This document provides only internal FCA guidance. It is not intended to create any rights, substantive or procedural, enforceable at law or in any administrative proceeding.
Introduction
The primary goals of the Agency’s oversight, examination, and supervisory activities are to ensure regulated institutions operate in a safe and sound manner, comply with law and regulations, and take corrective actions when needed. The oversight and examination process has many facets, but essentially involves assessing risk and evaluating control processes; identifying material weaknesses; establishing the appropriate FIRS rating; and maintaining effective communications. Details on oversight and examination policies, procedures, and practices are addressed throughout the FCA Examination Manual and other guidance documents. When weaknesses are identified, corrective actions are obtained through the most appropriate level of supervision for the situation. This section of the Examination Manual provides an overview of FCA’s supervision processes, with an emphasis on the remedies available when heightened supervision is needed through use of FCA’s enforcement authorities.
The Office of Examination (OE) has primary responsibility for ongoing oversight, examination, and supervision of Farm Credit System (System or FCS) institutions, and manages the Agency's enforcement action process. Although enforcement actions will typically be initiated by OE exam divisions, all FCA offices and staff, while carrying out their areas of responsibility, should be observant to conditions that may warrant consideration of an enforcement action. In such cases, the initiating unit will coordinate closely with OE to facilitate the enforcement process. Note: all supervision and enforcement activities related to Farmer Mac are the sole responsibility of the Office of Secondary Market Oversight (OSMO); as such, OSMO has supplemental procedures to define roles and responsibilities for supervision and enforcement activities related to Farmer Mac.
Levels of Supervision
FCA utilizes the concept of differential supervision at three levels: Normal Supervision, Special Supervision, and Enforcement Supervision. As depicted in the graphic below, Normal Supervision is the first level of supervision and is basically handled within the context of the ongoing oversight and examination program. As the level of risk and concern increases, the intensity of supervision needed to resolve those risks and concerns is heightened. Special Supervision and, if necessary, Enforcement Supervision are used to address these latter situations. General considerations when determining the appropriate supervisory approach include:
Risk assessment results
Oversight and examination findings
Capability and willingness of institution management in addressing the problems
Effect of weaknesses on the safety and soundness of the institution
Magnitude of the weaknesses or violations identified
Understandings and agreements (both written and unwritten) with the board of directors
The responsible staff in the OE exam division generally determines the level and scope of supervision needed and documents it in the institution Oversight Plan. Responsible staff must exercise reasonable judgment based on the circumstances of the specific situation. As the level of concern increases, the exam division staff will collaborate with OE’s Risk Supervision Division (RSD) to discuss the preferred supervisory approach for the situation. In addition, FCA Board policy and Agency Policy and Procedure Manual (PPM) documents outline criteria for when the Regulatory Enforcement Committee (REC) or FCA Board involvement are needed.
Normal Supervision
FCA’s preferred approach is to proactively address potential risks and concerns through the Normal Supervision process. Institutions operating under Normal Supervision generally have the following characteristics:
1. A FIRS composite rating of 1 or 2.
2. Problems identified do not endanger the financial condition of the institution or materially impact its financial performance.
3. Management and a board who are willing and able to address problems that might arise in the normal course of business.
The OE exam divisions have primary responsibility to examine and supervise the operations of FCS institutions that have demonstrated they can correct identified weak conditions or unsafe and unsound practices in the normal course of their operations. Thus, Normal Supervision is basically an extension of ongoing oversight and examination activities. Each OE exam division Director will ensure that exam staff follows current policies and procedures in the FCA Examination Manual, OE Operating Plan, and other guidance documents in completing oversight and examination activities, and communicating the results to the institution. This will include identifying and communicating corrective action expectations through use of required actions, recommendations, other suggestions, or best practices, and obtaining commitment from the board and/or management to implement these corrective actions, as appropriate. Through the Normal Supervision process, the “loop” is then closed through exam division follow-up activities to reasonably ensure corrective action expectations are appropriately addressed and the underlying concerns are resolved.
