Title: FINAL RULE--Disclosure to Shareholders; Accounting and Reporting Requirements--12 CFR Parts 620 and 621
Issue Date: 02/05/1988
Agency: FCA
Federal Register Cite: 53 FR 3335
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FARM CREDIT ADMINISTRATION

12 CFR Parts 620 and 621

Disclosure to Shareholders; Accounting and Reporting Requirements


ACTION: Final rule.

SUMMARY: The Farm Credit Administration (FCA) adopts final amendments to Part 620 relating to disclosure of the condition or classification of loans to senior officers and directors and their immediate families and affiliated organizations and a final amendment to Part 621 relating to accounting and reporting requirements. The FCA withdraws proposed amendments to Part 620 that are either inconsistent with or that require further consideration in light of the Agricultural Credit Act of 1987, Pub. L. 100-233, and adopts minor substantive, technical and clarifying amendments to Part 620 that were proposed on August 14, 1987. The amendment to Part 621 deletes an obsolete examining classification from the definition of "other high risk loans."

EFFECTIVE DATE: This regulation shall become effective after the expiration of 30 days from publication during which either or both Houses of Congress are in session. A document will be published in the Federal Register announcing the effective date.

FOR FURTHER INFORMATION CONTACT:

Dorothy J. Acosta, Senior Attorney, Office of the General Counsel, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090, (703) 883-4020

or

James Thies, Assistant Chief, Financial Analysis and Standards Division, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090, (703) 883-4483, TDD (703) 883-4444.

TEXT:
SUPPLEMENTARY INFORMATION: On April 7, 1987, the FCA held a public hearing in response to concerns expressed by institutions of the Farm Credit System (System) with provisions of the FCA's regulation that required disclosure in shareholder reports of problem loans from the reporting institution to its senior officers and directors and their immediate families and affiliated organizations (12 CFR Part 620). In response to the testimony presented at that hearing, the FCA proposed amendments to Parts 620 and 621 (52 FR 30374, August 14, 1987). The comment period closed October 15, 1987.

During the comment period, bills were introduced in the United States Congress that, among other things, would limit disclosure that the FCA can require of the condition and classification of loans (problem loans) to directors and their immediate families in a manner different from that which had been proposed on August 14, 1987. The limiting provision was enacted into law on January 6, 1988, as an amendment to section 5.17(a)(9) of the Farm Credit Act of 1971. (See section 424 Agricultural Credit Act of 1987, Pub. L. 100-233). The amendment prohibits the FCA from requiring in shareholder reports disclosure of the condition or classification of a loan to a director of the institution who has resigned before the time for filing the applicable report with the Farm Credit Administration or whose term of office will expire no later than the date of the meeting of stockholders to which the statement relates. In addition, the statute limits disclosure that can be required of members of a director's immediate family to those who reside with the director or those in whose loan or business operation the director has a material financial or legal interest. The legislative history of the section indicates that Congress also intends the limitations on disclosure to apply to senior officers. (See H.R. Rep. No. 490, 100th Cong., 1st Sess. 268.) The new statute requires the limitations to be implemented within 30 days of enactment.

A. Part 620 -- Disclosure to Shareholders

1. Transactions with Senior Officers and Directors

In response to the concerns expressed at the public hearing, the FCA proposed to amend 620.3(j)(3) to require in shareholder reports disclosure of problem loans to relatives of senior officers and directors with which such officer or director has a business relationship, instead of immediate family members, as defined in 620.1(c). The amendment would also have required problem loans to immediate family members not having a business relationship with the officer or director to be reported to the FCA. In addition, the institution would have been required to inform shareholders that this disclosure to the FCA was available upon request. Similar amendments were proposed to 620.3(j)(2)-Transactions other than loans. The FCA also proposed to amend 620.3(j)(3) to allow a director or senior officer to avoid disclosure of a problem loan by resigning or by correcting the problem within 60 days of the identification of the problem, provided that if the director or officer ran for election or were reappointed or reemployed within two years, the disclosure that would have been required but for the resignation would have been required to be made to shareholders prior to election or in the next annual report, whichever came first.

Because these proposed amendments to 620.3(j) (2) and (3) are inconsistent with the new statutory limitation, the FCA withdraws them. To comply with the statutory requirements, an interim rule implementing the new statutory limitation is also published today, effective one week from publication, with opportunity for comment. (See interim rule published elsewhere in today's Federal Register.)

