Title: PROPOSED RULE--Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System--12 CFR Part 630
Issue Date: 02/04/1994
Agency: FCA
Federal Register Cite: 58 FR 5341
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Part 630

RIN 3052-AB23

Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System


ACTION: Proposed rule.

[*5341]

SUMMARY: The Farm Credit Administration (FCA), by the FCA Board (Board), publishes for comment proposed regulations that would require each bank of the Farm Credit System (FCS or System), the Federal Farm Credit Banks Funding Corporation (Funding Corporation), and the Farm Credit System Financial Assistance Corporation (Financial Assistance Corporation) to jointly publish annual and quarterly reports to investors and potential investors in Systemwide debt obligations and consolidated bank debt obligations of the Farm Credit System (FCS debt obligations). The report to investors required by the proposed rule would contain Systemwide financial statements, supplemental financial statement information, and related analyses pertaining to System institutions presented on a combined basis.

The proposed rule would 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 proposed rule would integrate individual System institutions' disclosure to shareholders with the Systemwide disclosure to investors.

Though not required by existing FCA regulations, System institutions have developed the Farm Credit System Disclosure Program (System Disclosure Program) and currently publish a "Report to Investors of the Farm Credit System" (FCS Report). Included in the FCS Report are an Information Statement that contains financial data and a general report. The content of the report to investors that would be required by this proposed rule is similar to that of the Information Statement.

The proposed regulations generally parallel the System Disclosure Program, and thus should not impose significant additional regulatory burdens on System institutions. Further, the proposed rule would not impose any new responsibilities for financial disclosure on FCS associations. However, it contains one provision that would affect the associations' [*5342] engagements with external auditors; i.e., it would provide for direct communication between association external auditors and System banks regarding questions about associations' financial information that arise in the preparation of the report to investors.

DATES: Written comments must be received on or before April 20, 1994.

ADDRESSES: Comments must be submitted in writing (in triplicate) to Patricia W. DiMuzio, Division Director, Regulation Development Division, Office of Examination, Farm Credit Administration, McLean, Virginia 22102-5090. Copies of all communications received will be available for examination by interested parties in the Regulation Development Division, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Tong-Ching Chang, Staff Accountant, Technical and Operations Division, Office of Examination, Farm Credit Administration, McLean, Virginia 22102-5090, (703) 883-4483, TDD (703) 883-4444,

or

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.

SUPPLEMENTARY INFORMATION:

I. Background

Farm Credit System institutions jointly publish the 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, debt obligations issued by the System, and the external environments in which the System operates. Except for the quarter that coincides with the end of the fiscal year, System institutions also jointly publish quarterly Information Statements. In connection with the sale of debt securities, the Funding Corporation routinely distributes the FCS Report and quarterly Information Statements to the investment dealers and dealer banks (selling group) that sell FCS debt securities.

The FCA currently has no regulations that specifically govern disclosure of the System financial information contained in the Information Statement. To prevent any inconsistency with the FCA regulations regarding System institutions' disclosure to shareholders and accounting and reporting requirements and to delineate the disclosure responsibilities of System institutions in this area, the FCA proposes regulations for a new part 630, Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System. The proposed rule would govern the System's preparation and reporting of financial information to investors. The authority for the proposed regulations is section 5.17(a)(8) of the Farm Credit Act of 1971, as amended (1971 Act), 12 U.S.C. 2252(a)(8), which authorizes the FCA 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."

The proposed regulations generally parallel the System Disclosure Program. They reflect the division of responsibilities among the institutions participating in the System Disclosure Program, and the disclosures that would be required are similar to those contained in the Information Statements currently published by the System.

Under the proposed regulations, the institutions participating in the System Disclosure Program, including each of the System banks, the Funding Corporation, and the Financial Assistance Corporation, n1 would continue to share the responsibility for disclosure of Systemwide financial information to investors and the public. These institutions would be designated as the "disclosure entities" under the proposed regulations. In addition, the Funding Corporation would be responsible for filing the report to investors with the FCA. Although associations' financial statements are required by 12 CFR part 620, Disclosure to Shareholders, to be combined with their related banks' financial statements and such combined statements are included in the Information Statement, associations have no direct role in the System Disclosure Program. Consistent with the existing System Disclosure Program, the proposed regulations do not affect the current reporting relationship between a bank and its related associations, and imposes no additional reporting responsibilities on associations.

n1 Since the board of the Funding Corporation is also the board of the Farm Credit System Financial Assistance Corporation (FAC), FAC's participation in the System Disclosure Program is implied.

The FCA has added requirements designed to improve the disclosure entities' internal controls over Systemwide financial reporting. Because these proposed requirements are generally compatible with the System Disclosure Program, the FCA does not believe they will result in significant additional regulatory burden.

In general, the proposed regulations would (1) require the System to publish a report to investors; (2) delineate the responsibilities relating to the preparation of the report; (3) reinforce internal controls over the 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.

Under the proposed regulations, the Funding Corporation would be required to maintain a Farm Credit System Audit Committee (System Audit Committee) to oversee the Systemwide financial disclosure to investors. Each bank would also be required to establish or utilize any existing bank audit committee to oversee the bank's financial reporting to shareholders and the Funding Corporation for disclosure to investors.

The proposed rule also would implement section 514 of the Farm Credit Banks and Associations Safety and Soundness Act of 1992 (1992 Act) regarding disclosures to investors. Section 514(c)(2) and (d) of the 1992 Act requires the FCA to review and, if necessary, amend its financial disclosure regulations 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 System institutions.

Below is a section-by-section explanation of significant provisions of the proposed regulations.

II. Subpart A-General

A. Purpose and Definitions

Proposed 630.1 articulates the purpose of the regulations-to require the System to publish annual and quarterly reports that will provide combined financial information on a Systemwide basis to investors and potential investors in Systemwide and consolidated bank debt obligations of the System, as well as to other users of the reports. The reports would contain combined financial statements, supplemental financial statement information, and related information pertaining to all System institutions as a whole.

Section 630.2 defines significant terms used in the proposed regulations. [*5343] The term "disclosure entities," as defined in proposed 630.2(b), means all banks, the Funding Corporation, and the Financial Assistance Corporation. Because the Federal Agricultural Mortgage Corporation (Farmer Mac) is not liable for any debt or obligation of any other institutions of the System, for purposes of the proposed regulations, the term "Farm Credit System" defined in proposed 630.2(d) does not include Farmer Mac.

Each bank may individually issue notes, bonds, debentures, or other similar obligations under authority of section 4.2(a), (b), and (e) of the 1971 Act. Also, each bank may join with other banks of the System to issue consolidated bank debt obligations under section 4.2(c) of the 1971 Act or Systemwide debt obligations under section 4.2(d) of the 1971 Act. Under section 4.4 of the 1971 Act, all banks are jointly and severally liable for debt obligations issued under section 4.2(c) or (d) of the 1971 Act. The proposed regulations use the term "FCS debt obligations" (defined in 630.2(e)) to encompass both consolidated bank debt obligations and Systemwide debt obligations.

B. Publishing and Filing the Report to Investors

Proposed 630.3 contains general requirements and instructions for publishing and filing annual and quarterly reports to investors by the disclosure entities. For purposes of subpart A of the proposed regulations, the term "report to investors" or "report" refers to both the annual and quarterly reports required by this part unless otherwise specified. Under proposed 630.3(a), the disclosure entities would be required to jointly publish the report. Proposed 630.3(b) provides that each report must present combined financial statements and accompanying footnotes to provide investors with the most meaningful presentation of the combined financial condition and results of operations pertaining to all System institutions. The proposed regulations define the required combined financial statements in proposed 630.2(g) as the "Systemwide combined financial statements." Pursuant to proposed 630.3(c) and 630.20(l), the Funding Corporation must determine the "reporting entity" n2 of the Systemwide combined financial statements in accordance with generally accepted accounting principles (GAAP).

n2 A "reporting entity" refers to the identity or boundaries of an entity for which financial statements are prepared. A reporting entity may comprise two or more affiliated entities and is not necessarily a legal entity per se.

