Title: FINAL RULE--Disclosure to Shareholders; Accounting and Reporting Requirements--12 CFR Parts 620 and 621
Issue Date: 11/21/1986
Agency: FCA
Federal Register Cite: 51 FR 42084
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 620 and 621

Disclosure to Shareholders; Accounting and Reporting Requirements

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit Administration Board (FCA Board) adopted final amendments to existing regulations Part 620 -- Disclosure to Shareholders, and Part 621 -- Accounting and Reporting Requirements. The amendments to Part 620 delete certain disclosure requirements; limit specified disclosures to particular relevant situations; and make various related and technical changes. The amendments to Part 621 correct certain accounting provisions that may result in the misclassification of some loans in the financial statements of Farm Credit System (System) institutions.

EFFECTIVE DATE: These regulations shall become effective November 21, 1986; however, an officer or director who resigns from office before July 1, 1987, and does not stand for reelection in 1987 shall not be required to make disclosures otherwise required under 620.3(j)(3) of the regulations.

FOR FURTHER INFORMATION CONTACT: Gary L. Norton, Senior Attorney, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020.

TEXT:
SUPPLEMENTARY INFORMATION:


Part 620 -- Discussion

On March 13, 1985, the Farm Credit Administration (FCA) adopted final regulations requiring the preparation and distribution of financial and operating reports to shareholders. See 51 FR 8644 (March 13, 1986). The final regulations established standards for the form, content, and distribution of annual reports by System banks and associations to shareholders. These regulations were further supplemented to require quarterly financial reporting as well. See 51 FR 21336 (June 12, 1986). Prior to the adoption of these regulations, no uniform standards existed and there was considerable variation in the reports of System institutions. The FCA regulations are modeled after regulations of Federal bank regulatory agencies and the Securities and Exchange Commission (SEC) applicable to banks and bank holding companies that are public companies under the Securities Exchange Act of 1934 (1934 Act), but are tailored to take into account structural and operational differences between System institutions and other federally chartered financial institutions and the value of disclosure to the participation of shareholders in their cooperative lending institutions.

Since the regulations were adopted, the FCA received a number of comments related to paragraph (j)(3) of 620.3 regarding disclosures of indebtedness to the institution by senior officers and directors, their immediate families, and affiliated organizations.

This paragraph of the regulation requires that the reporting institution state in its annual report to shareholders, if true, that there have been loans outstanding during the last fiscal year to date to senior officers and directors that were made in the ordinary course of business on the same terms available to other persons for comparable transactions and that do not involve more than a normal risk of collectibility. Disclosure of loans to senior officers and directors, and their immediate families, and affiliated organizations need be made only if the loans do not meet these criteria. If a loan to any of the specified persons meets any of the disclosure criteria under the regulation, the person's name and the particulars of the loan as specified in the regulation must be described.

The comments received fall primarily into several categories. Some of the commentators objected to any disclosures of loans to officers, directors, their immediate families, and affiliates to shareholders, believing such disclosure constitutes an invasion of their privacy. Some of these commentators appear to believe that disclosure is routinely required even if the loans are performing loans, made in the ordinary course of business and on the same terms available to other borrowers. The majority of the other commentators do not object to some disclosure of senior officers' and directors' loans, but disagree with requiring the disclosure of loans made to immediate family members and affiliated organizations that meet the disclosure criteria. These commentators believe that such disclosure constitutes an inappropriate invasion of privacy of persons who have nothing to do with management of the institution; interferes with the control of immediate family members and affiliated organizations over disclosures of
their private business affairs; is inconsistent with the alleged understanding by such persons at the time the loans were executed that the loan terms would be kept confidential; and will result in a flood of litigation. A number of commentators recommended that if a disclosure of loans to family members is to be made, disclosure only be required where a business relationship between such family members exists.

Another category of commentators suggested that no disclosures of the type described be required with respect to an officer or director who resigns or otherwise leaves office during the fiscal year or declines to stand for reelection. These commentators believe no useful purpose is served in requiring such disclosure if the persons involved have no further connection with the management or board of the institution.

