[Federal Register Volume 70, Number 176 (Tuesday, September 13, 2005)]
[Rules and Regulations]
[Pages 53901-53910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18053]



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Rules and Regulations
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Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / 
Rules and Regulations

[[Page 53901]]



FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 612, 614, 615, and 620

RIN 3052-AC21


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; Disclosure to Shareholders; Preferred Stock

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or Agency) amends its 
rules governing preferred stock issued by Farm Credit System (FCS or 
System) banks, associations, and service corporations. This final rule 
requires greater board involvement and oversight in the retirement of 
preferred stock, enhances FCA's current standards of conduct 
regulations to specifically address insider preferred stock 
transactions, modifies and streamlines the FCA review and clearance 
process, and requires disclosure of senior officer and director 
preferred stock transactions. Lastly, we add a new provision to require 
FCA prior approval of investments by FCS banks, associations, and 
service corporations in preferred stock of other System institutions, 
including the Federal Agricultural Mortgage Corporation (Farmer Mac).

EFFECTIVE DATE: This regulation will be effective 30 days after 
publication in the Federal Register during which either or both Houses 
of Congress are in session. We will publish a notice of the effective 
date in the Federal Register. However, we have delayed the effective 
date of Sec.  612.2165(b)(12)-(15), Sec.  615.5245(a), and Sec.  
615.5270(d) of the rule for 6 months from the effective date of this 
final rule in order to allow System institutions with existing 
preferred stock programs to adopt the policies and procedures necessary 
to comply with the rule. We will also publish a notice of the effective 
date for the delayed portion of this rule.

FOR FURTHER INFORMATION CONTACT: Dennis K. Carpenter, Senior Policy 
Analyst, Office of Policy and Analysis, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4479; TTY (703) 883-4434; or Howard 
Rubin, Senior Attorney, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    Through this rulemaking we strive to:
    <bullet> Ensure the stability and quality of capital at FCS 
institutions;
    <bullet> Ensure fair and equitable treatment of all shareholders of 
FCS preferred stock and minimize the potential for insider abuse;
    <bullet> Modify and streamline our review and clearance process for 
equity issuances; and
    <bullet> Require disclosure of senior officer and director 
preferred stock purchases and retirements.
    The Agency believes additional regulatory guidance and requirements 
will help ensure consistent treatment for all FCS institutions seeking 
to issue preferred stock.

II. Delay of Effective Date and Application of Rule to Existing 
Preferred Stock Programs

    All provisions of this final rule will apply to existing preferred 
stock that has been issued by System institutions prior to the 
effective date of this rule. All System institutions issuing preferred 
stock subsequent to the effective date of this rule will be required to 
fully comply with the provisions of this rule as the preferred stock is 
issued. However, we have delayed the effective date of the following 
sections of the rule for 6 months from the effective date of this final 
rule to allow System institutions with existing preferred stock 
programs additional time to adopt the policies and procedures necessary 
to comply with the rule:
    <bullet> Section 612.2165(b)(12)-(15) (Policies and Procedures);
    <bullet> Section 615.5245(a) (Limitations on association-issued 
preferred stock); and
    <bullet> Section 615.5270(d) (Policy on retirement of preferred 
stock).
    Any institution-specific conditions of clearance for any previously 
cleared preferred stock program remain in effect regardless of the 
provisions of this rule. However, an institution may apply to FCA to 
revise any condition of clearance. Additionally, as before, any new or 
modified preferred stock issuances will be subject to institution-
specific conditions that the FCA Board considers appropriate.

III. Background

    On June 4, 2004, we published a proposed regulation (69 FR 31541) 
that would change the regulatory capital treatment for preferred stock 
issued by Farm Credit System institutions and place certain 
restrictions on a System institution's ability to retire \1\ preferred 
stock. The proposed rule would also: (1) Require greater board 
involvement and oversight in the retirement of preferred stock, (2) 
enhance current standards of conduct regulations to specifically 
address insider preferred stock transactions, (3) require disclosure of 
senior officer and director preferred stock transactions, (4) modify 
and streamline our review and clearance process, and (5) add a new 
provision to require FCA prior approval of investments by FCS banks, 
associations, and service corporations in preferred stock of other FCS 
institutions, including Farmer Mac.
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    \1\ In this preamble, we use the term ``redeem'' interchangeably 
with ``retire,'' which is the term used in the governing provisions 
of the Farm Credit Act.
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    In the preamble to the proposed rule, we noted our concerns about 
the stability (or ``permanence'') of preferred stock that an 
institution plans to retire routinely with few limitations or without 
direct involvement or consideration by the institution's board of 
directors. (We will refer to this stock as ``continually redeemable 
preferred stock'' in our discussions that follow.) In particular, we 
noted our concerns about the risk associated with the capital and 
earnings volatility that may result from fluctuations in purchases and 
retirements that could occur daily. We further noted that continually 
redeemable preferred stock may be an especially volatile source of 
capital under adverse credit or interest rate

[[Page 53902]]

conditions when the likelihood of requests for redemption increases.
    In addition to that safety and soundness concern, we expressed 
``mission and policy concerns'' over FCS institutions' issuance of 
equities that have many characteristics of deposit or money market 
instruments and limited attributes of equity. We did recognize, 
however, that System institutions have statutory authority to issue 
debt and equity securities (subject to FCA regulation) to fulfill their 
mission of serving the needs of farmers, ranchers, and rural residents. 
We noted that preferred stock can be a valuable tool for FCS 
institutions to increase their capital and generate additional loanable 
funds to meet the credit needs of their borrowers. Additionally, we 
recognized that preferred stock issued to eligible borrowers provides 
FCS associations a mechanism for members to invest and participate in 
their cooperative beyond minimum borrower stock purchases.

IV. General Comments

    We received a comment on the proposed rule from the Farm Credit 
Council and 3 separate comments from individual FCS institutions. We 
also received a comment from the Independent Community Bankers of 
America (ICBA) and approximately 150 very similar comments from 
commercial banks or individuals associated with commercial banks. Both 
System and non-System commenters expressed strong opposition--albeit 
from very different perspectives--to major portions of the rule.

