the bank 

level. One commenter suggested that 

retired board members be allowed to 

serve on the nominating committee. 

Another commenter stated that we 

should allow retiring directors, who 

aren’t candidates for re-election for the 

coming year but are still serving as 

directors, be eligible to serve on the 

nominating committee. A few 

commenters stated that we should allow 

nominating committee members to 

become director candidates as long as 

they resign from that committee. One 

commenter supporting the restriction on 

candidates serving on the nominating 

committee asked us also to address the 

conflict of interest created when family 

members of a candidate serves on the 

nominating committee. 

We continue to believe that an open 

and fair nominating process must be 

free of potential conflicts that could 

result if sitting board members serve on 

nominating committees. A director who 

is not fully retired from the board may 

not serve on the committee if he or she 

is still a director at the time of service 

on the committee. In taking this 

position, we are mindful that a 

‘‘retiring’’ director may decide to run 

again for election to the board. However, 

a retired board member is sufficiently 

removed from obvious conflicts to serve 

on the nominating committee. We also 

disagree with suggestions that director 

candidates be allowed to serve on the 

nominating committee. Nominating 

committee members may not be 

candidates for director positions during 

the same election cycle. While we 

understand that a person elected to the 

nominating committee may decide 

during the course of service to run for 

a director position, it is inappropriate 

for the person to continue as a 

nominating committee member because 

he or she now has a conflict of interest 

as well as access to information on other 

candidates not generally available. In 

such an event, the member has a duty 

to defer candidacy until the following 

election cycle. We share the concerns of 

the commenter regarding family 

members of a candidate serving on the 

nominating committee and leave it to 

each institution’s board of directors to 

develop, consistent with our conflict of 

interest regulations, a written policy on 

this issue. 

c. Duties 

One commenter raised concerns that 

increasing committee duties and time 

commitments will reduce the 

willingness of stockholders to serve on 

the committee. One commenter 

expressed concern that the rule would 

prevent stockholders from seeking 

election due to the nominating 

committee selection process. Another 

commenter asked that we remove 

restrictions on directors and employees 

assisting the committee in identifying 

candidates. A separate commenter 

stated that nominating committees 

should operate independent of 

institution management. We also 

received a comment stating it is 

unproductive to require all directorcandidates to have opposition, 

especially when no interest is indicated. 

Still another commenter questioned if 

the committee could nominate someone 

who was unwilling to serve. 

We agree that locating at least two 

willing and qualified candidates for 

each open board position may be 

difficult and our rule does not require 

two nominees. Our rule instead requires 

nominating committees to document 

their efforts when unable to find two 

nominees. We do not agree that the 

nominating committee selection process 

will deter willing and able candidates 

from seeking election to the board. To 

the contrary, we believe that the 

transparency will facilitate the efforts of 

stockholders who might be interested in 

seeking elective office. We also clarify 

that nominees must be willing 

participants. A nominating committee 

cannot nominate someone unwilling to 

be a director in the institution. 

Likewise, nominating committees 

cannot rely on employees of the 

institution to locate nominees. The 

provisions of § 611.320(b) explain the 

limitations with respect to the 

assistance that employees may offer the 

nominating committee. 

Several commenters stated the 

requirement that nominating 

committees conduct independent 

evaluations may be impractical or too 

time consuming and some commenters 

asked that we remove the ‘‘independent 

evaluation’’ component from the 

committee’s duties. Other commenters 

asked us to clarify how committees are 

to identify qualified candidates, how to 

determine suitability beyond what is in 

the Act and institution bylaws, and how 

much information the associations can 

disclose with respect to prospective 

candidates. One commenter stated that 

requiring the committee to use 

established qualifications opposes the 

plain meaning of the Act and frustrates 

Congressional intent. The commenter 

suggested making consideration of 

desirable qualifications set forth in 

bylaws an option for committees, not a 

requirement. One commenter raised 

confidentiality concerns if the 

nominating committee is provided 

detailed candidate information 

necessary to conduct its evaluation 

process. 

We agree with the commenters 

concerns regarding the time burden the 

proposed nominating committee duties 

would create. In response to these 

comments, we have removed from the 

rule the requirement for an independent 

critical evaluation, instead requiring 

only an evaluation of candidate 

qualifications. We have also specified 

that the evaluation consider known 

obstacles preventing a candidate from 

performing his or her duties. We 


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clarified that the committees nominate, 

not seek, individuals who meet the 

eligibility requirements. As to the 

committee’s consideration of director 

qualifications, we do not agree that 

director qualifications defeat the 

purpose of the Act, especially as the Act 

provides for qualifications to be 

included in each institution’s bylaws. 

However, we modified our rule on 

director qualifications to express them 

as desirable, thereby clarifying a 

perceived mandatory requirement. We 

decline to regulate how nominating 

committees should fulfill their duties. 

While the final rule provides for a 

pledge of confidentiality from 

nominating committee members with 

regard to sensitive and personal 

information provided to them in the 

course of their committee duties, we 

leave it to each institution’s board of 

directors to develop, consistent with 

this rule, a written policy on how best 

to treat sensitive information. 

d. Resources 

A few commenters objected to 

providing nominating committees a 

copy of the current operational or 

strategic business plan that contains the 

board self-evaluation, noting that it may 

include confidential information. One 

commenter asked that banks not be 

required to provide a list of stockholders 

to the committee as it would serve no 

purpose to give the name of an 

association. Another commenter asked 

us to define ‘‘pledge of confidentiality’’

for the purpose of providing proprietary 

information to the nominating 

committee. 

We re-evaluated our reasons for 

providing a nominating committee an 

institution’s business plan, finding the 

reasons insufficient in light of the 

comments received. We also removed 

the requirement that committee 

resources be addressed in institution 

bylaws. While we removed these 

requirements, we continue to require 

institutions to provide a summary of the 

current board self-evaluation when 

requested by their nominating 

committee. We also, as a conforming 

change, require institutions to provide 

their nominating committees their 

director qualifications policies. 

D. Conflict of Interest and 

Compensation Disclosure [§ 620.5] 

1. Disclosure of Other Business Interests 

Three commenters opposed requiring 

senior officers to make the same 

disclosure of other business interests as 

is currently required by directors. Other 

comments indicated no objection to the 

provision, although one commenter 

questioned the need for a regulatory 

requirement. Another commenter asked 

for clarification on whether unpaid 

positions with other businesses would 

have to be disclosed. The three 

commenters opposing the change stated 

the disclosure was an impingement on 

the privacy rights of directors and senior 

officers and we had not claimed a 

failure to make such disclosures put 

stockholders at risk. The commenters 

stated the disclosure provision provided 

no valuable information to stockholders 

and was redundant of other reporting 

requirements. One commenter stated the 

Standards of Conduct Officer reports 

any such business interests so a 

regulation requiring public disclosure 

does not improve the process in any 

way. 

We are making no changes to this 

provision of the rule. In proposing this 

provision, we considered the reporting 

requirements of part 612 and the 

specific business interests that could 

create a real or potential conflict of 

interest. We also looked to the reporting 

requirements of other regulators. We 

concluded that directors and senior 

officers, who represent stockholders in 

a position of trust and who voluntarily 

seek this position, have an obligation to 

disclose other business interests that 

may present real or perceived conflicts 

of interest. Whether a position is paid or 

not does not remove the potential 

conflict of interest. Therefore, both paid 

and unpaid business affiliations must be 

disclosed. 

2. Disclosure of Compensation 

Eight commenters agreed with 

reporting director compensation for 

serving on a board committee. We 

received no comments in disagreement 

with this aspect of the rule. We final 

this provision as proposed. 

One commenter suggested we require 

the disclosure of business expenses to 

facilitate stockholder evaluation of the 

value of services received. One 

commenter remarked that travel 

expenses are not compensation. We are 

not changing the rule in response to 

these comments. We did not propose 

changes to disclosure of business or 

travel expenses, but will take the 

comments under advisement. 

a. Noncash and Third-Party 

Compensation 

We received a total of 82 comments 

on this provision of the rule. One 

commenter supported the provision 

while another requested we maintain 

the ‘‘status quo.’’ Most System 

commenters disagreed with the general 

provision on noncash disclosure and 

one expressed concern that disclosure of 

this type of compensation may become 

a deterrent to directors and officers in 

their interactions with borrowers and 

constituents. Many commented that 

existing regulations are fine and others 

commented that this level of reporting 

is burdensome and not cost efficient. 

Two commenters opposed this 

provision because noncash 

compensation is a small percentage of 

an association’s overall budget and 

therefore does not require detailed 

disclosure. Two commenters remarked 

that a rule provision of this nature 

would create a negative impression and 

three others commented that the 

provision was unacceptable and 

unnecessary for stockholder disclosure. 

One commenter asked for justification 

based on safety and soundness needs. 

Two other commenters stated that we 

should be consistent with SarbanesOxley and another two commented that 

this type of reporting puts the 

institution at a competitive 

disadvantage. 

Nineteen commenters requested 

clarification of what we consider 

noncash compensation and when 

disclosure is necessary. One commenter 

asked how this level of disclosure 

would enhance transparency. A separate 

16 commenters requested we only 

require disclosure of compensation 

received directly from the reporting 

institution, eliminating the third-party 

provision. Another 11 commenters 

questioned the need to report 

reimbursed expenses, under the 

assumption that third-party payments 

are reimbursed by the employing 

institution or absorbed by the thirdparty as a business expense. Many 

commenters questioned why 

reimbursed expenses would be 

considered compensation. Forty-six 

commenters requested we restore some 

threshold level for noncash 

compensation reporting to eliminate 

burdensome reporting of minor noncash 

items, such as the receipt of a cup of 

coffee. Two commenters suggested 

$1,500-$5,000, six others requested a 

level not tied to overall compensation 

received, one commenter requested a 

threshold amount based on an inflationadjusted dollar minimum and another 

commenter suggested a materiality 

standard for noncash compensation 

disclosure. Eleven other commenters 

requested we base the interpretation of 

what constitutes compensation on 

Internal Revenue Service (IRS) rules. 

We do not consider reporting noncash 

compensation a deterrent to normal 

interactions with borrowers and 

constituents, but important to prevent 

improper or excessive exchanges of 

noncash items. We also do not believe 


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15See generally 26 U.S.C. 132. 

