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contains regulatory documents having general

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Rules and Regulations Federal Register

53901 

Vol. 70, No. 176 

Tuesday, September 13, 2005 

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. 

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. 

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 

§ 612.2165(b)(12)–(15), § 615.5245(a), 

and § 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: 

• Ensure the stability and quality of 

capital at FCS institutions; 

• Ensure fair and equitable treatment 

of all shareholders of FCS preferred 

stock and minimize the potential for 

insider abuse; 

• Modify and streamline our review 

and clearance process for equity 

issuances; and 

• 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: 

• Section 612.2165(b)(12)–(15) 

(Policies and Procedures); 

• Section 615.5245(a) (Limitations on 

association-issued preferred stock); and 

• 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 institutionspecific 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. 

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 

53902 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

2As 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. 

3See 12 U.S.C. 2013(9), 2073(16), 2093(8), 

2122(9), and 2154a(b). 

4 12 U.S.C. 2154a(a)(2). 

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: 

• 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); 

• 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; 

• FCA has no discretion to narrow the 

statutory definition of permanent 

capital; 

• 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; 

• 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; 

• 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; 

• 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; 

• Existing regulatory controls and 

conditions on preferred stock issuances 

adequately address safety and 

soundness concerns regardless of the 

permanent capital ratio; 

• There have been no complaints 

from System institution members about 

any aspect of existing preferred stock 

programs; and 

• 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: 

• 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); 

• Threatening the deposit base of 

community banks hurts rural America, 

which is inconsistent with the aims of 

the Act; 

• System institutions have sufficient 

sources of capital and therefore don’t 

need preferred stock to raise capital; 

• 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

• Preferred stock should have a 

minimum effective maturity of 5 years 

to better recognize the purpose of 

preferred stock to provide stable, longterm capital and to prevent preferred 

stock from performing too much like 

money market or deposit instruments; 

• FCS preferred stock should be 

subject to the same limits imposed by 

the Federal Deposit Insurance 

Corporation (FDIC) for commercial bank 

preferred stock; 

• 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 

• 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 § 615.5203 (‘‘Treatment of 

Preferred Stock in the Permanent 

Capital Ratio’’) and proposed 

§ 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: 

(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. 

Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 53903 

5 53 FR 40033 (October 13, 1988). 

6Continually 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.’’

7See 62 FR 4429 (January 30, 1997). 

8The 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. 

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

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 nonSystem commenters that System 

institutions not advertise or otherwise 

represent that their preferred stock 

offerings are deposits or ‘‘money 

market’’ accounts. Current 

§ 615.5250(c)(1) (redesignated as new 

§ 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 

§ 615.5250(c)(4) (redesignated as new 

§ 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 § 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

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 § 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

Deleted § 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 

53904 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

9 12 U.S.C. 2154. 

10 12 U.S.C. 2241 et seq. 

11See 12 U.S.C. 2014, 2074(a), 2094, 2146. 

12 12 U.S.C. 2154a(c)(1)(I). 13 12 CFR 612.2135. 

14The FCA adopted on June 9, 2005, regulatory 

amendments that address investments by Farmer 

Mac in other FCS institutions. (70 FR 40635, July 

14, 2005). 

15See 12 U.S.C. 2013(11), (16), 2073(7), (8). 

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 § 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 § 615.5270(d) would have 

generally prohibited retirement of any 

preferred stock prior to 12 months after 

the date of issuance. Proposed 

§ 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. NonSystem 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. 

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—§ 612.2165 

Proposed § 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 § 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 § 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 § 612.2165 as final. 

B. Lending Limits—§ 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 § 615.5301(i). We 

received no comments and adopt the 

proposal as final. 

C. Investments in FCS Institution 

Preferred Stock—§ 615.5175 

Proposed § 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 § 615.5171 (which 

relates to transfer of capital from banks 

to associations).14

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 § 615.5175 as final without 

changes. 

D. Capital Adequacy—Definitions— 

§ 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 § 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 § 615.5201. 

Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 53905 

E. Treatment of Preferred Stock for 

Permanent Capital Computations—

§ 615.5203 

For the reasons discussed in detail 

above, we delete proposed § 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 

§ 615.5201, which retains the definition 

(and treatment) of term preferred stock 

from previous § 615.5201(1)(5). 