A. System Comments

    System commenters stated that:
    <bullet> The restrictions on retirement of preferred stock and the 
limits on inclusion of preferred stock in permanent capital ratios 
violate provisions of the Farm Credit Act of 1971, as amended (Act);
    <bullet> The proposed rule's definition of ``effective maturity'' 
would improperly prohibit an association from issuing certain forms of 
preferred stock that meet the statutory definition of permanent 
capital;
    <bullet> FCA has no discretion to narrow the statutory definition 
of permanent capital;
    <bullet> FCA lacks a statutory basis to limit or restrict issuance 
or retirement of association preferred stock provided the association 
is in compliance with all regulatory capital standards;
    <bullet> Many of the concerns raised about the ``permanence'' of 
preferred stock are also applicable to borrower stock, the primary form 
of equity issued by System associations;
    <bullet> All System institutions are currently very well 
capitalized and System institutions would still meet or exceed all 
minimum capital levels even if all preferred stock were retired at 
once;
    <bullet> Instead of adopting one rigid set of rules, the FCA should 
look at different approaches to address the issues and concerns raised 
by preferred stock programs and to deal with those issues through the 
examination process;
    <bullet> Existing regulatory controls and conditions on preferred 
stock issuances adequately address safety and soundness concerns 
regardless of the permanent capital ratio;
    <bullet> There have been no complaints from System institution 
members about any aspect of existing preferred stock programs; and
    <bullet> Preferred stock programs provide value to System 
institution members while giving them an opportunity to support their 
cooperative lender.

B. Non-System Comments

    Non-System commenters stated that:
    <bullet> FCS institutions should not be allowed to issue preferred 
stock at all because such stock represents unfair and improper 
competition for commercial bank deposits by a Government-sponsored 
enterprise (GSE);
    <bullet> Threatening the deposit base of community banks hurts 
rural America, which is inconsistent with the aims of the Act;
    <bullet> System institutions have sufficient sources of capital and 
therefore don't need preferred stock to raise capital;
    <bullet> If allowed at all, preferred stock issuance should be in 
lieu of System institutions offering cash management accounts in order 
to avoid System entities becoming depository institutions with unique 
GSE benefits; \2\
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    \2\ As acknowledged by the ICBA, the Act specifically authorizes 
System lenders to offer its members a funds-held account (known as a 
Voluntary Advance Conditional Payment account). Additionally, the 
Act authorizes System institution members to invest in Farm Credit 
Bank bonds, which may be structured as short-term investment 
accounts. ICBA asserts that ``FCA is allowing FCS to offer cash 
management accounts, which basically amount to checking accounts, 
clearly in contradiction to the Act.'' This comment does not appear 
germane to the proposed rule, and FCA does not authorize any 
institution to engage in activities that violate the Act.
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    <bullet> Preferred stock should have a minimum effective maturity 
of 5 years to better recognize the purpose of preferred stock to 
provide stable, long-term capital and to prevent preferred stock from 
performing too much like money market or deposit instruments;
    <bullet> FCS preferred stock should be subject to the same limits 
imposed by the Federal Deposit Insurance Corporation (FDIC) for 
commercial bank preferred stock;
    <bullet> Retirements should be conducted on the basis of the entire 
class of stock, rather than on an individual basis, so that preferred 
stock does not function as a deposit; and
    <bullet> Given the purpose of the FCS to serve a specific market--
agricultural lending--and the risks associated with this industry, the 
retirement of preferred stock should be allowed only if the entity has 
a permanent capital ratio of at least 12 percent.

C. Our Consideration of the Comments Received

    Upon consideration of all the comments, FCA has decided to delete 
proposed Sec.  615.5203 (``Treatment of Preferred Stock in the 
Permanent Capital Ratio'') and proposed Sec.  615.5270(c) and (d) 
(restrictions on preferred stock retirements) from the final rule 
because we believe that FCA can achieve the safety and soundness 
objectives articulated in the proposed rule in a manner that does not 
implicate the authority issues raised by commenters. As discussed in 
detail below, we also made other relatively minor changes in response 
to the comments.

V. Authority To Issue Preferred Stock

    As discussed in the preamble to the proposed rule, Congress broadly 
authorized each FCS bank and association to adopt bylaws providing for 
the classes and terms of stock issued by the institution.\3\ Congress 
specifically defined ``stock'' to include ``voting and nonvoting stock, 
(including preferred stock).'' \4\ Congress did not further define 
``preferred stock'' in the Act. Congress defined ``permanent capital'' 
in section 4.3A of the Act to mean:
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    \3\ See 12 U.S.C. 2013(9), 2073(16), 2093(8), 2122(9), and 
2154a(b).
    \4\ 12 U.S.C. 2154a(a)(2).

    (A) Current year retained earnings;
    (B) Allocated and unallocated earnings * * *;
    (C) All surplus (less allowances for losses);
    (D) Stock issued by a System institution, except:
    (i) Stock that may be retired by the holder of the stock on 
repayment of the holder's loan, or otherwise at the option or 
request of the holder; and
    (ii) Stock that is protected under section 4.9A of the Act or is 
otherwise not at risk; and
    (E) Any other debt or equity instruments or other accounts that 
the FCA determines appropriate to be considered permanent capital.


[[Page 53903]]


    Congress authorized System institutions to issue preferred stock so 
long as the stock is at risk and the institution's board retains 
discretion over stock retirements. When first implementing the new 
capitalization statutes added by the 1987 amendments to the Act, FCA 
stated: ``[n]o stock may be issued by Farm Credit institutions after 
October 5, 1988, that is not both at risk and retireable at the 
discretion of the board of directors provided minimum capital adequacy 
standards are met. These are the essential characteristics of permanent 
capital.'' \5\
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    \5\ 53 FR 40033 (October 13, 1988).
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    While, from the holder's standpoint, continually redeemable 
preferred stock is in many ways functionally similar to a deposit, 
there is a significant legal distinction: a deposit is a debt on which 
the depositor has a legally enforceable right to demand repayment, 
while continually redeemable preferred stock is an ``at-risk'' equity 
of the issuing institution for which a preferred stockholder ordinarily 
does not have an enforceable right to demand redemption. Furthermore, 
the deposit holder (a creditor) has priority in liquidation over the 
preferred stockholder (an equity holder). This important distinction 
makes preferred stock ``at-risk'' (meaning the shareholder can lose 
some or all of the principal investment). This also means that 
preferred stock is not a deposit, not insured, and, contrary to non-
System commenters' assertions, not subject to rules governing 
commercial bank deposits.
    Non-System commenters suggest that FDIC rules related to issuance 
and treatment of preferred stock should apply to System institutions. 
While FCA's risk-based capital rules are generally similar to those of 
Federal banking regulators, FCA operates under a different controlling 
statute than those banking regulators. Unlike the banking statutes, 
Congress created and defined ``permanent capital'' in the Act and 
granted System institutions certain express authorities over the 
issuance and retirement of stock, including preferred stock that meets 
the statutory definition of permanent capital. FCA does not have 
discretion to adopt capital rules that contradict provisions of the 
Act.
    Because Congress authorized System institutions to issue preferred 
stock, FCA has no basis to restrict the activity simply because it 
creates competition for commercial banks. However, we share the concern 
expressed by non-System commenters that System institutions not 
advertise or otherwise represent that their preferred stock offerings 
are deposits or ``money market'' accounts. Current Sec.  615.5250(c)(1) 
(redesignated as new Sec.  615.5255(c)(1)) requires that the disclosure 
statement that must be provided to purchasers of preferred stock must 
state that the equity is an ``at-risk'' investment. Existing Sec.  
615.5250(c)(4) (redesignated as new Sec.  615.5255(h)) prohibits any 
System institution representative from making any disclosure in 
connection with the sale of an equity that is inaccurate or misleading. 
We consider any explicit or implicit representation by a System 
institution or its representatives that preferred stock is a 
``deposit,'' ``money market instrument,'' or anything other than an 
``at-risk'' equity investment to be a violation of our regulations.