16 26 CFR 1.61–21(a)(5). 

that it creates a negative impression but 

validates the integrity of System 

directors and senior officers. Section 

514 of the 1992 Act recognizes the 

benefits when directors, officers and 

employees of the System disclose 

financial information and potential 

conflicts of interest. The 1992 Act 

further requires FCA to ensure our 

regulations provide adequate 

disclosures to stockholders and other 

interested parties. Despite the cost and 

related reporting burden, both the need 

for transparency and the need to avoid 

potential conflicts of interest require 

that noncash compensation above a de 

minimis level be disclosed, 

notwithstanding the relatively small 

share it represents in an institution’s 

overall budget. We also note that 

Sarbanes-Oxley contains no salary 

disclosure provision, but addresses 

stock and stock option compensation. 

We agree that a reporting threshold 

would alleviate most of the anticipated 

reporting burdens and modified the rule 

to restore a threshold for reporting 

noncash compensation. The $5,000 

annual aggregate dollar threshold 

applies to director disclosures and 

senior officer perquisite reporting. We 

discuss perquisite reporting in section 

V.D.2.d.ii. of this preamble. We are not 

including any adjustments for inflation 

at this time since the threshold is set at 

the upper limit of the range suggested 

by commenters. 

We agree that adopting an IRS 

definition of compensation would 

provide consistency and facilitate 

recordkeeping. The IRS defines noncash 

compensation as a fringe benefit or 

perquisite. The IRS considers fringe 

benefits as compensation, unless the 

employee pays the market value of the 

benefits or the benefits are specifically 

excluded from income by law.15 Under 

IRS rules, the provider of the benefits 

does not have to be the employer, but 

may be a client or customer of the 

employer; so a System institution would 

be deemed to be the provider of a 

benefit given to a director or senior 

officer if it is given for services 

performed on behalf of the institution.16

We selected the IRS rules instead of a 

materiality rule because IRS rules add a 

greater level of clarity on third-party 

compensation. Similar to the IRS rules, 

our rule requires reporting as 

compensation the value of gifts, 

unreimbursed payments of trips, or use 

of property received from third parties, 

which are made to directors and senior 

officers for acting in their official 

capacity with the institution. We believe 

that disclosure of cash and noncash 

compensation and compensation from 

third-parties increases transparency and 

helps ensure that directors and senior 

officers are not unduly influenced. This 

provision was not generated out of a 

concern for the integrity of System 

directors and senior officers, but was 

designed to address the unwitting 

acceptance of items and how the receipt 

of such items may be perceived as a 

conflict of interest, adversely affecting 

shareholder and investor confidence. 

Accordingly, we are retaining the 

requirement for inclusion of third-party 

compensation. We also clarify that 

compensation is any unreimbursed 

item, as it would not be compensation 

if the employee reimbursed the 

institution or third-party. 

b. Stock and Stock Options 

We received 31 comments on 

reporting stock and stock options in the 

annual report. One commenter 

supported disclosing of all sources of 

compensation. Other commenters 

disagreed with the provision; stating the 

System does not compensate 

management or directors with stock. 

One commenter neither agreed nor 

disagreed with the provision, but 

suggested placing a restriction on the 

issuance of stock and stock option 

compensation instead of creating a 

disclosure program. Eight other 

commenters asked us to remove the 

provision and a separate nine stated 

they were unaware of any stock 

compensation. Seven commenters stated 

that System institutions are not able to 

use stock or stock options to 

compensate staff and one commenter 

expressed the opinion that it was 

inappropriate for us to include this 

provision given the cooperative nature 

of the System. Four commenters asked 

us to clarify why we included this 

provision in the rule, with several 

suggesting we require disclosure only 

where stock or stock options are 

actually received. 

We are not requiring a specific 

disclosure of stock or stock options in 

the final rule. We had proposed the 

specific disclosure to address situations 

where bank and association officers 

serve, in their capacity as institution 

officers, on the FAMC board. The Act 

requires the FAMC board to consist, in 

part, of five directors elected by 

stockholders of System institutions 

(banks and associations). These 

individuals serve on the board of FAMC 

as representatives of the System and 

FAMC compensation of its board 

members has included stock and stock 

options. We are satisfied that the 

reporting of any other business interest 

of directors and senior officers, which 

would include reporting service on the 

FAMC board, clarifies the reason for the 

enhanced disclosure and achieves the 

stated objectives of the original 

proposed provision. However, we 

clarify that any stock or stock option 

received as part of a compensation 

package from the reporting institution 

would be considered noncash 

compensation for purposes of our rule. 

We strongly encourage banks and 

associations to inform stockholders of 

the availability of FAMC compensation 

information and that such compensation 

may include stock or stock options in 

FAMC. We believe that a Farm Credit 

bank or association making this type of 

disclosure for affected directors and 

officers would satisfy the intent of the 

1992 Act disclosure requirements and 

our policy concerns. 

c. Chief Executive Officer (CEO) 

Compensation Threshold 

Ten commenters supported removing 

the $150,000 CEO compensation 

disclosure threshold. Six other 

commenters specifically opposed the 

removal of the reporting threshold for 

CEO compensation without further 

explanation. We found no basis for 

retaining the $150,000 minimum 

reporting limit and final the rule as 

proposed. All institutions must report 

their CEO’s compensation, regardless of 

the amount. 

d. Senior Officer Compensation 

Disclosure 

(i) Individual Compensation Disclosure 

We received 198 letters addressing 

individual senior officer compensation 

disclosure, with all but one opposing all 

or part of the provision. One member of 

the public supported the requirement, 

stating it was time System institutions 

provided full disclosure. The FCC stated 

that the existing regulation already 

requires disclosure of individual 

compensation information to 

stockholders upon request. They 

commented that we referenced 

disclosure as a best practice without 

explaining why it is a best practice, 

indicating that the SEC requires officer 

compensation disclosure for publicly 

traded companies because management 

also serves on the boards of these 

companies. These board members are in 

a position to influence board approval 

of compensation arrangements, which 

the FCC asserts does not apply to 

System institutions. 

A few commenters remarked that the 

aggregated reporting enabled 

stockholders to determine a ‘‘ballpark 

range’’ of salaries. One commenter 


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17 51 FR 2136, June 12, 1986. 

stated we were imposing SarbanesOxley on institutions in a ‘‘misguided 

attempt’’ to satisfy others. Two 

commenters remarked that aggregate 

disclosure was sufficient as it enables 

the boards to evaluate the institution’s 

operating rate and cost structure. They 

stated that individual compensation 

disclosure is not meaningful and its 

potential value to stockholders and 

investors is not strong enough to 

override the privacy and confidentiality 

interests of those individuals whose 

compensation would be disclosed in a 

public report. Some commenters stated 

that individual disclosure would be 

especially burdensome for associations. 

Still others commented that the 

information would be misused or 

misstated, would give competitors an 

edge, enabling them to lure away 

valuable employees, or would create 

employee dissatisfaction issues. 

Another commenter asserted that 

such individual disclosures would 

compromise the CEO’s ability to 

differentiate salary at the management 

level. Other commenters added that 

individual disclosure would serve no 

purpose other than to create 

distractions, animosity, and jealousy 

among employees. One commenter 

requested we consider how disclosure 

would interfere with the board and 

management prerogatives as well as 

individual privacy interests. Other 

commenters stated that individual 

reporting disclosure would impinge on 

the privacy rights of senior officers, 

presenting opportunities for outsiders to 

distort the information for their own 

benefit and purposes. Still other 

commenters stated they did not 

understand why we would require 

greater disclosure to the public when 

the public has no legitimate business 

purpose for the information. Several 

commenters stated that we can deal 

with any safety and soundness concerns 

regarding senior officers’ salaries 

through our examination and 

enforcement functions. Another 

commenter asserted that concerns over 

the amount of compensation paid to 

senior officers are for the boards to 

handle, not us, but that we could note 

our concerns during the examination 

process. Some commenters stated that if 

we were to proceed with individual 

disclosures that it should be limited to 

the five most highly compensated senior 

officers or to follow the SEC 

compensation disclosure rules. Some of 

these commenters suggested instead that 

the current threshold for individual 

disclosure, as in the case of the CEO, 

should be extended to the other senior 

officers. One commenter stated that if 

we proceeded with individual 

disclosure we should set a dollar 

threshold, suggesting $150,000. 

We are withdrawing this provision of 

the rule and restoring the existing 

aggregate disclosure of senior officer 

compensation. We instead clarify that 

the existing requirement for aggregate 

reporting includes all senior officers, 

plus those officers (who are not senior 

officers) receiving among the five 

highest levels of compensation. The 

former rule’s use of the phrase ‘‘at a 

minimum’’ may have been read to 

permit reporting the top five officers’

aggregated compensation instead of all 

senior officer aggregated compensation 

and any additional officers whose 

compensation was one of the five 

highest paid. As explained in the 1986 

rulemaking,17 this portion of the rule 

was intended to address oversights in 

reporting that may have resulted from a 

highly paid officer functioning as a 

senior officer but not having a formal 

designation as such. We are also 

amending the means of determining 

which other officers are included in the 

senior officer aggregate based on 

comments received. Institutions will be 

required to include in the senior officer 

aggregated compensation report any 

other officer receiving a compensation 

package that is among the five highest 

paid, not the five highest paid officers. 

This is different from the former rule 

because it focuses on the dollar amount, 

not the number of officers, as requested 

by many commenters. We believe tying 

the level of aggregated reporting to the 

compensation paid, instead of a number 

of officers, alleviates past questions 

regarding which other officers are 

included in the senior officer 

compensation report when more than 

five receive the same amount of 

compensation. We did not go as far as 

the commenters asked by setting a 

dollar threshold for the aggregation as 

we are mindful of compensation 

variances based on locality and 

institution business volume. 

Although we are withdrawing the 

provision on individual compensation 

disclosure, we continue to believe that 

reporting compensation improves 

transparency. The objective of this type 

of disclosure is to provide stockholders 

with information to assess whether 

senior officer compensation is 

appropriate in view of the institution’s 

financial condition and to hold the 

board accountable for the level of 

compensation paid to its senior officers. 

We may therefore reconsider the 

viability of aggregated compensation 

reporting in future rulemaking. 