Proposed 630.3(c) through (g) contains general requirements similar to those followed by individual institutions in preparing and filing disclosures to shareholders under 620.2 of this chapter. Pursuant to proposed 630.3(c), the disclosure entities would be required to prepare their Systemwide combined financial information for disclosure to investors in accordance with the accounting and reporting standards prescribed in part 621 of this chapter. This would ensure comparability between the report to investors prepared pursuant to this proposed rule and the disclosure to shareholders prepared by individual System institutions pursuant to part 620 of this chapter.

Proposed 630.3(e) would permit the Funding Corporation to present the information required by this part in any order it deems suitable in the report. Under proposed 630.3(f), the Funding Corporation must disclose in the report that additional financial information regarding individual banks is contained in the banks' periodic reports and state where the reports can be obtained.

Finally, the Funding Corporation would be required to file the report to investors with the FCA in the same manner as individual banks or associations file their periodic reports with the FCA. Proposed 630.3(g) provides that at least one of the three copies of the report filed with the FCA must be dated and manually signed on behalf of the Funding Corporation by: (1) The officer(s) designated by the Funding Corporation board to certify the report; (2) the chief executive officer of the Funding Corporation; and (3) at least one of the members of the Funding Corporation board. The signers of the report must certify that the report has been prepared in accordance with all applicable statutory or regulatory requirements and that the information it contains is true, accurate, and complete to the best of his or her knowledge and belief.

C. Responsibilities for Preparing the Report to Investors

Proposed 630.4 delineates responsibilities of the disclosure entities and associations for preparing the report to investors. All disclosure entities have a role in the preparation of the report to investors, either by supplying essential financial information or by compiling and combining it into a meaningful Systemwide report. The disclosure entities thus bear the responsibility for the accuracy and completeness of the published report. The associations, which are not disclosure entities under this part, would be required by proposed 630.4(d) to provide for direct communication between disclosure entities and association external auditors regarding questions pertinent to association financial information that arise in the preparation of the report.

1. Responsibilities of the Funding Corporation

Proposed 630.4(a) sets forth the responsibilities of the Funding Corporation. The proposed regulations formalize the Funding Corporation's function in the existing System Disclosure Program by assigning the Funding Corporation the lead role among disclosure entities in preparing the report to investors.

Under proposed 630.4(a)(1), the Funding Corporation would be required to publish the reports required by 630.3(a). The annual report to investors must be published within 90 days after the end of each fiscal year. With the exception of the quarter coinciding with the fiscal year-end, the Funding Corporation would be required to publish a report covering each quarter within 60 days after quarterend. Within the same time period, pursuant to 630.4(a)(4), the Funding Corporation must file these reports with the FCA in accordance with 630.3(g).

Proposed 630.4(a)(2) would require the Funding Corporation to establish a system of internal controls over Systemwide financial disclosure to investors. The internal control policies and procedures must be approved by the System Audit Committee. Under this system of internal controls, the Funding Corporation must: (1) Maintain written policies and procedures to be carried out by the disclosure entities for preparation of the report to investors; (2) provide instructions to the disclosure entities regarding the information needed for preparing the report to investors; (3) provide for the review and verification of information submitted by all other disclosure entities to the Funding Corporation; and (4) specify procedures for the monitoring of interim disclosures of System institutions and timely disclosure of any material changes to the most recently published report to investors.

As defined in proposed 630.2(f), the "materiality" of an event must be determined at each reporting level in light of the surrounding circumstances under which the reporting is made. Therefore, each bank must submit to the Funding Corporation all information the bank believes to be material either to the financial statements of the [*5344] bank or to the combined financial statements of the bank and its related associations. On receipt of information from all disclosure entities, the Funding Corporation must in turn make a materiality judgment based on the aggregate effect of all information received to determine the extent of discussion and analysis to be presented in the report to investors.

Under proposed 630.4(a)(3), the Funding Corporation would be responsible for collecting the component financial data and related analysis needed from each disclosure entity to prepare the report to investors. This provision would authorize the Funding Corporation to collect the information and any supporting data needed from each disclosure entity to comply with the requirements of proposed subparts B and C. Under the proposed regulations, the Funding Corporation would obtain associations' financial information through the banks rather than from the associations. This proposed rule integrates the requirement of part 620 of this chapter that banks prepare combined financial statements with their related associations.

Under proposed 630.4(a)(5) and (6), the Funding Corporation would be responsible for supplying copies of the report to selling group dealers for distribution to investors and potential investors in FCS debt obligations and also for making the report available for public inspection. The FCA does not intend to impose a complex delivery system for the report to investors analogous to the prospectus delivery requirements of the Securities Act of 1933. Rather, the proposed regulations recognize that the Funding Corporation and other System institutions currently use the Information Statement to provide information to the public in connection with the sale of FCS debt securities. The FCA believes that the information contained in the report is useful to investors and seeks to ensure that the report is reasonably available to them through selling group dealers and the Funding Corporation and otherwise to the public upon request.

Under proposed 630.4(a)(7), the Funding Corporation would be required to notify the FCA immediately when the Funding Corporation believes that it will be unable to publish and file the report within the regulatory deadline because of the failure of one or more banks to comply with their responsibilities prescribed in proposed 630.4(c). This provision is designed to allow the FCA, if necessary, to enforce the requirement that the banks provide the information needed by the Funding Corporation to prepare the report to investors in a timely fashion. n3

n3 No provision is made for notice as a result of failure of the Financial Assistance Corporation to comply with proposed 630.5(b) because the board of the Funding Corporation is statutorily designated as the board of the Financial Assistance Corporation. The board is responsible for providing information about the Financial Assistance Corporation needed by the Funding Corporation to prepare the report to investors in a timely manner.

Pursuant to proposed 630.4(a)(8), the Funding Corporation must prepare a statement to briefly explain the respective responsibilities of the disclosure entities in Systemwide financial reporting and state that the Funding Corporation has policies and procedures in place to ensure, to the best of the knowledge and belief of its management and board, that the information contained in the report is true, accurate, and complete. The statement must be signed by the Funding Corporation's chief executive officer and chairman of the board. This obligation acknowledges the Funding Corporation's shared accountability with the banks for the reports as well as its lead role among the disclosure entities for preparation of the report. For the purpose of preparing the report, if the Funding Corporation needs specific information contained in the Report of Examination of a bank or an association, proposed 630.4(a)(9) would authorize the Funding Corporation to request such information from the Chief Examiner of the FCA.

2. Responsibilities of the Financial Assistance Corporation

Proposed 630.4(b) sets forth the obligation of the Financial Assistance Corporation to provide the Funding Corporation with the information it requires to prepare the Systemwide combined financial statements. As noted, because the board of the Funding Corporation is the board of the Financial Assistance Corporation and has the capacity to control financial reporting of both entities, it is unnecessary to specify the Financial Assistance Corporation's responsibilities for reporting to the Funding Corporation in the proposed regulations.

3. Responsibilities of Banks

Proposed 630.4(c) sets forth the banks' responsibilities for furnishing and updating information to be used by the Funding Corporation for preparation of the report to investors and would require each bank to provide annual, quarterly, and other interim financial information to the Funding Corporation in accordance with Funding Corporation instructions.