VI. Inclusion of Preferred Stock in the Permanent Capital Ratio

    Proposed Sec.  615.5203 would have established a sliding scale of 
how much preferred stock could be included in an institution's 
permanent capital ratio calculation based on the ``effective maturity'' 
of the instrument. System commenters argued that this would violate the 
Act, since instruments that meet the statutory definition of 
``permanent capital'' must be treated as permanent capital in the 
permanent capital ratio. Non-System commenters stated that preferred 
stock should not be included in permanent capital unless it is 
perpetual preferred stock that has no maturity and no requirements for 
future redemption.\6\
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    \6\ Continually redeemable preferred stock does meet the basic 
definition of perpetual preferred: it has no stated maturity and 
there is no binding obligation requiring the institution to redeem 
it. However, we interpret the comment as relating to what we 
described as ``continually redeemable preferred stock.''
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    In addition, a System commenter stated that the proposed rule added 
``needless complexity'' to the computation of the permanent capital 
ratio. System commenters also indicated that the proposal created 
confusion as to how a particular instrument's ``effective maturity'' 
would be established for purposes of computing the permanent capital 
ratio.
    Upon review, we agree with the commenters that the proposal was 
more complex than needed and that we already have adequate means to 
address the safety and soundness concerns raised by the issuance of 
continually redeemable preferred stock. Therefore, we are eliminating 
proposed Sec.  615.5203 in its entirety. FCA previously recognized the 
limitations of the permanent capital ratio as a meaningful measurement 
of the stability and adequacy of an institution's capital when we 
adopted new surplus and net collateral requirements in 1997.\7\ 
Therefore, FCA's examiners will focus on total and core surplus, and 
net collateral measurements of capital when examining institutions. 
Moreover, when FCA examiners review an institution's capital, they 
continue to have the discretion to evaluate the effect continually 
redeemable preferred stock has on capital when assigning a numerical 
rating to an institution's capital under the Financial Institution 
Rating System (FIRS).\8\
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    \7\ See 62 FR 4429 (January 30, 1997).
    \8\ The FIRS is the FCA's system for rating the capital, assets, 
management, earnings, liquidity, and interest-rate risk of an 
association. This rating is not subject to public disclosure.
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    Deleted Sec.  615.5203(e) provided that the total amount of 
preferred stock with an effective maturity of less than 5 years that an 
institution may include as permanent capital for computation of the 
permanent capital ratio is limited to 25 percent of the institution's 
permanent capital (after deductions required in the permanent capital 
ratio computation). As discussed above, the FCA has adequate tools to 
evaluate an institution's capital without the need for this type of 
adjustment to the permanent capital ratio. Moreover, we recognize that 
System institutions require a diversified capital base and that one 
fixed cap amount may not be appropriate for all institutions.
    Therefore, we expect each System institution to incorporate 
appropriate limits on preferred stock in its capitalization plan. FCA 
will review proposed limits in connection with its clearance of new 
preferred stock offerings, and FCA examiners will monitor the 
appropriateness of limitations on existing programs.
    Additionally, FCA will monitor System disclosures to ensure that 
any public representations regarding strength of capital are not 
misleading because of the inclusion of ``continually redeemable 
preferred stock'' in the permanent capital ratio.
    Additionally, we note that the volatility of continually redeemable 
preferred stock can affect an institution's funding and liquidity 
needs. Although funding and liquidity risks are not specifically 
addressed in this final rule, we expect an institution's board and 
management to consider these risks when deciding whether to issue 
continually redeemable preferred stock. We intend, through our 
examination efforts, to monitor an institution's management of its

[[Page 53904]]

preferred stock program and will consider the funding and liquidity 
effects of preferred stock issuances on an institution's risk profile.

VII. Restrictions on Retirement

    Proposed Sec.  615.5270(c) would have generally prohibited a System 
bank, association, or service corporation from retiring continually 
redeemable preferred stock unless the institution's permanent capital 
ratio would be in excess of 8 percent after any retirement. Proposed 
Sec.  615.5270(d) would have generally prohibited retirement of any 
preferred stock prior to 12 months after the date of issuance. Proposed 
Sec.  615.5270(e)(3) would have prohibited a board from delegating 
authority to retire preferred stock to institution management unless 
the institution's permanent capital ratio would be in excess of 9 
percent after any retirement. System commenters asserted that these 
restrictions violated the Act. Non-System commenters stated that longer 
holding periods were appropriate and that preferred stock should only 
be retireable as a class.
    Congress gave FCA broad powers over the adequacy of System 
institution capital. Section 4.3 of the Act requires FCA to ensure that 
System institutions ``achieve and maintain adequate capital.'' \9\ 
Title V of the Act authorizes FCA to adopt regulations to implement the 
Act and to take enforcement actions in response to, or to prevent, an 
unsafe or unsound practice.\10\ The Act also provides that 
capitalization of System institutions, including the manner in which 
stock is issued, held, transferred, and retired, is subject to FCA 
regulation.\11\ However, as pointed out by System commenters, the Act 
gives System institutions specific authority over retirement of 
equities. In particular, section 4.3A(c)(1)(I) of the Act provides that 
``notwithstanding any other provision'' of the Act, an institution's 
bylaws ``shall permit the retirement of stock at the discretion of the 
institution if the institution meets the capital adequacy standards 
established under section 4.3(a).'' \12\ System commenters assert that 
any FCA restriction on the ability of an institution to retire stock 
when that institution meets capital adequacy standards would violate 
the Act. Non-System commenters' suggestion that retirements be allowed 
only by class raises the same legal issues.
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    \9\ 12 U.S.C. 2154.
    \10\ 12 U.S.C. 2241 et seq.
    \11\ See 12 U.S.C. 2014, 2074(a), 2094, 2146.
    \12\ 12 U.S.C. 2154a(c)(1)(I).
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    We believe, as discussed above, that we can adequately address and 
monitor safety and soundness concerns over the potential volatility of 
preferred stock through our examination process. Therefore, we are not 
adopting the proposed restrictions on retirement of preferred stock. 
Instead, the final rule requires that each institution's board of 
directors establish policy guidance on retirement of preferred stock 
that is specific to the capital needs of the institution. This guidance 
must specify the threshold levels of total surplus and core surplus 
that must be met before any delegation of retirement of preferred stock 
from the board to management may be effective. Given the potential 
volatility of continually redeemable preferred stock, we expect these 
threshold delegation levels to be set above the regulatory minimums.