The FCC stated that we had an 

opportunity to impose detailed 

disclosure requirements following 

passage of the 1992 Act yet did not do 

so. They stated that we failed to impose 

such requirements following passage of 

the 1992 Act, even after we had studied 

Congressional statements associated 

with that legislation. We maintain our 

prerogative to change the reporting and 

disclosure requirements when we 

determine there is a need. As explained 

in section IV.C. of this preamble, our 

authority to promulgate rules is not 

limited to those that respond to 

particular Congressional mandates, such 

as the ones in the 1992 Act. In addition, 

Congressional mandates do not become 

inapplicable after the passage of time. 

We also note that we made changes to 

our disclosure rules after passage of the 

1992 Act. In 1993 we proposed 

individual senior officer compensation 

disclosures to satisfy the objectives of 

section 514 of the 1992 Act. The 1993 

proposed rule was intended to benefit 

System stockholders by providing them 

with senior officer compensation 

information comparable to that available 

to stockholders of other financial 

institutions. However, based on System 

objections to the 1993 proposal, we 

limited individual compensation 

disclosure to CEOs, while providing 

individual senior officer compensation 

disclosure on shareholder request. 

Forty-six commenters specifically 

opposed disclosure of senior officer 

compensation in the annual report 

instead of in the AMIS, while nine 

commenters supported this change in 

disclosure locations. A few commenters 

stated that the AMIS provides 

controlled disclosure to stockholders as 

opposed to the annual report which is 

used as marketing or promotional 

material. The FCC stated that disclosing 

compensation in the annual report does 

not improve the quality of the 

disclosure and that the purported 

benefit of consistency between the Farm 

Credit banks, which report such 

information in their annual reports, and 

the associations ignores the critical 

distinctions in the composition of the 

banks’ and associations’ respective 

stockholder groups. They also remarked 

that the commercial banks do not 

provide the information in their annual 

reports but in proxy statements filed 

with the SEC. 

In conformance with withdrawing the 

proposed disclosure of individual senior 

officer compensation, we do not final 

some of the proposed changes at 

§ 620.5(i)(2) regarding the location of 

senior officer compensation disclosure. 

Specifically, we retain the existing 

provision allowing associations the 


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option of reporting senior officer 

compensation in the AMIS instead of 

the annual report. We are, however, 

clarifying that the AMIS must be 

available for public inspection at the 

reporting association’s offices. The 

AMIS is required to be available for 

public inspection under our existing 

rule at § 620.2(a) and to avoid confusion 

of AMIS availability, we require that 

associations state in the annual report 

that the AMIS is available for public 

inspection. 

A number of commenters stated that 

the current regulation already provides 

for disclosure of individual 

compensation information to 

stockholders upon request, and that it is 

not burdensome for stockholders to 

make such requests. In conformance 

with withdrawing the proposed 

disclosure of individual senior officer 

compensation, we do not final some of 

the proposed changes at 

§ 620.5(i)(2)(iii). Specifically, we keep 

the existing provision requiring 

disclosure of individual senior officer 

compensation to requesting 

shareholders. We are, however, 

removing the $50,000 threshold for 

making these disclosures. One 

commenter had recommended we raise 

the reporting threshold for disclosure of 

any individual senior officer’s 

compensation upon request by a 

stockholder to $60,000 from $50,000 to 

keep pace with current market wages. 

We are not raising or keeping the 

threshold. Although the public 

disclosure requirement for individual 

senior officer compensation is limited to 

CEOs in the final rule, we continue to 

believe that it is important for 

stockholders of reporting institutions to 

have access to individual compensation 

information of their senior officers 

without restriction. Therefore, the 

required disclosure statement in the 

annual report or the AMIS (if the 

association chooses) is modified to 

require institutions to disclose to 

requesting stockholders the 

compensation information for any 

individual senior officer and any other 

officer included in the aggregate. We 

take this opportunity to emphasize that 

institutions may not question the reason 

for a request of individual senior officer 

compensation, nor record the request in 

the shareholder’s files. Institutions must 

promptly provide the information to 

their shareholders without any 

contingencies or undue delay. 

(ii) Senior Officer Perquisites 

Ten System commenters opposed 

lowering the reporting level for 

perquisites from $25,000 to $5,000. One 

commenter stated that the disclosure for 

perquisites was inconsistent with 

Sarbanes-Oxley and requirements for 

other corporate lending institutions. A 

second commenter stated that the 

disclosure of perquisites should be 

included in the aggregate for all senior 

officers. As stated in the proposed rule, 

perquisites by their nature are nominal 

privileges and benefits. As such, we 

believe the $5,000 disclosure level for 

the reportable loan transaction 

threshold at § 620.5(j) is a reasonable 

level. Due to our withdrawing the 

reporting of individualized senior 

officer compensation, the reporting of 

perquisites continues to be reported in 

the aggregate and listed separately from 

salary, bonus and other compensation. 

We also note that reporting senior 

officer perquisites is consistent with 

SEC reporting requirements. 

E. Audit and Compensation Committees 

1. Audit Committee 

a. Bank and Association Audit 

Committees [§ 620.30] 

We received 150 comment letters on 

this provision. Several commenters 

supported audit committees for banks 

and associations, but expressed 

objections to certain aspects of our rule. 

One commenter remarked that higher 

auditing standards are needed within 

the System to avoid accounting 

problems experienced by other GSEs. 

i. Chairmanship 

We received 140 comment letters 

opposing the requirement that a director 

with financial expertise serve as the 

audit committee’s chair. These 

commenters stated that the board or the 

audit committee should be free to 

designate its own chair, with one 

commenter explaining that a board 

might logically name the director with 

the most financial expertise as chair but 

should have the flexibility to do so. 

Another explained that they like to 

rotate their committee chairs and our 

rule restricts their ability to do so. 

Another commenter stated that putting 

an outside director in the chairmanship 

position lessens the director’s 

independent perspective. One 

commenter stated that the authority for 

the committee to hire experts negated 

the need for the director with expertise 

to chair the committee. Many 

commenters said it was unreasonable to 

equate financial expertise with the 

ability to serve as an effective chair, 

particularly if the financial expert is 

new to the institution. Still others 

explained that leadership skills, past 

experience, knowledge of institution 

operations and lending activities, and 

history of service on the board may be 

more useful qualities for an audit 

committee chair than placing a new 

director with financial expertise in this 

position. These commenters further 

stated that removing a financial expert 

from the chairmanship would not limit 

his or her involvement in the 

committee’s activities or restrict his or 

her ability to present contrary views. 

Other commenters suggested that we 

require a financial expert serve on the 

audit committee, without requiring him 

or her to be the chair. A few 

commenters remarked that there was no 

need for a financial expert as all 

committee members were being 

required to have some level of financial 

knowledge. 

We agree that chairing the audit 

committee may require other skills or 

experience beyond financial expertise. 

We are therefore amending the rule to 

only require that any director identified 

as a financial expert, as defined in the 

rule, serve on the audit committee. This 

director does not have to chair the 

committee, but should not be 

automatically excluded from doing so. 

We believe this change to the rule 

addresses all the comments without 

compromising a financial expert’s role 

on the committee. We further require 

any financial expert adviser, retained by 

smaller associations under 

§ 611.210(a)(2), serve as adviser to the 

institution’s audit committee. We 

believe it is important for a board’s 

financial expert, whether drawn from a 

director or contracted adviser, be 

available to the institution’s audit 

committee. The final rule does not 

require outside director participation on 

the audit committee. Elsewhere in the 

rule, we removed the requirement that 

an outside director be a financial expert. 

Continuing to require an outside 

director to serve on the audit committee, 

combined with the requirement that 

committee members have a level of 

financial knowledge, would, in effect, 

still require institutions to appoint a 

financial expert as an outside director. 

ii. Association Exemption 

Twelve commenters objected to 

requiring audit committees for 

associations, stating that we are 

interfering with the authority of the 

board of directors to establish board 

committees and determine committee 

composition and structure. One 

commented that associations should 

have the ultimate discretion to 

determine what committees they have 

and how they are staffed. Another 

commenter requested a small institution 

exemption from the audit committee 

requirement of $500 million on the basis 

that other regulators have similar 


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exemptions and the requirement is 

unduly burdensome for small 

associations. 

We are not providing an exemption 

for small institutions. As explained in 

the proposed rule, requiring the 

establishment of audit committees and 

identifying basic composition is 

necessary to the safe and sound 

operations of System institutions. The 

increasing size, complexity, and 

sophistication of today’s financial 

markets and the pivotal role the board 

of directors and its audit committee has 

in ensuring accurate oversight and 

reporting to stockholders, investors, and 

the public make certain basic operating 

practices essential. 

Two commenters stated that the full 

board should be able to function as the 

audit committee. One commenter stated 

that each stockholder-elected director 

must fulfill his fiduciary responsibility 

with regard to auditing issues and 

objected to a ‘‘separation of duties’’

whereby only a few directors serve on 

an audit committee that would operate 

autonomously. Our rule establishes a 

minimum size, not a maximum, making 

it possible for an entire board to serve 

as the audit committee. We caution the 

institutions considering this approach 

that larger committee membership may 

reduce the efficiency and effectiveness 

of the committee. The committee, all of 

whose members should have some level 

of financial knowledge, is responsible 

for overseeing the financial statements 

of the institution, among other duties. 

These specific, and potentially complex, 

duties may require smaller group 

discussions than what may be achieved 

with an entire board. The audit 

committee does not function 

independently of the board, but 

functions under a board charter and 

reports to the board on a regular basis. 

iii. Knowledge, Duties, and Resources 

Fourteen commenters opposed 

requiring all audit committee members 

to be knowledgeable in financial 

matters. Some commenters instead 

asked that most committee members 

have this knowledge, suggesting it might 

be difficult to find qualified board 

members to adequately staff the audit 

committee. One commenter cited the 

OCC, explaining that they do not require 

commercial banks to have directors with 

financial expertise unless the bank has 

$3 billion or more in assets. To perform 

its duties, audit committee members 

must be knowledgeable in at least one 

of the areas cited in the rule. We agree 

that some institution directors, upon 

election or appointment to the board, 

might not have sufficient financial 

knowledge to serve on an audit 

committee. This is one of the reasons we 

are requiring institutions to establish a 

director training policy. Institution 

directors lacking sufficient financial 

experience should receive training so 

they might serve on the audit 

committee. 