Special Supervision
For institutions exhibiting conditions that are serious, but do not necessarily critically impair the safety and soundness of the institution, the level of concern increases from Normal Supervision to Special Supervision, and OE oversight increases accordingly. The Special Supervision of an institution does not involve an enforcement action, but rather provides the institution's board and management an opportunity to correct the problems discovered during the oversight and examination process, and thus avoid the need for a formal enforcement action. The use of Special Supervision, which is at the discretion of the exam division Director in consultation with RSD, is generally applicable when any number of the following conditions exists:
1. The "risk profile" (risk relationship to financial capacity) of an institution is considered to be weak and deteriorating, but its total condition is not such that an enforcement action is justified. Other trend indicators may also be unfavorable. For example:
Adverse assets to risk funds position is > 75 percent
Permanent capital ratio is < 10 percent of risk-adjusted assets and deteriorating
2. Unsatisfactory conditions or practices exist that, if not promptly and sufficiently addressed, may warrant consideration of an enforcement action. For example:
The magnitude of controllable problems approach or exceed the managerial capability of the institution. (i.e. the key elements of management systems)
A significant number of items are identified as requiring corrective actions
The internal credit review is unreliable
The institution is engaging in unsafe and unsound practices
The institution is violating law or regulation
There are significant breaches of fiduciary duties
3. The board and management recognize the identified safety and soundness or regulatory compliance weaknesses/concerns and are willing and able to correct them, and such actions are likely to resolve the concerns.
4. The "financial profile" (earnings, liquidity, and quality of collateral in relationship to the direct loan), while satisfactory, borders at the lower end of a satisfactory range and is threatened by increasing risk in the loan and/or investment portfolios. For example:
A material default1 exists in the institution's general financing agreement with its district bank
[1 In light of the purpose of sections 614.4125(e) and (f) of FCA regulations and the common legal meaning of the term "material," the term "material default" should be interpreted to require notice to the FCA Chief Examiner in situations in which there is a substantial likelihood that a reasonable person would believe that the default in question might eventually result in or lead to the failure of the association if not corrected.]
The exam division Director, in consultation with RSD, is responsible for determining when an institution operating under Special Supervision can be returned to Normal Supervision or should be recommended for Enforcement Supervision. Generally, the transition to Normal Supervision can be considered when the exam division Director has the confidence in management and the board that problems can be addressed in the normal course of business. If deterioration in the institution is evident or financial and credit conditions worsen, an enforcement action may be warranted to establish the managerial discipline and put in place the controls needed to prevent further deterioration or the failure of the institution.
Enforcement Supervision
Enforcement Supervision is applicable to those institutions where a formal enforcement action is needed to correct unsafe or unsound conditions and practices or violations of law and regulations. Generally, institutions that require consideration of Enforcement Supervision are those where any one of the following conditions exists:
1. A “4” or “5” composite FIRS rating is assigned to an FCS institution;
2. The institution or person is deemed unable or unwilling to address a material: (a) unsafe or unsound condition or practice; or (b) violation or ongoing violation of law or regulation;
3. The institution or person is about to engage in a material unsafe or unsound practice or is about to commit a willful or material violation of law or regulation that exposes the institution to significant risk;
4. Conditions meet the statutory criteria for a suspension or removal;
5. Conditions meet the statutory criteria for assessing a civil money penalty and the factors to be considered in determining the amount of a civil money penalty justify the imposition of the penalty;
6. Conditions meet the statutory criteria to place an FCS institution in conservatorship or receivership; or
7. An institution or person fails to comply with an enforcement document or is unwilling or unable to address a violation of a condition imposed in writing. An enforcement document is conditions imposed in writing to address unsafe or unsound practices or violations of law, rule or regulation.
As appropriate, consideration also may be made for conditions not specified above. Refer to FCA Board Policy Statement 79 for specific criteria on when an enforcement action should be considered and referred. An enforcement action may be based upon an examination activity where a formal report of examination is issued. However, a report of examination is not required if circumstances or events in an institution so warrant. The key is that FCA has sufficient, documented evidence supporting the decision to take the action because an enforcement action could be contested in court.
Enforcement Authority
In 1985, Congress gave FCA enforcement authorities (refer to the Farm Credit Act of 1971, as amended (Act)). These enforcement powers enable FCA to impose rehabilitative or punitive enforcement measures on boards and management teams of System institutions for violating a law, rule, or regulation and/or engaging in an unsafe or unsound condition or practice. These powers include the authority to enter written agreements; issue orders to cease and desist; levy civil money penalties; and remove, suspend, or prohibit officers, directors, and any other persons from participating in the affairs of a System institution. These authorities provide FCA with appropriate power to ensure that System institutions, boards and management, and related parties comply with laws and regulations and operate in a safe and sound manner. The following summarizes each type of enforcement action.
