Title: FINAL RULE--Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System--12 CFR Part 630
Issue Date: 09/12/1994
Agency: FCA
Federal Register Cite: 59 FR 46734
___________________________________________________________________________
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: Final rule.

[*46734]

SUMMARY: The Farm Credit Administration (FCA), by the FCA Board, adopts new final regulations governing the Farm Credit System's (FCS or System) preparation and reporting of Systemwide financial information to investors. The final rule requires that each bank of the System, the Federal Farm Credit Banks Funding Corporation (Funding Corporation), and the Farm Credit System Financial Assistance Corporation (Financial Assistance Corporation) jointly publish periodic reports to investors and potential investors in Systemwide debt obligations and consolidated bank debt obligations of the Farm Credit System (FCS debt obligations).

The purpose of the rule is to 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 required report to investors must present Systemwide combined financial statements, supplemental financial statement information, and related analyses pertaining to System institutions on a combined basis. The final rule covers Systemwide financial and nonfinancial information now regularly disclosed by the Funding Corporation in annual and quarterly information statements and press releases.

The final regulations generally parallel the existing Farm Credit System Disclosure Program (System Disclosure Program) and should not impose any significant additional burdens on System institutions. Consistent with the System Disclosure Program, the final rule preserves the existing reporting relationship between a System bank and its related associations.

EFFECTIVE DATE: The regulations shall become effective upon the expiration of 30 days after publication in the Federal Register during which either or both Houses of Congress are in session. Notice of the effective date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Tong-Ching Chang, Staff Accountant, Policy Development and Planning 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. [*46735]

SUPPLEMENTARY INFORMATION:

I. Background

Under the System Disclosure Program, the Funding Corporation, on behalf of the System, periodically distributes to investors a disclosure document containing Systemwide financial information. The System institutions that participate in the System Disclosure Program (i.e., each of the System banks, the Funding Corporation, and the Financial Assistance Corporation n1 ) jointly publish the Report to Investors of the Farm Credit System (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, its debt obligations, and the environment in which it operates. Except for the quarter that coincides with the end of the fiscal year, System institutions also jointly publish a quarterly Information Statement. In connection with the sale of debt securities, the Funding Corporation routinely distributes the FCS Report and quarterly Information Statement to the investment dealers and dealer banks (selling group) that sell FCS debt securities. The FCA currently has no regulations that specifically govern the System's disclosure of Systemwide financial information to investors.

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

II. Statutory Authority and Proposed Rulemaking

Under section 5.17(a)(8) of the Farm Credit Act of 1971, as amended (1971 Act), 12 U.S.C. 2252(a)(8), the FCA is authorized 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. * * *" On February 4, 1994, the FCA proposed regulations for a new part 630, Disclosure to Investors in Systemwide and Consolidated Bank Debt Obligations of the Farm Credit System, to govern the System's preparation and reporting of Systemwide financial information to investors. (59 FR 5341) In general, the proposed regulations reflected the current division of responsibilities among the institutions participating in the System Disclosure Program, and included requirements for disclosures similar to those contained in the Information Statements currently published by the System. The institutions participating in the System Disclosure Program were designated as the "disclosure entities" in the proposed regulations, in recognition of their shared responsibility for disclosure of Systemwide financial information to investors and the general public.

III. Discussion of the Final Rule and Summary of Public Comments

The FCA is adopting part 630 largely as proposed. The final rule includes changes and clarifications to address comments received on the proposed rule. As in the proposed regulations, the final regulations (1) Require the System to publish annual and quarterly reports to investors; (2) delineate responsibilities relating to the preparation of the report; (3) reinforce internal controls over 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. The final rule will prevent any inconsistency between Systemwide disclosure to investors and FCA regulations governing accounting and reporting standards and individual System institution disclosure to shareholders. These new FCA regulations will apply to the information currently contained in the System's Information Statements and press releases that contain Systemwide financial information. The final rule also implements section 514 of the Farm Credit Banks and Associations Safety and Soundness Act of 1992, Pub. L. 102-552 (1992 Act), which requires adequate disclosure to investors of financial and conflict-of-interest information.

The final regulations will 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. This is consistent with the FCA Board's regulatory policy to "Protect the public, the investors, and the customer/shareholders of the System in an effort to create an environment whereby customer/shareholders and investors can take advantage of the System's strength and rely on its future viability with confidence." (See FCA Board Policy Statement on Regulatory Philosophy, 59 FR 32189, June 22, 1994)

The FCA received six comment letters on the proposed regulations during the comment period, which expired on April 20, 1994. One letter was submitted by the Farm Credit Council (FCC) on behalf of its membership. The FCC comments were the product of input from a number of sources, including System banks, the System's Accounting Standards Work Group, and the Funding Corporation. The FCC recognized and concurred with the FCA's efforts to ensure that timely and accurate Systemwide financial information continues to be disclosed to investors and potential investors in FCS debt securities. Noting the System's general support for the proposed regulations, the FCC submitted comments on several provisions of the proposed regulations in the body of its letter and provided technical comments on other provisions in an attached appendix.

The Funding Corporation, the Farm Credit Bank of Texas (FCBT), and the Farm Credit Bank of Baltimore (FCBB) each submitted a letter addressing specific issues. The Funding Corporation commented concerning its access to FCA Examination Reports of System banks and associations. The FCBT addressed the same issue in its letter. In addition, the FCBT urged that the FCA prohibit directors of System institutions from serving on the System Audit Committee. While endorsing the comments submitted by the FCC, the FCBB urged that the FCA clarify, for purposes of Systemwide disclosure, the treatment of the FCBB's wholly-owned subsidiary, the Farm Credit Finance Corporation of Puerto Rico.