Two commenters disagreed with 

requiring a supermajority vote of the 

board of directors to deny an audit 

committee’s request for resources. The 

commenters said that the board should 

decide what level of approval was 

needed for this purpose. While we 

believe that the board should have a 

check on audit committee spending, we 

believe the committee should have 

sufficient autonomy to carry out its 

duties. A supermajority vote by the 

board prevents abuse but ensures the 

committee’s access to needed resources. 

Other commenters asked that we 

change the duties of the committee from 

having oversight over the preparation of 

financial reports to one of a review 

function. We disagree; part of the 

board’s oversight and fiduciary duty is 

to assure stockholders that financial 

reports are subject to review by the 

board or its committee, independent of 

management. This function is delegated 

to, and conducted by, the audit 

committee, which has a special set of 

skills for dealing with financial audits. 

A simple review would not discharge all 

of the board’s responsibility regarding 

financial reporting to stockholders, 

investors, and the public in general. 

Therefore, we make no change in the 

final rule dealing with the required 

statement by the audit committee that 

financial statements were prepared 

under its oversight. 

As a technical change, we are 

reorganizing into paragraphs the 

provisions regarding audit committee 

oversight of the external auditor. 

b. System Audit Committee [§ 630.6] 

We received three comment letters on 

our provision dealing with the System 

Audit Committee (SAC). Generally, the 

commenters discussed the structural 

and operational changes to the existing 

SAC that the proposed rule would have 

required. One commenter remarked that 

Funding Corporation board members are 

financially literate but there is no 

assurance that the board will have a 

financial expert as defined by the SEC. 

Another commented that requiring audit 

committees to be comprised of members 

from a board of directors may work for 

individual System institutions, but not 

for the SAC. The SAC requires broader 

representation and greater financial 

experience due to the unique role it 

plays in representing the interests of all 

System institutions and in organizing 

financial statements on behalf of the 

entire System. We agree that an audit 

committee at the System-wide level 

need not be composed solely of Funding 

Corporation board members. Therefore, 

we are not adopting the proposed 

requirement that the SAC be comprised 

entirely of members of the Funding 

Corporation’s board. However, a 

System-wide audit committee should 

include representation from the System 

and we are modifying the membership 

requirements for the SAC to require at 

least one-third of the SAC members be 

from the System. When calculating the 

number of required System 

representatives, fractions of 0.5 or more 

should be rounded up to the nearest 

whole number. For example, one-third 

of a five-member committee equals 1.66 

members, so there would have to be two 

System representatives on a fivemember SAC. 

We also remove the requirement that 

a Funding Corporation outside director 

serve on the SAC. However, the SAC 

must have at least one financial expert. 

Unlike bank and association audit 

committees, the expert must chair the 

SAC. Because the SAC membership is 

not restricted to the Funding 

Corporation board of directors, the same 

recruitment issues leading to our 

changing this aspect of the rule for 

banks and associations do not arise. We 

believe that since the SAC assists in 

setting the reporting and disclosure 

standards for the entire System, it 

should have broader representation 

from System institutions and deeper 

and broader financial knowledge and 

experience than other System 

institution audit committees. We also 

retain the definition of financial 

expertise used in the proposed rule. 

This definition is less restrictive than 

that used by the SEC as it allows for 

experience in either internal controls or 

in preparing and auditing financial 

statements, but not both. Given this less 

restrictive definition and the significant 

responsibilities of the SAC, we believe 

the requirement that the financial expert 

chair the SAC is both prudent and 

appropriate. 

As a technical change, we are 

reorganizing into paragraphs the 

provisions regarding audit committee 

oversight of the external auditor. We 

also make minor technical and 

grammatical changes because of changes 

made to the SAC composition. 

2. Compensation Committee [§§ 620.31 

and 630.6] 

We received 125 System comment 

letters on the requirement for 

compensation committees. Of these, 11 

commenters supported the provision; 43 


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5760 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

commenters expressed opposition to a 

regulatory requirement for a 

compensation committee; and the rest of 

the commenters suggested revisions to 

the rule without expressly agreeing or 

disagreeing with it. Commenters 

opposed to this requirement stated that 

each institution should have the 

discretion to determine what board 

committees are necessary. Some stated 

that their institution already provides 

adequate oversight to compensation 

packages. Some expressed the view that 

the entire board is responsible for 

compensation and should not be forced 

to delegate that duty. Other commenters 

stated that the best practice is to have 

compensation committees responsible 

for communicating policies and 

strategies, not making decisions. We are 

not changing the requirement that all 

institutions have compensation 

committees. While we agree that System 

institutions should have broad 

discretion to manage their internal 

affairs; we also believe that System 

institutions need to comply with certain 

standards facilitating safety and 

soundness and promoting the 

cooperative principles of user control 

and accountability. 

One hundred and one commenters 

requested we not require compensation 

committees to set or approve senior 

officer compensation. They stated that 

the CEO is responsible for setting the 

compensation of senior officers and the 

committee’s approval would undermine 

the CEO’s authority. The commenters 

also stated that such a requirement 

would compromise the ability of the 

board to hold the CEO accountable for 

hiring and promoting officers. These 

commenters stated that such a 

requirement could result in the 

committee members evaluating the 

performance of senior officers, instead 

of the CEO. One commenter stated that 

individual pay packages for senior 

managers should remain the prerogative 

of the CEO. Another commented that 

although compensation committee 

salary reviews may be a best practice, 

we have gone farther by requiring the 

committee to approve compensation 

paid. The commenter stated that the 

committee should determine their own 

level of involvement in monitoring the 

activities of the CEO. Yet another 

commenter stated that the provision 

weakens governance by blurring the line 

between the board and CEO in 

compensation matters. Five commenters 

requested the committee’s authority be 

limited to reviews and 

recommendations, with approval 

authority reserved for the full board. 

The commenters remarked that this 

change should provide sufficient 

oversight of the CEO in his 

administration of the institution’s 

compensation program. 

We are persuaded by the commenters 

that control over individual senior 

officer compensation is better handled 

by the CEO. However, we continue to 

believe the compensation committee 

must take an active role in monitoring 

compensation. Therefore, we are 

modifying our rule to require the 

compensation committee approve the 

overall compensation program for senior 

officers. We believe this modification 

strengthens governance and provides a 

clear distinction between boards and 

CEOs in compensation matters. We 

believe the rule provides institution 

boards with sufficient flexibility to 

delegate or apportion many of these 

compensation matters in ways that they 

deem most appropriate. 

A few commenters asked for a small 

institution exemption, noting that small 

institutions with few employees should 

not be required to have a compensation 

committee. We disagree and are not 

providing a small institution exemption. 

We continue to believe that a welldefined compensation program, 

administered by a qualified, objective 

board committee will ensure that 

institutions have the needed structure 

for this important function, regardless of 

their size. 

Three commenters stated that they 

already had committees performing 

these functions but with different 

committee names, such as the executive 

committee or human resource 

committee. These commenters 

requested that the final rule allow 

deviations from the proposed committee 

name. We are not changing the rule 

because the rule does not require the 

committee be named a ‘‘compensation 

committee.’’ A board committee 

performing the duties of the 

compensation committee, with a charter 

that satisfies committee requirements 

may fill the role of a compensation 

committee, even though it has a 

different name. 

VI. Miscellaneous 

1. Bank Director Compensation 

[§ 611.400] 

We asked for comments on whether 

we should change our existing 

regulation allowing a waiver of the 

statutory limit on Farm Credit bank 

director compensation. We did not 

propose changes to our existing rule, but 

asked whether we should retain, reduce, 

increase, or remove the current 

regulatory 30-percent waiver amount 

and at what level we should remove the 

authority of Farm Credit banks to 

exercise the waiver without prior 

submission to FCA. We also sought 

comment on what constitutes an 

appropriate exceptional circumstance. 

We received nine System letters and 

one letter under our regulatory burden 

initiative on this issue. All commenters 

supported an increase in the 

compensation cap because of increased 

governance responsibilities, the 

changing legal climate, heightened 

standards of accountability, and 

recruitment difficulties. None offered 

suggestions on the appropriate amount 

or exceptional circumstances needed to 

trigger the waiver amount. The FCA 

Board reviewed the comments 

submitted and on December 15, 2005 

issued Bookletter 051 to increase the 

maximum bank director compensation 

to $45,740. 

2. Implementation Date 

We proposed a 1-year delay in the 

implementation date of the rule in two 

areas: A director who has financial 

expertise and a second outside director. 

Two commenters urged us to consider 

extending implementation beyond 1 

year. However, many commenters noted 

that their respective institutions were 

already in compliance with many of the 

provisions of the rule. We are not 

extending the 1-year implementation 

date but are changing the areas where it 

applies. We delay for 1 year the board 

composition requirements on financial 

experts (§ 611.210(a)(2)) and additional 

outside directors (§ 611.220(a)(2)(i) and 

(ii)). We also delay for 1 year the 

nominating committee requirement 

(§§ 611.325 and 620.21(d)(2)) for Farm 

Credit banks only. All other provisions 

require compliance by the effective date 

of this rule. 

3. Other Comments Received 

We received two comments that fall 

outside the scope of this rule. One 

commenter requested we revisit the 

intent and effective result of our 

cumulative voting regulations. The 

commenter stated that as institutions 

grow in size the effect of cumulative 

voting may produce the opposite of its 

intended purpose and larger 

associations effectively control the 

outcome of bank elections under this 

process. The second commenter 

requested we modernize our regulatory 

framework and the Act because it is 

necessary for the System to be able to 

meet the changing capital needs of rural 

America. We will consider these 

comments in our regulatory burden 

initiative. 


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Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 5761 

VII. Regulatory Flexibility Act 

Pursuant to section 605(b) of the 

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

et seq.), FCA hereby certifies that the 

final rule will not have a significant 

economic impact on a substantial 

number of small entities. Each of the 

banks in the Farm Credit System, 

considered together with its affiliated 

associations, has assets and annual 

income in excess of the amounts that 

would qualify them as small entities. 

Therefore, Farm Credit System 

institutions are not ‘‘small entities’’ as 

defined in the Regulatory Flexibility 

Act. 

List of Subjects 

12 CFR Part 611 

Agriculture, Banks, banking, Rural 

areas. 

12 CFR Part 612 

Agriculture, Banks, banking, Conflicts 

of interest, Crime, Investigations, Rural 

areas. 

