[Federal Register Volume 70, Number 183 (Thursday, September 22, 2005)]
[Rules and Regulations]
[Pages 55513-55516]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18892]


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FARM CREDIT ADMINISTRATION

12 CFR Part 627

RIN 3052-AC26


Title IV Conservators, Receivers, and Voluntary Liquidations; 
Receivership Repudiation Authorities

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) issues this 
final rule amending our regulations governing how the Farm Credit 
System Insurance Corporation (FCSIC), as receiver or conservator of a 
Farm Credit System (System) institution, will treat financial assets 
transferred by the institution in connection with a securitization or 
in the form of a participation. This final rule will resolve issues 
raised by Financial Accounting Standards Board (FASB) Statement No. 
140, Accounting for Transfers and Servicing of Financial Assets and 
Extinguishment of Liabilities (SFAS 140). Under conditions described in 
the final rule, the FCSIC will not seek to recover or reclaim certain 
financial assets in exercising its authority to repudiate or disaffirm 
contracts pursuant to 12 CFR 627.2725(b)(2), (b)(14) and 627.2780(b) 
and (d). Additionally, with this final rule, the FCSIC will not seek to 
enforce the ``contemporaneous'' requirement of section 5.61(d) of the 
Farm Credit Act of 1971, as amended (Act) (12 U.S.C. 2277a-10(d)). The 
final rule is substantially identical to receivership rules issued by 
the Federal Deposit Insurance Corporation (FDIC) and the National 
Credit Union Administration (NCUA).

EFFECTIVE DATE: This regulation will be effective 30 days after 
publication in the Federal Register during which either or both Houses 
of Congress are in session. We will publish a notice of the effective 
date in the Federal Register.

FOR FURTHER INFORMATION CONTACT:
Robert E. Donnelly, Senior Accountant, Office of Policy and Analysis, 
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TTY 
(703) 883-4434, or
Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION:

I. Objective

    The objective in this final rule is to give certainty to System 
institutions regarding how the FCSIC will treat qualifying 
participations and securitizations if the institution is subsequently 
placed in conservatorship or receivership. The rule will achieve this 
by ensuring that the FCSIC will not attempt to ``pull back'' the 
subject assets into the conservatorship or receivership estate if the 
transaction meets specified conditions.
    There is nothing in this final rule that provides any System 
institutions with the authority to engage in any transaction that is 
not otherwise authorized.

[[Page 55514]]

II. Background

    As discussed in the preamble to the proposed rule (see 70 FR 21685, 
April 27, 2005), under generally accepted accounting principles (GAAP), 
a transfer of financial assets is accounted for as a sale if the 
transferor surrenders control over the assets. This principle is set 
forth in the SFAS No. 140 issued by the FASB.\1\ Under this principle, 
one of the conditions for determining that the transferor has 
surrendered control is that the assets have been isolated from the 
transferor, i.e., put presumptively beyond the reach of the transferor, 
its creditors, a trustee in bankruptcy, or a receiver. This is known as 
the ``legal isolation'' condition.
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    \1\ SFAS 140 replaced SFAS 125 (which had covered the same 
issues and was identically titled) in September 2000. SFAS 140 
revised the standards for accounting for securitizations and other 
transfers of financial assets and collateral and required certain 
disclosures, but it carried over most of the provisions of SFAS 125 
without reconsideration. The FDIC receivership issues and its 
related rule 12 CFR 360.6, which are discussed later in this 
preamble, are described in paragraphs 157-160 of SFAS 140.
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    Whether the legal isolation condition has been met is determined 
primarily from a legal perspective. This determination involves 
considerations of the kind of receivership into which the transferor 
may be placed and the powers of the receiver to reach assets that were 
transferred prior to its appointment. If the available evidence 
provides reasonable assurance that the transferred assets would be 
beyond the reach of the powers of a bankruptcy trustee or receiver for 
the transferor, then a determination that the transferred assets have 
been legally isolated is appropriate.
    When the transferor is a System institution, the FCSIC may be 
appointed conservator or receiver. The FCSIC has authority to repudiate 
burdensome contracts under Sec. Sec.  627.2725(b)(2), (b)(14) and 
627.2780(b) and (d) of FCA regulations; and it can repudiate certain 
other contracts under section 5.61(d) of the Act.\2\ Due to these 
provisions, the question becomes whether financial assets transferred 
in connection with a securitization or in the form of a participation 
would be beyond the reach of the FCSIC as conservator or receiver.
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    \2\ See 12 CFR 627.2725(b)(2), (b)(14) and 627.2780(b) and (d), 
and 12 U.S.C. 2277a-10(d).
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    Under Sec. Sec.  627.2725(b)(2) and 627.2780(d), the FCSIC may take 
any action it considers appropriate or expedient to carry on the 
business of the institution during the process of liquidation or during 
the conservatorship. Under Sec.  627.2725(b)(14), the FCSIC, when 
acting as conservator or receiver of a System institution, has the 
power to disaffirm or repudiate any contract or lease to which the 
institution is a party, the performance of which the FCSIC determines 
to be burdensome. Repudiation of a contract relieves the FCSIC from 
performing any unperformed obligations remaining under the contract. 
Section 5.61(d) of the Act provides that no agreement that tends to 
diminish or defeat the FCSIC's interest in an asset acquired by the 
FCSIC as conservator or receiver is enforceable against the FCSIC 
unless the agreement meets certain requirements. One of those 
requirements is that the agreement must be executed, by the institution 
and by any person claiming an adverse interest under it, 
contemporaneously with the acquisition of the asset by the institution. 
This is referred to as the ``contemporaneous'' requirement. These 
provisions are discussed below.

