Title: PROPOSED RULE--Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Disclosure to Shareholders; Director Elections--12 CFR Parts 615 and 620
Issue Date: 06/09/1995
Agency: FCA
Federal Register Cite: 60 FR 30470
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 615 and 620

RIN 3052-AB60

Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Disclosure to Shareholders; Director Elections

ACTION: Proposed rule.

[*30470]

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board, proposes to amend the regulations relating to the implementation of cooperative principles to allow greater flexibility in the method by which directors of Farm Credit System associations and banks for cooperatives are elected, consistent with cooperative principles. The amendments are intended to permit regional election of directors.

DATES: Comments should be received on or before July 10, 1995.

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

FOR FURTHER INFORMATION CONTACT:

John J. Hays, Policy Analyst, Regulation Development, Office of Examination, (703) 883-4498, TDD (703) 883-4444;

or

Rebecca S. Orlich, Senior Attorney, Regulatory Operations Division, Office of General Counsel, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: The FCA has received requests from a number of Farm Credit System associations to reconsider its regulation pertaining to the at-large election of directors of associations. This regulation is one of many promulgated by the FCA in 1988 to implement extensive changes to the structure of the System affected by the Agricultural Credit Act of 1987. It provides that voting shareholders of associations and Banks for Cooperatives (BCs) shall:

[b]e accorded the right to vote in the election of each director and, unless otherwise provided in the capitalization bylaws, be allowed to cumulate such votes and distribute them among the candidates in the shareholder's discretion.

12 CFR 615.5230(a)(1)(ii). At the time of promulgation, the FCA believed that enabling each shareholder to vote in the election of each director was necessary to ensure that each director is accountable to all shareholders of the institution, since each director owes fiduciary duties to all shareholders. The FCA was also concerned that shareholders in regions with a small number of shareholders would be able to wield proportionately more voting power than shareholders in regions with a greater number of shareholders. It therefore required the at-large election of directors but permitted associations that, in 1988, had bylaws providing for regional elections of directors to continue to do so until January 1, 1993. In response to the desire for regional representation expressed in the comments, the FCA placed no restrictions on the institution's ability to provide for geographic representation on the board and provided for cumulative voting unless shareholders approved bylaws providing otherwise.

A number of associations have objected that the prohibition of regional election of directors imposes an unreasonable burden on director candidates, who must campaign over widespread territories, and deprives voting shareholders of the ability to elect a representative to the board who lives and farms in their area, and with whom they could become acquainted. Furthermore, these associations have argued that regional voting in agricultural cooperatives is increasingly commonplace and is consistent with cooperative principles. In response to these concerns, the FCA has reconsidered the issue and has determined that its concerns about director accountability and equitable voting power can be addressed in a less burdensome way, consistent with cooperative principles, that will permit the regional election of directors. The Agency has also determined that regional voting should be an option for BCs. This proposed regulation has no application to agricultural credit banks at this time, because issues pertaining to corporate governance for an agricultural credit bank, including board structure, are being studied separately. The FCA does welcome comments concerning Farm Credit Bank director elections on a regional basis, as stated later in this proposed rule.

The FCA proposes to amend 615.5230(a)(1)(ii) to permit the regional election of directors of associations and BCs subject to the following conditions:

(1) To ensure that a director is accountable to all shareholders, institutions with bylaws providing for shareholder removal of directors must provide that each director may be removed by a majority vote of all voting shareholders and may not be removed by a vote of only the shareholders in his or her region; and

(2) The bylaw provides for the apportionment of the institution's territory into voting regions with approximately equal numbers of voting shareholders and ensures equitable representation from each voting region through an annual evaluation by the institution's board of directors.

The bylaw procedure to ensure equitable voting regions may, for example, contain procedures to redraw the boundaries of the voting regions, alter the number of directors from a region, or other similar action.

