Source: http://www.fca.gov/preambles_historical.nsf/4da2e7d1cb5aee2a852565a8006489ba/99552e66e847c616852568270063eaff?OpenDocument
Timestamp: 2014-03-11 08:21:19
Document Index: 76624104

Matched Legal Cases: ['art 630', 'art 630', 'art 630', 'art 630', 'art 621', 'art 621', 'art 621', 'art 621', 'art 620', 'art 620', 'art 620', 'art 630', 'art 621', 'art 620', 'art 630', 'art 621']

59 FR 46734
Title:	FINAL RULE--Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System--12 CFR Part 630	Issue Date:	09/12/1994
Federal Register Cite:	59 FR 46734
12 CFR Part 630 RIN 3052-AB23 Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System ACTION: Final rule. [*46734] SUMMARY: The Farm Credit Administration (FCA), by the FCA Board, adopts new final regulations governing the Farm Credit System's (FCS or System) preparation and reporting of Systemwide financial information to investors. The final rule requires that each bank of the System, the Federal Farm Credit Banks Funding Corporation (Funding Corporation), and the Farm Credit System Financial Assistance Corporation (Financial Assistance Corporation) jointly publish periodic reports to investors and potential investors in Systemwide debt obligations and consolidated bank debt obligations of the Farm Credit System (FCS debt obligations).
The purpose of the rule is to ensure that timely and accurate Systemwide financial information continues to be disclosed to investors and the public to assist them in making informed decisions regarding FCS debt obligations and System institutions. The required report to investors must present Systemwide combined financial statements, supplemental financial statement information, and related analyses pertaining to System institutions on a combined basis. The final rule covers Systemwide financial and nonfinancial information now regularly disclosed by the Funding Corporation in annual and quarterly information statements and press releases.
The final regulations generally parallel the existing Farm Credit System Disclosure Program (System Disclosure Program) and should not impose any significant additional burdens on System institutions. Consistent with the System Disclosure Program, the final rule preserves the existing reporting relationship between a System bank and its related associations. EFFECTIVE DATE: The regulations shall become effective upon the expiration of 30 days after publication in the Federal Register during which either or both Houses of Congress are in session. Notice of the effective date will be published in the Federal Register. FOR FURTHER INFORMATION CONTACT:
Tong-Ching Chang, Staff Accountant, Policy Development and Planning Division, Office of Examination, Farm Credit Administration, McLean, Virginia 22102-5090, (703) 883-4483, TDD (703) 883-4444,
William L. Larsen, Senior Attorney, Regulatory Operations Division, Office of General Counsel, Farm Credit Administration, McLean, Virginia 22102-5090, (703) 883-4020, TDD (703) 883-4444. [*46735] SUPPLEMENTARY INFORMATION:
Under the System Disclosure Program, the Funding Corporation, on behalf of the System, periodically distributes to investors a disclosure document containing Systemwide financial information. The System institutions that participate in the System Disclosure Program (i.e., each of the System banks, the Funding Corporation, and the Financial Assistance Corporation n1 ) jointly publish the Report to Investors of the Farm Credit System (FCS Report) on an annual basis. The FCS Report includes an Information Statement and a general report. The Information Statement contains combined financial statements and related analyses pertaining to all System institutions. The general report contains other information about the System, its debt obligations, and the environment in which it operates. Except for the quarter that coincides with the end of the fiscal year, System institutions also jointly publish a quarterly Information Statement. In connection with the sale of debt securities, the Funding Corporation routinely distributes the FCS Report and quarterly Information Statement to the investment dealers and dealer banks (selling group) that sell FCS debt securities. The FCA currently has no regulations that specifically govern the System's disclosure of Systemwide financial information to investors.
n1 Since the board of the Funding Corporation is also the board of the Financial Assistance Corporation, the Financial Assistance Corporation's participation in the System Disclosure Program is implied.
II. Statutory Authority and Proposed Rulemaking
Under section 5.17(a)(8) of the Farm Credit Act of 1971, as amended (1971 Act), 12 U.S.C. 2252(a)(8), the FCA is authorized to "Regulate the preparation by System institutions and the dissemination to stockholders and investors of information on the financial condition and operations of such institutions. * * *" On February 4, 1994, the FCA proposed regulations for a new part 630, Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System, to govern the System's preparation and reporting of Systemwide financial information to investors. (59 FR 5341) In general, the proposed regulations reflected the current division of responsibilities among the institutions participating in the System Disclosure Program, and included requirements for disclosures similar to those contained in the Information Statements currently published by the System. The institutions participating in the System Disclosure Program were designated as the "disclosure entities" in the proposed regulations, in recognition of their shared responsibility for disclosure of Systemwide financial information to investors and the general public.
III. Discussion of the Final Rule and Summary of Public Comments
The FCA is adopting part 630 largely as proposed. The final rule includes changes and clarifications to address comments received on the proposed rule. As in the proposed regulations, the final regulations (1) Require the System to publish annual and quarterly reports to investors; (2) delineate responsibilities relating to the preparation of the report; (3) reinforce internal controls over Systemwide financial disclosure; and (4) establish reporting standards for the report to ensure that relevant information concerning the combined financial condition and results of operations of the System is disclosed to investors and potential investors. The final rule will prevent any inconsistency between Systemwide disclosure to investors and FCA regulations governing accounting and reporting standards and individual System institution disclosure to shareholders. These new FCA regulations will apply to the information currently contained in the System's Information Statements and press releases that contain Systemwide financial information. The final rule also implements section 514 of the Farm Credit Banks and Associations Safety and Soundness Act of 1992, Pub. L. 102-552 (1992 Act), which requires adequate disclosure to investors of financial and conflict-of-interest information.