Many of the comment letters reflect a lack of familiarity with the disclosure requirements for public companies, asserting incorrectly that FCA regulations are more extensive than those of other Federal regulators of publicly held financial institutions. While there are minor differences between the regulators, the basic regulatory framework and disclosure format is substantially similar to that of the other Federal regulators.

While the FCA has not taken a position on whether the voting stock of System institutions constitutes a security under the 1934 Act, the FCA's regulation is premised upon the belief that the System as an interdependent unit, whose stock is widely held and whose debt securities are widely distributed to and traded by the public, should be subject to disclosure requirements similar to those required of other public companies. The stock of System institutions does represent an economic interest in, and obligation to the respective institutions which carries attendant risks. In addition, such disclosure is needed to provide shareholders with sufficient information to hold directors and officers accountable for the performance of their fiduciary duties, to alert them to conflicts of interests or potential conflicts of interest, and to act as a prophylactic to keep such conflicts from arising. Further, the Board believes that since stockholders of System institutions are also borrowers from those institutions, FCA
disclosure requirements can be viewed as protecting borrowers rights to full information concerning the operations of the institutions and the relationship and dealing of director and officers, and their associates, to the institution.

The FCA Board considered and rejected assertions that the requirements of the regulation amount to an interference with, or an invasion of personal rights of privacy. The System is part of the larger financial community and, as such, must be prepared to operate by standards similar to those that apply to other financial institutions such as bank holding companies, commercial banks, savings and loan associations, savings banks, and finance companies whose equities and debt obligations are widely held by the public. For years, the officers and directors of those other publicly owned institutions have been subject to the same type of disclosure required under the subject regulations. The public policy decision was made long ago that one who chooses to serve as an officer or director of a public financial institution must accept the fact that his or her direct and indirect interests in or relationships with the institution should be subject of disclosure to persons to whom a fiduciary duty is owed. It should be noted that in spite of these and other factors, public financial institutions have not been unable to attract qualified persons to serve as officers and directors, and there is no reason to believe that the System will not be able to continue to do so once those participating in its management and boards adjust to comparable regulation.

The FCA Board also considered the purposes and value of the regulation in the context of the agency's changed regulatory approach which is designed to reflect the mandate of the Farm Credit Amendments Act of 1985 that the agency operate as an arm's-length regulator. The FCA believes that approaches such as disclosure to shareholders can provide an appropriate market-type substitute for more direct FCA regulation in some areas.

Some commentators noted the existence of State privacy laws which they allege may be violated by the disclosure regulations. The FCA Board notes that such State laws do not in any way interfere with the application of the disclosure regulations of any of the various Federal financial regulators. Where a Federal agency lawfully adopts such regulations, State laws on the subject are preempted to the extent they interfere with the application of the regulations. The fact that this issue has long ago been resolved is evidenced by the historic compliance with similar Federal disclosure regulations by banks, thrift institutions, and public companies located in the States where the concerned communicators reside.

The FCA Board has determined that, notwithstanding the soundness of the basis for and approach of the regulations some changes can be made in the regulations, to respond to the concerns of the commentators without compromising the effectiveness of the regulation.

First, since the purpose of the disclosure is to provide sufficient information to shareholders to evaluate the performance of directors and senior officers of their fiduciary duties, the FCA Board has determined that it is not necessary to name a family member whose loan is required to be disclosed. Rather, it is sufficient to disclose: (1) The name of the officer or director involved; (2) the fact that a loan has been made by the institution to a member of his or her immediate family or affiliated organization that meets the disclosure criteria; and (3) the information about the loan specified in the regulation. The FCA Board has further determined that in order to accomplish the purposes of the regulation, the definition of immediate family should include, consistent with the practice of the other Federal financial institution regulators, spouse, mothers- and fathers-in-law, brothers- and sisters-in-law, and sons- and daughters-in-law. This change would further protect the privacy of immediate family members by expanding the class of persons to whom the disclosure could be attributable, thereby making the individual less likely to be identifiable.