VIII. Section-by-Section Response to Comments

A. Standards of Conduct--Sec.  612.2165

    Proposed Sec.  612.2165(b)(14) requires FCS institutions to 
establish policies that prohibit directors and employees from 
purchasing or retiring any stock in advance of the release to other 
stockholders of material non-public information concerning the 
institution. Proposed Sec.  612.2165(b)(15) requires FCS institutions 
to establish policies and procedures specifying when directors and 
employees may purchase and retire preferred stock in the institution.
    One System commenter stated that the proposed rule addresses only 
retirements of preferred stock but that the establishment, allocation 
and distribution of dividends also present potential for conflicts of 
interest. The commenter suggested that each System institution have the 
opportunity to address these issues in its own way.
    First, proposed Sec.  612.2165 specifically applies to purchases as 
well as retirements of preferred stock. Second, we believe the timely 
disclosure requirements of this rule provide a check on potential 
conflicts of interest. Third, as stated in our Standards of Conduct 
regulations applicable to directors and employees, ``the avoidance of 
misconduct and conflicts of interest is indispensable to the 
maintenance'' of the standards.\13\ Therefore, we adopt the proposed 
changes to Sec.  612.2165 as final.
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    \13\ 12 CFR 612.2135.
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B. Lending Limits--Sec.  614.4351(a)(3)

    This provision will require FCS institutions to deduct from their 
lending limit base any amounts of preferred stock not eligible to be 
included in total surplus as defined in Sec.  615.5301(i). We received 
no comments and adopt the proposal as final.

C. Investments in FCS Institution Preferred Stock--Sec.  615.5175

    Proposed Sec.  615.5175 provides that FCS banks, associations, and 
service corporations may purchase preferred stock issued by another FCS 
institution, including Farmer Mac, only with the written prior approval 
of the FCA, except pursuant to Sec.  615.5171 (which relates to 
transfer of capital from banks to associations).\14\
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    \14\ The FCA adopted on June 9, 2005, regulatory amendments that 
address investments by Farmer Mac in other FCS institutions. (70 FR 
40635, July 14, 2005).
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    Non-System commenters requested that FCA prevent any System entity 
from purchasing preferred stock in any other System institution. We did 
not receive any other comments on this provision. As we stated in the 
preamble to the proposed rule, the Act specifically authorizes System 
institutions to purchase non-voting equities in other System 
institutions.\15\ As we also stated in the proposed rule preamble, 
while there have not been any recent investments by one System 
institution in the preferred stock of another, System institutions have 
historically invested in preferred stock of other System institutions 
to provide financial assistance. In addition, because we are requiring 
FCA prior approval, we do not see any purpose or need for a rule 
prohibiting such investments. Therefore, we adopt proposed Sec.  
615.5175 as final without changes.
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    \15\ See 12 U.S.C. 2013(11), (16), 2073(7), (8).
---------------------------------------------------------------------------

D. Capital Adequacy--Definitions--Sec.  615.5201

    We proposed to modify our definitions in subpart H that apply to 
our capital adequacy regulations by defining preferred stock by class 
and maturity and to use those definitions in differentiating how each 
class is treated for permanent capital ratio computation purposes. 
However, since we are not adopting proposed Sec.  615.5203, separately 
identifying classes of preferred stock is unnecessary. We retain the 
general definition of ``preferred stock'' and also add a separate 
definition of ``term preferred stock,'' which is currently located 
within the definition of ``permanent capital'' in Sec.  615.5201.

[[Page 53905]]

E. Treatment of Preferred Stock for Permanent Capital Computations--
Sec.  615.5203

    For the reasons discussed in detail above, we delete proposed Sec.  
615.5203 in its entirety from the final rule. This deletion does not 
affect FCA's existing ``phase-out'' treatment of term preferred stock, 
as is made clear by revised Sec.  615.5201, which retains the 
definition (and treatment) of term preferred stock from previous Sec.  
615.5201(1)(5).

F. Implementation of Cooperative Principles--Sec.  615.5230

    We proposed to make a one-word addition to Sec.  615.5230(b)(1) to 
clarify that a class stockholder vote is required only when a new 
issuance would ``adversely'' affect the interests of that class. This 
change will conform the language of the rule to our current 
interpretation of this rule. We did not receive any comments on this 
proposal, and we adopt the proposal as final.

G. Permanent Capital Requirements--Sec.  615.5240

    We did not propose any substantive changes to this section and we 
received no comments. We therefore adopt paragraphs (a) and (b) (with a 
minor grammatical correction) as proposed. Current paragraph (c), 
addressing an institution board's authority to delegate retirement of 
borrower stock to management, is moved to new Sec.  615.5275(a) and 
broadened to include all ``stock.'' This was included in the proposed 
rule as Sec.  615.5270(e).