The final regulations will ensure that timely and accurate Systemwide financial information continues to be disclosed to investors and the public to assist them in making informed decisions regarding FCS debt obligations and System institutions. This is consistent with the FCA Board's regulatory policy to "Protect the public, the investors, and the customer/shareholders of the System in an effort to create an environment whereby customer/shareholders and investors can take advantage of the System's strength and rely on its future viability with confidence." (See FCA Board Policy Statement on Regulatory Philosophy, 59 FR 32189, June 22, 1994)
The FCA received six comment letters on the proposed regulations during the comment period, which expired on April 20, 1994. One letter was submitted by the Farm Credit Council (FCC) on behalf of its membership. The FCC comments were the product of input from a number of sources, including System banks, the System's Accounting Standards Work Group, and the Funding Corporation. The FCC recognized and concurred with the FCA's efforts to ensure that timely and accurate Systemwide financial information continues to be disclosed to investors and potential investors in FCS debt securities. Noting the System's general support for the proposed regulations, the FCC submitted comments on several provisions of the proposed regulations in the body of its letter and provided technical comments on other provisions in an attached appendix.
The Funding Corporation, the Farm Credit Bank of Texas (FCBT), and the Farm Credit Bank of Baltimore (FCBB) each submitted a letter addressing specific issues. The Funding Corporation commented concerning its access to FCA Examination Reports of System banks and associations. The FCBT addressed the same issue in its letter. In addition, the FCBT urged that the FCA prohibit directors of System institutions from serving on the System Audit Committee. While endorsing the comments submitted by the FCC, the FCBB urged that the FCA clarify, for purposes of Systemwide disclosure, the treatment of the FCBB's wholly-owned subsidiary, the Farm Credit Finance Corporation of Puerto Rico.
The American Institute of Certified Public Accountants (AICPA) and Price Waterhouse, the external auditor currently engaged to provide an opinion on the Systemwide combined financial statements, also commented on the proposed regulations. Both of these commentors suggested that the requirements for an accountant's opinion on supplemental information be clarified. The AICPA also commented on issues concerning the definition of "material," the due dates of the reports to investors, and the requirement for filing a letter with the FCA explaining the preferability of an accounting change.
After the FCA published the proposed rule, the General Accounting Office (GAO) issued a report entitled "Farm Credit System: Repayment of Federal Assistance and Competitive Position" (GAO/GGD-94-39, dated March 10, 1994), which recommended that the FCA require the System to exclude the Farm Credit Insurance Fund (Insurance Fund) from the System's combined financial statements because of the [*46736] GAO's view that exclusion is the most appropriate accounting treatment. On May 10, 1994, the FCA responded to the GAO's recommendation in a letter to Congressional committees which described the FCA's approach to Insurance Fund reporting as reflected in this rulemaking. The final regulations require that the System prepare the Systemwide combined financial statements in accordance with generally accepted accounting principles (GAAP), provide supplemental financial statement data with and without the Insurance Fund, and give a thorough discussion and analysis of the fund in the report to investors. The FCA believes that these regulations, as adopted, will ensure that investors are provided with meaningful information regarding the Insurance Fund and the effect of the fund on the System's financial position.
Provided below are a section-by-section analysis of changes to the proposed rule and FCA responses to the comments received.
IV. Section-by-Section Analysis of Public Comments
A. Section 630.2-Definitions
1. Section 630.2(b) and (h)-Definitions of "Combined Financial Statements" and "Systemwide Combined Financial Statements"
For preparation of the Systemwide combined financial statements, the final rule requires that each bank provide the Funding Corporation with bank-only financial data as well as with combined financial data of the bank and its related associations. The FCC and the FCBB commented that the proposed regulations should be clarified to address how the consolidated financial data of a bank and its wholly-owned subsidiaries should be reported in the Systemwide disclosure.
To distinguish financial data prepared on a combined basis from that prepared on a consolidated basis, a new definition of "combined financial statements" has been added in � 630.2(b) of the final rule. The definition is added to clarify that combined financial statements are prepared by a group of affiliated entities that share the same financial interest regardless of whether any of the entities has the ability to exercise control over another. In contrast, consolidated financial statements are prepared by a parent-entity to include the financial data of subsidiaries that are under its "control."
To prevent this newly added definition of "combined financial statements" from being confused with the definition of "Systemwide combined financial statements" contained in � 630.2(g) of the proposed rule, proposed � 630.2(g) has been simplified to define "Systemwide combined financial statements" as the combined financial statements required by this part. Proposed � 630.2(g) also is redesignated as � 630.2(h). The proposed language specifying the purpose for which the Systemwide combined financial statements are prepared has been moved and combined with provisions pertinent to financial statements in � 630.20(l).
2. Proposed Definition of "Material"
Section 630.2(f) of the proposed regulations provided a definition of "material" similar to that found in Securities and Exchange Commission (SEC) Rule 405. The FCA received two comments on the proposed definition of "material." The AICPA asserted that defining "material" other than as established in accounting literature would be confusing and inconsistent if audits of the Systemwide combined financial statements are required to be performed in accordance with generally accepted auditing standards (GAAS). The AICPA recommended either deleting the proposed definition of "material" or amending it to refer to the materiality definition in GAAS or in Financial Accounting Standards Board Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information (FAC No. 2).
The FCA notes that the definition of "material" in the proposed rule was intended to govern information presented outside the basic financial statements. n2 Regardless of the proposed definition, the Systemwide combined financial statements required by this part are subject to materiality criteria established in GAAP. Specifically, pursuant to � 630.3(c), n3 the Systemwide combined financial statements must be prepared in accordance with the accounting and reporting standards set forth in part 621 of this chapter. Because � 621.2(g) defines the term "material" in accordance with FAC No. 2, the GAAP definition of "material" contained in part 621 of this chapter will govern the System's preparation of Systemwide combined financial statements. Consequently, materiality judgments for preparation of the Systemwide combined financial statements must be made in accordance with GAAP.
n2 Information presented "outside" the basic financial statements refers to information that is not considered necessary for presentation of financial position, results of operations, or cashflows in conformity with GAAP, e.g., management's discussion and analysis.
n3 Section 630.3(c) provides that "All items of essentially the same character as items required to be reported in the reports of condition and performance pursuant to part 621 of this chapter shall be prepared in accordance with the rules set forth in part 621 of this chapter."