The FCA also proposes a conforming amendment to 620.21(d)(1) of the FCA regulations. This regulation would be amended to require disclosures regarding regional voting in the association's annual information statement.

Since these proposed amendments would significantly affect the voting rights of individual borrower/shareholders and cooperatives, rather than the rights of associations and BCs, the FCA specifically seeks comment on the proposals from voting shareholders. The FCA strongly encourages the associations and BCs to call on their member-borrowers to make their views known to the FCA on this matter.

There are certain director election matters that would not be changed by an association's or BC's adoption of [*30471] regional voting. Pursuant to section 4.15 of the Act, there would continue to be only one nominating committee for an association, who would "endeavor to assure representation to all sections of the association territory and as nearly as possible to all types of agriculture practiced within the area." Both association nominating committees and BCs must assure that there are at least two nominees for each elective office to be filled. Nominations for association directors will continue to be accepted from the floor and may be made by any eligible voting shareholder, whether or not he or she resides in the nominee's region, unless the bylaws provide otherwise. In addition, each director would continue to owe a fiduciary duty to all the shareholders of the association, not just to the shareholders in his/her region.

Finally, the FCA has received a request from one System association to propose amendments to the regulations that would extend regional voting to elections of Farm Credit Bank directors and make changes regarding the cumulative voting requirement. The FCA is considering this request and seeks comment on whether other System institutions, shareholders, or members of the public share the requester's same interest.

It is the FCA's view that this proposed regulation is consistent with the FCA Board's Policy Statement on Regulatory Philosophy and achieves the statement's objectives of: (1) Addressing specifically identified risks in a way that causes the least burden for institutions; (2) formulating regulations that are clear and easy to understand; and (3) providing flexibility to institutions in their election procedures.

List of Subjects

12 CFR Part 615

Accounting, Agriculture, Banks, banking, Government securities, Investments, Rural areas.

12 CFR Part 620

Accounting, Agriculture, Banks, banking, Reporting and recording requirements, Rural areas.

For the reasons stated in the preamble, parts 615 and 620 of chapter VI, title 12 of the Code of Federal Regulations are proposed to be amended to read as follows:

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, AND FUNDING OPERATIONS

1. The authority citation for part 615 continues to read as follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart I--Issuance of Equities

2. Section 615.5230 is amended by adding a new paragraph (a)(1)(iii) and revising paragraphs (a)(1)(ii) and (a)(3) to read as follows:

615.5230 -- Implementation of cooperative principles.

(a) * * *

(1) * * *

(i) * * *

(ii) Unless regional election of directors is provided for in the bylaws pursuant to 615.5230(a)(3), be accorded the right to vote in the election of each director (except for a director that is elected by the other directors);

(iii) Unless regional election of directors is provided for in the bylaws, or unless otherwise provided in the bylaws, be allowed to cumulate such votes and distribute them among the candidates in the shareholder's discretion.

(2) * * *

(3) Regional election of directors is permitted under the following conditions:

(i) A bylaw establishing regional elections is approved by a majority of voting shareholders, voting in person or by proxy;

(ii) The bylaw provides for the apportionment of the institution's territory into voting regions with an approximately equal number of voting shareholders and ensures equitable representation from each voting region by means of an annual evaluation by the institution's board of directors; and

(iii) If there is a bylaw providing for shareholder removal of directors, it provides that all voting shareholders of the institution, whether or not they reside in the director's region, have the right to vote to remove each director.

* * * * *

PART 620--DISCLOSURE TO SHAREHOLDERS

3. The authority citation for part 620 continues to read as follows:

Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12 U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101 Stat. 1568, 1656.

Subpart D--Association Annual Meeting Information Statement

620.21 -- [Amended]

4. Section 620.21 is amended by adding the words "or elected" after the word "nominated" in the first sentence of paragraph (d)(1).

Dated: June 6, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 95-14217 Filed 6-8-95; 8:45 am]

BILLING CODE 6705-01-P