In addition, the FCA Board has determined that certain of the specific disclosures required are relevant only in certain situations. For example, the interest rate and repayment terms are pertinent only if the loan was made on preferential terms. The amount past due and the reason the loan involves more than a normal risk of collectibility is pertinent only if the loan is disclosed because it involves more than a normal risk of collectibility.

Accordingly, the FCA Board amends 12 CFR 620.3(j)(3) so that where the regulation requires disclosure of loans made by the institution to a family member or affiliated organization of an officer or director, the name of the family member or organization need not be stated. Instead, the revised regulation requires only the disclosure of (1) the name of the senior officer or director, (2) the fact that the loan to an immediate family member meets one of the regulatory criteria for disclosure, and (3) the specific information concerning the loan required by the regulation. Similarly, the FCA Board amends 620.3(j)(2) -- Transactions other than loans, to delete the requirement to disclose the name of the immediate family member or an affiliated organization. In addition, the FCA Board amends 620.3(j)(3)(i) to clarify that the provision applies to members of the immediate family and affiliated organizations of senior officers and directors.

Section 620.3(j)(3) is further amended to require that the loan interest rate and repayment terms be disclosed only if the loan is made on preferential terms, and to require that the amount past due and the reason the loan involved more than a normal risk of collectibility be disclosed only if the loan involves more than a normal risk of collectibility. It should be noted that this aspect of the modified disclosure applies also to loans of a senior officer or director which are required to be disclosed.

Finally, the FCA Board amends in 12 CFR 620.1(c) the definition of immediate family to include spouse, parents, children, siblings, mothers- and fathers-in-law, brothers- and sisters-in-law, and sons- and daughters-in-law.

With respect to the commentators' suggestion that the disclosure provisions should not apply to senior officers or directors who resign or otherwise leave office during the fiscal year, the FCA Board has determined that the effectiveness of the regulation would be compromised if officers and directors could avoid disclosure by leaving office prior to the end of the fiscal year. The preventive effect of the regulation would be undermined if this were permitted. Shareholders would be deprived of meaningful information about potential conflicts of interest which may have involved persons servicing the institution during the course of the year which would give them a basis for holding past and current members of management and board accountable. Also, shareholders would be deprived of relevant information that they would find useful were such persons to run for election at a later date. While disclosure is required of a nominee for director, such disclosure relates only to the prior fiscal year. For these reasons
, the FCA Board declines to make the change requested by the commentators.

The FCA Board has determined that, as a transitional matter, it is appropriate to allow an officer or director who resigns or otherwise leaves office prior to July 1, 1987, and does not stand for election in 1987 to avoid the requirements of 620.3(j)(3). The FCA Board is persuaded by the argument that such persons originally undertook their duties without knowledge that in doing so they might be required to make disclosures concerning their financial affairs and those of their immediate families and affiliated organizations. Therefore, the FCA will not consider as a violation of the regulation the omission of disclosure otherwise required by the regulation with respect to senior officers or directors who resign or otherwise leave office prior to the end of fiscal 1986 and who do not intend to run for reelection in 1987.

Part 621 -- Discussion

Existing regulation 621.2(a)(15)(iv) defines "nonaccrual loan" to include (1) all loans 90 days past due unless adequately secured and in process of collection and (2) all loans past due for 180 days without regard to the adequacy of the security or collection efforts. This definition is consistent with the definition of nonaccrual loans used by other Federal bank regulators except that other regulators do not use the 180-day criterion. The 180-day criterion was designed to encourage prompt servicing of past due loans by limiting the phrase "in process of collection" to servicing actions which have corrected deficiencies within 180 days.

The FCA Board believes loans should be classified as nonaccrual if they are not fully collectible with respect to principal and interest. The FCA Board has determined that a criterion that is based solely on time past due may result in the classification of some loans as nonaccrual even if they are fully collectible. The FCA Board believes there are other methods of encouraging prompt collection that do not have this effect.