H. Limitation on FCS Association Preferred Stock--Sec.  615.5245

    Paragraph (a) of the proposal would limit the amount of preferred 
stock that a single investor may hold in any one FCS association 
offering to the greater of $2 million or 5 percent of the issuance. 
This limitation was intended to reduce the potential that any one 
holder of association preferred stock could have undue influence on any 
one class of stock.
    Non-System commenters suggested that ``these levels seem 
excessive'' since individual borrowers ``supposedly'' capitalize the 
System with a $1,000 stock purchase when they apply for loans. They 
further suggested that this provision was aimed at allowing 
agribusinesses to invest in the FCS, which they asserted was 
unnecessary because the System can access capital markets for funding. 
The non-System commenters suggested a $5,000 cap for all borrowers.
    We believe this comment contains an unrealistically narrow and 
outdated understanding of the role of borrower stock in the System. As 
we stated in the proposed rule preamble, we believe that it is 
important for System institutions to build their capital primarily 
through earnings, but that diversified capital can be a valuable source 
of additional financial strength. Most System associations have lowered 
their borrower stock purchase requirements to the statutory minimum so 
that borrower stock now plays a minor role in capitalizing the System. 
Additionally, FCA's capital rules now give greater consideration to 
other types of capital when gauging the stability of an institution's 
capital.
    System commenters asserted that System institutions can and should 
be able to use all statutorily authorized programs at their disposal to 
determine the best method of capitalization. System commenters also 
asserted that, in addition to the capital benefits to the institution, 
preferred stock provides a valuable service to their members and allows 
them to further invest in their cooperative lender.
    We continue to have concerns over the potential for one or a small 
group of holders to dominate a class of preferred stock. Related to 
that is our concern that all association members have an equal 
opportunity to purchase preferred stock. However, in considering all 
the comments, we concluded that a ``one size fits all'' rule 
establishing a specific dollar or percentage cap is not desirable or 
necessary to achieve our objectives. Instead, final Sec.  615.5245(a) 
and (b) provides that each association offering preferred stock to its 
members must adopt a policy that:
    (1) Addresses applicable ownership issues related to the issuance 
of the preferred stock. We expect an association's policy to address 
the association's limits on ownership by any one holder or small group 
of holders, if such limits are deemed necessary by the association's 
membership. In addition, we expect the policy to address such items as 
an amount (e.g., 5 percent) of preferred stock held by any one holder 
that would require internal disclosure to the association's membership 
of such ownership concentration.
    (2) Makes the stock available for purchase to each of its members 
on the same basis. In other words, an association may not limit the 
opportunity to purchase preferred stock to only selected members.
    We believe that these provisions will be more effective than a 
specific cap to ensure, on an institution-specific basis, that any one 
holder (or small group of holders) of association-issued preferred 
stock will not have undue influence over any one class of stock. The 
required association policy is designed to require the association 
board to develop and support institution-specific controls and 
procedures for administering its preferred stock issuances with the 
full knowledge and support of the association's membership. The policy 
requirement is intended to place ultimate control, outside of specific 
safety and soundness concerns, of the preferred stock program in the 
hands of the association membership. We will monitor the institution's 
policies and programs to determine whether these objectives are met and 
will consider in a future rulemaking whether additional disclosure 
requirements--such as requiring additional disclosure of preferred 
stock holdings to include non-insiders when those stock holdings exceed 
a certain numerical threshold--are necessary.
    Paragraph (c) requires boards of directors of FCS associations 
offering preferred stock to eligible borrowers to adopt a policy that 
prohibits the association from extending credit to eligible borrowers 
to purchase preferred stock in the association. Non-System commenters 
supported this proposal and System institutions did not comment on the 
proposal. Therefore, we adopt paragraph (c) as final without change.

I. Disclosure Requirements for Borrower Stock--Sec.  615.5250

    The proposed rule reorganized this section but retained the same 
requirements. We received no comments on this proposal and adopt Sec.  
615.5250 as final without changes.

J. Disclosure and Review Requirements for Other Equities--Sec.  
615.5255

    The proposed rule retained the same basic regulatory framework as 
our existing rules, requiring banks, associations, and service 
corporations to submit a proposed disclosure statement to FCA before 
any sale may take place, but clarifies and streamlines the current 
review and clearance process. The proposal also added a new paragraph 
(h) (now redesignated as paragraph (i)), under which each bank and 
association must establish a method to disclose and make information on 
insider purchases and retirements readily available to the public.
    System commenters objected to proposed paragraph (h), because it 
makes insider information available to the public generally, and not 
just to institution stockholders/members and the FCA. System commenters 
stated that the requirement served no legitimate

[[Page 53906]]

safety and soundness issue, was invasive of insiders' privacy, and 
would provide competitors with an opportunity to distort the operations 
of the System and FCA. Non-System commenters supported the proposed 
disclosure requirements.\16\ We believe that transparency in this area 
is very important to avoid any appearance of impropriety by institution 
insiders and that disclosure should not be limited to existing 
institution members. Publicly disclosing this information reduces the 
potential for insider abuse and may provide potential new members/
stockholders with useful information. Therefore, we have adopted 
redesignated paragraph (i) as final without changes.
---------------------------------------------------------------------------

    \16\ The ICBA stated that this information ``should be available 
through Freedom of Information Act (FOIA) requests without 
restrictions.'' We note, however, that System institutions are not 
Government entities subject to FOIA.
---------------------------------------------------------------------------

    One Farm Credit Bank suggested that because proposed Sec.  
615.5255(d) (streamlined review process for issuances to sophisticated 
investors) incorporates the Securities and Exchange Commission (SEC) 
definitions of ``accredited investor'' and ``qualified institutional 
buyer,'' we should remove the $250,000 minimum purchase requirement 
because there is no comparable requirement in the Federal securities 
law. The purpose of this provision is to minimize the possibility that 
privately offered FCS securities could be marketed to non-qualified 
investors by subsequent purchasers in the secondary market. Because FCA 
does not have comparable securities enforcement authority to the SEC, 
we believe that a prohibition on sales in denominations below $250,000, 
coupled with a requirement that such prohibition be disclosed on the 
face of the instrument, is necessary to effectively achieve the purpose 
of the rule.
    The Farm Credit bank commenter also requested that the expedited 
review process be available for any registered offering for which SEC 
approval is required in the event that the bank becomes an SEC 
registrant. Since no System institution currently registers securities 
with the SEC, the request is premature and beyond the scope of this 
rule.
    Additionally, FCA must review applications to ensure compliance 
with Farm Credit Act and FCA regulatory requirements (including 
permanent capital requirements), something the SEC review does not 
cover. Therefore, we have adopted Sec.  615.5255(d) as redesignated 
Sec.  615.5255(e) without change.
    In the final rule we adopt proposed Sec.  615.5255(j) as 
redesignated Sec.  615.5255(k), which provides that in addition to FCA 
requirements, each institution is responsible for ensuring its 
compliance with all applicable Federal and state securities laws. 
Therefore, each institution must affirmatively determine whether they 
are subject to SEC oversight requirements. Non-System commenters 
``strongly urged'' FCA to require any issuance of System preferred 
stock to be registered with the SEC. We do not believe that we need to 
address this issue in order to achieve the objectives of this rule and 
therefore the suggestion is beyond the scope of this rulemaking.
    We received no other comments to proposed Sec.  615.5255 and adopt 
all other proposed changes as final.