The American Institute of Certified Public Accountants (AICPA) and Price Waterhouse, the external auditor currently engaged to provide an opinion on the Systemwide combined financial statements, also commented on the proposed regulations. Both of these commentors suggested that the requirements for an accountant's opinion on supplemental information be clarified. The AICPA also commented on issues concerning the definition of "material," the due dates of the reports to investors, and the requirement for filing a letter with the FCA explaining the preferability of an accounting change.

After the FCA published the proposed rule, the General Accounting Office (GAO) issued a report entitled "Farm Credit System: Repayment of Federal Assistance and Competitive Position" (GAO/GGD-94-39, dated March 10, 1994), which recommended that the FCA require the System to exclude the Farm Credit Insurance Fund (Insurance Fund) from the System's combined financial statements because of the [*46736] GAO's view that exclusion is the most appropriate accounting treatment. On May 10, 1994, the FCA responded to the GAO's recommendation in a letter to Congressional committees which described the FCA's approach to Insurance Fund reporting as reflected in this rulemaking. The final regulations require that the System prepare the Systemwide combined financial statements in accordance with generally accepted accounting principles (GAAP), provide supplemental financial statement data with and without the Insurance Fund, and give a thorough discussion and analysis of the fund in the report to investors. The FCA believes that these regulations, as adopted, will ensure that investors are provided with meaningful information regarding the Insurance Fund and the effect of the fund on the System's financial position.
Provided below are a section-by-section analysis of changes to the proposed rule and FCA responses to the comments received.

IV. Section-by-Section Analysis of Public Comments

A. Section 630.2-Definitions

1. Section 630.2(b) and (h)-Definitions of "Combined Financial Statements" and "Systemwide Combined Financial Statements"

For preparation of the Systemwide combined financial statements, the final rule requires that each bank provide the Funding Corporation with bank-only financial data as well as with combined financial data of the bank and its related associations. The FCC and the FCBB commented that the proposed regulations should be clarified to address how the consolidated financial data of a bank and its wholly-owned subsidiaries should be reported in the Systemwide disclosure.

To distinguish financial data prepared on a combined basis from that prepared on a consolidated basis, a new definition of "combined financial statements" has been added in § 630.2(b) of the final rule. The definition is added to clarify that combined financial statements are prepared by a group of affiliated entities that share the same financial interest regardless of whether any of the entities has the ability to exercise control over another. In contrast, consolidated financial statements are prepared by a parent-entity to include the financial data of subsidiaries that are under its "control."

To prevent this newly added definition of "combined financial statements" from being confused with the definition of "Systemwide combined financial statements" contained in § 630.2(g) of the proposed rule, proposed § 630.2(g) has been simplified to define "Systemwide combined financial statements" as the combined financial statements required by this part. Proposed § 630.2(g) also is redesignated as § 630.2(h). The proposed language specifying the purpose for which the Systemwide combined financial statements are prepared has been moved and combined with provisions pertinent to financial statements in § 630.20(l).

2. Proposed Definition of "Material"

Section 630.2(f) of the proposed regulations provided a definition of "material" similar to that found in Securities and Exchange Commission (SEC) Rule 405. The FCA received two comments on the proposed definition of "material." The AICPA asserted that defining "material" other than as established in accounting literature would be confusing and inconsistent if audits of the Systemwide combined financial statements are required to be performed in accordance with generally accepted auditing standards (GAAS). The AICPA recommended either deleting the proposed definition of "material" or amending it to refer to the materiality definition in GAAS or in Financial Accounting Standards Board Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information (FAC No. 2).

The FCA notes that the definition of "material" in the proposed rule was intended to govern information presented outside the basic financial statements. n2 Regardless of the proposed definition, the Systemwide combined financial statements required by this part are subject to materiality criteria established in GAAP. Specifically, pursuant to § 630.3(c), n3 the Systemwide combined financial statements must be prepared in accordance with the accounting and reporting standards set forth in part 621 of this chapter. Because § 621.2(g) defines the term "material" in accordance with FAC No. 2, the GAAP definition of "material" contained in part 621 of this chapter will govern the System's preparation of Systemwide combined financial statements. Consequently, materiality judgments for preparation of the Systemwide combined financial statements must be made in accordance with GAAP.

n2 Information presented "outside" the basic financial statements refers to information that is not considered necessary for presentation of financial position, results of operations, or cashflows in conformity with GAAP, e.g., management's discussion and analysis.

n3 Section 630.3(c) provides that "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."

The FCC recommended that the proposed definition of "material" be expanded to recognize the different levels of reporting and disclosure responsibilities of the System banks and the Funding Corporation. The FCC suggested two separate definitions of "material." One of the suggested definitions would apply to the Banks' reporting responsibilities to the Funding Corporation and the second would apply to the Funding Corporation's disclosure responsibilities on a Systemwide basis as subject to antifraud provisions of the Federal securities laws.

Under GAAP, individual materiality judgments are made on a case-by-case basis and materiality is measured at each reporting level in light of surrounding circumstances. The GAAP position is supported by FAC No. 2 and recognizes that no general standards of materiality could be formulated to take into account all the considerations that enter into an experienced human judgment. In line with this approach to the concept of materiality, the FCA believes that it is unnecessary to include, as suggested by the FCC, two separate definitions of "material."

Materiality judgments regarding information presented outside the financial statements, while not covered by the GAAP definition, are governed by current standards of materiality under the securities laws. n4 The FCA believes that the case law standard of materiality provides sufficient guidance to the System in preparing information to be presented outside the financial statements. To avoid any confusion between the GAAP materiality standard which governs preparation of the financial statements, and the standard of materiality enunciated in the case law, which governs information presented outside of the financial statements, the proposed definition of "material" has been eliminated from the final rule.

n4 See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) and cases following.