Written Agreement
A written agreement is a contract between FCA and the institution or an individual(s). An agreement commits the institution or individual to taking the specified actions needed to correct a problem. FCA uses agreements when problems are not severe enough to warrant a more rigorous action and the board and management are able and willing to address the agreement’s requirements. An institution’s board of directors or the specified individual executes the agreement with an authorized representative of FCA. If an institution or the individual fails to comply with an agreement, FCA may begin cease and desist proceedings.
Order to Cease and Desist(Section 5.25 of the Act)
An order to cease and desist is issued to institutions or individuals when problems are severe. It also may be used when the institution violates agreements or conditions that were imposed on an institution when granting an application (such as a merger or reorganization application). FCA may issue an order to cease and desist when: (1) the institution or person has engaged, is engaging, or is about to engage in an unsafe or unsound practice, or (2) the institution or person has violated, is violating, or is about to violate a law, rule, or regulation, any condition imposed in writing by FCA in connection with the granting of any application or other request by the institution or person, or any written agreement entered into with FCA.
An order to cease and desist either specifies affirmative actions necessary to correct illegal or unsafe practices or conditions, or requires that such activities be stopped, or both. All cease and desist proceedings begin with a notice of charges served on the affected institution or person. The notice sets forth allegations about the unsafe or unsound practices and/or any violations of law, regulations, written agreements, or conditions that have been identified by FCA, and sets a time and place for a hearing, should one be needed.
Generally, FCA asks the institution board or person to consent to the cease and desist order before issuing the notice of charges. A majority of board members, as stipulated in the institution’s bylaws, must agree to the order. If the institution or person consents to a cease and desist order, the matter does not continue to an administrative hearing and the order is effective on execution of the Stipulation and Consent for the order by the institution board or person. If consent to the order is not obtained, the notice of charges must be answered within 20 days of service, and the matter continues to a formal hearing before a Federal administrative law judge (ALJ).
After a hearing at which all parties present evidence to the ALJ, the ALJ gives a recommended decision to the FCA Board. The Board ultimately decides whether to issue an order to cease and desist. The party to whom an order to cease and desist has been issued may obtain review of the order by the appropriate United States Court of Appeals. If an order to cease and desist is not complied with, it can be enforced in Federal district court or a civil money penalty action can be initiated. An order to cease and desist remains in effect until terminated by the FCA Board or a reviewing court.
Temporary Order to Cease and Desist(Section 5.26 of the Act)
FCA may issue a temporary order to cease and desist before a cease and desist proceeding is completed when a violation, threatened violation, or unsafe or unsound practice is likely to:
(1) cause insolvency; (2) cause substantial dissipation of assets or earnings; (3) seriously weaken the condition of the institution; or (4) seriously prejudice the interests of investors or shareholders prior to completion of a cease and desist proceeding. The temporary order can require the institution or a specific party to stop the violation or practices described, and/or take corrective action. Unless the temporary order is set aside by court order, it is effective immediately upon being served on the party and remains in force until the effective date of a permanent order to cease and desist, if issued, or dismissal of the charges.
Removal, Suspension, & Prohibition(Sections 5.28 & 5.29 of the Act)
FCA may remove or suspend from office, or prohibit from participation in the conduct of the affairs of the institution, a director or officer that has violated a law, rule, regulation, or order to cease and desist, engaged in an unsafe or unsound practice, or committed or engaged in any act, omission, or practice which constitutes a breach of fiduciary duty if: (1) the institution has suffered or probably will suffer substantial financial loss or other damage; (2) the director or officer has received financial gain through a violation or unsound practice; and (3) the interests of the institution’s shareholders or investors in System obligations could be seriously prejudiced; and, the violation, unsound practice, or breach of fiduciary duty involves personal dishonesty, or demonstrates willful or continuing disregard for the safety and soundness of the institution. Directors, officers, or other persons participating in the conduct of the affairs of an institution can also be removed from a System institution if their conduct or practice with respect to another business or System institution: (1) has caused a substantial financial loss or other damage;
(2) shows personal dishonesty or willful or continuing disregard for the entity’s safety or soundness; or (3) shows that the individual is unfit to participate in the conduct of the institution’s affairs.