K. Retirement of Other Equities--Sec.  615.5270

    As discussed above, because we have decided to address our safety 
and soundness concerns through other means, we have deleted proposed 
Sec.  615.5270(c), which would have tied the ability to retire 
preferred stock to levels of permanent capital in excess of the 
regulatory minimum. We also delete proposed paragraph (d), which would 
have generally required a 12-month holding period before retirements of 
preferred stock were allowed.
    In the final rule, we adopt proposed paragraph (e), now designated 
as new paragraph (c), placing limitations on the ability of bank, 
association, or service corporation boards of directors to delegate 
authority to retire any at-risk stock to management. Non-System 
commenters stated that boards should not be allowed to delegate any 
decisions regarding retirement of preferred stock. They said this would 
help avoid any conflicts of interest with management and their 
decisions to retire stock when it may not be completely in the best 
interests of the institution. They also stated that if all decisions on 
preferred stock retirements are made directly by the board, then all 
relevant information will be recorded and maintained in the minutes of 
the board meetings. We continue to believe that the proposed 
restrictions, coupled with the other provisions of this rule, are 
sufficient to ensure that institution boards retain sufficient control 
and oversight over all stock retirements, not just preferred stock and 
therefore adopt paragraph (c) without change.
    We also adopt proposed Sec.  615.5270(f), now designated as Sec.  
615.5270(d), without substantive change other than as described in 
Section VII, Restrictions on Retirement, of this preamble. This 
provision requires each bank, association, or service corporation that 
issues preferred stock to adopt a written policy covering retirement of 
preferred stock that, at a minimum: (1) Describes any delegations of 
authority, (2) identifies any limits on the amount of stock that may be 
retired during a single quarterly (or shorter) time period, (3) ensures 
all stockholder requests for retirement are treated fairly and 
equitably, (4) prohibits any insider from retiring preferred stock in 
advance of the release of material non-public information concerning 
the institution to other stockholders, and (5) establishes when 
insiders may retire their preferred stock.
    As we stated in the preamble to the proposed rule, we believe these 
new regulations are necessary to ensure that FCS institutions operate 
in a safe and sound manner and that these provisions will reduce the 
potential for insider abuse and the potential or appearance of unfair 
treatment or dealings relating to the retirement of preferred stock. We 
received no comments on this provision.

L. Payment of Dividends--Sec.  615.5295

    Proposed Sec.  615.5295 would: (1) Require an institution's board 
of directors to declare a dividend before any dividends may be paid to 
stockholders; (2) prohibit an institution from declaring or paying any 
dividend unless after declaration or payment of the dividend the 
institution would continue to meet its regulatory capital standards 
under this part; and (3) require an FCS institution to exclude any 
accrued but unpaid dividends from regulatory capital computations.
    Non-System commenters agreed with this proposal because, in their 
view, it helps address the issue of the stock functioning like a 
deposit and helps ensure there are no discriminatory practices involved 
with the payment of dividends only to particular stockholders upon 
their request.
    System commenters suggested that FCA clarify that institutions may 
declare dividends on at least a monthly basis and that a board may 
adopt a continuing resolution to pay dividends as long as the 
institution continues to meet regulatory capital standards. First, the 
rule does not include any frequency restrictions, so board action could 
theoretically take place on a monthly basis. However, we expect that 
any board decision on dividends be undertaken with the same formality 
as any other decision of the board. Second, a ``continuing resolution'' 
to pay dividends would defeat the purpose of the rule and therefore, 
FCA will

[[Page 53907]]

consider such a resolution to violate this rule. As we stated in the 
preamble to the proposed rule, we are adding this provision to 
emphasize the distinction between debt and equity securities. 
Declaration of dividends relates to the capitalization of the 
institution and is not equivalent to setting interest rates or other 
routine business decisions. Therefore, we adopt Sec.  615.5295 without 
change and expect System institutions to treat dividend decisions in 
the same manner as other capitalization issues.

M. Disclosure of Insider Preferred Stock Transactions

    Proposed Sec.  620.5(j)(2) would add new required disclosures of 
transactions with senior officers and directors in FCS institution 
annual reports to shareholders. System commenters asserted that the 
proposal is overly broad and that disclosure of individual information 
is unnecessary. They suggest that FCA impose certain minimum 
thresholds, such as aggregating all directors and senior officers or, 
at a minimum, impose specific amounts or percentages below which no 
individual disclosure need be made.
    We proposed this new disclosure requirement along with other 
disclosure amendments previously discussed in an effort to increase the 
transparency of insider preferred stock transactions. Because we are 
removing some of the most restrictive provisions of the proposed rule, 
full disclosure of insider activities is even more vital to ensure 
transparency of System operations. Therefore, we adopt the proposed 
rule as final without change.

IX. 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 rule will not 
have a significant impact on a substantial number of small entities. 
Each of the banks in the System, considered together with its 
affiliated associations and service corporations, has assets and annual 
income in excess of the amounts that would qualify them as small 
entities. Therefore, System institutions are not ``small entities'' as 
defined in the Regulatory Flexibility Act.

List of Subjects

12 CFR Part 611

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 612

    Agriculture, Banks, banking, Conflicts of interests, Rural areas.

12 CFR Part 614

    Agriculture, Banks, banking, Flood insurance, Foreign trade, 
Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.

12 CFR Part 620

    Accounting, Agriculture, Banks, banking, Reporting and 
recordkeeping requirements, Rural areas.


0
For the reasons stated in the preamble, we now amend parts 611, 612, 
614, 615, and 620 of chapter VI, title 12 of the Code of Federal 
Regulations as follows:

PART 611--ORGANIZATION

0
1. The authority citation for part 611 continues to read as follows:

    Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15, 
4.20, 4.21, 5.9, 5.10, 5.17, 6.9, 6.26, 7.0-7.13, 8.5(e) of the Farm 
Credit Act (12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 
2203, 2208, 2209, 2243, 2244, 2252, 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.

Subpart I--Service Organizations

0
2. Amend Sec.  611.1135 by revising paragraph (f) to read as follows:


Sec.  611.1135  Incorporation of service corporations.

* * * * *
    (f) When your service corporation issues equities, what are the 
disclosure requirements? Your service corporation must provide the 
disclosures described in Sec.  615.5255 of this chapter.

PART 612--STANDARDS OF CONDUCT

0
3. 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).

0
4. Amend Sec.  612.2165 by revising paragraphs (b)(12) and (b)(13) and 
adding new (b)(14) and (b)(15) to read as follows:


Sec.  612.2165  Policies and procedures.