3. Section 630.2(g)-Definition of "Report to Investors"

The FCC commented that, although the preamble clarifies that the term "report to investors" used throughout the proposed rule is intended to mean the Information Statement currently published by the Funding Corporation, confusion exists as to whether the term [*46737] refers to the FCS Report or the Information Statement. Because the FCS Report currently prepared by the Funding Corporation contains certain information that is not part of the System Disclosure Program, and for which System banks are not responsible, the FCC suggested that all references to the "report to investors" in the regulation be replaced with the term "Information Statement."

The FCA does not intend to regulate the name of the report required by this part. The term "report to investors" used in the proposed rule is merely a general reference to the disclosure document required by this part. However, in response to the FCC's comment, a new definition of "report to investors" has been added as § 630.2(g) of the final rule to clarify that the term "report to investors" referred to in the regulations means "a report that presents the Systemwide combined financial statements, supplemental financial statement information, and related financial and nonfinancial information pertaining to the System required by this part." Under this provision, a document containing only information that is not required by this part and that is clearly identified as separate from the required report will not be subject to this final rule.

B. Section 630.3-Publishing and Filing the Report to Investors

1. Section 630.3(a)

The FCA received two comments on § 630.3(a), which establishes the due dates for publishing the annual and quarterly reports to investors. The FCC opined that the word "publish" in § 630.3(a) is subject to interpretation, and could mean printed, mailed, or received by the investors. The commentor suggested that the word "publish" be replaced with the phrase "make available."

Section 630.3(a) requires not only that the System "make available" the report to investors by the dates specified in § 630.3(a)(1) and (a)(2) but that the System take affirmative steps to distribute the report to investors. One such step, as noted in the rule proposal, is distribution of sufficient copies of the report to the selling group dealers for subsequent distribution to interested investors. The FCA believes that the suggested substitution of the phrase "make available" may discourage exploration of other report distribution techniques and, accordingly, has retained the word "publish" in § 630.3(a).

The AICPA also commented on § 630.3(a), suggesting that the FCA reconsider whether the due dates prescribed in § 630.3(a) provide sufficient time for preparation of the combined information from various entities within the System. The FCA believes that the due dates established in § 630.3(a) for publishing and filing an annual report within 90 days after the end of each fiscal year and a quarterly report within 60 days after the end of each reporting quarter are adequate. The 90-day requirement for publishing the annual report to investors is consistent with industry practice. The 60-day requirement for publishing the quarterly report permits the Funding Corporation to publish the report 15 days after the constituent System banks and associations have filed their quarterly reports with the FCA pursuant to part 620 of this chapter. In addition, in the event the Funding Corporation is unable to prepare and publish the report to investors because one or more banks fail to fulfill their responsibilities for providing information to the Funding Corporation in accordance with § 630.4(c), § 630.4(a)(7) authorizes the Funding Corporation to request the FCA to extend the due date for publishing the report to investors. Accordingly, the FCA has adopted the due dates established in § 630.3(a) as proposed.

2. Section 630.3(f)-Banks' Joint and Several Liability for Consolidated Bank Debt Obligations

Section 630.3(f) requires that each report to investors include a statement that Systemwide debt securities and consolidated bank debt obligations are joint and several liabilities of individual banks. The FCC questioned the statutory basis for this required statement as regards individual bank joint and several liability for consolidated bank debt obligations. The FCC requested that the FCA provide a legal analysis of the statutory basis and extend the comment period for this provision.

The FCA believes that no extensive analysis is required to justify the position that consolidated bank debt obligations are joint and several liabilities of individual banks. The basis for this disclosure is found in section 4.4 of the 1971 Act, which clearly establishes joint and several liability of all banks for consolidated and Systemwide debt regardless of the title of the 1971 Act under which the bank operates. The FCA notes that the 75-day comment period on these regulations included a 30-day extension of the original comment period and believes that another extension of the comment period is unnecessary. The FCA has adopted § 630.3(f) as proposed.

C. Section 630.4-Responsibilities for Preparing the Report to Investors

1. Section 630.4(a)(2)(ii), (a)(3), and (a)(9)-Report of Examination

Proposed § 630.4(a)(9) authorizes the Funding Corporation to make a request to the FCA regarding the content of the latest Reports of Examination of any banks and related associations if the information is necessary for preparation of the report to investors. Two System institutions-the Funding Corporation and the FCBT-commented on the proposed provision.

The Funding Corporation suggested that the regulation be expanded so that, upon its request, each bank would be required to provide the Funding Corporation with the Reports of Examination and related information for the bank and related associations. The Funding Corporation is concerned that the regulation as proposed may be interpreted to implicitly absolve a bank of its responsibility to report to the Funding Corporation any significant regulatory conditions imposed or actions taken by the FCA against the bank or its related associations.

Conversely, the FCBT supported proposed § 630.4(a)(9) as written on the basis that it maintains an appropriate balance between the confidentiality of examination reports required by § 602.205 of this chapter and the need to provide complete and accurate disclosure to investors required by the proposed rule. Section 630.4(c) sets forth the responsibilities of each bank for preparation of the report to investors. Based on § 630.4(c)(5)(i), which requires that each bank certify to the Funding Corporation that the bank has submitted all information needed for preparation of the report to investors in accordance with the instruction of the Funding Corporation, the FCBT concluded that protection of the confidentiality of examination reports will not encourage banks to avoid their primary disclosure responsibilities with respect to material matters that may be discussed in the examination report.

