Title: PROPOSED RULE--Disclosure To Shareholders--12 CFR Part 620
Issue Date: 04/07/1986
Agency: FCA
Federal Register Cite: 51 FR 11745
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Part 620

Disclosure To Shareholders

AGENCY: Farm Credit Administration.


ACTION: Proposed rule.

SUMMARY: The Farm Credit Administration (FCA), by the Acting Chairman of the Farm Credit Administration Board (Board), publishes for comment a proposed amendment to 12 CFR Part 620 which would: (1) Require disclosure in the annual report to shareholders of the aggregate amount of compensation paid during the last fiscal year to the top five most highly paid officers as a group, without naming them; (2) require each production credit association (PCA) to send the financial statement of the Federal intermediate credit bank (FICB) in its district to PCA shareholders along with the PCA's annual report to shareholders; and (3) require banks and associations beginning with the quarter ending June 30, 1986, to report quarterly to shareholders on the financial condition of the institution within a framework for such interim reporting established in the proposed regulation.

DATES: Written comments must be received on or before May 5, 1986.

ADDRESSES: Written comments should be submitted to Acting Chairman, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090. Copies of all comments received will be available for examination by interested parties in the Office of Director, Congressional and Public Affairs Division, Office of Administration, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Thomas J. Holland, Office of Examination and Supervision, Farm Credit Administration, (703) 883-4452; or

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

TEXT: SUPPLEMENTARY INFORMATION: The FCA recently adopted regulations requiring Farm Credit System (System) banks and associations to disseminate annual reports to shareholders at the end of each fiscal year and information statements to association shareholders just prior to any shareholder meeting at which directors are elected (51 FR 8644, March 13, 1986). In the course of considering public comments on those disclosure regulations, the FCA concluded that the following areas of disclosure not covered by those regulations may be appropriate for inclusion to assure adequate disclosure to stockholders, and should be proposed and published for comment.

A. Distribution of FICB Statements With PCA Annual Reports To Shareholders

The recently adopted 620.3 requires that financial statements of each Federal land bank (FLB) accompany the annual report to shareholders of each Federal land bank association (FLBA) in its district. Several commentators questioned the necessity of such a requirement. The FCA had included this requirement in the proposed regulation because all of the loans generated by the FLBA are carried as assets on the FLB books rather than the FLBA's, since the FLB is the creditor who enters into the lending agreement with the borrower. When the borrower purchases stock or participation certificates in the FLBA, the FLBA is required to purchase a like amount of equity in the FLB, which equity is specifically identified to the particular shareholder's loan. For these reasons, and because of the manner in which capital preservation agreements between the FLB and the FLBAs are designed to operate, it is the health of the FLB that determines the safety of the equity holders' investments. Also, it is the FLB that sets the interest rate on the borrowers' loans. For these reasons the requirement was retained in the final disclosure regulations.

As a result of staff discussion of this issue, the FCA concluded that even though the FICB-PCA relationship is not the same as the FLB-FLBA relationship, it may also be appropriate that FICB statements be sent to PCA shareholders. The FICB controls the PCA's access to funds and hence largely determines interest rates that are charged to association borrowers. FICB statements may assist PCA shareholders in evaluating the PCA's investment in the FICB. Furthermore, because of the intradistrict loss-sharing agreements between PCAs and FICBs, and the authority of FICBs to provide financial assistance to PCAs, the health of the FICB and its capacity to assist PCAs would appear to be material and relevant to the safety of the PCA shareholders' investments. Therefore, the FCA proposes for comment an amendment to 620.2(b) of the new regulation that would require the FICB's financial statements to accompany the reports to shareholders of the PCAs that are shareholders in the FICB.

B. Compensation of Senior Officers

As the FCA considered comments on the requirement in the recently adopted 620.3 to disclose director compensation, it concluded that the failure to require disclosure of senior officer compensation could be viewed as a significant omission that was inconsistent with basic disclosure standards. The materiality of this information to shareholders in evaluating the stewardship of directors was deemed to outweigh the potential for additional downward pressure on salaries that in some instances are already so low as to make recruiting of qualified personnel difficult. However, to minimize the potential for such harm, the proposed regulation would require disclosure of aggregate rather than individual compensation paid to the top five most highly paid officers as a group, with a statement that a shareholder would have the right to disclosure on any of those individuals upon request. The types of compensation that must be included in the disclosure are annual salary, cash bonuses, deferred compensation, vested pension benefits (unless the plan is made available to all employees on the same basis), and any noncash compensation that exceeds 10 percent of the total cash compensation or $25,000, whichever is less.