The FCC recommended that the proposed definition of "material" be expanded to recognize the different levels of reporting and disclosure responsibilities of the System banks and the Funding Corporation. The FCC suggested two separate definitions of "material." One of the suggested definitions would apply to the Banks' reporting responsibilities to the Funding Corporation and the second would apply to the Funding Corporation's disclosure responsibilities on a Systemwide basis as subject to antifraud provisions of the Federal securities laws.
Under GAAP, individual materiality judgments are made on a case-by-case basis and materiality is measured at each reporting level in light of surrounding circumstances. The GAAP position is supported by FAC No. 2 and recognizes that no general standards of materiality could be formulated to take into account all the considerations that enter into an experienced human judgment. In line with this approach to the concept of materiality, the FCA believes that it is unnecessary to include, as suggested by the FCC, two separate definitions of "material."
Materiality judgments regarding information presented outside the financial statements, while not covered by the GAAP definition, are governed by current standards of materiality under the securities laws. n4 The FCA believes that the case law standard of materiality provides sufficient guidance to the System in preparing information to be presented outside the financial statements. To avoid any confusion between the GAAP materiality standard which governs preparation of the financial statements, and the standard of materiality enunciated in the case law, which governs information presented outside of the financial statements, the proposed definition of "material" has been eliminated from the final rule.
n4 See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) and cases following.
3. Section 630.2(g)-Definition of "Report to Investors"
The FCC commented that, although the preamble clarifies that the term "report to investors" used throughout the proposed rule is intended to mean the Information Statement currently published by the Funding Corporation, confusion exists as to whether the term [*46737] refers to the FCS Report or the Information Statement. Because the FCS Report currently prepared by the Funding Corporation contains certain information that is not part of the System Disclosure Program, and for which System banks are not responsible, the FCC suggested that all references to the "report to investors" in the regulation be replaced with the term "Information Statement."
The FCA does not intend to regulate the name of the report required by this part. The term "report to investors" used in the proposed rule is merely a general reference to the disclosure document required by this part. However, in response to the FCC's comment, a new definition of "report to investors" has been added as � 630.2(g) of the final rule to clarify that the term "report to investors" referred to in the regulations means "a report that presents the Systemwide combined financial statements, supplemental financial statement information, and related financial and nonfinancial information pertaining to the System required by this part." Under this provision, a document containing only information that is not required by this part and that is clearly identified as separate from the required report will not be subject to this final rule.
B. Section 630.3-Publishing and Filing the Report to Investors
1. Section 630.3(a)
The FCA received two comments on � 630.3(a), which establishes the due dates for publishing the annual and quarterly reports to investors. The FCC opined that the word "publish" in � 630.3(a) is subject to interpretation, and could mean printed, mailed, or received by the investors. The commentor suggested that the word "publish" be replaced with the phrase "make available."
Section 630.3(a) requires not only that the System "make available" the report to investors by the dates specified in � 630.3(a)(1) and (a)(2) but that the System take affirmative steps to distribute the report to investors. One such step, as noted in the rule proposal, is distribution of sufficient copies of the report to the selling group dealers for subsequent distribution to interested investors. The FCA believes that the suggested substitution of the phrase "make available" may discourage exploration of other report distribution techniques and, accordingly, has retained the word "publish" in � 630.3(a).
The AICPA also commented on � 630.3(a), suggesting that the FCA reconsider whether the due dates prescribed in � 630.3(a) provide sufficient time for preparation of the combined information from various entities within the System. The FCA believes that the due dates established in � 630.3(a) for publishing and filing an annual report within 90 days after the end of each fiscal year and a quarterly report within 60 days after the end of each reporting quarter are adequate. The 90-day requirement for publishing the annual report to investors is consistent with industry practice. The 60-day requirement for publishing the quarterly report permits the Funding Corporation to publish the report 15 days after the constituent System banks and associations have filed their quarterly reports with the FCA pursuant to part 620 of this chapter. In addition, in the event the Funding Corporation is unable to prepare and publish the report to investors because one or more banks fail to fulfill their responsibilities for providing information to the Funding Corporation in accordance with � 630.4(c), � 630.4(a)(7) authorizes the Funding Corporation to request the FCA to extend the due date for publishing the report to investors. Accordingly, the FCA has adopted the due dates established in � 630.3(a) as proposed.
2. Section 630.3(f)-Banks' Joint and Several Liability for Consolidated Bank Debt Obligations
Section 630.3(f) requires that each report to investors include a statement that Systemwide debt securities and consolidated bank debt obligations are joint and several liabilities of individual banks. The FCC questioned the statutory basis for this required statement as regards individual bank joint and several liability for consolidated bank debt obligations. The FCC requested that the FCA provide a legal analysis of the statutory basis and extend the comment period for this provision.
The FCA believes that no extensive analysis is required to justify the position that consolidated bank debt obligations are joint and several liabilities of individual banks. The basis for this disclosure is found in section 4.4 of the 1971 Act, which clearly establishes joint and several liability of all banks for consolidated and Systemwide debt regardless of the title of the 1971 Act under which the bank operates. The FCA notes that the 75-day comment period on these regulations included a 30-day extension of the original comment period and believes that another extension of the comment period is unnecessary. The FCA has adopted � 630.3(f) as proposed.
C. Section 630.4-Responsibilities for Preparing the Report to Investors
1. Section 630.4(a)(2)(ii), (a)(3), and (a)(9)-Report of Examination
Proposed � 630.4(a)(9) authorizes the Funding Corporation to make a request to the FCA regarding the content of the latest Reports of Examination of any banks and related associations if the information is necessary for preparation of the report to investors. Two System institutions-the Funding Corporation and the FCBT-commented on the proposed provision.
The Funding Corporation suggested that the regulation be expanded so that, upon its request, each bank would be required to provide the Funding Corporation with the Reports of Examination and related information for the bank and related associations. The Funding Corporation is concerned that the regulation as proposed may be interpreted to implicitly absolve a bank of its responsibility to report to the Funding Corporation any significant regulatory conditions imposed or actions taken by the FCA against the bank or its related associations.