F. Implementation of Cooperative 

Principles—§ 615.5230 

We proposed to make a one-word 

addition to § 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—

§ 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 

§ 615.5275(a) and broadened to include 

all ‘‘stock.’’ This was included in the 

proposed rule as § 615.5270(e). 

H. Limitation on FCS Association 

Preferred Stock—§ 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 § 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 noninsiders 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—§ 615.5250 

The proposed rule reorganized this 

section but retained the same 

requirements. We received no 

comments on this proposal and adopt 

§ 615.5250 as final without changes. 

J. Disclosure and Review Requirements 

for Other Equities—§ 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 

53906 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

16The 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. 

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. 

One Farm Credit Bank suggested that 

because proposed § 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 § 615.5255(d) as 

redesignated § 615.5255(e) without 

change. 

In the final rule we adopt proposed 

§ 615.5255(j) as redesignated 

§ 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. NonSystem 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 § 615.5255 and adopt all other 

proposed changes as final. 

K. Retirement of Other Equities—

§ 615.5270 

As discussed above, because we have 

decided to address our safety and 

soundness concerns through other 

means, we have deleted proposed 

§ 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 § 615.5270(f), 

now designated as § 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—§ 615.5295 

Proposed § 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 

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

■ 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 

■ 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 

■ 2. Amend § 611.1135 by revising 

paragraph (f) to read as follows: 

§ 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 § 615.5255 of this chapter. 

PART 612—STANDARDS OF 

CONDUCT 

■ 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). 

■ 4. Amend § 612.2165 by revising 

paragraphs (b)(12) and (b)(13) and 

adding new (b)(14) and (b)(15) to read 

as follows: 

§ 612.2165 Policies and procedures. 

* * * * * 

(b) * * * 

(12) Establish reporting requirements, 

consistent with this part, to enable the 

institution to comply with § 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 nonpublic 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 

■ 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 

■ 6. Amend § 614.4351 by adding a new 

paragraph (a)(3) to read as follows: 

§ 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 § 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 

■ 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. 

53908 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

Subpart F—Property, Transfers of 

Capital, and Other Investments 

■ 8. Add new § 615.5175 to read as 

follows: 

§ 615.5175 Investments in Farm Credit 

System institution preferred stock. 

Except as provided for in § 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 

■ 9. Amend § 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: 

§ 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 

■ 10. Revise § 615.5230(b)(1) to read as 

follows: 

§ 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; 

* * * * * 

■ 11. Revise § 615.5240 to read as 

follows: 

§ 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. 

■ 12. Add a new § 615.5245 to read as 

follows: 

§ 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. 

■ 13. Revise § 615.5250 to read as 

follows: 

§ 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. 

■ 14. Add new § 615.5255 to read as 

follows: 

§ 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 

§ 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 

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

■ 15. Amend subpart J of part 615 by 

revising the heading to read as stated 

above. 

■ 16. Amend § 615.5270 by adding new 

paragraphs (c), (d), and (e) to read as 

follows: 

§ 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. 

■ 17. Add new § 615.5295 to read as 

follows: 

§ 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 

■ 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 

■ 19. Amend § 620.5 by revising 

paragraph (j)(2) to read as follows: 

§ 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 

53910 Federal Register / Vol. 70, No. 176 / Tuesday, September 13, 2005 / Rules and Regulations 

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 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2005–22332; Directorate 

Identifier 2005–CE–46–AD; Amendment 39–

14262; AD 2005–18–21] 

RIN 2120–AA64 

Airworthiness Directives; Raytheon 

Aircraft Company Models 1900, 1900C, 

1900C (C–12J), and 1900D Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final rule; request for 

comments. 

SUMMARY: The FAA is adopting a new 

airworthiness directive (AD) for certain 

Raytheon Aircraft Company Models 

1900, 1900C, 1900C (C–12J), and 1900D 

airplanes. This AD requires you to 

inspect all elevator hinge support 

attachments on both left and right 

elevators for loose and missing rivets, 

replace rivets if loose or missing rivets 

are found, inspect the elevator hinge 

joints for looseness and clearance of 

each elevator to its stabilizer, correct 

looseness and clearance if incorrect, and 

report results of the required 

inspections. This AD results from a 

report of excessive movement of the 

elevator and elevator trim. The hinge 

support attachment that attaches the 

elevator to the horizontal stabilizer was 

loose and had loose and missing rivets. 

