[Federal Register Volume 77, Number 30 (Tuesday, February 14, 2012)]
[Proposed Rules]
[Pages 8179-8181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3411]


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FARM CREDIT ADMINISTRATION

12 CFR Part 630

RIN 3052-AC77


Disclosure to Investors in System-wide and Consolidated Bank Debt 
Obligations of the Farm Credit System

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, us, we, or our) proposes 
to amend our regulations related to the Federal Farm Credit Banks 
Funding Corporation (Funding Corporation) System Audit Committee (SAC) 
and the Farm Credit System (System) annual report to investors. The 
proposed rule would remove the provision that a two-thirds majority 
vote of the Funding Corporation board of directors be required to deny 
a request for resources by the SAC to engage independent legal counsel, 
outside advisors or consultants. The proposed rule would instead 
require appropriate funding to the SAC to perform these duties, 
quarterly reporting by the SAC to the Funding Corporation board on 
resources used, and annual reporting to investors.

DATES: Submit comments on or before April 16, 2012.

ADDRESSES: We offer a variety of methods for you to submit your 
comments. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by email or through the FCA's Web site. 
As facsimiles (fax) are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act, we no longer 
accept comments submitted by fax. Regardless of the method you use, 
please do not submit your comments multiple times via different 
methods. You may submit comments by any of the following methods:
    <bullet> Email: Send an email to <a href="/cdn-cgi/l/email-protection#fb899e9cd698949696bb9d989ad59c948d"><span class="__cf_email__" data-cfemail="7507101258161a1818351316145b121a03">[email protected]</span></a>.
    <bullet> FCA Web site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> Mail: Gary K. Van Meter, Director, Office of Regulatory 
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 
22102-5090.
    You may review copies of all comments we receive at our office in 
McLean, Virginia or on our Web site at http://www.fca.gov. Once you are 
in the Web site, select ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted, including any 
supporting data provided, but for technical reasons we may omit items 
such as logos and special characters. Identifying information that you 
provide, such as phone numbers and addresses, will be publicly 
available. However, we will attempt to remove email addresses to help 
reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: Deborah Wilson, Senior Accountant, 
Office of Regulatory Policy, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4414, TTY (703) 883-4434, or Laura McFarland, 
Senior Counsel, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this proposed rule are to:
    <bullet> Allow the SAC unrestricted access to resources to engage 
legal counsel, consultants and outside advisors,
    <bullet> Ensure that investors are provided transparent and 
complete disclosure on the safe and sound use of resources by the SAC, 
and
    <bullet> Clarify that the appointment, compensation, and retention 
of the external auditor for the System-wide reports cannot be changed 
without the agreement of both the SAC and the Funding Corporation 
board.

II. Background

    The Farm Credit Act of 1971, as amended (Act),\1\ authorizes the 
FCA to issue regulations implementing the Act's provisions.\2\ Our 
regulations are intended to ensure the safe and sound operations of 
System institutions and to govern the disclosure of financial 
information to shareholders of, and investors in, the System. In 2006, 
we issued a final rulemaking on the governance of System 
institutions.\3\ Those regulations changed the structure, 
responsibilities, and authority of existing audit committees at the 
banks and the SAC, and it required audit committees at System 
associations.
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    \1\ Public Law 92-181, 85 Stat. 583 (1971), 12 U.S.C. 2001 et 
seq.
    \2\ 12 U.S.C. 2252(a)(8), (9) and (10).
    \3\ 71 FR 5740 (Feb. 2, 2006).
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    We explained in our 2006 rulemaking that an audit committee is the 
guardian of an institution's financial integrity, and its independence 
is essential to investor confidence in the transparency of audited 
financial statements. The 2006 rulemaking required that audit 
committees at banks and associations be comprised solely of well-
qualified board members,\4\ but made an exception to the composition of 
the SAC. Section 630.6(a) requires that only one-third of the SAC 
membership be composed of directors from the Funding Corporation board. 
This exception was in response to comments received on the 2006 
rulemaking that audit committee composition derived solely from the 
board of directors may be appropriate for individual System 
institutions, but not for the SAC. Commenters believed that the duties 
of the SAC require broader representation and greater financial 
experience of its members due to its oversight for the preparation of 
System combined financial statements.
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    \4\ Section 620.6 of the FCA's regulations states, ``[e]ach 
member of an audit committee must be a member of the Farm Credit 
institution's board of directors * * * All committee members should 
be knowledgeable in at least one of the following: public and 
corporate finance, financial reporting and disclosure, or accounting 
procedures.''
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    The 2006 rulemaking required that the SAC be permitted to contract 
for independent legal counsel and expert advisers and that the Funding 
Corporation provide monetary and nonmonetary resources for these 
activities. Also, the rulemaking required