Accordingly, the FCA Board adopts an amendment to the regulation that eliminates the 180-day criterion and defines "in process of collection" more broadly to encourage prompt collection and establish clearly definable minimum standards for System institutions to follow in determining whether past due loans are in process of collection. The existing regulation provides that a loan is in process of collection when collection of the debt is proceeding in due course through legal action or, in appropriate circumstances, through collection efforts not involving formal legal action that are reasonably expected to result in repayment of the debt in full or in its restoration to current status. Under the revised rule, a loan will be considered in process of collection only if a written plan of collection meeting the requirements of the regulation has been adopted by the institution and is documented in the loan file, the borrower and the institution have acted substantially in accordance therewith, and collection efforts are proceeding in due course. The regulation requires that the plan specify (1) the reasons the selected collection method was chosen over other methods; (2) the approvals necessary to implement the plan in accordance with the institution's policies and procedures; and (3) the actions necessary to collect the debt and the dates by which such actions must be accomplished. Where actions by the borrower are necessary, the plan must include the borrower's written agreement to complete the actions by the specified dates. The requirement to specify the reasons the selected collection method was chosen is intended to encourage consideration of various alternatives for correcting delinquencies, including restructurings.

Under both the current and the revised regulation, a loan past due 90 days or more but not well secured must be transferred to nonaccrual status regardless of whether it is "in process of collection."

The FCA Board finds, pursuant to 5 U.S.C. 553(b), that a notice and comment period is impracticable, unnecessary, and contrary to the public interest and adopts the amendments in final. A notice and comment period is unnecessary for Part 620 because the Board adopts the amendments in response to concerns raised by comments received after the regulation was adopted in final and with respect to Part 621 because the issue has been the subject of extensive informal comment and discussion with the commentators overwhelmingly in favor of deleting the 180-day requirement, and the amendments relax a reporting requirement. A notice and comment period is impracticable and contrary to the public interest for Part 620 because it would create uncertainty about the regulation's requirements at a time when institutions should be gearing up for the preparation of the 1986 annual report to shareholders and the resulting delay could interfere with the distribution of annual reports to shareholders in a timely manner. A notice and comment period is impracticable and contrary to the public interest for Part 621 because the delay that would result could cause nonaccrual loans to be overstated in year-end 1986 financial statements. These changes are in no way detrimental to the broader public interest in that they do not compromise in any way the effectiveness of the regulations in serving their intended purposes.

The FCA Board has further determined that in light of the adjournment of Congress and the urgent need for this regulation to become effective, it is necessary to invoke the emergency provision contained in 5.17(b)(2) of the Farm Credit Act of 1971, as amended. By invoking this exception, the effective date of the regulation will not be delayed until the expiration of the 30 days during which either or both Houses of Congress are in session.

For the same reasons that a notice and comment period is impracticable, unnecessary and contrary to the public interest, the FCA Board has determined, pursuant to 5 U.S.C. 553(d), that the 30-day period specified therein should be waived so that the amendments will be effective immediately upon publication in the Federal Register.

List of Subjects in 12 CFR Parts 620 and 621

Disclosure to shareholders, Annual reports, Quarterly reports, Association annual meeting information statement, Accounting and reporting requirements, Reporting and recordkeeping requirement, Report of condition and performance.

For the reasons set forth in the preamble, Chapter VI, Title 12, of the Code of Federal Regulations is amended as follows:

PART 620 -- DISCLOSURE TO SHAREHOLDERS

1. The authority citation for Part 620 is revised to read as follows:

Authority: Secs. 5.17(9) and (10), Pub. L. 99-205, 99 Stat. 1678, 12 U.S.C. 2252.

Subpart A -- Annual Reports to Shareholders

2. Section 620.1 is amended by revising paragraph (c) to read as follows:

620.1 Definitions.

* * * * *

(c) "Immediate family" means spouse, parents, siblings, children, mothers- and fathers-in-law, brothers- and sisters-in-law, and sons- and daughters-in-law.