Proposed 630.4(c)(5) would require several certifications from bank management relating to the information submitted to the Funding Corporation for inclusion in the report to investors. Banks must certify to the Funding Corporation that all information has been submitted in accordance with the Funding Corporation's instructions; that the information submitted is prepared in accordance with all applicable statutory and regulatory requirements; and that the information is true, accurate, and complete. Certifications to the Funding Corporation are to be signed on behalf of the board of a bank by an officer(s) designated by the bank board and by the chief executive officer. It would be the Funding Corporation's responsibility to determine the form of the certification to be made by each bank for compliance with the requirements of proposed 630.4(c)(5).

4. Responsibilities of Associations

Under the proposed regulations, associations have no direct responsibility for preparation of the report to investors. The associations' responsibilities for preparing combined financial statements with related banks are governed by part 620 of this chapter. However, banks must be able to follow up on issues that may arise in connection with association financial information that banks will be using to prepare their information for submission to the Funding Corporation. Therefore, proposed 630.4(d) would require each association to provide in the engagement letter with its external auditor that the external auditor shall notify the association and respond to inquiries of the related bank pertaining to the preparation of the combined financial data of the association and its related bank.

D. Prohibition Against Incomplete, Inaccurate, or Misleading Disclosure

Proposed 630.5 prohibits incomplete, inaccurate, or misleading disclosure by any of the parties involved in the preparation of the report to investors. If, in the judgment of the FCA, an incomplete, inaccurate, or misleading disclosure has been made, the party responsible is obligated under this section to provide correct information to allow the Funding Corporation [*5345] to rectify the erroneous disclosure. If a party discovers, prior to publication, that incomplete, inaccurate, or misleading disclosure has been made, the erroneous disclosure must be corrected before it is incorporated into the report. If a report containing erroneous disclosure has been published, the Funding Corporation would be required to take corrective actions as soon as possible to ensure that the reported information presents a fair and accurate picture of the System's results of operations and financial condition. Other disclosure entities would be required to furnish the information needed by the Funding Corporation to make the correction. In addition to corrective actions by System institutions, where appropriate, the FCA may use its enforcement powers under title V, part C of the 1971 Act to enforce proposed 630.5.

E. Audit Committees

Audit committees are a key component of an institution's corporate governance. Section 630.6(a) is proposed to formalize the existing System Audit Committee function and should have minimal effect on current operations of the System Audit Committee.

Proposed 630.6(a) (1) through (3) would require a System Audit Committee consisting of no fewer than three members. The System Audit Committee would report to the board of the Funding Corporation. Members selected to serve on the committee must be independent of management of any disclosure entity and association and must have financial management expertise sufficient to carry out their oversight role. A person who is an officer or employee of a disclosure entity or an association would not be considered independent of management. The committee must be given adequate resources and authorities to discharge its responsibilities, including the ability to consult with the Funding Corporation's general counsel and outside counsel to discuss legal matters that may have a significant impact on the Systemwide combined financial statements and related analyses.

Proposed 630.6(a)(4) prescribes the minimum responsibilities of the System Audit Committee. These responsibilities would include: (1) Making recommendations on the selection of an independent auditor for audits of Systemwide combined financial statements; (2) overseeing the Funding Corporation management's preparation of the report to investors; (3) reviewing the impact of significant accounting and auditing developments and approving accounting policy changes for the Systemwide combined financial statements; (4) reviewing each report and interim disclosure to investors prior to its release; and (5) overseeing the internal control system over Systemwide financial reporting for preparation of reports to investors. Lastly, the names of the System Audit Committee members must be disclosed pursuant to proposed 630.20(n).

To prepare the Systemwide combined financial statements and related discussions and analyses, the Funding Corporation relies on financial data and narratives furnished by the banks. To provide further assurance that the banks' submissions to the Funding Corporation are accurate and complete, proposed 630.6(b) would require that each bank establish and maintain a bank audit committee to oversee the internal controls over the bank's accounting and financial reporting. The proposed requirements of composition, membership qualifications, and responsibilities of the bank audit committee are similar to those of the System Audit Committee described above. A System bank whose audit committee is comprised of members of the entire board would meet the composition requirement of proposed 630.6(b)(2).

Since most System banks have performed this oversight function either through a subcommittee of the board or through the full board acting as an audit committee, the FCA does not view proposed 630.6(b) as a burdensome requirement. The audit committee requirement is consistent with the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which imposes a similar requirement on insured depository institutions with total assets of $ 500 million or more.

III. Subpart B-Annual Report to Investors

Proposed 630.20 prescribes the contents of the annual report to investors. Each disclosure entity would be required to provide the information called for by this subpart, along with any supporting information, to the Funding Corporation. Information required by the proposed regulation is generally consistent with the information currently presented in the Information Statement, which should minimize any burden that may be imposed.

The proposed content requirements resemble those of the annual report to shareholders under 620.5 of this chapter. Under proposed 630.20(a), the report would be required to provide a description of: (1) The System's business, including the System's organizational structure, geographical area, and customers; (2) the types of lending activities engaged in and financial activities offered by System institutions; (3) significant developments affecting the System's organizational structure and the manner of conducting business; (4) acquisition or disposition of material assets; and (5) concentrations of total assets (10 percent or more) in particular types of agricultural activity or business. The report must also include the address of the headquarters of each disclosure entity and service organization of the System.

Proposed 630.20(b) would require that the report provide a description of the regulatory and enforcement authority of the FCA, and the role and authority of the Farm Credit System Insurance Corporation (FCSIC) and the Financial Assistance Corporation. With respect to the FCSIC, proposed 630.20(b)(2) would require that the report provide a description of the FCSIC's status as a Government corporation and its role in ensuring the timely payment of principal and interest on FCS debt obligations and providing assistance to System institutions. In addition, a statement that System institutions have no control over the management of the FCSIC or expenditures from the Insurance Fund would be required.

Proposed 630.20(c) would require a description of System institutions' material pending legal proceedings and a summary of the types of and reasons for enforcement actions in effect during the year. Similar information is currently disclosed to shareholders by banks and their related associations under 620.5(c) of this chapter. Therefore, the banks would be required to submit such information regarding their related associations to the Funding Corporation.

Proposed 630.20(d) would require that the report describe the System's funding mechanism, including System banks' authority to issue debt obligations, and the types and characteristics of debt securities issued. Proposed 630.20(d)(1) would require that the report provide a disclosure regarding debt obligations that may be issued by each bank. Accordingly, the disclosure would include a description of banks' authority to issue notes, bonds, debentures, or other obligations individually under section 4.2 (a), (b), or (e) of the 1971 Act and the fact that such debt obligations are not entitled to the benefits of insurance provided by the FCSIC.

Proposed 630.20(d) would also require the report to contain a description of applicable statutory and regulatory restrictions that affect a bank's ability to incur debt. In addition, any agreements among banks and the Funding Corporation that affect a bank's ability to incur debt and any agreements among System institutions on matters [*5346] relating to financial assistance or loss sharing must be disclosed pursuant to proposed paragraphs (d) (2) and (3) of this section.

Proposed 630.20(e) sets forth the requirement for a description of the System's capital structure. With respect to permanent capital compliance and statutory or regulatory prohibitions for stock retirement or earnings distribution by System institutions, proposed paragraph (e) of this section would require that the report provide the number of institutions, categorized by banks and associations, that do not comply with permanent capital standards or are under prohibitions, as well as a summary of the causes of such noncompliance or prohibitions.