III. Description of the Final Rule

    This final rule will add a new Sec.  627.2726 to the 
conservatorship and receivership provisions in part 627 of FCA's 
regulations. The rule will apply only to those securitizations or 
participations in which the transfer of financial assets meets all 
conditions for sale accounting treatment under GAAP, other than the 
``legal isolation'' condition as it applies to institutions for which 
the FCSIC may be appointed as conservator or receiver, which is 
addressed by this rule. The final rule provides that, for these 
transfers, the FCSIC will not, by exercise of its authority to 
repudiate contracts under Sec.  627.2725(b)(2) or (b)(14), reclaim, 
recover, or recharacterize as property of the institution or the 
receivership any financial assets transferred by a System institution 
in connection with a securitization or in the form of a participation. 
Although the repudiation of a securitization or participation will not 
affect transferred financial assets, repudiation will excuse the FCSIC 
from performing any continuing obligations imposed by the 
securitization or participation. If the FCSIC, in order to terminate 
such continuing obligations or duties, seeks to repudiate an agreement 
or contract under which a System institution has transferred financial 
assets in connection with a securitization or in the form of a 
participation, the FCSIC will not seek to reclaim, recover, or 
recharacterize as property of the institution or the receivership such 
financial assets.
    The definitions in the final rule are limited to this rule only, 
and language has been added to the final rule to clarify this point. 
The definition of ``participation'' is specifically limited to 
participations that are ``without recourse'' to the selling or ``lead'' 
institution. ``Without recourse'' means that the participation must not 
be subject to any agreement that requires the selling or ``lead'' 
institution to repurchase the participant's interest or to otherwise 
compensate the participant upon the borrower's default on the 
underlying obligation. The term ``without recourse'' will not, however, 
preclude the lead institution from retaining a subordinated interest in 
the participated obligation, against which losses are initially 
allocated. The final rule will not apply unless the System institution 
received adequate consideration for the transfer of financial assets at 
the time of the transfer, and the documentation effecting the transfer 
of financial assets reflects the intent of the parties to treat the 
transaction as a sale, and not as a secured borrowing, for accounting 
purposes.
    The final rule further provides that it will not be construed as 
waiving, limiting, or otherwise affecting the rights or powers of the 
FCSIC to take any action or to exercise any power not specifically 
limited by this section. Such rights or powers include, but are not 
limited to, any rights, powers or remedies of the FCSIC regarding 
transfers taken in contemplation of the institution's insolvency or 
with the intent to hinder, delay, or defraud the institution or the 
creditors of such institution, or that is a fraudulent transfer under 
applicable law.
    The final rule further provides that the FCSIC will not seek to 
avoid an otherwise legally enforceable securitization agreement or 
participation agreement executed by a System institution solely because 
such agreement does not meet the ``contemporaneous'' requirement of 
section 5.61(d) of the Act.
    The final rule will apply to securitizations and participations 
engaged in by System institutions while the rule is in effect, even if 
the rule is later amended or repealed. Section 627.2726(g) provides 
that any repeal or amendment of the rule by the FCA will not apply to 
any transfer of financial assets made in connection with a 
securitization or participation that was in effect before such repeal 
or amendment. As a result of Sec.  627.2726(g), where a transfer of 
financial assets in connection with a securitization or in the form of 
a participation is made by a System institution and the securitization 
or participation was in effect before any repeal or amendment of the 
rule by the FCA, such transfer

[[Page 55515]]

will continue to satisfy the legal isolation requirement 
notwithstanding the repeal or amendment.
    The final rule makes a conforming change to Sec.  627.2780(b) to 
clarify that the provisions of this final rule apply to a 
conservatorship as well as to a receivership.

IV. Comments

    The FCA received no written comments on the proposed rule. The FCA 
adopts the rule as final with no substantive changes other than the 
change to the definitions section described above.

V. Regulatory Flexibility Act

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

List of Subjects in 12 CFR Part 627

    Agriculture, Banks, banking, Claims, Rural areas.