Conversely, the FCBT supported proposed � 630.4(a)(9) as written on the basis that it maintains an appropriate balance between the confidentiality of examination reports required by � 602.205 of this chapter and the need to provide complete and accurate disclosure to investors required by the proposed rule. Section 630.4(c) sets forth the responsibilities of each bank for preparation of the report to investors. Based on � 630.4(c)(5)(i), which requires that each bank certify to the Funding Corporation that the bank has submitted all information needed for preparation of the report to investors in accordance with the instruction of the Funding Corporation, the FCBT concluded that protection of the confidentiality of examination reports will not encourage banks to avoid their primary disclosure responsibilities with respect to material matters that may be discussed in the examination report.
While the FCBT supports � 630.4(a)(9) as proposed, it commented that the phrase "if necessary" leaves doubt as to whether the Funding Corporation should request the FCA to provide information contained in the examination reports in all cases or simply in those cases where a bank does not provide information contained in the examination report to the Funding Corporation. The FCBT requested that the FCA provide a definitive and unambiguous rule regarding the obligation to furnish copies of these reports. [*46738] In response to the comments received, the FCA has revised paragraphs (a)(2)(ii), (a)(3), and (a)(9) of � 630.4 to clarify that the Funding Corporation is responsible for collecting from each disclosure entity information needed for preparation of the report to investors, including any information that is material to a single disclosure entity. Likewise, in accordance with the Funding Corporation's instructions, each bank is responsible for providing the Funding Corporation with information that is material either to the bank or, on a combined basis, to the bank and its related associations. If information necessary for preparation of a report to investors that is meaningful and not misleading is not forthcoming from a bank in accordance with the provisions of � 630.4(c), the Funding Corporation may request the FCA to provide information regarding the content of the latest Reports of Examination of any banks or related associations necessary to ensure that the information presented in the report to investors is meaningful and not misleading. The FCA will then make a determination whether to provide the Funding Corporation with relevant information contained in the Report of Examination or, if appropriate, the entire report.
The FCA is cognizant of both the Funding Corporation's desire to have direct access to Reports of Examination and the FCBT's concern with protection of the confidentiality of the Reports of Examination. The FCA does not believe that � 630.4(a)(9) would relieve a bank of its responsibility to report any significant regulatory conditions that would have a material impact on the information being presented in the report to investors. It remains the primary responsibility of each bank to provide accurate and complete information to the Funding Corporation for preparing disclosure to investors. Each bank is required to certify to this effect to the Funding Corporation.
Section 630.4(a)(9) is established to provide the Funding Corporation with a contingency source for obtaining information needed to prepare accurate and comprehensive annual and quarterly reports to investors, while maintaining the confidentiality of the Reports of Examination. However, such requests from the Funding Corporation to the FCA are expected to be rare. Also, as the FCBT noted in its comment letter, � 630.5 prohibits banks from making incomplete, inaccurate, or misleading disclosures. Failure to disclose material information would violate these regulations and subject a bank and its officers and directors to possible FCA enforcement action.
2. Sections 630.4(c)(1) and 630.20(m)(3)-Bank-Only Financial Data
Section 630.4(c)(1) requires that each bank provide the Funding Corporation with information needed for preparation of the report to investors. The FCC suggested that proposed � 630.4(c)(1) be revised to clarify that, for Systemwide disclosure, information to be provided by each bank to the Funding Corporation includes not only financial information, but nonfinancial information as well, including information covering structural changes and regulatory enforcement activity. Proposed � 630.4(c)(1) has been clarified to refer to other nonfinancial information.
The FCC also suggested that proposed � � 630.4(c)(1) and 630.20(m)(3)(i) be revised to clarify that it is appropriate to include any wholly-owned subsidiary of a bank in the bank-only information. The FCBB submitted a separate comment in which it urged the FCA to include the FCC's suggestion in the final rule to address the treatment of the Farm Credit Finance Corporation of Puerto Rico, a wholly-owned subsidiary of the FCBB.
To address the concerns raised by the commentors regarding a bank's reporting of consolidated financial data in Systemwide disclosure, the FCA has removed the wording "bank-only" from � 630.4(c)(1) and clarified that, if a bank is required to prepare consolidated financial statements in accordance with GAAP, it is appropriate that the bank provide consolidated financial data of the bank and its consolidated subsidiaries to the Funding Corporation. Conforming changes were also made to � 630.20(m)(3) and Appendix A of the final rule.
3. Section 630.4(d)-Responsibilities of Associations
Proposed � 630.4(d) provides the banks with access to their related associations' auditors for preparation of the report to investors. The FCC commented that the banks sometimes may need to have access to others, such as legal counsel. To ensure that the banks have the ability to obtain any information necessary to accurately prepare their submission to the Funding Corporation, the FCC suggested that the regulation include a general statement that the banks may have access to any material association information. Under sections 2.2 and 2.12 of the 1971 Act, each association is subject to supervision by its related bank. Each Farm Credit Bank is responsible for preparing the combined financial statements of the bank and related associations for disclosure to shareholders pursuant to part 620 of this chapter. Part 620 of this chapter does not, however, specify how the disclosure responsibilities between banks and related associations are shared. To clarify this issue for purposes of part 630, the FCA has expanded proposed � 630.4(d) by adding a general statement in � 630.4(d)(1) of the final rule to require that each association provide its related bank with the information necessary to allow the bank to provide accurate and complete information to the Funding Corporation for preparation of the report to investors. The original text of proposed � 630.4(d) has been redesignated as � 630.4(d)(2).
D. Section 630.5-Prohibition Against Incomplete, Inaccurate, or Misleading Disclosure
The FCC suggested that the FCA clarify that � 630.5 concerning prohibition against incomplete, inaccurate, or misleading disclosure would apply only when the defective disclosure is material. Since compliance with the disclosure standards of this part is generally subject to a materiality test in any event, the FCA finds it unnecessary to add the suggested materiality language to � 630.5 and has adopted this section as proposed.
E. Section 630.6-System Audit Committee and Bank Audit Committees
1. Section 630.6(a)(2)
Under � 630.6(a)(2), officers or employees of a System institution are prohibited from serving on the System Audit Committee (SAC) because they are not independent of management. The FCBT urged the FCA to prohibit System directors from serving on the SAC due to potential conflicts of interest based on competition between System institutions.