The FCA also proposed an amendment to 620.3(j)(3)(i) to clarify that Federal Land Bank Associations (FLBAs) must disclose loans from the Federal land bank (FLB) to the FLBA's senior officers and directors that do not meet the conditions of 620.3(j)(3) (i) and (ii). (The amendment was inadvertently omitted from the actual text of the proposed regulation.) The clarification was proposed to reflect the fact that the FLB rather than the FLBA is the primary creditor. The FCA believed that the System had understood the regulation to require such disclosure and the comments confirmed that this was the case. The FCA adopts the proposed amendment as part of the final regulation.

2. Transactions With Other Farm Credit Institutions

The FCA proposed amendments that would require disclosure of loans to the reporting institution's senior officers and directors, their affiliated organizations and immediate family members from any Farm Credit institution having a supervisory relationship with the reporting institution if the loan did not meet the criteria of 620.3(j)(3)(i). The FCA withdraws this proposed amendment pending further consideration of the impact of the restructuring provisions of the new statute on the issues addressed by the proposed amendment.

3. Definition of "business relationship"

The FCA proposed a definition of "business relationship," a term used in the proposed amendments to 620.3(j) (2) and (3). The FCA withdraws the proposed definition, as the term is not used in the final regulation.

4. Other Changes

The FCA adopts the proposed amendment to 620.1(a), which revises the definition of "affiliated organization" by substituting "partner" for the third "director" in the definition. This change would eliminate organizations in which the person's only role is to serve as director and would include within the definition organizations in which the person has a partnership interest. Comments received on this change were supportive.

The FCA adopts a number of other minor substantive and technical changes and corrections that were proposed.

Section 620.21(c) is amended to clarify that the most recent quarterly report need not be actually sent with the annual information statement if it has already been sent to shareholders, by inserting "preceded or" before "accompanied." However, persons who have become shareholders since the most recent quarterly report was disseminated should be provided with a copy of it, either at the time they become shareholders or with the annual information statement. Comments received on this proposed changed were supportive.

Section 620.3(c) is amended to clarify that the requirement to disclose material pending legal proceedings is not intended to require routine disclosure of pending enforcement proceedings before the FCA, by deleting the words "or agency." Rather, the reporting institution will need to consider whether the enforcement proceeding or the circumstances giving rise to it are so material that they should be disclosed. Comments received on this proposed change were supportive.

The FCA adopts the following proposed technical amendments and corrections:

Section 620.2(k) is amended by deleting the "s" in "reports" in the first sentence and inserting "also" before "include" in the third sentence.

Section 620.10(a) is amended by changing "reporting requirements" to "report" in the last sentence.

Section 620.11(b)(2) is amended by changing "that" to "than" in the first sentence.

Section 620.11(b)(4) is amended by changing the second "that" in sentence 2 to "and," and inserting "that" between "accounts" and "have" in sentence 3.

Section 620.20(b) is amended to correct the citation contained therein from 621.21 to 620.21.

B. Part 621 -- Accounting and Reporting Requirements

Part 621 is amended to delete all references to "vulnerable" loans, by deleting 621.2(a)(18)(i) and redesignating 621.2(a)(18) (ii), (iii), (iv), and (v). Section 621.2(24), which defines "vulnerable" is also deleted.

With this deletion, nonperforming loans are defined without reference to examining classifications. This amendment was proposed by the FCA primarily because the examining classification set forth in the regulation is outdated and because the use of examining classifications to define "other high risk loans" introduces a more subjective judgment into the primarily objective criteria for determining loan performance categories. It was also believed that this change would respond in part to the concern expressed at the hearing that some loans would be required to be disclosed because of immaterial irregularities or lack of documentation that would cause the loan to be classified as "vulnerable," even though the borrower was current on his or her payments.

Comments received on this change were generally supportive, but some commentors believed it an insufficient response to their concern that disclosure might be required even though the loan is not contractually past due, but has suffered a decline in collateral value. The FCA reemphasizes that the collectibility of a loan must be evaluated on the basis of the likelihood that the institution will be able to collect all of the contractual principal and interest over the life of the loan in light of all current information available about the borrower's operations. This is especially important in view of the fact that many loans are annual payment loans. If the institution has information about the borrower's operations that indicates that the borrower will not be able to make such a payment when it becomes due, the loan may be deemed to involve a greater than normal risk of collectibility even though it is not yet contractually past due.

The heading of 621.4 is amended to correct the spelling of "Accrual."

List of Subjects in 12 CFR Parts 620 and 621

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

As stated in the preamble, Parts 620 and 621 of 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 continues to read as follows:

Authority: Secs. 5.17(a) (9) and 10, Pub. L. 99-205, 99 Stat. 1678, 12 U.S.C. 2252(a) (9) and (10); Sec. 424, Pub. L. 100-233.