FCA begins proceedings to remove, suspend, or prohibit individuals by serving written notice to them of the Agency’s intent. The notice states the grounds for the action and the time and place of a formal administrative hearing. If the person does not consent to the action, the matter proceeds to a hearing. Based on a review of the hearing record and recommendations of the ALJ, the FCA Board decides whether to take the specified action against the individual. A removal, suspension, or prohibition order may be reviewed by the appropriate United States Court of Appeals. If deemed necessary, FCA may suspend a director or officer pending completion of a removal proceeding. Once in place, a removal, suspension, or prohibition order prohibits the person from participating in any manner in the affairs of the institution.
FCA can also remove, suspend, or prohibit from further participation in any manner in the conduct of the affairs of the institution, an individual charged with or convicted of a crime involving dishonesty or breach of trust punishable by imprisonment for more than 1 year. FCA must show that the person’s continued service is a threat to the interests of the institution’s shareholders or investors or threatens public confidence in the institution or the System. Within 30 days of service, the person may request an appearance before the FCA to modify or terminate the removal, suspension, or prohibition order. A suspension or prohibition order remains in effect until terminated by FCA or until the criminal charge is finally settled. At such time as the conviction is not subject to further appeal, FCA can order the individual’s removal from office or prohibit the individual from further participation in the institution’s affairs.
Civil Money Penalty (CMP)(Section 5.32 of the Act)
A CMP action requires an institution or individual to pay a monetary penalty and can be used alone or with other administrative actions. A CMP may be assessed against a System institution or any officer, director, employee, agent, or other person participating in the conduct of the affairs of the institution. A CMP can be assessed for violation of the Act, regulations issued under the Act, or an order to cease and desist. For purposes of assessing a CMP, a directive issued under Sections 4.3(b)(2), 4.3A(e), or 4.14A(i) of the Act is also treated as a final order issued pursuant to Section 5.25 of the Act. CMPs cannot be assessed for a violation of a temporary Order to Cease and Desist before the order becomes final.
In determining whether a violation is of sufficient gravity to warrant initiating a referral, FCA staff shall consider the 13 factors (referral criteria) which were cited in FCA’s policy regarding the assessment of CMPs published in the Federal Register (53 Fed. Reg. 27286 (1988)). Note: FCA staff are not required to consider the referral criteria when making a determination to assess a CMP under the Flood Act.
In determining the amount of the assessment, FCA will take into consideration the good faith of the institution or persons involved, the gravity of the violation, the history of previous violations, the adequacy of financial resources, and such other matters as judicious action may require. (Note: The CMP provisions of the Flood Act do not require that FCA consider these five statutory factors.) FCA may assess up to $1,100 per day for each day the institution or individual is in violation of a cease and desist order and up to $550 per day for each day a violation of law or regulation continues. (Note: the figures shown here were last adjusted for inflation in 2005 – consult with the OGC for the latest penalty amounts as adjusted for inflation. Pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended, every Federal agency, including FCA, must adjust each CMP under its jurisdiction by the rate of inflation at least every 4 years.) FCA also has authority to assess a CMP under other applicable Federal statute, including the Homeowners Protection Act of 1998 (the Private Mortgage Insurance Act (the PMI Act)) and the Flood Disaster Protection Act of 1973, as amended (the Flood Act). For purposes of assessing a CMP, the PMI Act (12 U.S.C. Section 4909(b)(1)) provides that a violation of a requirement of the PMI Act is deemed a violation of the Act. Under provisions of the Flood Act (42 U.S.C. Section 4012a(f)), FCA shall assess a CMP against an institution that is found to have a pattern of committing violations of the Flood Act or applicable regulations promulgated under the Flood Act.
Before FCA determines whether to assess a CMP, the offending individual or institution is given an opportunity to submit relevant information that addresses the violation. Once FCA reviews this information, the individual or institution will either receive a notice of assessment or be informed that no assessment will be imposed. If a notice to assess a CMP is issued, the individual or institution is afforded the same hearing procedures that apply to cease and desist orders. If the evidence supports the allegations, FCA can order the offending party to pay the penalty. The party can seek review of the assessment by the appropriate U.S. Court of Appeals, but if the individual or institution fails to pay the assessment after it becomes final, FCA may refer the matter to the Department of Justice for collection.