The 5-year selected financial data required by proposed 630.20(f) generally track the current System disclosure to investors and are also very similar to the requirements of 620.5(f) of this chapter. However, the list provided under the caption "selected financial data" in proposed 630.20(f) excludes "protected borrower capital" and related capital ratios. System institutions can no longer issue protected borrower stock. Because the outstanding balance of protected borrower capital is immaterial to the financial position of the System on a Systemwide basis and is being retired at a steady rate, the regulations would not require presentation of "protected borrower capital" and related capital ratios as an element of "selected financial data." However, "protected borrower capital" must be reported separately from at-risk capital stock in the comparative financial statements or elsewhere in the report.

Proposed 630.20(g) would require a discussion and analysis (D&A) on material financial aspects of the System. Generally, the D&A must cover 3 comparative years. Overall, the D&A requirements under proposed 630.20(g) are less extensive than those required by the Securities and Exchange Commission (SEC) in its Industry Guide 3 for bank holding companies. To help determine the extent of the D&A needed, proposed 630.20(g)(6) includes general guidance for preparation of the D&A and clarifies that the purpose of the D&A is to provide useful information to investors for making business decisions.

Proposed 630.20(g)(1) would require that the D&A include a description of the System loan portfolio by major category, the risk exposure of the loan portfolio, and secondary market activities. It would also require that the amount of loans outstanding that were used to finance the purchases of stock and other equities of System institutions be disclosed. With respect to discussions of results of operations, proposed 630.20(g)(2)(vi) would require that the report explain how changes to Insurance Fund assets and related restricted capital affected reported income. The discussion must describe major components of the changes on a comparative basis. All other requirements regarding results of operations of proposed 630.20(g)(2) are similar to those required by 620.5(g)(2) of this chapter.

Proposed 630.20(g)(3) would require a list of outstanding debt securities by type and a discussion of other sources of System funding. Proposed paragraph (g)(3)(i) of this section specifies that insured obligations must be reported separately from uninsured obligations and prescribes the minimum reporting requirement for each type of security listed. The D&A must also address a number of liquidity-related matters, such as any FCA regulations or System policies regarding liquidity and liquidity reserves; material changes in liquidity and management thereof; any regulatory limitations or System policies or objectives regarding investments; System investment portfolio; and asset/liability management practices and related measurements of interest rate risk of the System, including the use of derivatives and other off-balance-sheet transactions. The FCA notes the heightened interest of other bank regulators and the Congress in the institutional and systemic risk of the rapidly growing and relatively unregulated market for derivative financial products. It is likely that derivative product transactions by the banking industry and others will receive increased regulatory scrutiny in the future. Accordingly, while proposed 630.20(g)(3)(iv) would require a brief discussion of derivative transactions, the FCA requests specific comment on whether disclosure requirements regarding derivative transactions should be more detailed.

Proposed 630.20(g)(4) would require a discussion of capital resources similar to that required under 620.5(g)(4) of this chapter.

Proposed 630.20(g)(5) specifies the requirements for disclosure regarding the Insurance Fund. It would require that the report provide: (1) A description of the purposes for which expenditures from the Insurance Fund may be made and the statutory requirements for making such expenditures; (2) a schedule itemizing the amount of Insurance Fund assets that have been specifically identified by the FCSIC for payment of estimated obligations of the FCSIC and the amount of the fund assets for which no specific use has been identified or designated by the FCSIC; and (3) an explanation of how FCSIC expenditures or designations of Insurance Fund assets for payment of future obligations affect the combined assets and capital of the System.

Proposed 630.20(g)(6) contains general guidance for preparation of the D&A. Because the purpose of the D&A is to enhance a reader's understanding of the combined financial statements, information presented should be relevant to an assessment of the combined financial statements. The D&A should focus on material events and uncertainties known at the time of reporting. The information provided should be material to System institutions, clarify any ambiguities in the combined financial statements, and highlight significant aspects of the financial statements. As preparer, the Funding Corporation would be responsible for ensuring that the D&A in the report to investors is relevant and useful to investors and the public.

Sections 630.20 (h), (i), and (j) are proposed to implement the requirements of section 514 of the 1992 Act regarding disclosure of financial and conflict-of-interest information by System personnel. The proposed regulations would require the report to provide information to investors on System institutions' related-party transactions on an aggregate basis.

Under proposed 630.20(k), "Relationship with independent public accountant," a change in the independent public accountant who audits the Systemwide combined financial statements or a disagreement with the public accountant would require disclosure if disclosure to the FCA is also required under 621.4 of this chapter.

Proposed 630.20(l) would require that the report present Systemwide combined financial statements that have been prepared in accordance with GAAP for the comparative periods specified. The financial statements presented must be audited in accordance with generally accepted auditing standards (GAAS) by a qualified public accountant and the accountant's opinion on the statements must be presented in the annual report to investors.

Proposed 630.20(m) would require that the annual report present supplemental information regarding the components of Systemwide combined financial statements. Such supplemental information must be presented in accordance with the requirements and [*5347] instructions of the FCA, either as separate schedules or in accompanying notes to the Systemwide combined financial statements. The supplemental information must be examined by an independent public accountant for compliance with the FCA regulations and guidelines and the accountant's opinion must accompany the supplemental information in the report.

Proposed 630.20 (m)(2) and (m)(3) specify that, at a minimum, the report must include current year supplemental balance sheet and income statement data for the following components: combined financial data of all banks (without associations); combined financial data of all associations; financial data of the Financial Assistance Corporation; financial data of the Insurance Fund; and combined financial data pertaining to the System with and without the Insurance Fund. Following recent correspondence and discussions with the Funding Corporation on how financial information regarding the Insurance Fund is to be presented in the 1993 FCS Report, the FCA has developed guidelines for compliance with proposed 630.20(m). The guidelines appear in the appendix to this proposed rule and contain two schedules to illustrate the format and selected financial data to be presented in the schedules. The supplemental disclosure must include any additional information and disclosure sufficient to enable readers to understand the basis of presentation of the supplemental information, the adjustments contained therein, and the effect of each component on the Systemwide combined financial statements.

Finally, proposed 630.20(o) would require the report to include a cross-reference sheet indicating the location of the required information.

IV. Subpart C-Quarterly Reports to Investors

Proposed 630.40, "Content of the quarterly report to investors," contains provisions similar to those contained in subpart C of part 620 of this chapter. Supplemental financial statement information required to be disclosed in the annual report must also be presented in quarterly reports.

The proposed regulations would require a quarterly report to be presented in an easily understandable format and in a manner that is not misleading. Quarterly reports may be prepared on the presumption that readers of the report have read or have access to the most recently published annual report. The adequacy of additional disclosure needed in the quarterly report may be determined in that context.

The rules for condensation applicable to individual institutions for preparing their quarterly financial statements prescribed in part 620 of this chapter have been incorporated in proposed part 630 to apply to the preparation of the Systemwide quarterly financial statements. In addition, proposed 630.40(b)(4) would require that quarterly reports to investors update material contingencies that exist at the time of the interim reporting even though a significant change since year-end may not have occurred.

Proposed 630.40(d) sets forth the requirements of the interim financial statements of the quarterly report and the respective comparative periods of the interim statements presented. Proposed 630.40(e) specifies the reporting periods for which quarterly supplemental information would be required. The proposed regulations do not require that interim financial statements or supplemental information be audited. However, the FCA may require the Systemwide combined financial statements of an interim period to be audited should the need arise for supervisory actions.

List of Subjects in 12 CFR Part 630

Accounting, Agriculture, Banks, banking, Credit, Organization and functions (Government agencies), Reporting and recordkeeping requirements, Rural areas.