12 CFR Part 614 

Agriculture, Banks, banking, Foreign 

trade, Reporting and recordkeeping 

requirements, Rural areas. 

12 CFR Part 615 

Accounting, Agriculture, Banks, 

banking, Government securities, 

Investments, Rural areas. 

12 CFR Part 618 

Agriculture, Archives and records, 

Banks, banking, Insurance, Reporting 

and recordkeeping requirements, Rural 

areas, Technical assistance. 

12 CFR Part 619 

Agriculture, Banks, banking, Rural 

areas. 

12 CFR Part 620 

Accounting, Agriculture, Banks, 

banking, Reporting and recordkeeping 

requirements, Rural areas. 

12 CFR Part 630 

Accounting, Agriculture, Banks, 

banking, Organization and functions 

(Government agencies), Reporting and 

recordkeeping requirements, Rural 

areas. 

■ For the reasons stated in the preamble, 

parts 611, 612, 614, 615, 618, 619, 620, 

and 630 of chapter VI, title 12 of the 

Code of Federal Regulations are 

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, 4.15, 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, 2013, 

2021, 2071, 2072, 2091, 2092, 2121, 2123, 

2142, 2183, 2203, 2208, 2209, 2243, 2244, 

2252, 2278a–9, 2278b–6, 2279a–2279f–1, 

2279aa–5(e)); secs. 411 and 412 of Pub. L. 

100–233, 101 Stat. 1568, 1638; secs. 409 and 

414 of Pub. L. 100–399, 102 Stat. 989, 1003, 

and 1004. 

■ 2. Add a new subpart B, consisting of 

§§ 611.210 and 611.220 to read as 

follows: 

Subpart B—Bank and Association Board of 

Directors 

Sec. 

611.210 Director qualifications and 

training. 

611.220 Outside directors. 

Subpart B—Bank and Association 

Board of Directors 

§ 611.210 Director qualifications and 

training. 

(a) Qualifications. (1) Each bank and 

association board of directors must 

establish and maintain a policy 

identifying desirable director 

qualifications. The policy must explain 

the type and level of knowledge and 

experience desired for board members, 

explaining how the desired 

qualifications were identified. The 

policy must be periodically updated and 

provided to the institution’s nominating 

committee. 

(2) Each Farm Credit institution board 

must have a director who is a financial 

expert. Boards of directors for 

associations with $500 million or less in 

total assets as of January 1 of each year 

may satisfy this requirement by 

retaining an advisor who is a financial 

expert. The financial advisor must 

report to the board of directors and be 

free of any affiliation with the external 

auditor or institution management. A 

financial expert is one recognized as 

having education or experience in: 

Accounting, internal accounting 

controls, or preparing or reviewing 

financial statements for financial 

institutions or large corporations 

consistent with the breadth and 

complexity of accounting and financial 

reporting issues that can reasonably be 

expected to be raised by the institution’s 

financial statements. 

(b) Training. Each bank and 

association board of directors must 

establish and maintain a policy for 

director training that includes 

appropriate implementing procedures. 

The policy must identify training areas 

supporting desired director 

qualifications. Each Farm Credit bank 

and association must require newly 

elected or appointed directors to 

complete director orientation training 

within 1 year of assuming their position 

and require incumbent directors to 

attend training periodically to advance 

their skills. 

§ 611.220 Outside directors. 

(a) Eligibility, number and term. (1) 

Eligibility. No candidate for an outside 

director position may be a director, 

officer, employee, agent, or stockholder 

of an institution in the Farm Credit 

System. Farm Credit banks and 

associations must make a reasonable 

effort to select outside directors 

possessing some or all of the desired 

director qualifications identified 

pursuant to § 611.210(a) of this part. 

(2) Number. Stockholder-elected 

directors must constitute at least 60 

percent of the members of each 

institution’s board. 

(i) Each Farm Credit bank must have 

at least two outside directors. 

(ii) Associations with total assets 

exceeding $500 million as of January 1 

of each year must have no fewer than 

two outside directors on the board. 

However, this requirement does not 

apply if it causes the percent of 

stockholder-elected directors to be less 

than 75 percent of the board. 

(iii) Associations with $500 million or 

less in total assets as of January 1 of 

each year must have at least one outside 

director. 

(3) Terms of office. Banks and 

associations may not establish a 

different term of office for outside 

directors than that established for 

stockholder-elected directors. 

(b) Removal. Each institution must 

establish and maintain procedures for 

removal of outside directors. When the 

removal of an outside director is sought 

before the expiration of the outside 

director’s term, the reason for removal 

must be documented. An institution’s 

director removal procedures must allow 

for removal of an outside director by a 

majority vote of all voting stockholders 

voting, in person or by proxy, or by a 

two-thirds majority vote of the full 

board of directors. The outside director 

subject to the removal action is 

prohibited from voting in his or her own 

removal action. 

Subpart C—Election of Directors and 

Other Voting Procedures 

■ 3. Amend § 611.320 by revising 

paragraphs (b) and (e) to read as follows: 

§ 611.320 Impartiality in the election of 

directors. 

* * * * * 

(b) No employee or agent of a Farm 

Credit institution shall take any part, 

directly or indirectly, in the nomination 


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5762 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

or election of members to the board of 

directors of a Farm Credit institution, or 

make any statement, either orally or in 

writing, which may be construed as 

intended to influence any vote in such 

nominations, or elections. This 

paragraph shall not prohibit employees 

or agents from providing biographical 

and other similar information or 

engaging in other activities pursuant to 

policies and procedures for nominations 

and elections. This paragraph does not 

affect the right of an employee or agent 

to nominate or vote for stockholderelected directors of an institution in 

which the employee or agent is a voting 

member. 

* * * * * 

(e) No Farm Credit institution may in 

any way distribute or mail, whether at 

the expense of the institution or 

another, any campaign materials for 

director candidates. Institutions may 

request biographical information, as 

well as the disclosure information 

required under § 620.21(d), from all 

declared candidates who certify that 

they are eligible, restate such 

information in a standard format, and 

distribute or mail it with ballots or 

proxy ballots. 

■ 4. Add a new § 611.325 to read as 

follows: 

§ 611.325 Bank and association 

nominating committees. 

Nominating committees must conduct 

themselves in the impartial manner 

prescribed by the policies and 

procedures adopted by their institution 

under § 611.320. 

(a) Composition. The voting 

stockholders of each bank and 

association must elect a nominating 

committee of no fewer than three 

members. No individual may serve on a 

nominating committee who, at the time 

of selection to or during service on a 

nominating committee, is an employee, 

director, or agent of that bank or 

association. A nominating committee 

member may not be a candidate for 

election to the board in the same 

election for which the committee is 

identifying nominees. 

(b) Responsibilities. It is the 

responsibility of each nominating 

committee to identify, evaluate, and 

nominate candidates for stockholder 

election to a bank or association board 

of directors. 

(1) Each nominating committee must 

nominate individuals whom the 

committee determines meet the 

eligibility requirements to run for 

director positions. The committee must 

endeavor to assure representation from 

all areas of the institution’s territory and 

as nearly as possible all types of 

agriculture practiced within the 

territory. 

(2) The nominating committee must 

evaluate the qualifications of the 

director candidates. The evaluation 

process must consider whether there are 

any known obstacles preventing a 

candidate from performing the duties of 

the position. 

(3) Each committee must nominate at 

least two candidates for each director 

position being voted on by stockholders. 

If two nominees cannot be identified, 

the nominating committee must provide 

written explanation to the existing 

board of the efforts to locate candidates 

or the reasons for disqualifying any 

other candidate that resulted in fewer 

than two nominees. 

(c) Resources. Each bank and 

association must provide its nominating 

committee reasonable access to 

administrative resources in order for the 

committee to perform its duties. Banks 

and associations must, at a minimum, 

provide their nominating committees 

with a current list of stockholders, the 

most recent bylaws, the current director 

qualifications policy, and a copy of the 

policies and procedures that the bank or 

the association has adopted pursuant to 

§ 611.320(a) assuring impartial 

elections. On the request of the 

nominating committee, the institution 

must also provide a summary of the 

current board self-evaluation. The bank 

or association may require a pledge of 

confidentiality by committee members 

prior to releasing evaluation documents. 

Subpart F—Bank Mergers, 

Consolidations and Charter 

Amendments 

§ 611.1030 [Removed and reserved] 

■ 5. Remove and reserve § 611.1030. 

Subpart P—Termination of System 

Institution Status 

■ 6. Amend § 611.1223 by revising 

paragraph (d)(9) to read as follows: 

§ 611.1223 Information statement—

contents. 

* * * * * 

(d) * * * 

(9) 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. 

* * * * * 

PART 612—STANDARDS OF 

CONDUCT AND REFERRAL OF 

KNOWN OR SUSPECTED CRIMINAL 

VIOLATIONS 

■ 7. The authority citation for part 612 

continues to read as follows: 

Authority: Secs. 5.9, 5.17, 5.19 of the Farm 

Credit Act (12 U.S.C. 2243, 2252, 2254). 

Subpart A—Standards of Conduct 

■ 8. Amend § 612.2130 as follows: 

■ a. Add the word ‘‘currently’’ after the 

word ‘‘who’’ each time it appears in 

paragraph (a); 

■ b. Remove paragraph (d); 

■ c. Redesignate existing paragraphs (e) 

through (u) as paragraphs (d) through 

(t), consecutively; and 

■ d. Revise newly redesignated 

paragraph (e) to read as follows: 

§ 612.2130 Definitions. 

* * * * * 

(e) Entity means a corporation, 

company, association, firm, joint 

venture, partnership (general or 

limited), society, joint stock company, 

trust (business or otherwise), fund, or 

other organization or institution. 

* * * * * 

■ 9. Amend § 612.2150 by revising 

paragraph (d) to read as follows: 

§ 612.2150 Employees—prohibited 

conduct. 