The FCA believes that the suggested prohibition would be disruptive to the existing SAC and force the Funding Corporation to recruit SAC members from outside the System. In addition, the FCA views the FCBT's argument as relating less to conflict of interest than to concern regarding preservation of the confidentiality of information reviewed by the SAC. Under section 4.9 of the 1971 Act, directors and management of System institutions are eligible to serve on the board of the Funding Corporation. As a practical matter, any information available to SAC members is equally available to the members of [*46739] the board of the Funding Corporation. Thus, precluding System directors from serving on the SAC would not necessarily prevent confidential information from being exposed to directors of other System banks. In light of these considerations, the FCA is adopting the rule as proposed but will monitor SAC activities for apparent inappropriate use of information. Finally, the FCA notes that � 630.6(a) does not prevent the Funding Corporation board from adopting a policy to disqualify System directors from serving on the SAC.
2. Section 630.6(a)(4)(iii)
The FCC commented that the word "approve" contained in � 630.6(a)(4)(iii) of the proposed rule implies that the SAC has the authority to dictate individual bank accounting policies or that the Funding Corporation has the authority to require banks to uniformly and consistently adopt or change accounting policies. This was not the intent of the proposed rule. The primary duty of the SAC is to ensure the integrity of the report to investors jointly prepared by the Funding Corporation and System banks. The SAC is responsible for overseeing the reporting process and internal controls implemented by the Funding Corporation for preparation of the System's report to investors. To clarify that neither the SAC nor the Funding Corporation is charged with the responsibility for dictating individual banks' accounting polices, the FCA has substituted the word "review" for the word "approve" as suggested.
3. Section 630.6(a)(4)(iv)
Under proposed � 630.6(a)(4)(iv), the SAC is required to review each disclosure document containing Systemwide information prescribed in this part, including annual reports, quarterly reports, and press releases, prior to its release. The FCC commented that the SAC's responsibility should pertain only to financial information and disclosures contained in the annual information statements because the SAC generally would not have the expertise to review and evaluate nonfinancial information, such as is found in the description of business and description of debt securities. The FCC also suggested that, to facilitate timely issuance of quarterly information, the requirement for a review of each quarterly report or press release by the SAC prior to its release be eliminated.
To ensure the quality of the report to investors, the FCA believes that each annual or quarterly report should be reviewed by the SAC in its entirety. Under � 630.6(a)(2), which provides that "members shall be knowledgeable in public and corporate finance and financial reporting and disclosure," members selected to serve on the SAC should have the expertise to review the entire report to investors, including both financial and nonfinancial information. However, the FCA agrees that the essence of press releases is to provide timely release of interim information and has deleted the requirement for a review of press releases by the SAC from � 630.6(a)(4)(iv).
4. Section 630.6(a)(4)(v) and (b)(3)(ii)
The FCC suggested that the word "oversee" contained in proposed � 630.6(a)(4)(v) and (b)(3)(ii) regarding the responsibility of the SAC and the bank audit committee be replaced with the word "review" because the proposed wording implies that the audit committee would perform a management function in the System or the bank. The FCC also suggested other changes to proposed � 630.6(a)(4)(v) to avoid this implication.
The audit committee is commonly recognized as an entity established to perform an oversight function in the areas of financial reporting, internal control, and corporate governance. The word "oversee" contained in the proposed rule is consistent with the customary role of audit committees. The FCA has retained the word "oversee" in � 630.6(a)(4)(v) and (b)(3)(ii). The FCA notes that it is the responsibility of the board of each System institution to determine the steps the audit committee should perform to fulfill its oversight responsibilities. Thus, the boards of individual System institutions could charter their audit committee to review and direct management to take necessary corrective actions or merely to review and make corrective recommendations to the board.
F. Subpart B-Annual Report to Investors
1. Section 630.20(c)(2)-Description of Legal Proceedings and Enforcement Actions
The FCC suggested that the proposed � 630.20(c)(2) disclosure requirement for a summary of FCA enforcement actions against individual institutions be clarified and that any required discussion of the impact of the enforcement actions on the System's operations be linked to materiality. The FCA agrees with this suggestion and has revised the language of � 630.20(c)(2) of the final rule accordingly.
2. Section 630.20(d)-Description of Liabilities
The FCC expressed the view that the information called for by � 630.20(d)(1) regarding System debt obligations is too detailed and, thus, impractical. Section 630.20(d)(1)(ii) is, in large part, based upon the disclosure currently furnished by the System in its Information Statements. Unless otherwise needed to provide readers of the report to investors with information needed to understand the characteristics of System debt, the FCA does not expect extensive detail regarding the characteristics of specific debt offerings. To clarify this position, the FCA has deleted the words "terms and conditions" and added prefatory language to � 630.20(d)(1)(ii) requiring a description of debt obligations statutorily authorized to be issued and currently issued by the System, as well as other pertinent information.
The FCC also requested that the regulation clearly set forth the option of incorporating by reference the annual and quarterly reports to investors into specific offering documents. The FCA notes that the focus of this regulation is on periodic reports of the System to investors. It does not govern offering circulars or specific offering documents. Nothing in this regulation precludes the System from incorporating by reference information contained in the annual or quarterly reports to investors into specific offering documents if otherwise appropriate.
3. Section 630.20(g)(1)-Loan Portfolio
Proposed � 630.20(g)(1)(ii) required disclosure of the amount of loans outstanding that were used to finance the purchases of stock or other equities of System institutions.
The FCC expressed concern regarding the System's ability to comply with this requirement and questioned its relevance to investors. The FCC opined that disclosures currently provided by the System in its annual Information Statement are sufficient. The System's 1993 annual Information Statement states that association borrowers do not typically purchase capital stock for cash, but instead add the aggregate par value of stock to the principal amount of the related loan obligation. The 1993 report also provided the amount of capital stock and participation certificates outstanding at December 31, 1993. The FCC indicated that System compliance with the proposed requirement could only be on a prospective basis because System banks do not have a system in place to track needed information. Further, the FCC [*46740] argued that the costs involved in complying with this proposed requirement would outweigh the benefits derived from the disclosure.