"Senior officer" is defined in 12 CFR 620.1(b) as any person designated by the board of directors as responsible for a major management function. However, the regulation requires at a minimum the inclusion of the top five most highly paid officers, whether or not they have been designated by the board.

C. Quarterly Reports To Shareholders

The recently adopted Part 620 contains a requirement that associations (FLBAs and PCAs) include financial statements for the most recently ended quarterly period with the annual meeting information statements when the meeting to which the statement relates is held more than 134 days after the end of the preceding fiscal year. A commentator questioned the wisdom of requiring such interim reporting without establishing rules for the preparation of such statements to ensure comparability and a fair presentation of the institution's financial condition and operating results. The commentator, however, favored routine quarterly reporting to shareholders for each quarter of the year.

The FCA agrees that quarterly reporting to shareholders is desirable and that rules for the presentation of quarterly data are needed to assure a fair presentation and to permit the quarterly data to be presented in an abbreviated form. While FCA retained the requirement in Part 620, Subpart C, that statements for the most recently ended quarter accompany the annual information statement when the meeting to which it relates is held more than 134 days after the end of the fiscal year, that requirement will be deleted if the proposed Subpart B is adopted since the quarterly reports would be routinely sent to shareholders within 45 days of the end of each quarter.

List of Subjects in 12 CFR Part 620

Banks, Banking, Disclosure to shareholders, Annual reports.

PART 620 -- DISCLOSURE TO SHAREHOLDERS

As stated in the preamble, it is proposed that Part 620 of Chapter IV, Title 12, of the Code of Federal Regulations be revised as follows:

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

Authority: Sec. 5.17(9) and (10), Pub. L. 99-205, 99 Stat. 1678.)

Subpart A -- Annual Reports to Shareholders

2. Section 620.2 is amended by revising paragraph (b) to read as follows:

620.2 Preparing, distributing, and filing the report.

* * * * *

(b) For the purposes of 620.3(m), a Federal land bank association shall include the financial statements of the Federal land bank in the district in addition to its own and a production credit association shall include the financial statements of the Federal intermediate credit bank in the district in addition to its own. Production credit associations and Federal land bank associations shall comply with all other sections of this part except as expressly stated otherwise herein.

* * * * *

3. Section 620.3 is amended by revising paragraph (i) to read as follows:

620.3 Contents of the annual report to shareholders.

* * * * *

(i) Compensation of directors and senior officers.

(1) Director compensation. Describe the arrangements under which directors of the institution are compensated for all services as a director (including total cash compensation and any noncash compensation that exceeds 10 percent of total compensation or $25,000, whichever is less) and state the total cash compensation paid to directors as a group during the last fiscal year. For each director, state:

(i) The number of days served at board meetings;

(ii) The total number of days served in other official activities; and

(iii) The total compensation paid to each director during the last fiscal year.

(2) Senior officer compensation. Disclose the aggregate amount of compensation paid during the last fiscal year to all senior officers as a group, stating the number of persons in the group without naming them. At a minimum, disclose the aggregate amount of compensation paid to the five most highly paid officers whether or not designated as a senior officer by the board. For the purposes of this paragraph, compensation shall include annual salary, cash bonuses, deferred compensation, vested pension benefits (unless the plan is made available to all employees on the same basis), and any other noncash compensation that exceeds 10 percent of the total cash compensation or $25,000, whichever is less. The report shall include a statement that disclosure of the total compensation paid to individual senior officers or total compensation paid to any officer whose compensation is included in the aggregate is available to shareholders upon request.

* * * * *

4. Subpart B is added to read as follows:

Subpart B -- Quarterly Reports to Shareholders

Sec.

620.10 Preparing, distributing, and filling the report.

620.11 Content of quarterly report to shareholders.

Subpart B -- Quarterly Reports to Shareholders

620.10 Preparing, distributing, and filling the report.

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

(b) The quarterly report shall be filed with the Farm Credit Administration and distributed to shareholders no later than 45 days after the end of the quarterly period to which it relates.

(c) Copies of the Federal land bank quarterly reports shall be distributed to the shareholders of the Federal land bank associations in the district, and copies of the Federal intermediate credit bank quarterly reports shall be distributed to the shareholders of the production credit associations in the district.

620.11 Content of quarterly report to shareholders.

(a) The information required to be included in the quarterly report may be presented in any format deemed suitable by the institution, but shall include the items required by 620.21. The report must be easily readable and not presented in a manner that is misleading but may be condensed into major captions in accordance with the rules prescribed in paragraph (b) of this section.