* * * * * 

(d) Serve as an officer or director of 

an entity other than a System institution 

that transacts business with a System 

institution in the district or of any 

commercial bank, savings and loan, or 

other non-System financial institution, 

except employee credit unions. For the 

purposes of this paragraph, ‘‘transacts 

business’’ does not include loans by a 

System institution to a family-owned 

entity, service on the board of directors 

of the Federal Agricultural Mortgage 

Corporation, or transactions with 

nonprofit entities or entities in which 

the System institution has an ownership 

interest. With the prior approval of the 

board of the employing institution, an 

employee of a Farm Credit Bank or 

association may serve as a director of a 

cooperative that borrows from a bank for 

cooperatives. Prior to approving an 

employee request, the board shall 

determine whether the employee’s 

proposed service as a director is likely 

to cause the employee to violate any 

regulations in this part or the 

institution’s policies, e.g., the 

requirements relating to devotion of 

time to official duties. 

* * * * * 


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■ 10. Amend § 612.2155 by revising 

paragraph (a) introductory text to read 

as follows: 

§ 612.2155 Employee reporting. 

(a) Annually, as of the institution’s 

fiscal yearend, and at such other times 

as may be required to comply with 

paragraph (c) of this section, each senior 

officer must file a written and signed 

statement with the Standards of 

Conduct Official that fully discloses: 

* * * * * 

PART 614—LOAN POLICIES AND 

OPERATIONS 

■ 11. The authority citation for part 614 

continues to read as follows: 

Authority: 42 U.S.C. 4012a, 4104a, 4104b, 

4106, and 4128; Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 

1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13, 

2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 

4.12, 4.12A, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 

4.14E, 4.18, 4.18A, 4.19, 4.25, 4.26, 4.27, 

4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 

7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act 

(12 U.S.C. 2011, 2013, 2014, 2015, 2017, 

2018, 2019, 2071, 2073, 2074, 2075, 2091, 

2093, 2094, 2097, 2121, 2122, 2124, 2128, 

2129, 2131, 2141, 2149, 2183, 2184, 2201, 

2202, 2202a, 2202c, 2202d, 2202e, 2206, 

2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 

2219b, 2243, 2244, 2252, 2279a, 2279a–2, 

2279b, 2279c–1, 2279f, 2279f–1, 2279aa, 

2279aa–5); sec. 413 of Pub. L. 100–233, 101 

Stat. 1568, 1639. 

Subpart N—Loan Servicing 

Requirements; State Agricultural Loan 

Mediation Programs; Right of First 

Refusal 

§ 614.4511 [Removed and reserved] 

■ 12. Remove and reserve § 614.4511. 

PART 615—FUNDING AND FISCAL 

AFFAIRS, LOAN POLICIES AND 

OPERATIONS, AND FUNDING 

OPERATIONS 

■ 13. The authority citation for part 615 

continues to read as follows: 

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 

2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 

4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 

8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the 

Farm Credit Act (12 U.S.C. 2013, 2015, 2018, 

2019, 2020, 2073, 2074, 2075, 2076, 2093, 

2122, 2128, 2132, 2146, 2154, 2154a, 2160, 

2202b, 2211, 2243, 2252, 2278b, 2278b–6, 

2279aa, 2279aa–3, 2279aa–4, 2279aa–6, 

2279aa–7, 2279aa–8, 2279aa–10, 2279aa–12); 

sec. 301(a) of Pub. L. 100–233, 101 Stat. 1568, 

1608. 

Subpart H—Capital Adequacy 

■ 14. Amend § 615.5200 by revising 

paragraph (b)(1) to read as follows: 

§ 615.5200 Capital planning. 

* * * * * 

(b) * * * 

(1) Capability of management and the 

board of directors; 

* * * * * 

Subpart I—Issuance of Equities 

■ 15. Amend § 615.5230 by revising 

paragraphs (a)(1) introductory text, 

(a)(2) introductory text, (a)(3) 

introductory text, and (b)(5) to read as 

follows: 

§ 615.5230 Implementation of cooperative 

principles. 

(a) * * * 

(1) Each voting shareholder of an 

association or bank for cooperatives 

must: 

* * * * * 

(2) Each voting shareholder of a Farm 

Credit Bank must: 

* * * * * 

(3) The regional election of 

stockholder-elected directors is 

permitted under the following 

conditions: 

* * * * * 

(b) * * * 

(5) Each bank must endeavor to assure 

that there is a choice of at least two 

nominees for each elective office to be 

filled and that the board represents as 

nearly as possible all types of 

agriculture in the district. If fewer than 

two nominees for each position are 

named, the efforts to locate two willing 

nominees must be documented in the 

records of the bank and provided as part 

of the Annual Meeting Information 

Statement of part 620, subpart E of this 

chapter. The bank must also maintain a 

list of the type or types of agriculture 

engaged in by each director on its board. 

PART 618—GENERAL PROVISIONS 

■ 16. The authority citation for part 618 

continues to read as follows: 

Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 

2.5, 2.12, 3.1, 3.7, 4.12, 4.13A, 4.25, 4.29, 5.9, 

5.10, 5.17 of the Farm Credit Act (12 U.S.C. 

2013, 2019, 2020, 2073, 2075, 2076, 2093, 

2122, 2128, 2183, 2200, 2211, 2218, 2243, 

2244, 2252). 

Subpart G—Releasing Information 

■ 17. Amend § 618.8310 by revising 

paragraph (b) to read as follows: 

§ 618.8310 Lists of borrowers and 

stockholders. 

* * * * * 

(b)(1) Within 7 days after receipt of a 

written request by a stockholder, each 

Farm Credit bank or association must 

provide a current list of its stockholders’

names, addresses, and classes of stock 

held to such requesting stockholder. As 

a condition to providing the list, the 

bank or association may only require 

that the stockholder agree and certify in 

writing that the stockholder will: 

(i) Utilize the list exclusively for 

communicating with stockholders for 

permissible purposes; and 

(ii) Not make the list available to any 

person, other than the stockholder’s 

attorney or accountant, without first 

obtaining the written consent of the 

institution. 

(2) As an alternative to receiving a list 

of stockholders, a stockholder may 

request the institution mail or otherwise 

furnish to each stockholder a 

communication for a permissible 

purpose on behalf of the requesting 

stockholder. This alternative may be 

used at the discretion of the requesting 

stockholder, provided that the requester 

agrees to defray the reasonable costs of 

the communication. In the event the 

requester decides to exercise this 

option, the institution must provide the 

requester with a written estimate of the 

costs of handling and mailing the 

communication as soon as practicable 

after receipt of the stockholder’s request 

to furnish a communication. However, a 

stockholder may not exercise this option 

when requesting the list to distribute 

campaign material for election to the 

institution board or board committees. 

Farm Credit banks and associations are 

prohibited from distributing or mailing 

campaign material under § 611.320(e) of 

this chapter. 

(3) For purposes of paragraph (b) of 

this section ‘‘permissible purpose’’ is 

defined to mean matters relating to the 

business operations of the institutions. 

This includes matters relating to the 

effectiveness of management, the use of 

institution assets, the distribution by 

stockholder candidates of campaign 

material for election to the institution 

board or board committees, and the 

performance of directors and officers. 

This does not include communications 

involving commercial, social, political, 

or charitable causes, communications 

relating to the enforcement of a personal 

claim or the redress of a personal 

grievance, or proposals advocating that 

the bank or association violate any 

Federal, State, or local law or regulation. 

Subpart J—Internal Controls 

■ 18. Amend § 618.8430 by revising the 

introductory text and adding a new 

paragraph (d) to read as follows: 

§ 618.8430 Internal controls. 

Each Farm Credit institution’s board 

of directors must adopt an internal 

control policy, providing adequate 

direction to the institution in 


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establishing effective control over, and 

accountability for, operations, programs, 

and resources. The policy must include, 

at a minimum, the following: 

* * * * * 

(d) The role of the audit committee in 

providing oversight and review of the 

institution’s internal controls. 

■ 19. Amend § 618.8440 by revising 

paragraphs (b) introductory text and 

(b)(2) to read as follows: 

§ 618.8440 Planning. 

* * * * * 

(b) The plan must include, at a 

minimum, the following: 

(1) * * * 

(2) An annual review of the internal 

and external factors likely to affect the 

institution during the planning period. 

The review must include: 

(i) An assessment of management 

capabilities, 

(ii) An assessment of the needs of the 

board, based on the annual selfevaluation of the board’s performance, 

and 

(iii) Strategies for correcting identified 

weaknesses. 

* * * * * 

PART 619—DEFINITIONS 

■ 20. The authority citation for part 619 

is revised to read as follows: 

Authority: Secs. 1.4, 1.7, 2.1, 2.4, 2.11, 3.2, 

3.21, 4.9, 5.9, 5.12, 5.17, 5.18, 6.22, 7.0, 7.1, 

7.6, 7.7, 7.8, 7.12 of the Farm Credit Act (12 

U.S.C. 2011, 2015, 2072, 2075, 2092, 2123, 

2142, 2160, 2243, 2244, 2252, 2253, 2278b–

2, 2279a, 2279a–1, 2279b, 2279b–1, 2279b–2, 

2279f). 

■ 21. Amend part 619 by adding new 

§ 619.9235 to read as follows: 

§ 619.9235 Outside director. 

A member of a board of directors 

selected or appointed by the board, who 

is not a director, officer, employee, 

agent, or stockholder of any Farm Credit 

System institution. 

■ 21a. Amend part 619 by adding a new 

§ 619.9310 to read as follows: 

§ 619.9310 Senior officer. 

The Chief Executive Officer, the Chief 

Operations Officer, the Chief Financial 

Officer, the Chief Credit Officer, and the 

General Counsel, or persons in similar 

positions; and any other person 

responsible for a major policy-making 

function. 

PART 620—DISCLOSURE TO 

SHAREHOLDERS 

■ 22. The authority citation for part 620 

continues to read as follows: 

Authority: Secs. 5.17, 5.19, 8.11 of the 

Farm Credit Act (12 U.S.C. 2252, 2254, 

2279aa–11) sec. 424 of Pub. L. 100–233, 101 

Stat. 1568, 1656. 

Subpart A—General 

■ 23. Amend § 620.1 as follows: 

■ a. Remove paragraph (p); 

■ b. Redesignate existing paragraphs (q) 

through (s) as paragraphs (p) through (r), 

consecutively; and 

■ c. Revise paragraph (a). 

§ 620.1 Definitions. 

* * * * * 

(a) Affiliated organization means any 

organization, other than a Farm Credit 

organization, of which a director, senior 

officer or nominee for director of the 

reporting institution is a partner, 

director, officer, or majority 

shareholder. 