0
For the reasons stated in the preamble, part 627 of chapter VI, title 
12 of the Code of Federal Regulations is amended as follows:

PART 627--CONSERVATORS, RECEIVERS, AND VOLUNTARY LIQUIDATIONS

0
1. The authority citation for part 627 is amended to read as follows:

    Authority: Secs. 4.2, 5.9, 5.10, 5.17, 5.51, 5.58, 5.61 of the 
Farm Credit Act (12 U.S.C. 2183, 2243, 2244, 2252, 2277a, 2277a-7, 
2277a-10).

Subpart B--Receivers and Receiverships

0
2. Add a new Sec.  627.2726 to read as follows:


Sec.  627.2726  Treatment by the conservator or receiver of financial 
assets transferred in connection with a securitization or 
participation.

    (a) Definitions. For the purposes of this section, the following 
definitions apply:
    Beneficial interest means debt or equity (or mixed) interests or 
obligations of any type issued by a special purpose entity that entitle 
their holders to receive payments that depend primarily on the cash 
flow from financial assets owned by the special purpose entity.
    Financial asset means cash or a contract or instrument that conveys 
to one entity a contractual right to receive cash or another financial 
instrument from another entity.
    Participation means the transfer or assignment of an undivided 
interest in all or part of a loan or a lease from a seller, known as 
the ``lead'', to a buyer, known as the ``participant'', without 
recourse to the lead, pursuant to an agreement between the lead and the 
participant. Without recourse means that the participation is not 
subject to any agreement that requires the lead to repurchase the 
participant's interest or to otherwise compensate the participant due 
to a default on the underlying obligation.
    Securitization means the issuance by a special purpose entity of 
beneficial interests:
    (1) The most senior class of which at the time of issuance is rated 
in one of the four highest categories assigned to long-term debt or in 
an equivalent short-term category (within either of which there may be 
sub-categories or gradations indicating relative standing) by one or 
more nationally recognized statistical rating organizations, or
    (2) Which are sold in transactions by an issuer not involving any 
public offering for purposes of section 4 of the Securities Act of 1933 
(15 U.S.C. 77d), as amended, or in transactions exempt from 
registration under such Act pursuant to Regulation S thereunder (or any 
successor regulation).
    Special purpose entity means a trust, corporation, or other entity 
demonstrably distinct from the Farm Credit institution that is 
primarily engaged in acquiring and holding (or transferring to another 
special purpose entity) financial assets, and in activities related or 
incidental thereto, in connection with the issuance by such special 
purpose entity (or by another special purpose entity that acquires 
financial assets directly or indirectly from such special purpose 
entity) of beneficial interests.
    (b) The receiver shall not, by exercise of its authority to 
repudiate contracts under Sec.  627.2725(b)(2) and (b)(14), reclaim, 
recover, or recharacterize as property of the institution or the 
receivership any financial assets transferred by a Farm Credit 
institution in connection with a securitization or participation, 
provided that such transfer meets all conditions for sale accounting 
treatment under generally accepted accounting principles, other than 
the ``legal isolation'' condition as it applies to institutions for 
which the FCSIC may be appointed as receiver which is addressed by this 
section.
    (c) Paragraph (b) of this section shall not apply unless the Farm 
Credit institution received adequate consideration for the transfer of 
financial assets at the time of the transfer, and the documentation 
effecting the transfer of financial assets reflects the intent of the 
parties to treat the transaction as a sale, and not as a secured 
borrowing, for accounting purposes.
    (d) Paragraph (b) of this section shall not be construed as 
waiving, limiting, or otherwise affecting the power of the receiver to 
disaffirm or repudiate any agreement imposing continuing obligations or 
duties upon the institution in receivership.
    (e) Paragraph (b) of this section shall not be construed as 
waiving, limiting or otherwise affecting the rights or powers of the 
receiver to take any action or to exercise any power not specifically 
limited by this section, including, but not limited to, any rights, 
powers or remedies of the receiver regarding transfers taken in 
contemplation of the institution's insolvency or with the intent to 
hinder, delay, or defraud the institution or the creditors of such 
institution, or that is a fraudulent transfer under applicable law.
    (f) The receiver shall not seek to avoid an otherwise legally 
enforceable securitization agreement or participation agreement 
executed by a Farm Credit institution solely because such agreement 
does not meet the ``contemporaneous'' requirement of section 5.61(d) of 
the Act.
    (g) This section may be repealed or amended by the Farm Credit 
Administration, but any such repeal or amendment shall not apply to any 
transfers of financial assets made in connection with a securitization 
or participation that was in effect before such repeal or modification.

Subpart C--Conservators and Conservatorships

0
3. Amend Sec.  627.2780(b) by adding a second sentence to read as 
follows:


Sec.  627.2780  Powers and duties of conservators.

* * * * *
    (b) * * * The provisions of Sec.  627.2726 shall also apply to the 
conservator of a Farm Credit institution.* * *
* * * * *


[[Page 55516]]


    Dated: September 16, 2005.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 05-18892 Filed 9-21-05; 8:45 am]
BILLING CODE 6705-01-P