* * * * *
    (b) * * *
    (12) Establish reporting requirements, consistent with this part, 
to enable the institution to comply with Sec.  620.5 of this chapter, 
monitor conflicts of interest, and monitor recusal compliance;
    (13) Establish appeal procedures available to any employee to whom 
any required approval has been denied;
    (14) Prohibit directors and employees from purchasing or retiring 
any stock in advance of the release of material non-public information 
concerning the institution to other stockholders; and
    (15) Establish when directors and employees may purchase and retire 
their preferred stock in the institution.

PART 614--LOAN POLICIES AND OPERATIONS

0
5. 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 J--Lending and Leasing Limits

0
6. Amend Sec.  614.4351 by adding a new paragraph (a)(3) to read as 
follows:


Sec.  614.4351  Computation of lending and leasing limit base.

    (a) * * *
    (3) Any amounts of preferred stock not eligible to be included in 
total surplus as defined in Sec.  615.5301(i) of this chapter must be 
deducted from the lending limit base.
* * * * *

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

0
7. 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.

[[Page 53908]]

Subpart F--Property, Transfers of Capital, and Other Investments

0
8. Add new Sec.  615.5175 to read as follows:


Sec.  615.5175  Investments in Farm Credit System institution preferred 
stock.

    Except as provided for in Sec.  615.5171, Farm Credit banks, 
associations and service corporations may only purchase preferred stock 
issued by another Farm Credit System institution, including the Federal 
Agricultural Mortgage Corporation, with the written prior approval of 
the Farm Credit Administration. The request for approval should explain 
the terms and risk characteristics of the investment and the purpose 
and objectives for making the investment.

Subpart H--Capital Adequacy

0
9. Amend Sec.  615.5201 by removing and reserving paragraph (5) of the 
``permanent capital'' definition and adding new definitions for the 
terms ``preferred stock'' and ``term preferred stock'' to read as 
follows:


Sec.  615.5201  Definitions.

* * * * *
    Preferred stock means stock that is permanent capital and has 
dividend and/or liquidation preference over common stock.
* * * * *
    Term preferred stock means preferred stock with an original 
maturity of at least 5 years and on which, if cumulative, the board of 
directors has the option to defer dividends, provided that, at the 
beginning of each of the last 5 years of the term of the stock, the 
amount that is eligible to be counted as permanent capital is reduced 
by 20 percent of the original amount of the stock (net of redemptions).
* * * * *

Subpart I--Issuance of Equities

0
10. Revise Sec.  615.5230(b)(1) to read as follows:


Sec.  615.5230  Implementation of cooperative principles.

    (b)* * *
    (1) Each issuance of preferred stock (other than preferred stock 
outstanding on October 5, 1988, and stock into which such outstanding 
stock is converted that has substantially similar preferences) shall be 
approved by a majority of the shares of each class of equities 
adversely affected by the preference, voting as a class, whether or not 
such classes are otherwise authorized to vote;
* * * * *

0
11. Revise Sec.  615.5240 to read as follows:


Sec.  615.5240  Permanent capital requirements.

    (a) The capitalization bylaws shall enable the institution to meet 
the capital adequacy standards established under subparts H and K of 
this part and the total capital requirements established by the board 
of directors of the institution.
    (b) In order to qualify as permanent capital, equities issued under 
the bylaws must meet the following requirements:
    (1) Retirement must be solely at the discretion of the board of 
directors and not upon a date certain (other than the original maturity 
date of preferred stock) or upon the happening of any event, such as 
repayment of the loan, and not pursuant to any automatic retirement or 
revolvement plan;
    (2) Retirement must be at not more than book value;
    (3) The institution must have made the disclosures required by this 
subpart;
    (4) For common stock and participation certificates, dividends must 
be noncumulative and payable only at the discretion of the board; and
    (5) For cumulative preferred stock, the board of directors must 
have discretion to defer payment of dividends.

0
12. Add a new Sec.  615.5245 to read as follows:


Sec.  615.5245  Limitations on association preferred stock.

    (a) The board of directors of each association offering preferred 
stock must adopt a policy that addresses the association's conditions 
or limits on the amount of preferred stock that any one holder, or 
small number of holders may acquire.
    (b) Each association offering preferred stock must make the stock 
available for purchase to each of its members on the same basis.
    (c) An association may not extend credit for purchases of preferred 
stock in the association.

0
13. Revise Sec.  615.5250 to read as follows:


Sec.  615.5250  Disclosure requirements for borrower stock.

    (a) For sales of borrower stock, which for this subpart means 
equities purchased as a condition for obtaining a loan, an institution 
must provide a prospective borrower with the following documents prior 
to loan closing:
    (1) The institution's most recent annual report filed under part 
620 of this chapter;
    (2) The institution's most recent quarterly report filed under part 
620 of this chapter, if more recent than the annual report;
    (3) A copy of the institution's capitalization bylaws; and
    (4) A written description of the terms and conditions under which 
the equity is issued. In addition to specific terms and conditions, the 
description must disclose:
    (i) That the equity is an at-risk investment and not a compensating 
balance;
    (ii) That the equity is retireable only at the discretion of the 
board of directors and only if minimum permanent capital standards 
established under subpart H of this part are met;
    (iii) Whether the institution presently meets its minimum permanent 
capital standards;
    (iv) Whether the institution knows of any reason the institution 
may not meet its permanent capital standard on the next earnings 
distribution date; and
    (v) The rights, if any, to share in patronage distributions.
    (b) Notwithstanding the provisions of paragraph (a) of this 
section, no materials previously provided to a purchaser (except the 
disclosures required by paragraph (a)(4) of this section) need be 
provided again unless the purchaser requests such materials.

0
14. Add new Sec.  615.5255 to read as follows:


Sec.  615.5255  Disclosure and review requirements for other equities.