* * * * * 

Subpart B—Annual Report to 

Shareholders 

■ 24. Amend § 620.5 as follows: 

■ a. Revise paragraphs (h)(3), (i)(1), (i)(2) 

introductory text, (i)(2)(i), and (i)(2)(iii); 

and 

■ b. Add new paragraph (m)(3). 

§ 620.5 Contents of the annual report to 

shareholders. 

* * * * * 

(h) * * * 

(3) For each director and senior 

officer, list any other business interest 

where the director or senior officer 

serves on the board of directors or as a 

senior officer. Name the position held 

and state the principal business in 

which the business is engaged. 

* * * * * 

(i) * * * 

(1) Director compensation. Describe 

the arrangements under which directors 

of the institution are compensated for 

all services as a director (including total 

cash compensation and noncash 

compensation). Noncash compensation 

with an annual aggregate value of less 

than $5,000 does not have to be 

reported. State the total cash and 

reportable noncash compensation paid 

to all directors as a group during the last 

fiscal year. If applicable, describe any 

exceptional circumstances justifying the 

additional director compensation as 

authorized by § 611.400(c) of this 

chapter. For each director, state: 

(i) The number of days served at 

board meetings; 

(ii) The total number of days served 

in other official activities, including any 

board committee(s); 

(iii) Any additional compensation 

paid for service on a board committee, 

naming the committee; and 

(iv) The total cash and noncash 

compensation paid to each director 

during the last fiscal year. Reportable 

compensation includes cash and the 

value of noncash items provided by a 

third party to a director for services 

rendered by the director on behalf of the 

reporting Farm Credit institution. 

Noncash compensation with an annual 

aggregate value of less than $5,000 does 

not have to be reported. 

(2) Senior officer compensation. 

Disclose the information on senior 

officer compensation and compensation 

plans as required by this paragraph. 

Farm Credit System associations may 

disclose the information required by 

this paragraph in the Annual Meeting 

Information Statement (AMIS) required 

under subpart E of this part. 

Associations exercising this option must 

include a reference in the annual report 

stating that the senior officer 

compensation information is included 

in the AMIS and that the AMIS is 

available for public inspection at the 

reporting association offices pursuant to 

§ 620.2(a). 

(i) The institution must disclose the 

total amount of compensation paid to 

senior officers in substantially the same 

manner as the tabular form specified in 

the following Summary Compensation 

Table (table): 

SUMMARY COMPENSATION TABLE

Annual 

Name of individual or number in group Year Salary Bonus Deferred/ 

perquisite Other Total 

(a) (b) (c) (d) (e) (f) (g) 

CEO ......................................................... 20XX 

20XX 


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SUMMARY COMPENSATION TABLE—Continued 

Annual 

Name of individual or number in group Year Salary Bonus Deferred/ 

perquisite Other Total 

(a) (b) (c) (d) (e) (f) (g) 

20XX 

Aggregate number of senior officers: 

(X) ..................................................... 20XX 

(X) ..................................................... 20XX 

(X) ..................................................... 20XX 

(A) For each of the last 3 completed 

fiscal years, report the total amount of 

compensation paid and the amount of 

each component of compensation paid 

to the institution’s chief executive 

officer (CEO), naming the individual. If 

more than one person served in the 

capacity of CEO during any given fiscal 

year, individual compensation 

disclosures must be provided for each 

CEO. 

(B) For each of the last 3 completed 

fiscal years, report the aggregate amount 

of compensation paid, and the 

components of compensation paid, to 

all senior officers as a group, stating the 

number of officers in the group without 

naming them. If applicable, include in 

the aggregate the amount of 

compensation paid to those officers who 

are not senior officers but whose total 

annual compensation is among the five 

highest amounts paid by the institution 

for the reporting period. 

(C) Amounts shown as ‘‘Salary’’

(column (c)) and ‘‘Bonus’’ (column (d)) 

must reflect the dollar value of salary 

and bonus earned by the senior officer 

during the fiscal year. Amounts 

contributed during the fiscal year by the 

senior officer pursuant to a plan 

established under section 401(k) of the 

Internal Revenue Code, or similar plan, 

must be included in the salary column 

or bonus column, as appropriate. If the 

amount of salary or bonus earned during 

the fiscal year is not calculable by the 

time the report is prepared, the 

reporting institution must provide its 

best estimate of the compensation 

amount(s) and disclose that fact in a 

footnote to the table. 

(D) Amounts shown as ‘‘deferred/ 

perquisites’’ (column (e)) must reflect 

the dollar value of other annual 

compensation not properly categorized 

as salary or bonus, including but not 

limited to: 

(1) Deferred compensation earned 

during the fiscal year, whether or not 

paid in cash; or 

(2) Perquisites and other personal 

benefits, including the value of noncash 

items, unless the annual aggregate value 

of such perquisites is less than $5,000. 

Reportable perquisites include cash and 

the value of noncash items provided by 

a third party to a senior officer for 

services rendered by the officer on 

behalf of the reporting institution. 

* * * * * 

(iii) The annual report or AMIS must 

include a statement that disclosure of 

information on the total compensation 

paid during the last fiscal year to any 

senior officer or to any other officer 

included in the aggregate is available 

and will be disclosed to shareholders of 

the institution and shareholders of 

related associations (if applicable) upon 

request. 

* * * * * 

(m) * * * 

(3) State that the financial statements 

were prepared under the oversight of 

the audit committee, identifying the 

members of the audit committee. 

* * * * * 

Subpart C—Quarterly Report 

■ 25. Amend § 620.11 by adding a new 

paragraph (d)(5) and revising paragraphs 

(d) introductory text and (e) to read as 

follows: 

§ 620.11 Content of quarterly report to 

shareholders. 

* * * * * 

(d) Financial statements. The 

following financial statements must be 

provided: 

* * * * * 

(5) State that the financial statements 

were prepared under the oversight of 

the audit committee. 

(e) Review by independent public 

accountant. The interim financial 

information need not be audited or 

reviewed by an independent public 

accountant prior to filing. If, however, a 

review of the data is made in 

accordance with the established 

professional standards and procedures 

for such a review, the institution may 

state that the independent accountant 

has performed such a review under the 

supervision of the institution’s audit 

committee. If such a statement is made, 

the report of the independent 

accountant on such review must 

accompany the interim financial 

information. 

* * * * * 

Subpart E—Annual Meeting 

Information Statement 

■ 26. Revise the heading of subpart E to 

read as set forth above. 

§ 620.20 [Removed and reserved] 

■ 27. Remove and reserve § 620.20. 

■ 28. Amend § 620.21 by revising the 

introductory paragraph, paragraphs 

(c)(2) and (d) to read as follows: 

§ 620.21 Contents of the information 

statement and other information to be 

furnished in connection with the annual 

meeting or director elections. 

Each bank and association of the Farm 

Credit System must prepare and provide 

an information statement (‘‘statement’’

or ‘‘AMIS’’) to its shareholders at least 

10 days prior to any annual meeting or 

any director elections. The AMIS must 

reference the annual report required by 

subpart B of this part and such other 

material information as is necessary to 

make the required statement, in light of 

the circumstances under which it is 

made, not misleading. The AMIS must 

address the following items: 

* * * * * 

(c) * * * 

(2) State the name of any incumbent 

director who attended fewer than 75 

percent of the board meetings or any 

meetings of board committees on which 

he or she served during the last fiscal 

year. 

* * * * * 

(d) Nominees. (1) For each nominee, 

state the nominee’s name, city and state 

of residence, business address if any, 

age, and business experience during the 

last 5 years, including each nominee’s 

principal occupation and employment 

during the last 5 years. List all business 

interests on whose board of directors the 

nominee serves or is otherwise 


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employed in a position of authority, and 

state the principal business in which the 

business interest is engaged. Identify 

any family relationship of the nominee 

that would be reportable under part 612 

of this chapter if elected to the 

institution’s board. 

(2) If fewer than two nominees for 

each position are named, describe the 

efforts of the nominating committee to 

locate two willing nominees. 

(3) If association directors are 

nominated or elected by region, describe 

the regions and state the number of 

voting shareholders entitled to vote in 

each region. 

(4) State whether nominations will be 

accepted from the floor. Associations 

must accept floor nominations. Any 

director nominee from the floor must be 

an eligible candidate for the director 

position for which the person has been 

nominated. 

(i) For association directors not 

elected by region: 

(A) If the annual meeting is to be held 

in more than one session and paper mail 

or electronic mail balloting will be 

conducted upon the conclusion of all 

sessions, state that nominations from 

the floor may be made at any session or, 

if the association’s bylaws so provide, 

state that nominations from the floor 

shall be accepted only at the first 

session. 

(B) If shareholders will not vote solely 

by paper mail or electronic mail ballot 

upon conclusion of all sessions, state 

that nominations from the floor may be 

made only at the first session. 

(ii) For association directors elected 

by region: 

(A) If more than one session of an 

annual meeting is held in a region, and 

if paper mail or electronic mail balloting 

will be conducted at the end of all 

sessions in a region, state that 

nominations from the floor may be 

made at any session in the region or, if 

the association’s bylaws so provide, 

state that nominations from the floor 

shall be accepted only at the first 

session held in the region. 

(B) If shareholders will not vote solely 

by paper mail or electronic mail ballot 

upon conclusion of all sessions in a 

region, state that nominations from the 

floor may be made only at the first 

session held in the region. 

(5) For each nominee who is not an 

incumbent director, except a nominee 

from the floor, provide the information 

referred to in § 620.5(j) and (k) and 

paragraph (d)(1) of this section. If 

shareholders will vote by paper mail or 

electronic mail ballot upon conclusion 

of all sessions, each floor nominee must 

provide the information referred to in 

§ 620.5(j) and (k) and paragraph (d)(1) of 

this section in paper or electronic form 

to the Farm Credit institution within the 

time period prescribed by the 

institution’s bylaws. If the institution’s 

bylaws do not prescribe a time period, 

state that each floor nominee must 

provide the disclosure to the institution 

within 5 business days of the 

nomination. The institution must ensure 

that the information is provided to the 

voting shareholders by delivering the 

ballots for the election of directors in 

the same format as the comparable 

information contained in the 

information statement. If shareholders 

will not vote by paper mail or electronic 

mail ballot upon conclusion of all 

sessions, each floor nominee must 

provide the information referred to in 

§ 620.5(j) and (k) and paragraph (d)(1) of 

this section in paper or electronic form 

at the first session at which voting is 

held. 