* * * * *

3. Section 620.3 is amended by revising paragraphs (j)(2), (j)(3)(i), (3) (ii) introductory text, (3)(ii)(A), (B), (D), (E), (F), and (G), and by removing paragraphs (j)(3)(ii) (H) and (I), to read as follows:

620.3 Contents of the annual report to shareholders.

* * * * *

(j) * * *

(2) Transactions other than loans. For each person who served as a senior officer or director on January 1 of the year following the fiscal year of which the report is filed, or at any time during the fiscal year just ended, describe briefly any transaction or series of transactions other than loans that occurred at any time since the last annual meeting between the institution and such person, any member of the immediate family of such person, or any organization with which such person is affiliated. State the name of the officer or director who entered into the transaction or whose immediate family member or affiliated organization entered into the transaction, the nature of the person's interest in the transaction, and the terms of the transaction. No information need be given where the purchase price, fees, or charges involved were determined by competitive bidding or where the amount involved in the transaction (including the total of all periodic payments) does not exceed $5,000, or the interest of the
person arises solely as a result of his or her status as a stockholder of the institution and the benefit received is not a special or extra benefit not available to all stockholders.

(3) * * *

(i) To the extent applicable, state that the institution has had loans outstanding during the last full fiscal year to date to its senior officers and directors, their immediate family members, and any organizations with which such senior officers or directors are affiliated.

* * * * *

(ii) If the conditions stated in paragraph (j)(3)(i) of this section do not apply to the loan(s) of any person who has served as a senior officer or director since the start of the previous fiscal year, or any member of such person's immediate family, or any organization with which such person is or has been affiliated since the start of the previous fiscal year, state:

(A) The name of the officer or director to whom the loan was made or to whose relative or affiliated organization the loan was made.

(B) The largest aggregate amount of each indebtedness outstanding at any time during the last fiscal year.

(C) * * *

(D) The amount outstanding as of the latest practicable date.

(E) The reasons the loan does not comply with the criteria contained in paragraphs (j)(3(i)(A) through (C) of this section.

(F) If the loan does not comply with paragraph (j)(3)(i)(B) of this section, the rate of interest payable on the loan and the repayment terms.

(G) If the loan does not comply with paragraph (j)(3)(i)(C) of this section, the amount past due, if any, and the reason the loan is deemed to involve more than a normal risk of collectibility.

* * * * *

PART 621 -- ACCOUNTING AND REPORTING REQUIREMENTS

4. The authority citation for Part 621 is amended to read as follows:

Authority: Sec. 5.17 (9) and (10), Pub. L. 99-205, 99 Stat. 1678, 12 U.S.C. 2252(a)(9), (10).

Subpart A -- Accounting Requirements

5. Section 621.2 is amended by removing paragraph (a)(15)(iv) and by revising paragraphs (a)(11), (15)(iii), and (18)(ii) to read as follows:

621.2 Definitions.

(a) * * *

(11) A debt shall be considered in process of collection only if all of the following conditions are met:

(i) A written plan of collection, reasonably expected to result in repayment of the debt or in its restoration to current status, has been prepared by the lending institution setting forth clearly:

(A) The reasons the selected method of collection was chosen over alternate methods,

(B) All approvals necessary to implement the entire plan in accordance with the lending institution's policies and procedures, and

(C) The specific actions that must be taken by the lending institution and the borrower in order to achieve collection in full, or restoration to current status, together with the dates by which each of those actions is expected to be completed.

(ii) If full collection of the debt or its restoration to current status is dependent upon completion of any action by the borrower, the plan shall include the borrower's written agreement to complete all such actions by the dates set forth in the plan of collection.

(iii) It is severely past due and not adequately secured, not in process of collection, and not fully collectible with respect to all principal and interest.

(iv) Collection efforts are proceeding in due course.

* * * * *

(15) * * *

(iii) The plan is documented in the loan file and the institution and the borrowers(s) have acted substantially in accordance therewith.

* * * * *

(18) * * *

(ii) Are past due 90 days or more but adequately secured and in process of collection; or

* * * * *

Kenneth J. Auberger,

Secretary, Farm Credit Administration Board.

[FR Doc. 86-26252 Filed 11-20-86; 8:45 am]


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