    (a) A bank, association, or service corporation must submit a 
proposed disclosure statement to the Farm Credit Administration (FCA) 
for review and clearance prior to the proposed sale of any other 
equities, which for this subpart means equities not purchased as a 
condition for obtaining a loan.
    (b) An institution may not offer to sell other equities until a 
disclosure statement is reviewed and cleared by FCA.
    (c) A disclosure statement must include:
    (1) All of the information required by part 620 of this chapter in 
the annual report to shareholders as of a date within 135 days of the 
proposed sale. An institution may incorporate by reference its most 
recent annual report to shareholders and the most recent quarterly 
report filed with the FCA in satisfaction of this requirement;
    (2) The information required by Sec.  615.5250(a)(3) and (a)(4); 
and
    (3) A discussion of the intended use of the sale proceeds.
    (d) An institution is not required to provide the materials 
identified in

[[Page 53909]]

paragraphs (c)(1) and (c)(2) of this section to a purchaser who 
previously received them unless the purchaser requests it.
    (e) For any class of stock where each purchaser and each subsequent 
transferee acquires at least $250,000 of the stock and meets the 
definition of ``accredited investor'' or ``qualified institutional 
buyer'' contained in 17 CFR 230.501 and 230.144A (or successor 
provisions), a disclosure statement submitted pursuant to this section 
is deemed reviewed and cleared by FCA and an institution may treat 
stock that meets all requirements of part 615 as permanent capital for 
the purpose of meeting the minimum permanent capital standards 
established under subpart H unless FCA notifies the institution to the 
contrary within 30 days of receipt of a complete disclosure statement 
submission. A complete disclosure statement submission includes the 
proposed disclosure statement plus any additional materials requested 
by FCA.
    (f) For all other issuances, a disclosure statement submitted 
pursuant to this section is deemed cleared by FCA, and an institution 
may treat stock that meets all requirements of part 615 as permanent 
capital for the purpose of meeting the minimum permanent capital 
standards established under subpart H unless FCA notifies the 
institution to the contrary within 60 days of receipt of a complete 
disclosure statement submission. A complete disclosure statement 
submission includes the proposed disclosure statement plus any 
additional materials requested by FCA.
    (g) Upon request, FCA will inform the institution how it will treat 
the proposed issuance for other regulatory capital ratios or 
computations.
    (h) No institution, officer, director, employee, or agent shall, in 
connection with the sale of equities, make any disclosure, through a 
disclosure statement or otherwise, that is inaccurate or misleading, or 
omit to make any statement needed to prevent other disclosures from 
being misleading.
    (i) Each bank and association must establish a method to disclose 
and make information on insider preferred stock purchases and 
retirements readily available to the public. At a minimum, each 
institution offering preferred stock must make this information 
available upon request.
    (j) The requirements of this section do not apply to the sale of 
Farm Credit System institution equities to:
    (1) Other Farm Credit System institutions,
    (2) Other financing institutions in connection with a lending or 
discount relationship, or
    (3) Non-Farm Credit System lenders that purchase equities in 
connection with a loan participation transaction.
    (k) In addition to the requirements of this section, each 
institution is responsible for ensuring its compliance with all 
applicable Federal and state securities laws.

Subpart J--Retirement of Equities and Payment of Dividends

0
15. Amend subpart J of part 615 by revising the heading to read as 
stated above.

0
16. Amend Sec.  615.5270 by adding new paragraphs (c), (d), and (e) to 
read as follows:


Sec.  615.5270  Retirement of other equities.

* * * * *
    (c) A bank, association, or service corporation board of directors 
may delegate authority to retire at-risk stock to institution 
management if:
    (1) The board has determined that the institution's capital 
position is adequate;
    (2) All retirements are in accordance with the institution's 
capital adequacy plan or capital restoration plan;
    (3) The institution's permanent capital ratio will be in excess of 
9 percent after any retirements;
    (4) The institution will continue to satisfy all applicable minimum 
surplus and collateral standards after any retirements; and
    (5) Management reports the aggregate amount and net effect of stock 
purchases and retirements to the board of directors each quarter.
    (d) Each board of directors of a bank, association, or service 
corporation that issues preferred stock must adopt a written policy 
covering the retirement of preferred stock. The policy must, at a 
minimum:
    (1) Establish any delegations of authority to retire preferred 
stock and the conditions of delegation, which must meet the 
requirements of paragraph (c) of this section and include minimum 
levels for total surplus and core surplus commensurate with the 
volatility of the preferred stock.
    (2) Identify limitations on the amount of stock that may be retired 
during a single quarterly (or shorter) time period;
    (3) Ensure that all stockholder requests for retirement are treated 
fairly and equitably;
    (4) Prohibit any insider, including institution officers, 
directors, employees, or agents, from retiring any preferred stock in 
advance of the release of material non-public information concerning 
the institution to other stockholders; and
    (5) Establish when insiders may retire their preferred stock.
    (e) The institution's board must review its policy at least 
annually to ensure that it continues to be appropriate for the 
institution's current financial condition and consistent with its long-
term goals established in its capital adequacy plan.

0
17. Add new Sec.  615.5295 to read as follows:


Sec.  615.5295  Payment of dividends.

    (a) The board of directors of a bank, association, or service 
corporation must declare a dividend on a class of stock before any 
dividends may be paid to stockholders.
    (b) No bank, association, or service corporation may declare or pay 
any dividend unless after declaration or payment of the dividend the 
institution would continue to meet its regulatory capital standards 
under this part.
    (c) Each bank, association, and service corporation must exclude 
any accrued but unpaid dividends from regulatory capital computations 
under this part.

PART 620--DISCLOSURE TO SHAREHOLDERS

0
18. 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 B--Annual Report to Shareholders

0
19. Amend Sec.  620.5 by revising paragraph (j)(2) to read as follows:


Sec.  620.5  Contents of the annual report to shareholders.

* * * * *
    (j) * * *
    (2) Transactions other than loans. For each person who served as a 
senior officer or director on January 1 of the year following the 
fiscal year of which the report is filed, or at any time during the 
fiscal year just ended, describe briefly any transaction or series of 
transactions other than loans that occurred at any time since the last 
annual meeting between the institution and such person, any member of 
the immediate family of such person, or any organization with which 
such person is affiliated.
    (i) For transactions relating to the purchase or retirement of 
preferred stock issued by the institution, state the name of each 
senior officer or director

[[Page 53910]]

that held preferred stock issued by the institution during the 
reporting period, the current amount of preferred stock held by the 
senior officer or director, the average dividend rate on the preferred 
stock currently held, and the amount of purchases and retirements by 
the individual during the reporting period.
    (ii) For all other transactions, state the name of the senior 
officer or director who entered into the transaction or whose immediate 
family member or affiliated organization entered into the transaction, 
the nature of the person's interest in the transaction, and the terms 
of the transaction. No information need be given where the purchase 
price, fees, or charges involved were determined by competitive bidding 
or where the amount involved in the transaction (including the total of 
all periodic payments) does not exceed $5,000, or the interest of the 
person arises solely as a result of his or her status as a stockholder 
of the institution and the benefit received is not a special or extra 
benefit not available to all stockholders.
* * * * *

    Dated: September 7, 2005.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 05-18053 Filed 9-12-05; 8:45 am]
BILLING CODE 6705-01-P