While the FCBT supports § 630.4(a)(9) as proposed, it commented that the phrase "if necessary" leaves doubt as to whether the Funding Corporation should request the FCA to provide information contained in the examination reports in all cases or simply in those cases where a bank does not provide information contained in the examination report to the Funding Corporation. The FCBT requested that the FCA provide a definitive and unambiguous rule regarding the obligation to furnish copies of these reports. [*46738]

In response to the comments received, the FCA has revised paragraphs (a)(2)(ii), (a)(3), and (a)(9) of § 630.4 to clarify that the Funding Corporation is responsible for collecting from each disclosure entity information needed for preparation of the report to investors, including any information that is material to a single disclosure entity. Likewise, in accordance with the Funding Corporation's instructions, each bank is responsible for providing the Funding Corporation with information that is material either to the bank or, on a combined basis, to the bank and its related associations. If information necessary for preparation of a report to investors that is meaningful and not misleading is not forthcoming from a bank in accordance with the provisions of § 630.4(c), the Funding Corporation may request the FCA to provide information regarding the content of the latest Reports of Examination of any banks or related associations necessary to ensure that the information presented in the report to investors is meaningful and not misleading. The FCA will then make a determination whether to provide the Funding Corporation with relevant information contained in the Report of Examination or, if appropriate, the entire report.

The FCA is cognizant of both the Funding Corporation's desire to have direct access to Reports of Examination and the FCBT's concern with protection of the confidentiality of the Reports of Examination. The FCA does not believe that § 630.4(a)(9) would relieve a bank of its responsibility to report any significant regulatory conditions that would have a material impact on the information being presented in the report to investors. It remains the primary responsibility of each bank to provide accurate and complete information to the Funding Corporation for preparing disclosure to investors. Each bank is required to certify to this effect to the Funding Corporation.

Section 630.4(a)(9) is established to provide the Funding Corporation with a contingency source for obtaining information needed to prepare accurate and comprehensive annual and quarterly reports to investors, while maintaining the confidentiality of the Reports of Examination. However, such requests from the Funding Corporation to the FCA are expected to be rare. Also, as the FCBT noted in its comment letter, § 630.5 prohibits banks from making incomplete, inaccurate, or misleading disclosures. Failure to disclose material information would violate these regulations and subject a bank and its officers and directors to possible FCA enforcement action.

2. Sections 630.4(c)(1) and 630.20(m)(3)-Bank-Only Financial Data

Section 630.4(c)(1) requires that each bank provide the Funding Corporation with information needed for preparation of the report to investors. The FCC suggested that proposed § 630.4(c)(1) be revised to clarify that, for Systemwide disclosure, information to be provided by each bank to the Funding Corporation includes not only financial information, but nonfinancial information as well, including information covering structural changes and regulatory enforcement activity. Proposed § 630.4(c)(1) has been clarified to refer to other nonfinancial information.

The FCC also suggested that proposed § § 630.4(c)(1) and 630.20(m)(3)(i) be revised to clarify that it is appropriate to include any wholly-owned subsidiary of a bank in the bank-only information. The FCBB submitted a separate comment in which it urged the FCA to include the FCC's suggestion in the final rule to address the treatment of the Farm Credit Finance Corporation of Puerto Rico, a wholly-owned subsidiary of the FCBB.

To address the concerns raised by the commentors regarding a bank's reporting of consolidated financial data in Systemwide disclosure, the FCA has removed the wording "bank-only" from § 630.4(c)(1) and clarified that, if a bank is required to prepare consolidated financial statements in accordance with GAAP, it is appropriate that the bank provide consolidated financial data of the bank and its consolidated subsidiaries to the Funding Corporation. Conforming changes were also made to § 630.20(m)(3) and Appendix A of the final rule.

3. Section 630.4(d)-Responsibilities of Associations

Proposed § 630.4(d) provides the banks with access to their related associations' auditors for preparation of the report to investors. The FCC commented that the banks sometimes may need to have access to others, such as legal counsel. To ensure that the banks have the ability to obtain any information necessary to accurately prepare their submission to the Funding Corporation, the FCC suggested that the regulation include a general statement that the banks may have access to any material association information. Under sections 2.2 and 2.12 of the 1971 Act, each association is subject to supervision by its related bank. Each Farm Credit Bank is responsible for preparing the combined financial statements of the bank and related associations for disclosure to shareholders pursuant to part 620 of this chapter. Part 620 of this chapter does not, however, specify how the disclosure responsibilities between banks and related associations are shared. To clarify this issue for purposes of part 630, the FCA has expanded proposed § 630.4(d) by adding a general statement in § 630.4(d)(1) of the final rule to require that each association provide its related bank with the information necessary to allow the bank to provide accurate and complete information to the Funding Corporation for preparation of the report to investors. The original text of proposed § 630.4(d) has been redesignated as § 630.4(d)(2).

D. Section 630.5-Prohibition Against Incomplete, Inaccurate, or Misleading Disclosure

The FCC suggested that the FCA clarify that § 630.5 concerning prohibition against incomplete, inaccurate, or misleading disclosure would apply only when the defective disclosure is material. Since compliance with the disclosure standards of this part is generally subject to a materiality test in any event, the FCA finds it unnecessary to add the suggested materiality language to § 630.5 and has adopted this section as proposed.

E. Section 630.6-System Audit Committee and Bank Audit Committees

1. Section 630.6(a)(2)

Under § 630.6(a)(2), officers or employees of a System institution are prohibited from serving on the System Audit Committee (SAC) because they are not independent of management. The FCBT urged the FCA to prohibit System directors from serving on the SAC due to potential conflicts of interest based on competition between System institutions.