The elevator counterweight horn 

showed evidence of rubbing against the 

horizontal stabilizer, indicating possible 

incorrect clearance. We are issuing this 

AD to detect and correct any looseness 

in the elevator hinge support 

attachments, which could result in 

binding of the elevator control system. 

This elevator binding could lead to loss 

of control of the airplane. 

DATES: This AD becomes effective 

September 13, 2005. 

As of September 13, 2005, the 

Director of the Federal Register 

approved the incorporation by reference 

of certain publications listed in the 

regulation. 

We must receive any comments on 

this AD by October 20, 2005. 

ADDRESSES: Use one of the following to 

submit comments on this AD: 

• DOT Docket Web site: Go to 

http://dms.dot.gov and follow the 

instructions for sending your comments 

electronically. 

• Government-wide rulemaking Web 

site: Go to http://www.regulations.gov 

and follow the instructions for sending 

your comments electronically. 

• Mail: Docket Management Facility; 

U.S. Department of Transportation, 400 

Seventh Street, SW., Nassif Building, 

Room PL–401, Washington, DC 20590–

001. 

• Fax: 1–202–493–2251. 

• Hand Delivery: Room PL–401 on 

the plaza level of the Nassif Building, 

400 Seventh Street, SW., Washington, 

DC, between 9 a.m. and 5 p.m., Monday 

through Friday, except Federal holidays. 

To get the service information 

identified in this proposed AD, contact 

Raytheon Aircraft Company, P.O. Box 

85, Wichita, Kansas 67201; telephone: 

(800) 625–7043. 

To view the comments to this AD, go 

to http://dms.dot.gov. The docket 

number is FAA–2005–22332; 

Directorate Identifier 2005–CE–46–AD. 

FOR FURTHER INFORMATION CONTACT: 

Steven E. Potter, Aerospace Engineer, 

Airframe and Services Branch, ACE–

118W, 1801 Airport Road, Wichita, 

Kansas 67209; telephone: (316) 946–

4124; facsimile: (316) 946–4107. 

SUPPLEMENTARY INFORMATION: 

What events have caused this AD? On 

a recent flight, a Model 1900D 

experienced a binding elevator control 

column during takeoff. The pilot was 

able to free the control column. During 

continuation of the flight the elevator 

trim moved slowly nose up and 

required a one-half unit trim adjustment 

every one to two minutes. An inspection 

found a missing rivet and other loose 

rivets on the outboard hinge attachment 

that attaches the elevator to the 

horizontal stabilizer. The elevator 

counterweight horn showed evidence of 

rubbing against the horizontal stabilizer, 

indicating possible incorrect clearance. 

Loose rivets were found on other 

airplanes of the same type design. 

What is the potential impact if FAA 

took no action? Looseness in the 

elevator hinge support attachments 

could result in binding of the elevator 

control system. This elevator binding 

could lead to loss of control of the 

airplane. 

Is there service information that 

applies to this subject? Raytheon 

Aircraft Company has issued Safety 

Communique ́ No. 261, dated August 

2005. 

What are the provisions of this service 

information? The service information 

specifies inspecting all elevator hinge 

support attachments on both left and 

right elevators. 

FAA’s Determination and Requirements 

of the AD 

What has FAA decided? We have 

evaluated all pertinent information and 

identified an unsafe condition that is 

likely to exist or develop on other 

products of this same type design. 

Since the unsafe condition described 

previously is likely to exist or develop 

on other Raytheon Aircraft Company 

Models 1900, 1900C, 1900C (C–12J), and 

1900D airplanes of the same type 

design, we are issuing this AD to detect 

and correct any looseness in the elevator 

hinge support attachments, which could 

result in binding of the elevator control 

system. This elevator binding could lead 

to loss of control of the airplane. 

What does this AD require? This AD 

requires you to inspect all elevator 

hinge support attachments on both left 

and right elevators for loose and missing 

rivets, replace rivets if loose or missing 

rivets are found, inspect the elevator 

hinge joints for looseness and clearance 

of each elevator to its stabilizer, correct 

looseness and/or clearance if incorrect, 

and report results of the required 

inspections. 

How does the revision to 14 CFR part 

39 affect this AD? On July 10, 2002, we 

published a new version of 14 CFR part 

39 (67 FR 47997, July 22, 2002), which 

governs FAA’s AD system. This 

regulation now includes material that 

relates to altered products, special flight 

permits, and alternative methods of 

compliance. This material previously