(b) Rules for condensation. -- (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 that 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 statement of changes in financial position may be abbreviated, starting with a single figure for funds provided by operations and showing other changes individually only when they exceed 10 percent of the average of funds provided by operations for the 3 most recent fiscal years.

(4) The interim financial information shall include disclosure either on the face of the financial statements or in accompanying footnotes sufficient to make the interim information presented not misleading. Institutions may presume that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, 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. However, disclosure shall be provided of events occurring subsequent to the end of the most recent fiscal year that have a material impact on the institution. Disclosures should encompass, for example, significant changes since the end of the most recently completed fiscal year in such items as accounting principles and practices; estimates inherent in the preparation of financial statements; status of long-term contracts; capitalization, including significant new indebtedness or modification of existing financing arrangements; and the reporting entity resulting from business combinations or dispositions. Notwithstanding the above, when material contingencies exist, disclosure of such matters shall be provided, even if a significant change since year-end has not occurred.

(5) If, during the most recent interim period presented, the institution entered into a business combination treated for accounting purposes as a pooling of interests, the interim financial statements for both the current year and the preceding year shall reflect the combined results of the pooled businesses. Supplemental disclosure of the separate results of the combined entities for periods prior to the combination shall be given, with appropriate comments or comparisons between the separate and consolidated results.

(6) If a material business combination accounted for as a purchase has occurred during the current fiscal year, pro forma disclosure shall be made of the results of operations for the current year up to the date of the most recent interim balance sheet provided (and for the corresponding period in the preceding year) as though the companies had combined at the beginning of that period. This pro forma information shall, at a minimum, show:

(i) Total operating income.

(ii) Income before securities gains (losses), extraordinary items, and the cumulative effect of accounting changes.

(iii) Net income.

(7) In addition to meeting the reporting requirements specified by existing accounting pronouncements for accounting changes, the institution shall state the date of any material accounting change and the reasons for making it. In addition, a letter from the persons who verify the institution's financial statements shall be filed as an exhibit, indicating whether or not the change is to an alternative principle which in their judgment is preferable under the circumstances, except that no such letter need be filed when the change is made in response to a standard adopted by the Financial Accounting Standards Board which requires such change.

(8) Any material retroactive 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 undivided profits 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.

(9) The interim financial statements furnished shall reflect all adjustments that are, in the opinion of management, 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 interims periods are not necessarily indicative of results to be expected for the year.

(c) Management's discussion and analysis of financial condition and results of operations. In addition to furnishing the information required by 620.3(g) with respect to the interim period, such additional information as is 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 (2) of this section shall be provided.

(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. If the interim financial statements include an interim balance sheet as of the corresponding interim date of the preceding fiscal year, any material changes in financial conditions from that date to the date of the most recent interim balance sheet provided also shall be discussed. If discussions of changes from both the end and the corresponding interim date of the preceding fiscal year are required, the discussions may be combined at the discretion of the institution.

(2) Material changes in results of operations. Discuss any material changes in the institution's results of operations 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. If the institution is required to, or has elected to, provide an income statement for the most recent fiscal quarter, such discussion also shall cover material changes with respect to that fiscal quarter and the corresponding fiscal quarter in the preceding fiscal year. In addition, if the institution has elected to provide an income statement for the 12-month period ended as of the date of the most recent interim balance sheet provided, the discussion also shall cover material changes with respect to that 12-month period and the 12-month period ended as of the corresponding interim balance sheet date of the preceding fiscal year.

(d) Financial statements. The following financial statements shall be provided:

(1) An interim balance sheet as of the end of the most recent fiscal quarter and as of the end of the preceding fiscal year. A balance sheet for the comparable quarter of the preceding fiscal year is optional.

(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 financial condition and statements of changes in capital 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) Review by independent public accountant. The interim financial information need not be audited or reviewed by an independent public accountant prior to filing. If, however, a review of the data is made in accordance with the established professional standards and procedures for such a review, the institution may state that the independent accountant has performed such a review. If such a statement is made, the report of the independent account on such review shall accompany the interim financial information.

Subpart C -- Association Annual Meeting Information Statement

5. Section 620.20 is amended by revising paragraph (c) to read as follows:

620.20 Preparing, distributing, and filing the information statement.

* * * * *

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

* * * * *

Kenneth J. Auberger,

Acting Chairman.

[FR Doc. 86-7751 Filed 4-4-86; 8:45 am]

BILLING CODE 6705-01-M