The FCA believes that the suggested prohibition would be disruptive to the existing SAC and force the Funding Corporation to recruit SAC members from outside the System. In addition, the FCA views the FCBT's argument as relating less to conflict of interest than to concern regarding preservation of the confidentiality of information reviewed by the SAC. Under section 4.9 of the 1971 Act, directors and management of System institutions are eligible to serve on the board of the Funding Corporation. As a practical matter, any information available to SAC members is equally available to the members of [*46739] the board of the Funding Corporation. Thus, precluding System directors from serving on the SAC would not necessarily prevent confidential information from being exposed to directors of other System banks. In light of these considerations, the FCA is adopting the rule as proposed but will monitor SAC activities for apparent inappropriate use of information. Finally, the FCA notes that § 630.6(a) does not prevent the Funding Corporation board from adopting a policy to disqualify System directors from serving on the SAC.

2. Section 630.6(a)(4)(iii)

The FCC commented that the word "approve" contained in § 630.6(a)(4)(iii) of the proposed rule implies that the SAC has the authority to dictate individual bank accounting policies or that the Funding Corporation has the authority to require banks to uniformly and consistently adopt or change accounting policies. This was not the intent of the proposed rule. The primary duty of the SAC is to ensure the integrity of the report to investors jointly prepared by the Funding Corporation and System banks. The SAC is responsible for overseeing the reporting process and internal controls implemented by the Funding Corporation for preparation of the System's report to investors. To clarify that neither the SAC nor the Funding Corporation is charged with the responsibility for dictating individual banks' accounting polices, the FCA has substituted the word "review" for the word "approve" as suggested.

3. Section 630.6(a)(4)(iv)

Under proposed § 630.6(a)(4)(iv), the SAC is required to review each disclosure document containing Systemwide information prescribed in this part, including annual reports, quarterly reports, and press releases, prior to its release. The FCC commented that the SAC's responsibility should pertain only to financial information and disclosures contained in the annual information statements because the SAC generally would not have the expertise to review and evaluate nonfinancial information, such as is found in the description of business and description of debt securities. The FCC also suggested that, to facilitate timely issuance of quarterly information, the requirement for a review of each quarterly report or press release by the SAC prior to its release be eliminated.

To ensure the quality of the report to investors, the FCA believes that each annual or quarterly report should be reviewed by the SAC in its entirety. Under § 630.6(a)(2), which provides that "members shall be knowledgeable in public and corporate finance and financial reporting and disclosure," members selected to serve on the SAC should have the expertise to review the entire report to investors, including both financial and nonfinancial information. However, the FCA agrees that the essence of press releases is to provide timely release of interim information and has deleted the requirement for a review of press releases by the SAC from § 630.6(a)(4)(iv).

4. Section 630.6(a)(4)(v) and (b)(3)(ii)

The FCC suggested that the word "oversee" contained in proposed § 630.6(a)(4)(v) and (b)(3)(ii) regarding the responsibility of the SAC and the bank audit committee be replaced with the word "review" because the proposed wording implies that the audit committee would perform a management function in the System or the bank. The FCC also suggested other changes to proposed § 630.6(a)(4)(v) to avoid this implication.

The audit committee is commonly recognized as an entity established to perform an oversight function in the areas of financial reporting, internal control, and corporate governance. The word "oversee" contained in the proposed rule is consistent with the customary role of audit committees. The FCA has retained the word "oversee" in § 630.6(a)(4)(v) and (b)(3)(ii). The FCA notes that it is the responsibility of the board of each System institution to determine the steps the audit committee should perform to fulfill its oversight responsibilities. Thus, the boards of individual System institutions could charter their audit committee to review and direct management to take necessary corrective actions or merely to review and make corrective recommendations to the board.

F. Subpart B-Annual Report to Investors

1. Section 630.20(c)(2)-Description of Legal Proceedings and Enforcement Actions

The FCC suggested that the proposed § 630.20(c)(2) disclosure requirement for a summary of FCA enforcement actions against individual institutions be clarified and that any required discussion of the impact of the enforcement actions on the System's operations be linked to materiality. The FCA agrees with this suggestion and has revised the language of § 630.20(c)(2) of the final rule accordingly.

2. Section 630.20(d)-Description of Liabilities

The FCC expressed the view that the information called for by § 630.20(d)(1) regarding System debt obligations is too detailed and, thus, impractical. Section 630.20(d)(1)(ii) is, in large part, based upon the disclosure currently furnished by the System in its Information Statements. Unless otherwise needed to provide readers of the report to investors with information needed to understand the characteristics of System debt, the FCA does not expect extensive detail regarding the characteristics of specific debt offerings. To clarify this position, the FCA has deleted the words "terms and conditions" and added prefatory language to § 630.20(d)(1)(ii) requiring a description of debt obligations statutorily authorized to be issued and currently issued by the System, as well as other pertinent information.

The FCC also requested that the regulation clearly set forth the option of incorporating by reference the annual and quarterly reports to investors into specific offering documents. The FCA notes that the focus of this regulation is on periodic reports of the System to investors. It does not govern offering circulars or specific offering documents. Nothing in this regulation precludes the System from incorporating by reference information contained in the annual or quarterly reports to investors into specific offering documents if otherwise appropriate.

3. Section 630.20(g)(1)-Loan Portfolio

Proposed § 630.20(g)(1)(ii) required disclosure of the amount of loans outstanding that were used to finance the purchases of stock or other equities of System institutions.