Assessing Compliance with Enforcement Actions
Supervision of institutions operating under enforcement actions will include: (1) offsite monitoring of the institution's submissions required by the enforcement action, and (2) onsite visits and examination activities to verify compliance with the enforcement action and to determine the institution's condition and progress in taking corrective action. An evaluation of the adequacy of each required submission is made by the enforcement examiner or the examiner assigned responsibility for monitoring the institution, and a response is provided to the institution within 30 calendar days of receiving the submission. Evaluation of compliance with the enforcement action articles includes both the specific requirements of each article as well as management's effectiveness in eliminating the basis of criticism. Compliance is measured according to the following standards:
Compliance: The institution has appropriately responded to all material actions required by the article and corrected the unsatisfactory condition(s) that prompted the need for the article. When "compliance" is achieved with an article, required reporting is no longer necessary. However, if conditions exist that subsequently take the institution out of compliance with the article, reporting requirements will be reinstated. Note: If a reporting requirement is eliminated by an amendment to an order or agreement, it can only be reinstated by another agreement or order.
Substantial Compliance: The institution is taking appropriate actions to comply with all material requirements of the article. Accordingly, substantial evidence exists that the institution's performance will eventually correct the unsatisfactory conditions that prompted the need for the article; however, additional performance and reporting are necessary to monitor and fully resolve the unsatisfactory conditions.
Partial Compliance: The institution has made a "good faith effort" to meet the requirements of the article, but weaknesses are still evident or there are sufficient flaws in the actions taken to cast doubt on whether the unsatisfactory conditions will be fully resolved. Additional actions and/or oversight by the board of directors are necessary. Typically, a meeting is arranged to discuss with the board and management the additional action needed to correct the existing problem(s).
Noncompliance: The institution did not comply with any requirements of the article. Noncompliance may prompt the need for additional enforcement actions.
Not Determinable: Requirements of the article were not evaluated, or the institution was not able to comply with the requirements of the article during the period examined, for well substantiated and valid reasons.
Disclosure of Enforcement Actions
FCA believes it is in the best interest of the System, FCA, and the public that certain information concerning the issuance and any subsequent termination of enforcement actions be disclosed to the FCS and the public. The FCA believes that it is important to communicate to the FCS and the public that FCA is effectively using its enforcement powers through the issuance of enforcement documents and the subsequent termination of such enforcement documents, when appropriate. Disclosure is governed by FCA Board Policy Statement 34. Note: FCA regulations include specific disclosure requirements for institutions and the Funding Corporation regarding enforcement actions.
Other Supervisory Remedies Available
In addition to the specific types of enforcement actions described above, FCA has other remedies and tools available for use in the supervision of System institutions to facilitate resolution of significant concerns. For example:
Supervisory Letters – In conjunction with the Special Supervision process, OE will typically issue a letter to the institution that identifies specific required corrective actions.
Directives – The Act provides FCA with the authority to issue capital directives and distressed loan restructuring directives. While directives are not considered to be an enforcement document, they are enforceable in the same manner and to the same extent as an effective and outstanding cease and desist order that has become final. Refer to Sections 4.3 and 4.14A of the Act, and the related implementing regulations, for additional details.
Conditions Imposed in Writing – Conditions imposed in writing to address unsafe or unsound practices or violations of law, rule, or regulation are put in place by consent as part of approving an institution application request. The most common types of application requests are merger or reorganization requests. In these cases, the conditions imposed in writing would be referred to as supervisory conditions of merger or reorganization. Enforcement actions can be taken for failure to comply with conditions imposed in writing.
Conservatorship/Receivership – If the FCA Board determines that a ground for the appointment of a conservator or receiver exists, the Board may appoint ex parte and without notice a conservator or receiver for the institution. The FCA Board has exclusive power and jurisdiction to appoint a conservator or receiver, which will be the Farm Credit System Insurance Corporation. Refer to Section 4.12 of the Act, and the related implementing regulations, for additional details.
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