Previous Document IconPrevious Legal Opinion Summary

Next Document IconNext Legal Opinion SummaryExam Manual Table of Contents IconList of Legal Opinion Summaries

Legal Opinion Summary
Topic:Capital Regulations: What is the effect on the calculation of an association’s core and total surplus if it revolves a portion of its allocated equities within the next year?
ID Number:98-02
Issue Date:06/17/1998

A Farm Credit System (FCS) association asked what the effect would be on calculations of its core and total surplus ratios if it revolved a portion of its allocated equities within the coming year. OGC concluded that because the association has no scheduled plan for the retirement of equities allocated to its members and has not retired any allocated equities to date, all such equities are currently included in core and total surplus ratios. However, if some allocated equities are retired, the remaining similar equities (allocated in the same year as the retired equities) will be excluded from core surplus.

FCA’s regulations accommodate FCS associations’ common practice of revolving allocated equities according to a schedule. For allocated equities to be included in total surplus, the revolvement schedule must be at least 5 years in length. See 12 C.F.R. 615.5301(i)(2). For qualified allocated equities to be included in core surplus, the revolvement schedule must be at least 5 years in length and must not provide for revolvement within the next 3 years. See 12 C.F.R. 615.5301(b)(2). FCA established these criteria in order to exclude equities that an association holds for a relatively short time and that borrowers expect the association to retire in the near future.

However, the regulation was not intended to allow associations to retire equities on a regular basis, but avoid the 5- and 3-year rules of 615.5301, by simply not establishing a retirement plan. If FCA determines that an association's retirement practices, although not technically a “scheduled plan of revolvement,” diminishes the equities’ ability to absorb losses, FCA may require the deduction of some or all of the equities from core surplus, total surplus, or both. See 12 C.F.R. 615.5301(b)(6) and (i)(6). Additionally, proposed amendments to
615.5301(b)(2)(ii) (which became effective after the date of this opinion) clarify that if an institution retires or revolves includible allocated equities for reasons other than those specified in the regulation, any remaining equities allocated in the same year must be excluded from core surplus.

(June 17, 1998)