For the reasons stated in the preamble, part 630 of chapter VI, title 12 of the Code of Federal Regulations is proposed to be added to read as follows:

PART 630-DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

Subpart A-General

Sec.

630.1 Purpose.

630.2 Definitions.

630.3 Publishing and filing the report to investors.

630.4 Responsibilities for preparing the report to investors.

630.5 Prohibition against incomplete, inaccurate, or misleading disclosure.

630.6 Farm Credit System audit committee and bank audit committees.

Subpart B-Annual Report to Investors

630.20 Contents of the annual report to investors.

Subpart C-Quarterly Reports to Investors

630.40 Contents of the quarterly report to investors.

Appendix A to Part 630-Supplemental Information Disclosure Guidelines

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.

Subpart A-General

630.1 -- Purpose.

This part sets forth the requirements for preparation and publication by the Farm Credit System (FCS or System) of annual and quarterly reports to investors and potential investors in Systemwide and consolidated bank debt obligations of the System and to other users of the reports in the general public. The reports shall contain combined financial statements, supplemental financial statement information, and related information pertaining to the System.

630.2 -- Definitions.

For purposes of this part, the following definitions shall apply:

(a) Bank means any bank chartered under the Farm Credit Act of 1971, as amended (Act).

(b) 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).

(c) Engagement letter means the proposal, contract, letter, and other documents reflecting the understandings between the audit committee or board of directors of a bank or an association and its independent public accountant regarding the scope, terms, and nature of the audit services to be performed.

(d) Farm Credit System means, collectively, the banks, associations, and such other institutions that are or may be made a part of the System under the Act, all of which are chartered by and subject to regulation by the Farm Credit Administration (FCA). For purposes of this part, the System does not include the Federal Agricultural Mortgage Corporation (Farmer Mac).

(e) FCS debt obligation means, collectively, notes, bonds, debentures, and other debt securities issued by banks pursuant to section 4.2(c) (consolidated bank debt securities) and section 4.2(d) (Systemwide debt securities) of the Act.

(f) Material, when used to qualify a requirement to furnish information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable person would attach importance in determining the financial condition of an entity. [*5348]

(g) Systemwide combined financial statements means the combined financial statements required by this part that are prepared to 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.

630.3 -- Publishing and filing the report to investors.

For purposes of this subpart, unless otherwise specified, the term report to investors or report refers, collectively, to the annual and quarterly reports to investors required by this part.

(a) The disclosure entities shall jointly publish the following reports in order to provide meaningful information pertaining to the financial condition and results of operations of the System to investors and potential investors in FCS debt obligations and other users of the report:

(1) An annual report to investors within 90 days after the end of each fiscal year.

(2) A quarterly report to investors within 60 days after the end of each quarter, except for the quarter that coincides with the end of the fiscal year.

(b) Each report to investors shall present the Systemwide combined financial statements and related footnotes deemed appropriate for the purpose of the report to provide investors with the most meaningful presentation pertaining to the financial condition and results of operations of the System.

(c) 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.

(d) Each report to investors shall contain the information required by subparts B and C of this part, as applicable, and such other information as is necessary to make the required statements, in light of the circumstances under which they are made, not misleading.

(e) Information in any part of the report may be incorporated by reference in answer or partial answer to any other item of the report. Information required by this part may be presented in any order deemed suitable by the Funding Corporation.

(f) The report shall include a statement in a prominent location that Systemwide debt securities and consolidated bank debt obligations are joint and several liabilities of individual banks and that copies of each bank's recent periodic reports to shareholders are available upon request. The report shall also include addresses and telephone numbers where copies of the report to investors and the periodic reports of individual banks can be obtained. Copies of the report to investors shall be available for public inspection at the Funding Corporation.

(g) Three complete copies of the report shall be filed with the Chief Examiner, Farm Credit Administration, McLean, Virginia 22102-5090, within the applicable period prescribed under paragraphs (a)(1) and (a)(2) of this section.

(1) At least one copy of the report filed with the FCA shall be dated and manually signed by the following officers and director(s) of the Funding Corporation on its behalf:

(i) The officer(s) designated by the board of directors to certify the report;

(ii) The chief executive officer; and

(iii) Each member of the board or, at a minimum, one of the following board members formally designated by action of the board to certify on behalf of individual board members: the chairperson of the board or a board member designated by the chairperson of the board.

(2) The name and position title of each person signing the report shall be typed or printed beneath his or her signature. Signers of the report shall attest as follows:

The undersigned certify that this report has been prepared in accordance with all applicable statutory or regulatory requirements and that the information contained herein is true, accurate, and complete to the best of his or her knowledge and belief.

630.4 -- Responsibilities for preparing the report to investors.

(a) Responsibilities of the Funding Corporation. The Funding Corporation shall:

(1) Prepare the reports to investors required by 630.3(a), including the Systemwide combined financial statements and notes thereto, and such other disclosures, supplemental information, and related analysis as are required by this part to make the reports meaningful and not misleading.

(2) Establish a system of internal controls sufficient to reasonably ensure that any information it releases to investors and the general public concerning any matter required to be disclosed by this part is true and that there are no omissions of material information. The system of internal controls, at a minimum, shall require that the Funding Corporation:

(i) Maintain written policies and procedures, approved by the System Audit Committee, to be carried out by the disclosure entities for preparation of the report to investors;

(ii) Provide instructions to the disclosure entities regarding information required to be included in the Systemwide combined financial statements and the information required to be disclosed in the report to investors;

(iii) Review the information submitted to it for preparation of the report to investors, and make reasonable inquiries to ascertain whether the information is reliable, accurate, and complete; and

(iv) Specify procedures for monitoring interim disclosures of System institutions and disclose in a timely manner any material changes in information contained in the most recently published report to investors.

(3) Collect from each disclosure entity financial data and related analyses needed for preparation of the report to investors.

(4) File the reports with the FCA in accordance with 630.3(g).

(5) Ensure prompt delivery of sufficient copies of each report to selling group dealers for distribution to investors and potential investors in FCS debt obligations.

(6) Make the report available to the general public upon request.

(7) Notify the FCA if it is unable to prepare and publish the report to investors in compliance with the requirements of this part because one or more banks have failed to comply with the requirements of paragraph (c) of this section. A notification, signed by the officer(s) designated by the board of directors of the Funding Corporation to certify the report to investors and by the chief executive officer, shall be made to the FCA as soon as the Funding Corporation becomes aware of its inability to comply. The Funding Corporation shall explain the reasons for the notification and may request that the FCA extend the due date for the report to investors.

(8) Include in the report a statement that briefly explains the respective responsibilities of the disclosure entities and states that the Funding Corporation has policies and procedures in place to ensure, to the best of the knowledge and belief of management and the board of the Funding Corporation, that the information contained in the report is true, accurate, and complete. The statement shall be signed by the chief executive officer and the chairman of the board of the Funding Corporation.

(9) If necessary, request the FCA to provide information regarding the content of the latest Reports of [*5349] Examination of any banks and related associations. The request shall be made to the Chief Examiner, Farm Credit Administration, McLean, Virginia 22102-5090.

(b) Responsibilities of the Financial Assistance Corporation. The Financial Assistance Corporation shall provide to the Funding Corporation such information as may be required by the Funding Corporation to prepare the report.

(c) Responsibilities of banks. Each bank shall:

(1) Provide to the Funding Corporation, in accordance with instructions of the Funding Corporation, annual, quarterly, and other interim financial information, including both bank-only financial data and combined financial data of the bank and its related associations, as the Funding Corporation deems necessary for preparation of the report to investors.