The FCC expressed concern regarding the System's ability to comply with this requirement and questioned its relevance to investors. The FCC opined that disclosures currently provided by the System in its annual Information Statement are sufficient. The System's 1993 annual Information Statement states that association borrowers do not typically purchase capital stock for cash, but instead add the aggregate par value of stock to the principal amount of the related loan obligation. The 1993 report also provided the amount of capital stock and participation certificates outstanding at December 31, 1993. The FCC indicated that System compliance with the proposed requirement could only be on a prospective basis because System banks do not have a system in place to track needed information. Further, the FCC [*46740] argued that the costs involved in complying with this proposed requirement would outweigh the benefits derived from the disclosure.

The FCA supports the commentor's view that the cost involved in providing meaningful information to investors should not outweigh the benefits derived. The FCA also notes that § 630.20(e)(2), which requires the System to "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," will ensure that investors continue to receive information that describes the nature of borrower stock of the System. As a result, proposed § 630.20(g)(1)(ii) has been deleted from the final rule and proposed § 630.20(g)(1)(iii) and (iv) have been redesignated.

4. Section 630.20(g)(1)(ii)-Risk Exposure

Proposed § 630.20(g)(1)(iii) requires discussion and analysis of the risk exposure of the loan portfolio. The FCC suggested that the term "nonperforming loans" replace the term "high-risk assets" in this section of the regulation because it is more widely used in the commercial banking industry. Use of the term "high-risk assets" in proposed § 630.20(g)(1)(iii) is consistent with the recent amendment of the FCA's accounting and reporting guidelines in part 621 of this chapter. See 58 FR 48780 (September 20, 1993). In the FCA's regulations, the term "high-risk assets" is a generic reference to loans and loan-related assets that are to be categorized for loan performance and valuation assessment purposes according to the criteria set forth in § 621.6 of this chapter. Collectively, the classifications identified in § 621.6 of this chapter are consistent with the terminology used in the commercial banking industry for nonperforming loans. There is no regulatory requirement to categorize the classification as "high-risk assets" in the report to investors. Rather, proposed § 630.20(g)(1)(iii) requires discussion of any risks that could adversely affect the loan portfolio and loan-related assets. Accordingly, the FCA has retained the term "high-risk assets" and adopted § 630.20(g)(1)(iii) essentially as proposed. Proposed § 630.20(g)(1)(iii) is redesignated as § 630.20(g)(1)(ii). The FCA further notes that it expects to revisit the issue of accounting for impaired loans in the future to assess the impact of the implementation of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, issued by the Financial and Accounting Standards Board.

5. Section 630.20(g)(1)(iii)-Secondary Market Activities

The FCC commented that secondary market activities have never been and currently are not anticipated to be material to the System's financial condition. The FCC suggested that proposed § 630.20(g)(1)(iv) be modified to require these activities to be described when they become material to the System's financial condition. The FCA agrees with the commentor that the System's involvement in the secondary markets should be disclosed to investors when the effect of such activities on the financial condition of the System is material and has revised proposed § 630.20(g)(1)(iv) to add materiality tests. This provision is redesignated as § 630.20(g)(1)(iii) of the final rule.

The FCA believes that the System's statutory authority to participate in secondary markets should be disclosed to investors in any event. A new paragraph has thus been added in § 630.20(a)(1)(vi) of the final rule to require, without regard to materiality, a description of the authority of System institutions to purchase and sell interests in loans in secondary markets and the risk involved.

6. Section 630.20(g)(3)(ii) and (iii)-Liquidity and Investment

Section § 630.20(g)(3)(ii) and (iii) require that the System provide a brief description of the System's policies regarding liquidity and investment. The FCC pointed out that each System bank adopts its own liquidity and investment policies according to its business objectives. In the absence of universal policies regarding investment and liquidity among System institutions, the commentor suggested that the proposed regulations be revised to require only a general description of System banks' policies. The suggested change is consistent with the intent of the proposed regulations. The FCA has clarified the proposed regulations by revising § 630.20(g)(3)(ii)(A) and (g)(3)(iii) to require a brief overview of liquidity and investment matters.

7. Section 630.20(g)(3)(iv)-Interest Rate Sensitivity

Section 630.20(g)(3)(iv) requires a general description of the System's risk management practices, including a brief discussion of derivative transactions. Due to the heightened interest of the public, financial institution regulators, and Congress in this area, the FCA solicited comments on whether disclosure requirements regarding derivative activities should be more detailed. The FCC suggested that, given the changing GAAP environment for derivative transactions, the FCA consider the approach to derivatives activity regulation used by other bank regulators. This approach requires regulated institutions to adopt policies in accordance with GAAP. The regulator provides any clarification of GAAP or additional guidance through Call Report instructions or other mechanisms.

The FCA adopts § 630.20(g)(3)(iv) as proposed, with a clarification to provide for a "brief overview" of the System's asset and liability management practices. The FCA believes that this approach to derivatives activities disclosure is consistent with the FCC's suggestion. In addition, along with other financial institution regulators, the FCA is monitoring the area of derivatives activities. The FCA will consider requiring more extensive disclosure based on its assessment of the level and significance of System derivatives activities and as the need for regulatory policy in this area becomes more clearly defined.

8. Section 630.20(g)(5)-Insurance Fund

The FCC commented that § 630.20(g)(5), which requires a discussion of the Insurance Fund in the Discussion and Analysis (D&A) section of the report to investors, is unnecessary and would duplicate the disclosure contained in the notes to the System's combined financial statements. Section 630.20(g)(5) requires a discussion of the purposes of the Insurance Fund, a schedule itemizing Insurance Fund assets that have been identified for specific purposes, and an explanation of how expenditures of Insurance Fund assets affect the assets and capital of the System.