(6) Each bank and association must 

adopt policies and procedures that 

assure a disclosure statement is 

prepared by each director candidate. No 

person may be a nominee for director 

who does not make the disclosures 

required by this subpart. Candidate 

disclosure information must be 

distributed or mailed with ballots or 

proxy ballots to all shareholders eligible 

to vote in the election. Institutions may 

either restate such information in a 

standard format or provide complete 

copies of candidate disclosure 

information. 

* * * * * 

■ 29. Revise subpart F to read as 

follows: 

Subpart F—Bank and Association Audit and 

Compensation Committees 

Sec. 

620.30 Audit committees. 

620.31 Compensation committees. 

Subpart F—Bank and Association 

Audit and Compensation Committees 

§ 620.30 Audit committees. 

Each Farm Credit bank and 

association must establish and maintain 

an audit committee. An audit committee 

is established by adopting a written 

charter describing the committee’s 

composition, authorities, and 

responsibilities in accordance with this 

section. All audit committees must 

maintain records of meetings, including 

attendance, for at least 3 fiscal years. 

(a) Composition. Each member of an 

audit committee must be a member of 

the Farm Credit institution’s board of 

directors. An audit committee may not 

consist of less than three members and 

must include any director designated as 

a financial expert under § 611.210(a)(2) 

of this chapter. All audit committee 

members should be knowledgeable in at 

least one of the following: Public and 

corporate finance, financial reporting 

and disclosure, or accounting 

procedures. 

(b) Independence. Every audit 

committee member must be free from 

any relationship that, in the opinion of 

the board, would interfere with the 

exercise of independent judgment as a 

committee member. 

(c) Resources. Farm Credit institutions 

must permit their audit committees to 

contract for independent legal counsel 

and expert advisors. If an institution 

hires a financial expert advisor pursuant 

to § 611.210(a)(2), that advisor will also 

serve as an advisor to the audit 

committee. Each institution is 

responsible for providing monetary and 

nonmonetary resources to enable its 

audit committee to contract for external 

auditors, outside advisors, and ordinary 

administrative expenses. A two-thirds 

majority vote of the full board of 

directors is required to deny an audit 

committee’s request for resources. 

(d) Duties. Each audit committee must 

report only to the board of directors. In 

its capacity as a committee of the board, 

the audit committee is responsible for 

the following: 

(1) Financial reports. Each audit 

committee must oversee management’s 

preparation of the report to 

shareholders; review the impact of any 

significant accounting and auditing 

developments; review accounting policy 

changes relating to preparation of 

financial statements; and review annual 

and quarterly reports prior to release. 

After the audit committee reviews a 

financial policy, procedure, or report, it 

must record in its minutes its agreement 

or disagreement with the item(s) under 

review. 

(2) External auditors. The external 

auditor must report directly to the audit 

committee. Each audit committee must: 

(i) Determine the appointment, 

compensation, and retention of external 

auditors issuing audit reports of the 

institution; and 

(ii) Review the external auditor’s 

work. 

(3) Internal controls. Each audit 

committee must oversee the institution’s 

system of internal controls relating to 

preparation of financial reports, 

including controls relating to the 

institution’s compliance with applicable 

laws and regulations. Any internal audit 

functions of the institution must also be 

subject to audit committee review and 

supervision. 


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Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 5767 

§ 620.31 Compensation committees. 

Each Farm Credit bank and 

association must establish and maintain 

a compensation committee by adopting 

a written charter describing the 

committee’s composition, authorities, 

and responsibilities in accordance with 

this section. All compensation 

committees will be required to maintain 

records of meetings, including 

attendance, for at least 3 fiscal years. 

(a) Composition. Each compensation 

committee must consist of at least three 

members. Each committee member must 

be a member of the institution’s board 

of directors. Every member must be free 

from any relationship that, in the 

opinion of the board, would interfere 

with the exercise of independent 

judgment as a committee member. 

(b) Duties. Each compensation 

committee must report only to the board 

of directors. In its capacity as a 

committee of the board, the 

compensation committee is responsible 

for reviewing the compensation policies 

and plans for senior officers and 

employees. Each compensation 

committee must approve the overall 

compensation program for senior 

officers. 

(c) Resources. Each institution must 

provide monetary and nonmonetary 

resources to enable its compensation 

committee to function. 

PART 630—DISCLOSURE TO 

INVESTORS IN SYSTEM-WIDE AND 

CONSOLIDATED BANK DEBT 

OBLIGATIONS OF THE FARM CREDIT 

SYSTEM 

■ 30. The authority citation for part 630 

continues to read as follows: 

Authority: Secs. 5.17, 5.19 of the Farm 

Credit Act (12 U.S.C. 2252, 2254). 

Subpart A—General 

■ 31. Revise § 630.6 to read as follows: 

§ 630.6 Funding Corporation committees. 

(a) System Audit Committee. The 

Funding Corporation must establish and 

maintain a System Audit Committee 

(SAC) by adopting a written charter 

describing the committee’s composition, 

authorities, and responsibilities in 

accordance with this section. The SAC 

must maintain records of meetings, 

including attendance, for at least 3 fiscal 

years. 

(1) Composition. All SAC members 

should be knowledgeable in at least one 

of the following: Public and corporate 

finance, financial reporting and 

disclosure, or accounting procedures. 

(i) At least one-third of the SAC 

members must be representatives from 

the Farm Credit System. 

(ii) The SAC may not consist of less 

than three members and at least one 

member must be a financial expert. A 

financial expert is one who either has 

experience with internal controls and 

procedures for financial reporting or 

experience in preparing or auditing 

financial statements. 

(iii) The chair of the SAC must be a 

financial expert. 

(2) Independence. Every audit 

committee member must be free from 

any relationship that, in the opinion of 

the Funding Corporation board, would 

interfere with the exercise of 

independent judgment as a committee 

member. 

(3) Resources. The Funding 

Corporation must permit the SAC to 

contract for independent legal counsel 

and expert advisors. The Funding 

Corporation is responsible for providing 

monetary and nonmonetary resources to 

enable the SAC to contract for external 

auditors, outside advisors, and ordinary 

administrative expenses. A two-thirds 

majority vote of the full Funding 

Corporation board of directors is 

required to deny any SAC request for 

resources. 

(4) Duties. The SAC reports only to 

the Funding Corporation board of 

directors. In its capacity as a committee 

of the board, the SAC is responsible for 

the following: 

(i) Financial reports. The SAC must 

oversee the Funding Corporation’s 

preparation of the report to stockholders 

and investors; review the impact of any 

significant accounting and auditing 

developments; review accounting policy 

changes relating to preparation of the 

System-wide combined financial 

statements; and review annual and 

quarterly reports prior to release. After 

the SAC reviews a financial policy, 

procedure, or report, it must record in 

its minutes its agreement or 

disagreement with the item(s) under 

review. 

(ii) External auditors. The external 

auditor must report directly to the SAC. 

The SAC must: 

(A) Determine the appointment, 

compensation, and retention of external 

auditors issuing System-wide audit 

reports; and 

(B) Review the external auditor’s 

work. 

(iii) Internal controls. The SAC must 

oversee the Funding Corporation’s 

system of internal controls relating to 

preparation of financial reports, 

including controls relating to the Farm 

Credit System’s compliance with 

applicable laws and regulations. 

(b) Compensation committee. The 

Funding Corporation must establish and 

maintain a compensation committee by 

adopting a written charter describing 

the committee’s composition, 

authorities, and responsibilities in 

accordance with this section. The 

compensation committee will be 

required to maintain records of 

meetings, including attendance, for at 

least 3 fiscal years. 

(1) Composition. The committee must 

consist of at least three members. Each 

committee member must be a member of 

the Funding Corporation’s board of 

directors. Every member must be free 

from any relationship that, in the 

opinion of the board, would interfere 

with the exercise of independent 

judgment as a committee member. 

(2) Duties. The compensation 

committee must report only to the board 

of directors. In its capacity as a 

committee of the board, the 

compensation committee is responsible 

for reviewing the compensation policies 

and plans for senior officers and 

employees. The compensation 

committee must approve the overall 

compensation program for senior 

officers. 

(3) Resources. The Funding 

Corporation must provide monetary and 

nonmonetary resources to enable its 

compensation committee to function. 

Subpart B—Annual Report to Investors 

■ 32. Amend § 630.20 by revising the 

introductory heading for paragraph (h), 

paragraphs (h)(2) and (l) introductory 

text to read as follows: 

§ 630.20 Contents of the annual report to 

investors. 

* * * * * 

(h) Directors and senior officers. 

* * * * * 

(2) Senior officers. List the names of 

all senior officers employed by the 

disclosure entities, including position 

title and length of service at current 

position. 

* * * * * 

(l) Financial statements. Furnish 

System-wide combined financial 

statements and related footnotes 

prepared in accordance with GAAP, and 

accompanied by supplemental 

information prepared in accordance 

with the requirements of § 630.20(m). 

The System-wide combined financial 

statements must provide investors and 

potential investors in FCS debt 

obligations with the most meaningful 

presentation pertaining to the financial 

condition and results of operations of 

the Farm Credit System. The Systemwide combined financial statement and 

accompanying supplemental 

information must be audited in 

accordance with generally accepted 


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5768 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

auditing standards by a qualified public 

accountant (as defined in § 621.2(i) of 

this chapter) and indicate that the 

financial statements were prepared 

under the oversight of the System Audit 

Committee, identifying the members of 

the audit committee. The System-wide 

combined financial statements must 

include the following: 

* * * * * 

Subpart C—Quarterly Reports to 

Investors 

■ 33. Amend § 630.40 by revising 

paragraph (d) introductory text to read 

as follows: 

§ 630.40 Contents of the quarterly report 

to investors. 

* * * * * 

(d) Financial statements. Interim 

combined financial statements must be 

provided in the quarterly report to 

investors as set forth in paragraphs 

(d)(1) through (4). Indicate that the 

financial statements were prepared 

under the oversight of the System Audit 

Committee. 

* * * * * 

Dated: January 24, 2006. 

James M. Morris, 

Acting Secretary, Farm Credit Administration 

Board. 

[FR Doc. 06–829 Filed 2–1–06; 8:45 am] 

BILLING CODE 6705–01–U 


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