(2) Respond to Funding Corporation inquiries and provide any follow-up information requested by the Funding Corporation in connection with the preparation of the report to investors in accordance with instructions of the Funding Corporation.

(3) Notify the Funding Corporation promptly of any events occurring subsequent to publication of the report that may be material either to the financial condition and results of operations of the bank or to the combined financial condition and results of operations of the bank and its related associations. Furnish the Funding Corporation with any information necessary to provide interim Systemwide disclosure to investors to make the most recently published report to investors not misleading.

(4) Provide in the engagement letter with its external auditor that the external auditor shall, after notifying the bank, respond to inquiries from the Funding Corporation relating to preparation of the report.

(5)(i) Certify to the Funding Corporation that:

(A) All information needed for preparation of the report to investors has been submitted in accordance with the instructions of the Funding Corporation;

(B) The information submitted is prepared in accordance with all applicable statutory and regulatory requirements; and

(C) The information submitted is true, accurate, and complete to the best of management's knowledge and belief.

(ii) The certification required by paragraph (c)(5)(i) of this section shall be prepared as specified by the Funding Corporation and shall be manually signed and dated on behalf of the bank by:

(A) The officer(s) designated by the board of directors to certify the information submitted to the Funding Corporation; and

(B) The chief executive officer.

(d) Responsibilities of associations. Each association shall 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 pertaining to preparation of the combined financial data of the association and its related bank.

630.5 -- Prohibition against incomplete, inaccurate, or misleading disclosure.

Neither the Funding Corporation, nor any institution supplying information to the Funding Corporation under this part, nor any employee, officer, director, or nominee for director of the Funding Corporation or of such institutions, shall make or cause to be made any disclosure to investors and the general public required by this part that is incomplete, inaccurate, or misleading. When any such institution or person makes or causes to be made disclosure under this part that, in the judgment of the FCA, is incomplete, inaccurate, or misleading, whether or not such disclosure is made in published statements required by this part, such institution or person shall promptly furnish to the Funding Corporation, and the Funding Corporation shall promptly publish, such additional or corrective disclosure as is necessary to provide full and fair disclosure to investors and the general public. Nothing in this section shall prevent the FCA from taking additional actions to enforce this section pursuant to its authority under title V, part C of the Act.

630.6 -- Farm Credit System audit committee and bank audit committees.

(a) Farm Credit System audit committee. (1) The board of the Funding Corporation shall establish and maintain a System Audit Committee and adopt a written charter describing the committee's composition, authorities, and responsibilities.

(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.

(3) The System Audit Committee shall report to the board of the Funding Corporation and shall be given adequate resources and authorities to discharge its responsibilities, including the ability to consult the Funding Corporation's legal counsel.

(4) Responsibilities. At a minimum, the System Audit Committee shall:

(i) Make recommendations to the board of the Funding Corporation regarding the selection of an independent auditor of the Systemwide combined financial statements;

(ii) Oversee the Funding Corporation management's preparation of the report to investors;

(iii) Review the impact of any significant accounting and auditing developments and approve accounting policy changes relating to preparation of the Systemwide combined financial statements;

(iv) Review the System's annual and quarterly reports and other interim disclosures 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 compliance with laws and regulations.

(b) Farm Credit System bank audit committees. (1) Each System bank shall establish and maintain a bank audit committee that shall report to the board of the bank.

(2) The bank audit committee shall consist of no fewer than three members. Members shall be independent of management and free from any relationship that, in the opinion of the board of directors of the bank, 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.

(3) Responsibilities. At a minimum, the bank audit committee shall:

(i) Review the bank's financial statements and significant accounting policies;

(ii) Oversee the bank's financial reporting regarding its disclosure to shareholders and to the Funding Corporation for disclosure to investors;

(iii) Oversee the audit activities of the external auditor; and

(iv) Monitor internal controls, including those relating to compliance with laws and regulations. [*5350]

Subpart B-Annual Report to Investors

630.20 -- Contents of the annual report to investors.

The annual report shall contain the following:

(a) Description of business. (1) The description shall include a brief discussion of the following:

(i) The System's overall organizational structure, its lending institutions by type and their respective authorities, the relationships between different types of institutions, and the overall geographic area and eligible borrowers served by those institutions.

(ii) The types of lending activities engaged in and financial services offered by System institutions.

(iii) Any significant developments within the last 5 years that have had or could have a material impact on the System's organizational structure and the manner in which System institutions conduct business, including, but not limited to, statutory or regulatory changes, mergers or liquidations of System institutions, termination of System institution status, and financial assistance provided by or to a System institution through loss-sharing or capital preservation agreements or from any other source;

(iv) Any acquisition or disposition of material assets during the last fiscal year that took place outside the ordinary course of business.

(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.

(2) List the address of the headquarters of each disclosure entity and service organization of the System.

(b) Federal regulation and insurance. (1) Farm Credit Administration. Describe the regulatory and enforcement authority of the FCA over System institutions under the Act.

(2) Farm Credit System Insurance Corporation.

(i) Describe the role and authorities of the Farm Credit System Insurance Corporation (FCSIC) under part E of title V of the Act. Describe specifically the role of the FCSIC in insuring the timely payment of principal and interest on FCS debt obligations and in providing assistance to System institutions.

(ii) Describe the FCSIC's status as a Government corporation and state that System institutions have no control over the management of the FCSIC or the discretionary expenditures from the Insurance Fund, which are the sole prerogative of the FCSIC.

(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 to provide financial assistance to the System, and statutory repayment obligations of System institutions.

(c) Description of legal proceedings and enforcement actions.

(1) Describe any material pending legal proceedings in which one or more System institutions are a party, or that involve claims that a System institution(s) may be required by contract or operation of law to satisfy, and the potential impact of such proceedings, to the extent known, on the System.

(2) Provide a summary of the types and reasons for enforcement actions in effect during the year.

(d) Description of liabilities. (1) Describe how the System funds its lending operations, including:

(i) System banks' authority to borrow and issue notes, bonds, debentures, and other obligations and limitations thereof under section 4.2 of the Act;

(ii) The types of debt obligations that may be issued, the manner and form in which they are issued, the terms and conditions, rights of securities holders, risk factors, use of proceeds, tax effects of holding securities, market information, and other pertinent information;

(iii) For each of the types of obligations that may be issued, whether it is insured, and the extent of any joint and several liability for the obligations;

(iv) Any applicable statutory and regulatory requirements affecting a bank's ability to incur debt.

(2) Describe agreements among System banks and the Funding Corporation affecting a bank's ability to incur debt.

(3) Describe agreements among System institutions regarding capital preservation, loss sharing, or any other forms of financial assistance.

(e) Description of capital. (1) Describe the capitalization of the System, including capital structure, types of stock and participation certificates, and voting rights of holders of stock and participation certificates.

(2) 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.

(3) Describe any statutory or other authority of a System institution to require additional capital contributions from stockholders.

(4) Describe regulatory minimum permanent capital standards and capital adequacy requirements for banks and associations. State the number of institutions, if any, categorized by banks and associations, that are not currently in compliance with such standards and include a brief discussion of the reasons for the noncompliance.

(5) Describe any statutory and regulatory restrictions on retirement of stock and distribution of earnings by System institutions. State the number of System institutions, if any, categorized by banks and associations, that are currently affected by such restrictions and provide a summary of the causes of such prohibitions.

(f) Selected financial data. At a minimum, furnish the following combined financial data of the System in comparative columnar form for each of the last 5 fiscal years.