The FCA supports the commentor's view that the cost involved in providing meaningful information to investors should not outweigh the benefits derived. The FCA also notes that � 630.20(e)(2), which requires the System to "describe the statutory requirement that a borrower purchase stock as a condition of obtaining a loan; how such stock is purchased, transferred, and retired; and how earnings are distributed," will ensure that investors continue to receive information that describes the nature of borrower stock of the System. As a result, proposed � 630.20(g)(1)(ii) has been deleted from the final rule and proposed � 630.20(g)(1)(iii) and (iv) have been redesignated.
4. Section 630.20(g)(1)(ii)-Risk Exposure
Proposed � 630.20(g)(1)(iii) requires discussion and analysis of the risk exposure of the loan portfolio. The FCC suggested that the term "nonperforming loans" replace the term "high-risk assets" in this section of the regulation because it is more widely used in the commercial banking industry. Use of the term "high-risk assets" in proposed � 630.20(g)(1)(iii) is consistent with the recent amendment of the FCA's accounting and reporting guidelines in part 621 of this chapter. See 58 FR 48780 (September 20, 1993). In the FCA's regulations, the term "high-risk assets" is a generic reference to loans and loan-related assets that are to be categorized for loan performance and valuation assessment purposes according to the criteria set forth in � 621.6 of this chapter. Collectively, the classifications identified in � 621.6 of this chapter are consistent with the terminology used in the commercial banking industry for nonperforming loans. There is no regulatory requirement to categorize the classification as "high-risk assets" in the report to investors. Rather, proposed � 630.20(g)(1)(iii) requires discussion of any risks that could adversely affect the loan portfolio and loan-related assets. Accordingly, the FCA has retained the term "high-risk assets" and adopted � 630.20(g)(1)(iii) essentially as proposed. Proposed � 630.20(g)(1)(iii) is redesignated as � 630.20(g)(1)(ii). The FCA further notes that it expects to revisit the issue of accounting for impaired loans in the future to assess the impact of the implementation of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, issued by the Financial and Accounting Standards Board.
5. Section 630.20(g)(1)(iii)-Secondary Market Activities
The FCC commented that secondary market activities have never been and currently are not anticipated to be material to the System's financial condition. The FCC suggested that proposed � 630.20(g)(1)(iv) be modified to require these activities to be described when they become material to the System's financial condition. The FCA agrees with the commentor that the System's involvement in the secondary markets should be disclosed to investors when the effect of such activities on the financial condition of the System is material and has revised proposed � 630.20(g)(1)(iv) to add materiality tests. This provision is redesignated as � 630.20(g)(1)(iii) of the final rule.
The FCA believes that the System's statutory authority to participate in secondary markets should be disclosed to investors in any event. A new paragraph has thus been added in � 630.20(a)(1)(vi) of the final rule to require, without regard to materiality, a description of the authority of System institutions to purchase and sell interests in loans in secondary markets and the risk involved.
6. Section 630.20(g)(3)(ii) and (iii)-Liquidity and Investment
Section � 630.20(g)(3)(ii) and (iii) require that the System provide a brief description of the System's policies regarding liquidity and investment. The FCC pointed out that each System bank adopts its own liquidity and investment policies according to its business objectives. In the absence of universal policies regarding investment and liquidity among System institutions, the commentor suggested that the proposed regulations be revised to require only a general description of System banks' policies. The suggested change is consistent with the intent of the proposed regulations. The FCA has clarified the proposed regulations by revising � 630.20(g)(3)(ii)(A) and (g)(3)(iii) to require a brief overview of liquidity and investment matters.
7. Section 630.20(g)(3)(iv)-Interest Rate Sensitivity
Section 630.20(g)(3)(iv) requires a general description of the System's risk management practices, including a brief discussion of derivative transactions. Due to the heightened interest of the public, financial institution regulators, and Congress in this area, the FCA solicited comments on whether disclosure requirements regarding derivative activities should be more detailed. The FCC suggested that, given the changing GAAP environment for derivative transactions, the FCA consider the approach to derivatives activity regulation used by other bank regulators. This approach requires regulated institutions to adopt policies in accordance with GAAP. The regulator provides any clarification of GAAP or additional guidance through Call Report instructions or other mechanisms.
The FCA adopts � 630.20(g)(3)(iv) as proposed, with a clarification to provide for a "brief overview" of the System's asset and liability management practices. The FCA believes that this approach to derivatives activities disclosure is consistent with the FCC's suggestion. In addition, along with other financial institution regulators, the FCA is monitoring the area of derivatives activities. The FCA will consider requiring more extensive disclosure based on its assessment of the level and significance of System derivatives activities and as the need for regulatory policy in this area becomes more clearly defined.
8. Section 630.20(g)(5)-Insurance Fund
The FCC commented that � 630.20(g)(5), which requires a discussion of the Insurance Fund in the Discussion and Analysis (D&A) section of the report to investors, is unnecessary and would duplicate the disclosure contained in the notes to the System's combined financial statements. Section 630.20(g)(5) requires a discussion of the purposes of the Insurance Fund, a schedule itemizing Insurance Fund assets that have been identified for specific purposes, and an explanation of how expenditures of Insurance Fund assets affect the assets and capital of the System.
The FCA does not believe that the requirement of � 630.20(g)(5) will result in duplication of information in the report. Section 630.3(e) provides that "Information in any part of the report may be incorporated by reference * * * to any other item of the report. Information * * * may be presented in any order deemed suitable by the Funding Corporation." Accordingly, the Funding Corporation has the flexibility to determine where the D&A regarding the Insurance Fund is to be presented. The FCA has adopted � 630.20(g)(5) as proposed.
The FCA notes that the regulation does not require the D&A regarding the Insurance Fund to be audited. Pursuant to � 630.3(e), the System could opt to include the required D&A in the notes to the Systemwide combined financial [*46741] statements and incorporate the disclosure by reference into the D&A. In this situation, the required D&A regarding the Insurance Fund would be covered in the independent accountant's report on the Systemwide combined financial statements.