The FCA does not believe that the requirement of § 630.20(g)(5) will result in duplication of information in the report. Section 630.3(e) provides that "Information in any part of the report may be incorporated by reference * * * to any other item of the report. Information * * * may be presented in any order deemed suitable by the Funding Corporation." Accordingly, the Funding Corporation has the flexibility to determine where the D&A regarding the Insurance Fund is to be presented. The FCA has adopted § 630.20(g)(5) as proposed.

The FCA notes that the regulation does not require the D&A regarding the Insurance Fund to be audited. Pursuant to § 630.3(e), the System could opt to include the required D&A in the notes to the Systemwide combined financial [*46741] statements and incorporate the disclosure by reference into the D&A. In this situation, the required D&A regarding the Insurance Fund would be covered in the independent accountant's report on the Systemwide combined financial statements.

9. Section 630.20(g)(6)-Instructions for Discussion and Analysis

Proposed § 630.20(g)(6)(ii) requires that discussions required by proposed § 630.20(g) cover the 3-year period covered by the financial statements. The FCC suggested that the words "3-year" be deleted. In recognition that the reporting period for the balance sheet is only 2 comparative years, the FCA agrees with the commentor and has amended § 630.20(g)(6)(ii) of the final rule as suggested and revised the introductory paragraph of § 630.20(g) accordingly.

10. Section 630.20(i)-Compensation of Directors and Senior Officers

Section 630.20(i) requires the annual report to 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). The FCC commented that this requirement provides no useful information to investors and is redundant.

As stated in the rule proposal, the FCA is required by section 514 of the 1992 Act 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 institutions. The FCA believes that information on compensation of System directors and senior officers presented in individual System institutions' disclosure to shareholders pursuant to part 620 of this chapter could provide useful information to investors in making investment decisions. Thus, to implement the requirement of section 514 of the 1992 Act, § 630.20(i) requires that the report provide a statement informing investors of the availability of such information. The FCA adopts § 630.20(i) of the final rule as proposed.

11. Section 630.20(l) and (m)-Financial Statements and Supplemental Information

Proposed § 630.30(l) requires that the System prepare the combined financial statements in accordance with GAAP and instructions and other requirements of the FCA. Proposed § 630.20(m) further requires that the System provide supplemental information in addition to the audited financial statements and that the supplemental information be examined by a qualified public accountant for compliance with FCA regulations and guidelines and an opinion expressed thereon. The FCA received comments on proposed § 630.20(l) from the AICPA and the FCC and comments on proposed § 630.20(m) from the AICPA and Price Waterhouse.

With respect to proposed § 630.20(l), both the FCC and the AICPA suggested, for different reasons, that the phrase "instructions and other requirements of the FCA" be deleted from the proposed rule. The FCC was concerned that the proposed language indicates that regulatory accounting practices (RAP) may be utilized, causing investor confusion. On the other hand, the AICPA provided suggested language that would require both the basic financial statement and the supplemental information required by proposed § 630.20(l) and (m) to be audited in accordance with GAAS. The AICPA asserted that the requirements of proposed § 630.20(m) regarding supplemental information disclosure appear to comprise the "instructions and other requirements of the FCA" referred to in § 630.20(l) and, further, that GAAS addresses auditors' reporting on information presented outside financial statements.

Price Waterhouse, the external auditor of the System, also commented on proposed § 630.20(m). Price Waterhouse asserted that the proposed language that "supplemental information be examined by a qualified public accountant for compliance with FCA regulations and guidelines" is too broad and would be interpreted as requiring the independent accountant to render a report on the System's compliance with all FCA regulations and guidelines. This would require significant work by the independent accountant. Price Waterhouse commented that the proposed regulatory language in § 630.20(m) provides insufficient detail to enable the external auditor to determine the scope of additional work to be performed and the type of report to be issued by the auditor on the supplemental information.

Proposed § 630.20(l) was intended to preserve the FCA's ability to prescribe additional requirements for preparation and presentation of the Systemwide combined financial statements. However, after consideration of the comments received, the FCA adopts the AICPA's suggestion in the final rule to require that both the basic financial statements and the supplemental information required by § 630.20(l) and (m) be examined in accordance with GAAS and an opinion expressed thereon by an independent accountant. This change will resolve the FCC concern regarding RAP financial statements and Price Waterhouse's concern regarding the scope of examination of supplemental information and reporting by the independent accountant. However, to preserve the flexibility to revise the format and content specified in Appendix A of the final rule, the FCA retains the requirement that supplemental information be prepared in accordance with any additional FCA guidance or instructions.

12. Section 630.20(o)-Cross-Reference Sheet

Proposed § 630.20(o) called for a cross-reference sheet giving the location of information required by these regulations, in the order required, and identified by item numbers and captions. The FCC did not object to the preparation of a cross-reference sheet, but suggested that the cross-reference sheet would only be useful to the FCA and should only be required as an exhibit to copies of the report filed with the FCA. The FCA believes the cross reference to the content of the report provides useful information to readers of the report. To make this indexing requirement more useful to investors, the FCA has revised § 630.20(o) to inform readers of the location in the report of the information required under the major disclosure captions of this part.

G. Subpart C-Quarterly Report to Investors

Proposed § 630.40(b)(5) requires that the System file a "preferability" letter with the FCA disclosing any accounting changes made during the reporting period that are not required by new accounting pronouncements. The AICPA and the FCC commented that the requirement for filing a separate letter with the FCA explaining the reason for the preferable alternative accounting principle is unnecessary. They suggested that the requirement be deleted from § 630.40(b)(5).