(1) Balance sheet. (i) Loans.

(ii) Allowance for losses.

(iii) Net loans.

(iv) Cash and investments.

(v) Other property owned.

(vi) Total assets.

(vii) FCS debt obligations and other bonds, notes, debentures, and obligations, presented by type, with a descriptive title.

(viii) Total liabilities.

(ix) Capital stock and surplus.

(2) Statement of income.

(i) Net interest income.

(ii) Net other expenses.

(iii) Provision for loan losses.

(iv) Extraordinary items.

(v) Provision for income taxes.

(vi) Net income (loss).

(3) Key financial ratios.

(i) Return on average assets.

(ii) Return on average capital stock and surplus.

(iii) Net interest income as a percentage of average earning assets.

(iv) Net loan chargeoffs as a percentage of average loans.

(v) Allowance for loan losses as a percentage of gross loans outstanding at year end.

(vi) Capital stock and surplus as a percentage of total assets at year-end.

(vii) Debt to capital stock and surplus at year-end.

(g) Discussion and analysis. Fully discuss any material aspects of financial condition, changes in financial condition, and results of operations of System institutions, on a combined basis, during the last 3 fiscal years or such other time periods specified in the following paragraphs of this section. [*5351] Identify favorable and unfavorable trends, and significant events or uncertainties necessary to understand the financial condition and results of operations of the System. At a minimum, the discussion shall include the following:

(1) Loan portfolio. (i) 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.

(ii) Disclose the amount of loans outstanding that were used to finance the purchases of stock or other equities of System institutions, if any.

(iii) Risk exposure. (A) Describe and analyze all high risk assets and other property owned, including an analysis of the nature and extent of significant credit risks and potential credit risk within the loan portfolio and of other information that could adversely affect the loan portfolio and other property owned.

(B) Provide an analysis of the allowance for loan losses that includes the ratios of the allowance to loans (outstanding at year-end) and net chargeoffs to average loans, and a discussion of the adequacy of the allowance for losses to absorb the risk inherent in the loan portfolio and the basis for such determination.

(iv) Secondary market activities. (A) Describe and quantify System institutions' secondary market activities and the risk involved in such activities.

(B) Provide an analysis of historical loss experience and the amount provided for risk of loss associated with secondary market activities, if any.

(2) Results of operations. (i) Describe, on a comparative basis, changes in the major components of net interest income. Include a discussion of significant factors that contributed to the changes and quantify the amount of change(s) due to an increase or decrease in volume and the amount due to changes in interest rates earned and paid, based on averages for each period.

(ii) Describe any unusual or infrequent events or transactions or any significant economic changes that materially affected reported income and, in each case, indicate the extent to which income was so affected.

(iii) Discuss the factors underlying any material changes in the return on average assets and return on average capital stock and surplus.

(iv) Describe, on a comparative basis, the major components of operating expense and any other significant components of income or expense, indicating the reasons for significant increases or decreases, if any.

(v) Describe any known trends or uncertainties that have had, or that are reasonably expected to have, a material impact on net interest income or net income. Disclose any known events that will cause a material change in the relationship between costs and revenues.

(vi) Explain the changes that have taken place, by major components on a comparative basis, in the Insurance Fund 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;

(2) The average maturities and the average interest rates on debt outstanding at year-end, and the average maturities and the average interest rates of new debt issued during the year.

(B) Summarize any other sources of funds, including lines of credit with commercial lenders, and their terms.

(ii) Liquidity. (A) Describe any FCA regulations or System policies with regard to liquidity and liquidity reserves.

(B) Identify any known trends, demands, commitments, events, or uncertainties that will result in, or that are reasonably likely to result in, System liquidity increasing or decreasing in any material way. If a material liquidity deficiency is identified, indicate the course of action that has been taken or is proposed to be taken by management of affected System institutions to remedy the deficiency.

(iii) Investment. Briefly describe the System's investment policies and objectives, any regulatory limitations thereon, and the contents of the System's existing investment portfolio.

(iv) Interest rate sensitivity. (A) Briefly describe System asset and liability management practices, including interest rate risk measurement systems, and methods used to control interest rate risk, such as the use of investments, derivatives, and other off-balance-sheet transactions.

(B) Provide an analysis of the System's exposure to interest rate risk and its ability to control such risk.

(4) Capital resources. (i) Describe any material commitments to purchase capital assets and the anticipated sources of funding.

(ii) Describe any material trends, favorable or unfavorable, in the System's capital resources, including any material changes in the mix of capital and debt, the relative cost of capital resources, and any off-balance-sheet financing arrangements.

(iii) Provide a general discussion of any trends, commitments, contingencies, or events that are reasonably likely to have a material adverse effect upon System institutions' ability to comply with regulatory capital standards.

(5) Insurance Fund. (i) Describe the purposes for which expenditures from the Insurance Fund may be made and the statutory requirements for making such expenditures.

(ii) Provide a schedule itemizing the amount of Insurance Fund assets that have been specifically identified by the FCSIC for payment of estimated obligations of the FCSIC and the amount of the fund assets for which no specific use has been identified or designated by the FCSIC.

(iii) Explain how FCSIC expenditures or designations of Insurance Fund assets for payment of future obligations affect the combined assets and capital of the System, and quantify the effect, if any.

(6) Instructions for discussion and analysis. (i) The purpose of the discussion and analysis (D&A) shall be to provide to investors and other users information relevant to an assessment of the combined financial condition and results of operations of System institutions as determined by evaluating the amounts and certainty of cashflows from operations and from outside sources. The information provided pursuant to this section need only include that which is available to System institutions and which does not clearly appear in the combined financial statements.

(ii) The D&A of the financial statements and other statistical data shall be presented in a manner designed to enhance a reader's understanding of the combined financial condition, results of operations, cashflows, and changes in capital of System institutions. Unless otherwise specified in 630.20(g), the discussion shall cover the 3-year period covered by the financial statements and shall use year-to year comparisons or any other understandable format. Where trend information is relevant, reference to the [*5352] 5-year selected financial data required by paragraph (f) of this section may be necessary.

(iii) The D&A shall focus specifically on material events and uncertainties known at the time of reporting that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This should include descriptions and amounts of:

(A) Matters that would have an impact on future operations but that have not had an impact in the past; and

(B) Matters that have had an impact on reported operations but are not expected to have an impact on future operations.

(h) Directors and management-(1) Board of directors. Briefly describe the composition of boards of directors of the disclosure entities. List the name of each director of such entities, including the director's term of office and principal occupation during the past 5 years, or state that such information is available upon request pursuant to 630.3(f).

(2) Management. List the names of chief executive officers and presidents of disclosure entities, including position title, length of service at current position, and positions held during the past 5 years.

(i) Compensation of directors and senior officers. 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).

(j) Related party transactions. (1) Briefly describe how System institutions, in the ordinary course of business and subject to regulation by the FCA, may enter into loan transactions with related parties, including their directors, officers, and employees, the immediate family members (as defined in 620.1(e) of this chapter) of such persons, and any organizations with which such persons and their immediate family members are affiliated.

(2) On a comparative basis for each of the fiscal years covered by the balance sheet, state the aggregate amount of the following:

(i) Loans made to related parties;

(ii) Loans outstanding at year-end to related parties;

(iii) Loans outstanding at year-end to related parties that are made on more favorable terms than those prevailing at the time for comparable transactions with unrelated borrowers; and

(iv) Loans outstanding at year-end to related parties that involve more than a normal risk of collectibility (as defined in 620.1(i) of this chapter).