9. Section 630.20(g)(6)-Instructions for Discussion and Analysis
Proposed � 630.20(g)(6)(ii) requires that discussions required by proposed � 630.20(g) cover the 3-year period covered by the financial statements. The FCC suggested that the words "3-year" be deleted. In recognition that the reporting period for the balance sheet is only 2 comparative years, the FCA agrees with the commentor and has amended � 630.20(g)(6)(ii) of the final rule as suggested and revised the introductory paragraph of � 630.20(g) accordingly.
10. Section 630.20(i)-Compensation of Directors and Senior Officers
Section 630.20(i) requires the annual report to state that information on the compensation of directors and senior officers of System banks is contained in each bank's annual report to shareholders and that the annual report of each bank is available to investors upon request pursuant to � 630.3(f). The FCC commented that this requirement provides no useful information to investors and is redundant.
As stated in the rule proposal, the FCA is required by section 514 of the 1992 Act to ensure that the disclosure of financial and conflict-of-interest information by System personnel provides investors and potential investors with information necessary to assist them in making investment decisions regarding FCS debt obligations or institutions. The FCA believes that information on compensation of System directors and senior officers presented in individual System institutions' disclosure to shareholders pursuant to part 620 of this chapter could provide useful information to investors in making investment decisions. Thus, to implement the requirement of section 514 of the 1992 Act, � 630.20(i) requires that the report provide a statement informing investors of the availability of such information. The FCA adopts � 630.20(i) of the final rule as proposed.
11. Section 630.20(l) and (m)-Financial Statements and Supplemental Information
Proposed � 630.30(l) requires that the System prepare the combined financial statements in accordance with GAAP and instructions and other requirements of the FCA. Proposed � 630.20(m) further requires that the System provide supplemental information in addition to the audited financial statements and that the supplemental information be examined by a qualified public accountant for compliance with FCA regulations and guidelines and an opinion expressed thereon. The FCA received comments on proposed � 630.20(l) from the AICPA and the FCC and comments on proposed � 630.20(m) from the AICPA and Price Waterhouse.
With respect to proposed � 630.20(l), both the FCC and the AICPA suggested, for different reasons, that the phrase "instructions and other requirements of the FCA" be deleted from the proposed rule. The FCC was concerned that the proposed language indicates that regulatory accounting practices (RAP) may be utilized, causing investor confusion. On the other hand, the AICPA provided suggested language that would require both the basic financial statement and the supplemental information required by proposed � 630.20(l) and (m) to be audited in accordance with GAAS. The AICPA asserted that the requirements of proposed � 630.20(m) regarding supplemental information disclosure appear to comprise the "instructions and other requirements of the FCA" referred to in � 630.20(l) and, further, that GAAS addresses auditors' reporting on information presented outside financial statements.
Price Waterhouse, the external auditor of the System, also commented on proposed � 630.20(m). Price Waterhouse asserted that the proposed language that "supplemental information be examined by a qualified public accountant for compliance with FCA regulations and guidelines" is too broad and would be interpreted as requiring the independent accountant to render a report on the System's compliance with all FCA regulations and guidelines. This would require significant work by the independent accountant. Price Waterhouse commented that the proposed regulatory language in � 630.20(m) provides insufficient detail to enable the external auditor to determine the scope of additional work to be performed and the type of report to be issued by the auditor on the supplemental information.
Proposed � 630.20(l) was intended to preserve the FCA's ability to prescribe additional requirements for preparation and presentation of the Systemwide combined financial statements. However, after consideration of the comments received, the FCA adopts the AICPA's suggestion in the final rule to require that both the basic financial statements and the supplemental information required by � 630.20(l) and (m) be examined in accordance with GAAS and an opinion expressed thereon by an independent accountant. This change will resolve the FCC concern regarding RAP financial statements and Price Waterhouse's concern regarding the scope of examination of supplemental information and reporting by the independent accountant. However, to preserve the flexibility to revise the format and content specified in Appendix A of the final rule, the FCA retains the requirement that supplemental information be prepared in accordance with any additional FCA guidance or instructions.
12. Section 630.20(o)-Cross-Reference Sheet
Proposed � 630.20(o) called for a cross-reference sheet giving the location of information required by these regulations, in the order required, and identified by item numbers and captions. The FCC did not object to the preparation of a cross-reference sheet, but suggested that the cross-reference sheet would only be useful to the FCA and should only be required as an exhibit to copies of the report filed with the FCA. The FCA believes the cross reference to the content of the report provides useful information to readers of the report. To make this indexing requirement more useful to investors, the FCA has revised � 630.20(o) to inform readers of the location in the report of the information required under the major disclosure captions of this part.
G. Subpart C-Quarterly Report to Investors
Proposed � 630.40(b)(5) requires that the System file a "preferability" letter with the FCA disclosing any accounting changes made during the reporting period that are not required by new accounting pronouncements. The AICPA and the FCC commented that the requirement for filing a separate letter with the FCA explaining the reason for the preferable alternative accounting principle is unnecessary. They suggested that the requirement be deleted from � 630.40(b)(5).
The preferability letter was intended as a notice to inform the FCA of any accounting change made by the System during the interim period that is not required by existing accounting pronouncements. Because the quarterly report will be required to disclose such accounting changes, upon further consideration, the FCA has deleted the requirement of filing a preferability [*46742] letter from � 630.40(b)(5) of the final rule.
For the reasons stated in the preamble, part 630 of chapter VI, title 12 of the Code of Federal Regulations is added to read as follows:
Authority: Secs. 5.17, 5.19 of the Farm Credit Act (12 U.S.C. 2252, 2254); sec. 424 of Pub. L. 100-233, 101 Stat. 1568, 1656.
(c) Disclosure entity means any bank, the Farm Credit System Financial Assistance Corporation (Financial Assistance Corporation), and the Federal Farm Credit Banks Funding Corporation (Funding Corporation).
(1) An annual report to investors within 90 days after the end of each fiscal year;
(2) The name and position title of each person signing the report shall be typed or printed beneath his or her [*46743] signature. Signers of the report shall attest as follows:
(d) Responsibilities of associations. Each association shall:
(1) Provide its related bank with the information necessary to allow the bank to provide accurate and complete information regarding the bank and its related associations to the Funding Corporation for preparation of the report.