The preferability letter was intended as a notice to inform the FCA of any accounting change made by the System during the interim period that is not required by existing accounting pronouncements. Because the quarterly report will be required to disclose such accounting changes, upon further consideration, the FCA has deleted the requirement of filing a preferability [*46742] letter from § 630.40(b)(5) of the final rule.

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 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.

§ 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) Combined financial statements means financial statements prepared on a combined basis by a group of affiliated entities that share the same financial interest, regardless of whether any of the entities has the ability to exercise control over another. For purposes of this part, unless otherwise specified, combined financial data of a bank and its related associations includes financial data of the bank's consolidated subsidiaries.

(c) 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).

(d) 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.

(e) 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).

(f) 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.

(g) Report to investors or report means a report that presents the Systemwide combined financial statements, supplemental financial statement information, and related financial and nonfinancial information pertaining to the System required by this part.

(h) Systemwide combined financial statements means the combined financial statements required by this part.

§ 630.3 -- Publishing and filing the report to investors.

(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 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 referenced or incorporated 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 [*46743] 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 the information needed for preparation of the Systemwide combined financial statements and disclosures required to be presented 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 and other information needed for preparation of the report to investors, including any information that is material to the disclosure entity.

(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 chairperson of the board of the Funding Corporation.

(9) Request the FCA to provide information regarding the content of the latest Reports of Examination of any banks and related associations, if such information is necessary for preparation of a report that is meaningful and not misleading and is not forthcoming from a bank in accordance with paragraph (c) of this section. 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 annual, quarterly, and interim financial and other information in accordance with instructions of the Funding Corporation for preparation of the report to investors, including:

(i) Financial data of the bank or, if the bank is required under generally accepted accounting principles (GAAP) to prepare its financial statements on a consolidated basis with its subsidiaries, consolidated financial data of the bank and its consolidated subsidiaries; and

(ii) Combined financial data of the bank (including any consolidated subsidiaries of the bank) and related associations of the bank.

(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:

(1) Provide its related bank with the information necessary to allow the bank to provide accurate and complete information regarding the bank and its related associations to the Funding Corporation for preparation of the report.

(2) 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 [*46744] 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 review accounting policy changes relating to preparation of the Systemwide combined financial statements;

(iv) Review the System's annual and quarterly reports 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 the System's compliance with applicable 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.

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, terminations of System institution status, and financial assistance provided by or to System institutions 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; and

(vi) The authority of System institutions to purchase and sell interests in loans in secondary markets and the risk involved in such activities.

(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 Farm Credit Insurance Fund (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 [*46745] 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 of enforcement actions in effect during the year, and any material impact of such proceedings on the System.

(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) A description of the types of debt obligations authorized to be issued under the Act, the types of debt obligations currently issued, the manner and form in which they are issued, 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; and

(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, for the comparative years required by paragraph (g)(6)(ii) of this section or such other time periods specified in the following paragraphs of this section. 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) Categorization. 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) Risk exposure. (A) Describe and analyze all high-risk assets, including an analysis of the nature and extent of significant current and potential credit risks 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 for loan losses to loans (outstanding at year-end) and net chargeoffs to average loans, and a discussion of the adequacy of the allowance for loan losses to absorb the risk inherent in the loan portfolio and the basis for such determination.

(iii) Secondary market activities. (A) If material, quantify System institutions' secondary market activities and the risk involved in such activities.

(B) If material, provide an analysis of historical loss experience and the amount provided for risk of loss associated with secondary market activities.

(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 any significant increases or decreases.

(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 Insurance Fund [*46746] 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; and

(2) The average maturities and average interest rates on debt outstanding at year-end, and the average maturities and 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) Include a brief overview of 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. Provide a brief overview of 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) Provide a brief overview of the System's 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 on 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 Insurance Fund assets for which no specific use has been identified or designated by the FCSIC. Information provided shall be as of the end of the most recent fiscal year.

(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 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 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 [*46747] 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 prepared in accordance with GAAP, and accompanied by supplemental information prepared in accordance with the requirements of § 630.20(m). The Systemwide combined financial statements shall 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. The Systemwide combined financial statement and accompanying supplemental information shall be audited in accordance with generally accepted auditing standards by a qualified public accountant (as defined in § 621.2(i) of this chapter). 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. 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 any additional guidance or instructions provided by the FCA.

(1) 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.

(2) 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 the Insurance Fund;

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

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

(3) 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 financial data required by § 630.20(m)(2)(i) shall include the financial data required to be submitted by each bank pursuant to the requirement of § 630.4(c)(1)(i).

(4) The supplemental information 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) Include a detailed index setting forth the major disclosure captions of this subpart and the page or pages on which the required information appears in the report.

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 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 provisions of this paragraph, 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 [*46748] accounting changes, state the date of any material accounting change and the reasons for making it.

(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 shall also cover material changes with respect to the most recent 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 in paragraphs (d)(1) through (4):

(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)(2), (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 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:

TABLE A-SUPPLEMENTAL BALANCE SHEET INFORMATION

	Banks fn 1	Associations fn 2	Financialassistancecorporation	Eliminations	Combined without insurance fund fn3	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......................	....................	.........................	..................	..................	.........................	.........................	.........................

fn 1 Provide combined financial data of all FCS banks, including any consolidated subsidiaries of the 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.............................	....................	...........................	..................	..................	..........................	..........................	..........................

fn 1 Provide combined financial data of all FCS banks, including any consolidated subsidiaries of the 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: September 1, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-22221 Filed 9-9-94; 8:45 am]

BILLING CODE 6705-01-P