(k) Relationship with independent public accountant. If a change in the accountant who has previously 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 that have been prepared in accordance with generally accepted accounting principles (GAAP) and instructions and other requirements of the Farm Credit Administration and that have been audited in accordance with generally accepted auditing standards by a qualified public accountant (as defined in 621.2(i) of this chapter) and an opinion expressed thereon. The Systemwide combined financial statements shall include the following:

(1) A balance sheet as of the end of each of the 2 most recent fiscal years; and

(2) Statements of income, statements of changes in capital stock and surplus (or, if applicable, statements of changes in protected borrower capital and capital stock and surplus), and statements of cash flows for each of the 3 most recent fiscal years.

(m) Supplemental information. (1) Furnish supplemental information regarding the components of the Systemwide combined financial statements that has been prepared in accordance with the requirements of this paragraph and instructions of the FCA and that has been examined by a qualified public accountant for compliance with FCA regulations and guidelines and an opinion expressed thereon.

(2) At a minimum, the supplemental information shall include the following:

(i) Supplemental balance sheet information as of the end of the most recent fiscal year; and

(ii) Supplemental income statement information for the most recently completed fiscal year.

(3) At a minimum, the report shall present supplemental information showing combined financial data for the following components, on a stand-alone basis:

(i) Banks;

(ii) Associations;

(iii) Financial Assistance Corporation;

(iv) Combined financial data of the System without Insurance Fund;

(v) The Insurance Fund and related combination entries; and

(vi) Combined financial data of the System with Insurance Fund.

(4) The supplemental information shall be presented in a columnar format and include, at a minimum, the selected financial data listed in the schedules in Appendix A of this part. The prescribed components shall be designated as column headings and they may be abbreviated in the schedules. The schedules may be presented separately or in accompanying notes to the Systemwide combined financial statements and shall contain additional disclosures sufficient to explain the basis of the presentation of the supplemental information, the components, and any adjustments contained therein to enable readers to understand the effect of each component on the Systemwide combined financial statements.

(n) List the names of the System Audit Committee members in the report to investors.

(o) The report to investors shall include a cross-reference sheet setting forth the item numbers and captions in the same order as prescribed in this subpart and the page or pages on which the corresponding information appears.

Subpart C-Quarterly Reports to Investors

630.40 -- Contents of the quarterly report to investors.

(a) General. The quarterly report to investors shall contain the information specified in this section along with any other material information necessary to make the required disclosures, in light of the circumstances under which they are made, not misleading. The quarterly report must be presented in a format that is easily understandable and not misleading.

(b) Rules for condensation. For purposes of this subpart, major captions to be provided in interim financial statements are the same as those provided in the financial statements contained in the annual report to investors, except that the financial statements included in the quarterly report may be condensed into major captions in accordance with the rules prescribed under this paragraph.

(1) Interim balance sheets. When any major balance sheet caption is less than 10 percent of total assets and the amount in the caption has not increased or decreased by more than 25 percent since the end of the preceding fiscal [*5353] year, the caption may be combined with others.

(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.

(3) 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. It may be presumed 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 recently completed fiscal year may be omitted.

(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 above, 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 accounting changes, state the date of any material accounting change and the reasons for making it. A letter from the persons who verify the System's financial statements shall be included as an exhibit to the reports filed with the FCA, indicating whether or not the change is to an alternative principle that in their judgment is preferable under the circumstances, except that no such letter need be filed when the change is made in response to a standard adopted by the Financial Accounting Standards Board or other authoritative body that requires such change.

(6) Any material prior period adjustment made during any period covered by the interim financial statements shall be disclosed, together with its effect upon net income and upon the balance of surplus for any prior period included. If results of operations for any period presented have been adjusted retroactively by such an item subsequent to the initial reporting of such period, similar disclosure of the effect of the change shall be made.

(7) Interim financial statements furnished shall reflect all adjustments that are necessary to a fair statement of the results for the interim periods presented. A statement to that effect shall be included. Furnish any material information necessary to make the information called for not misleading, such as a statement that the results for interim periods are not necessarily indicative of results to be expected for the year.

(8) If any amount that would otherwise be required to be shown by this section with respect to any item is not material, it need not be separately shown. The combination of insignificant items is permitted.

(c) Discussion and analysis of interim financial condition and results of operations. Discuss any material changes to the information disclosed to investors pursuant to 630.20(g) that have occurred during the periods specified in paragraphs (d)(1) and (d)(2) of this section. Provide any additional information needed to enable the reader to assess material changes in financial condition and results of operations between the periods specified in paragraphs (d)(1) and (d)(2) of this section.

(1) Material changes in financial condition. Discuss any material changes in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet provided.

(2) Material changes in results of operations. Discuss any material changes in the combined results of operations of the System with respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year-to-date period of the preceding fiscal year. Such discussion also shall cover material changes with respect to that fiscal quarter and the corresponding fiscal quarter in the preceding fiscal year.

(d) Financial statements. Interim combined financial statements shall be provided in the quarterly report to investors as set forth below:

(1) An interim balance sheet as of the end of the most recent fiscal quarter and a balance sheet as of the end of the preceding fiscal year.

(2) Interim statements of income for the most recent fiscal quarter, for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable periods for the previous fiscal year.

(3) Interim statements of changes in capital stock and surplus (or, if applicable, interim statements of changes in protected borrower capital and capital stock and surplus) for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable period for the preceding fiscal year.

(4) Interim statements of cash flows for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable period for the preceding fiscal year.

(e) Supplemental information. The interim report shall present supplemental information in accordance with the requirements of 630.20 (m)(3) and (m)(4), as well as other requirements and instructions of the FCA, and shall include, at a minimum, the following:

(1) Supplemental balance sheet information as of the end of the most recent quarter; and

(2) Supplemental income statement information for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter.

(f) Review by independent public accountant. Unless otherwise ordered by the FCA as a result of a supervisory action, the interim financial statements and supplemental information need not be audited or reviewed by an independent public accountant prior to filing. If, however, a review of the report is made in accordance with the established professional standards and procedures for such a review, a statement that the independent accountant has performed such a review may be included. If such a statement is made, the report of the independent [*5354] accountant on such review shall accompany the interim financial information.

Appendix A to Part 630-Supplemental Information Disclosure Guidelines

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: [*5355]
Table A.-Supplemental Balance Sheet Information
Banks fn 1
Associations fn 2
Financial assistance corporation
Eliminations
Combined without insurance fund fn 3
Insurance fund and related combination entries
Combined with insurance fund
Cash and investments:
Net loans
Restricted assets
Other assets........................................
Total assets...............................
Total liabilities:
Protected borrower capital fn 4
Restricted capital
Capital stock and surplus.....................
Total liabilities, protected borrower capital, and capital stock and surplus...........................................
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fn 1 Provide bank-only combined financial data of all FCS banks.
fn 2 Provide association-only combined financial data of all FCS associations.
fn 3 Provide the combined financial data of all columns on the left.
fn 4 Any item that is no longer applicable, e.g., protected borrower stock, may be omitted.

Table B-Supplemental Income Statement Information
Banks fn 1
Associations fn 2
Financial assistance corporation
Eliminations
Combined without insurance fund fn 3
Insurance fund and related combination entries
Combined with insurance fund
Net interest income:
Provision for loan losses:
Other income:
Other expenses....................................
Net income.......................................
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fn 1 Provide bank-only combined financial data of all FCS banks.
fn 2 Provide association-only combined financial data of all FCS associations.
fn 3 Provide the combined financial data of all columns on the left.

Dated: January 27, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-2242 Filed 2-3-94; 8:45 am]

BILLING CODE 6705-01-P