(2) Provide in the engagement letter with its external auditor that the external auditor of the association shall, after notifying the association, respond to inquiries of the related bank [*46744] pertaining to preparation of the combined financial data of the association and its related bank.
(2) The System Audit Committee shall consist of no fewer than three members. Members shall be independent of management of any disclosure entity and association and free from any relationship that, in the opinion of the board of directors of the Funding Corporation, would interfere with the exercise of independent judgment as a committee member. Members shall be knowledgeable in public and corporate finance, and financial reporting and disclosure.
(iii) Review the impact of any significant accounting and auditing developments, and review accounting policy changes relating to preparation of the Systemwide combined financial statements;
(iv) Review the System's annual and quarterly reports to investors prior to their release; and
(v) Oversee the Funding Corporation's system of internal controls relating to preparation of the report, including controls relating to the System's compliance with applicable laws and regulations.
(iv) Monitor internal controls, including those relating to compliance with laws and regulations.
(v) Any concentrations of more than 10 percent of total assets in particular types of agricultural activities or businesses, and any dependence of an institution or a group of institutions of the System upon a specific activity or business, a single customer, or a few customers, including other financing institutions (OFIs), as defined in � 614.4540(e) of this chapter, the loss of any one of which would have a material effect on the System; and
(b) Federal regulation and insurance-(1) Farm Credit Administration. Describe the regulatory and enforcement authority of the FCA over System institutions under the Act.
(3) Farm Credit System Financial Assistance Corporation. Describe the role and authorities of the Financial Assistance Corporation under title VI of the Act, debt obligations of the Financial Assistance Corporation issued [*46745] to provide financial assistance to the System, and statutory repayment obligations of System institutions.
(v) Allowance for loan losses as a percentage of gross loans outstanding at year-end.
(1) Loan portfolio-(i) Categorization. Describe the loan portfolio of the System by major loan purpose category, indicating the amount and approximate percentage of the total dollar portfolio represented by each major category.
(B) Provide an analysis of the allowance for loan losses that includes the ratios of the allowance for loan losses to loans (outstanding at year-end) and net chargeoffs to average loans, and a discussion of the adequacy of the allowance for loan losses to absorb the risk inherent in the loan portfolio and the basis for such determination.
(vi) Explain the changes that have taken place, by major components on a comparative basis, in Insurance Fund [*46746] assets and related restricted capital and how such changes affected reported income.
(3) Funding sources and liquidity-(i) Funding sources.
(A) Provide, in tabular form, the component amounts and the total amount of FCS debt obligations, debt obligations issued by banks individually, and Financial Assistance Corporation debt obligations outstanding at year-end for each of the past 2 fiscal years. List debt obligations issued by System institutions separately by type, also separating insured obligations from uninsured obligations. For each type of debt obligation listed, provide the following, at a minimum, for each fiscal year listed:
(1) The beginning balance, the total amount of debt issued, the total amount of debt retired, and the year-end balance; and
(2) The average maturities and average interest rates on debt outstanding at year-end, and the average maturities and average interest rates of new debt issued during the year.
(k) Relationship with independent public accountant. If a change in the accountant who has previously [*46747] examined and expressed an opinion on the Systemwide combined financial statements has taken place since the last annual report to investors or if a disagreement with an accountant has occurred that the Funding Corporation would be required to report to the FCA under part 621 of this chapter, disclose the information required by � 621.4(c) and (d) of this chapter.
(l) Financial statements. Furnish Systemwide combined financial statements and related footnotes prepared in accordance with GAAP, and accompanied by supplemental information prepared in accordance with the requirements of � 630.20(m). The Systemwide combined financial statements shall provide investors and potential investors in FCS debt obligations with the most meaningful presentation pertaining to the financial condition and results of operations of the System. The Systemwide combined financial statement and accompanying supplemental information shall be audited in accordance with generally accepted auditing standards by a qualified public accountant (as defined in � 621.2(i) of this chapter). The Systemwide combined financial statements shall include the following:
(iv) Combined financial data of the System without the Insurance Fund;
(vi) Combined financial data of the System with the Insurance Fund.
(4) Interim reports shall disclose events that have occurred subsequent to the end of the most recently completed fiscal year that have a material impact on the System. Disclosures should encompass, for example, significant changes since the end of the most recently completed fiscal year in such items as accounting principles and practices, estimates used in the preparation of financial statements, status of long-term contracts, capitalization, significant new indebtedness or modification of existing financing agreements, financial assistance received, significant business combinations and liquidations of System institutions, and terminations of System institution status. Notwithstanding the provisions of this paragraph, where material contingencies exist, disclosure of such matters shall be provided even though a significant change since year-end may not have occurred.
(5) In addition to meeting the reporting requirements specified by existing accounting pronouncements for [*46748] accounting changes, state the date of any material accounting change and the reasons for making it.
(d) Financial statements. Interim combined financial statements shall be provided in the quarterly report to investors as set forth in paragraphs (d)(1) through (4):
Supplemental information required by � � 630.20(m) and 630.40(e) shall contain, at a minimum, the current year financial data for the components listed in the following tables and be presented in the columnar format illustrated in the following tables:
TABLE A-SUPPLEMENTAL BALANCE SHEET INFORMATION
Banks fn 1Associations fn 2FinancialassistancecorporationEliminationsCombined without insurance fund fn3Insurance fund and related combination entriesCombined with insurance fund
Other Assets.........................................................................................................................................................................................
Total assets........................................................................................................................................................................................
Capital stock and surplus......................................................................................................................................................................
Total liabilities,protected borrower capital, and capital stock and surplus..................................................................................................................................................................................
fn 1 Provide combined financial data of all FCS banks, including any consolidated subsidiaries of the banks.
fn 4 Any item that is no longer applicable, e.g. protected borrower stock, may be omitted.
Other expenses....................................................................................................................................................................................
Net income..............................................................................................................................................................................................
[FR Doc. 94-22221 Filed 9-9-94; 8:45 am]