[[Page 8180]]

a two-thirds super majority vote, in lieu of a simple majority vote, of 
the full Funding Corporation board to deny an SAC request for 
resources. In a petition dated May 2010, the SAC requested that we 
amend Sec.  630.6 to allow it unfettered ability to engage outside 
advisors, consultants and legal counsel in the performance of its 
duties. On November 18, 2010, we issued an advance notice of proposed 
rulemaking (ANPRM) on senior officer compensation disclosures and 
related topics in order to gather information for the development of a 
proposed rulemaking.\5\ Part of the ANPRM discussed the authority of 
the SAC to obtain resources. Among the comment letters received in 
response to the ANPRM, several responders, including the Farm Credit 
Council (Council) acting for its membership, and the Funding 
Corporation, addressed the ability of the SAC to have unfettered 
ability to access resources. The Council expressed the view of its 
membership that existing FCA regulations appropriately balance audit 
committee need with the board's ultimate responsibility to the 
customer-shareholder for the safety and financial stability of the 
institution. However, the Council also noted that its membership 
supported the SAC's request.
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    \5\ 75 FR 70619 (Nov. 18, 2010).
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    This proposed rule would expand the authority of the SAC related to 
its use of Funding Corporation resources for consultants, legal counsel 
and outside advisors. In its petition, the SAC asserted that expanding 
its authority on the use of resources would:
    <bullet> Avoid any future potential conflict that could arise 
between it and the Funding Corporation board on SAC requests for 
resources,
    <bullet> Enhance its independence, and
    <bullet> Promote the integrity of the System both in fact and 
perception to investors in System-wide debt securities.
    We considered these views in proposing this rule. The rule proposes 
that the SAC report to the board at least quarterly on its use of 
resources, and the Funding Corporation disclose the uses and their 
benefits in the System annual report to investors. Further, we propose 
to clarify that the SAC appoint, compensate, retain and oversee the 
System's independent accountants with the agreement of the Funding 
Corporation board.

III. Section-by-Section Analysis

    We request and encourage any interested person to submit comments 
on this proposed rule and ask that you support your comments with 
relevant data or examples. We are especially interested in receiving 
comments related to the proposed clarification that the SAC appoint, 
compensate, and retain external auditors with the agreement of the 
Funding Corporation board of directors.

A. System Audit Committee Authority [Sec.  630.6(a)]

    FCA regulations authorize the Funding Corporation board of 
directors to deny an SAC request for resources by a two-thirds majority 
vote of the full board. The proposed rule would provide the SAC with 
the unlimited ability to engage outside advisors, consultants and legal 
counsel in the performance of its duties. This proposed rule would 
require that the SAC use Funding Corporation resources in a manner that 
would not adversely affect the safety and soundness of the System and 
that the use of resources complies with law and regulation. Also, it 
would require that the SAC report to the Funding Corporation board at 
least quarterly on resources used pursuant to this proposed rule.
    This provision would not prevent the Funding Corporation from 
developing its own procedures to address the use of resources by the 
SAC. To facilitate an open and balanced discussion on the appropriate 
use of resources, we would expect the SAC to confer with the Funding 
Corporation board on its intent to use resources. We would also expect 
that in performing its fiduciary responsibilities, the full board would 
review the use of resources for any safety or soundness issues.

B. External Auditors [Sec.  630.6(a)(4)(ii)(A)]

    The proposed rule would revise our regulation relating to the 
appointment, compensation and retention of the external auditor. The 
revision would clarify that the SAC perform this duty with the 
agreement of the Funding Corporation board. We believe this 
clarification will ensure that the SAC's appointment, compensation and 
retention of the external auditor for the System-wide report are 
executed with the agreement of the full board of the Funding 
Corporation. Since the SAC is a subset of the full board, we believe 
the SAC duties related to the external auditors are of such 
significance that they must remain under the direct oversight of the 
full board.