Subpart A -- Annual Reports to Shareholders

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

620.1 Definitions.

(a) "Affiliated organization" means any organization, other than a Farm Credit organization, of which a director, senior officer or nominee for director of the reporting institution is a partner, officer, or majority shareholder.

* * * * *

3. Section 620.2 is amended by revising paragraph (k) to read as follows:

620.2 Preparing, distributing, and filing the report.

* * * * *

(k) For purposes of this part, each annual and quarterly report of a Federal land bank shall present the financial statements of the Federal land bank and its District Federal land bank associations on a combined basis. The annual and quarterly reports of a Federal intermediate credit bank shall present the financial statements of the Federal intermediate credit bank and its district production credit associations on a combined basis. The respective reports shall also include at a minimum the statement of condition and statement of income for the bank only. These statements may be in a summary form and shall disclose the basis of presentation if different than the accounting policies of the combined bank and association statements.

4. Section 620.3 is amended by revising paragraphs (c) and (j)(3)(i) introductory text to read as follows:

* * * * *

620.3 Contents of annual report to shareholders.

* * * * *

(c) Legal proceedings. Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the institution is a party, of which any of its property is the subject, or which involved claims that the institution may be required by contract or operation of law, to satisfy. Include the name of the court in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought.

* * * * *

(j) Transactions With Senior Officers and Directors

* * * * *

(3) Loans to senior officers and directors.

(i) To the extent applicable, state that the institution (or in the case of a Federal land bank association, its district Federal land bank) 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 that:

* * * * *

Subpart B -- Quarterly Report to Shareholders

5. Section 620.10 is amended by revising paragraph (a) to read as follows:

620.10 Preparing, distributing and filing the report.

(a) Each institution of the Farm Credit System except Federal land bank associations shall prepare a quarterly report for each fiscal quarter beginning with the quarter ending June 30, 1986, except that no report need be prepared for the fiscal quarter that coincides with the end of the fiscal year of the institution. The report shall conform to the requirements set forth in 620.11.

* * * * *

6. Section 620.11 is amended by revising paragraphs (b)(2) and (b)(4) to read as follows:

620.11 Content of quarterly report to shareholders.

* * * * *

(b) * * *

(2) Interim statements of income. When any major income statement caption is less than 15 percent of average net income for the 3 most recent fiscal years and the amount in the caption has not increased or decreased by more than 20 percent since the corresponding interim period of the preceding fiscal year, the caption may be combined with others. In calculating average net income, loss years should be excluded. If losses were incurred in each of the 3 most recent fiscal years, the average loss shall be used for purposes of this test.

* * * * *

(4) The interim financial information shall include disclosure either on the face of the financial statements or in accompanying footnotes sufficient to make the interim information presented not misleading. Institutions may presume that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year and the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure that would substantially duplicate the disclosure contained in the most recent audited financial statements (such as a statement of significant accounting policies and practices), and details of accounts that have not changed significantly in amount or composition since the end of the most recent completed fiscal year may be omitted. However, disclosure shall be provided of events occurring subsequent to the end of the most recent fiscal year that have a material impact on the institution. 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 inherent in the preparation of financial statements; status of long-term contracts; capitalization, including significant new indebtedness or modification of existing financing agreements; and the reporting entity resulting from business combinations or dispositions.

* * * * *

Subpart C -- Association Annual Meeting Information Statement

7. Section 620.20 is amended by revising paragraphs (b) and (c) to read as follows:

620.20 Preparing, distributing, and filing the information statement.

* * * * *

(b) The statement shall contain, at a minimum, the information specified in 620.21 and, in addition, such other material information as is necessary to make the required statement, in light of the circumstances under which they are made, not misleading.

(c) The statement shall incorporate by reference the annual report to shareholders required by Subpart A of this part. In addition, if any institution holds its annual meeting of shareholders more than 134 days after the end of its fiscal year, the statement shall be preceded or accompanied by the most recent quarterly statements required by Subpart B of this part.

* * * * *

PART 621 -- ACCOUNTING AND REPORTING REQUIREMENTS

8. The authority citation for Part 621 continues to read as follows:

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

Subpart A -- Accounting Requirements

621.2 [Amended]

9. Section 621.2 is amended by removing paragraph (a)(18)(i) and redesignating paragraphs (a)(18) (ii), (iii), (iv) and (v) as paragraphs (a)(18) (i), (ii), (iii), and (iv); and by removing paragraph (a)(24).

10. Section 621.4 is amended by revising the heading to read as follows:

621.4 Accrual basis of accounting.

Dated: February 2, 1988.


David A. Hill,

Secretary, Farm Credit Administration Board.

[FR Doc. 88-2484 Filed 2-4-88; 12:50 pm]

BILLING CODE 6705-01-M