C. Disclosure of System Audit Committee Expenditures [Sec.  630.20(n)]

    To ensure that investors are provided transparent and complete 
disclosure on the safe and sound use of resources by the SAC, we 
propose in Sec.  630.20(n) that Funding Corporation resources used by 
the SAC be disclosed by category in the annual report to investors. The 
proposed categories would include, at a minimum, independent legal 
counsel and related services, consultants, actuaries, outside advisors 
and other services performed on behalf of the SAC. We propose that fees 
paid for the audit of the combined System-wide financial statements and 
any fees under $5,000 per category need not be disclosed. In addition 
to disclosing the name of SAC members, we propose that experience and 
compensation for each member be included in the annual report. We 
propose this change for consistency with audit committee disclosures 
required at the bank and association level.

IV. Regulatory Flexibility Act

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

List of Subjects in 12 CFR Part 630

    Accounting, Agriculture, Banks, banking, Organization and functions 
(Government agencies), Reporting and recordkeeping requirements, Rural 
areas.
    For the reasons stated in the preamble, part 630 of chapter VI, 
title 12 of the Code of Federal Regulations are proposed to be amended 
as follows:

PART 630--DISCLOSURE TO INVESTORS IN SYSTEM-WIDE AND CONSOLIDATED 
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

    1. The authority citation for part 630 is revised to read as 
follows:

    Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of the Farm Credit 
Act (12 U.S.C. 2153, 2160, 2243, 2252, 2254); sec. 424 of Pub. L. 
100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-552, 106 
Stat. 4102.

Subpart A--General

    2. Section 630.6 is amended by revising paragraphs (a)(3) and 
(a)(4)(ii)(A) to read as follows:

[[Page 8181]]

Sec.  630.6  Funding Corporation committees.

    (a) System Audit Committee. * * *
* * * * *
    (3) Resources. The Funding Corporation must provide the SAC 
monetary and nonmonetary resources the SAC determines necessary to 
enable it to perform the duties listed in paragraph (a)(4) of this 
section. The Funding Corporation must permit the SAC to contract, for 
reasons directly related to the duties listed in paragraph (a)(4), the 
services of external auditors, independent legal counsel, and outside 
advisors. The SAC must not use the resources of the Funding Corporation 
in a manner that would adversely affect the safety and soundness of the 
System or be contrary to law and regulation. The SAC must provide the 
Funding Corporation board of directors a quarterly accounting of 
expenditures made pursuant to this section.
    (4) Duties. * * *
* * * * *
    (ii) External auditors. The external auditor must report directly 
to the SAC. The SAC must:
    (A) Determine, with the agreement of the Funding Corporation board 
of directors, the appointment, compensation, and retention of the 
external auditors issuing System-wide audit reports;
* * * * *

Subpart B--Annual Report to Investors

    3. Section 630.20 is amended by revising paragraph (n) to read as 
follows:


Sec.  630.20  Contents of the annual report to investors.

* * * * *
    (n) System Audit Committee. The Funding Corporation must include in 
the System-wide Report to Investors a description of the System Audit 
Committee and its activities during the reporting period. At a minimum, 
the report must:
    (1) List the names of the System Audit Committee members, including 
each member's term of office and principal occupation during the past 5 
years. For each member, state the total cash and noncash compensation 
paid for services on the System Audit Committee during the reporting 
period.
    (2) Categorize and disclose the dollar value of monetary and 
nonmonetary resources used by the System Audit Committee during the 
reporting period. Describe the benefit(s) obtained from expenditures 
made under each category. Disclosures of fees paid for the audit of the 
System-wide financial statements and those categories of expenses 
having an annual aggregate dollar value of less than $5,000 are not 
required. At a minimum, there must be separate categories for:
    (i) Administrative expenses,
    (ii) Contracted legal services,
    (iii) Contracted consultants and advisors, and
    (iv) Other contracted services, identifying the services.
* * * * *

    Dated: February 9, 2012.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2012-3411 Filed 2-13-12; 8:45 am]
BILLING CODE 6705-01-P


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