Title: FINAL RULE--Organization; General Provisions; Disclosure to Shareholders--12 CFR Parts 611, 618, and 620
Issue Date: 07/22/1994
Agency: FCA
Federal Register Cite: 59 FR 37406
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 618, and 620

RIN 3052-AB42

Organization; General Provisions; Disclosure to Shareholders


ACTION: Final rule.

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board (Board), adopts a final rule concerning director and senior officer compensation. The regulation amends the director compensation regulations to reflect changes to the Farm Credit Act of 1971 (Act) made by the Farm Credit Banks and Associations Safety and Soundness Act of 1992 (1992 Amendments), n1 and amends the annual report disclosure rules for director reimbursable expenses to address concerns raised by Farm Credit banks regarding the equity and regulatory burden of the existing rule. Additionally, the rule amends the disclosure requirements for senior officer compensation to make the disclosures more informative and useful to shareholders.

n1 Pub. L. 102-552, 106 Stat. 4102

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

FOR FURTHER INFORMATION CONTACT:

Laurie A. Rea, Policy Analyst, Regulation Development, Office of Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444, or

Joy E. Strickland, Senior Attorney, Regulatory Operations Division, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

1. Overview

The FCA published a proposed rule concerning director and senior officer compensation and reimbursable expense disclosures on December 23, 1993 (58 FR 68069). The comment period closed January 24, 1994.

Section 611.400, concerning bank director compensation, is adopted substantially as proposed with the exception that the cap on the amount by which the FCA Board would consider waiving the statutory limitation on bank director compensation for exceptional circumstances has been increased from 25 to 30 percent. Section 618.8270, regarding the reimbursement of travel, subsistence, and related expenses, has been modified by reducing several of the policy and procedure requirements originally proposed. The final rule retains the requirement that each Farm Credit System (FCS or System) institution develop a written policy regarding the reimbursement of travel, subsistence, and other related expenses to its directors, officers, and employees and provide stockholders with a brief description of the policy. Substantial changes have been made to the proposed senior officer compensation disclosure requirements in 620.5(i)(2). The final rule requires FCS institutions to disclose: (1) Individual compensation information of chief executive officers (CEOs) whose annualized salary and bonus exceed $ 150,000, adjusted annually to reflect changes in the Consumer Price Index (CPI); and (2) aggregate compensation information of all senior officers as a group. Both the CEO and aggregate senior officer compensation information is required to be reported for each of the last 3 fiscal years and presented in a Summary Compensation Table. The final rule retains the requirement that the institutions provide a discussion of compensation plans. Finally, a provision was added to allow associations the option of disclosing senior officer compensation information in either the Association Annual Meeting Information Statement or the annual report.

II. Response to Comments

The FCA received 140 comment letters from the Farm Credit Council (FCC) on behalf of its membership, 7 Farm Credit Banks, 3 Banks for Cooperatives, 122 associations, and 7 shareholders. Commentors expressed strong opposition to the proposed disclosure of individual compensation information for each of the five most highly paid senior officers. The following discussion focuses on the FCA response to commentors' concerns regarding the proposed senior officer disclosures as this was the predominant issue raised in their letters. The section-by-section discussion also addresses other comments received on the proposed rule.

A. Basis for Senior Officer Compensation Disclosures

Commentors stated that FCS institutions are not parallel to commercial banks or thrifts, or analogous to other Government-sponsored enterprises (GSEs). Therefore, commentors adamantly believe that FCS institutions should not be required to make similar executive compensation disclosures. commentors stressed four main points in support of their position. First, the compensation disclosure requirements for commercial banks, national banks, thrift institutions, and state member banks are applicable only to financial institutions subject to the registration requirements of section 12(b) or (g) of the Securities Exchange Act of 1934 (1934 Act). n2 Second, equity securities in FCS institutions are owned only by borrowing members of the institutions, not purchased primarily for investment, and not publicly traded. Thus, the investor concerns addressed by the 1934 Act are not present in the case of FCS institutions. Third, although formally exempt from the registration requirements of the 1934 Act, other GSEs report as if they were subject to Securities and Exchange Commission (SEC) statutes, in part, because their securities are subject to the listing requirements of the New York Stock Exchange. Fourth, the disclosures provide limited benefits to investors in FCS debt obligations because the banks are jointly and severally liable on these obligations. Consequently, investors generally rely on the strength of the System as a whole. Rather, commentors contend it would be more appropriate, in their judgment, for the FCA to compare the treatment of FCS institutions under the proposed rule to Federal Home Loan Banks (FHLBs) and credit unions, as the ownership structures of those entities more closely parallel those of the FCS banks and direct lender associations. Unlike commercial banks and thrifts, credit unions and FHLBs are not subject to executive compensation disclosures.

n2 Public companies with at least 500 shareholders of record and assets of at least $ 5,000,000 must register with the SEC pursuant to SEC regulations implementing the Securities Exchange Act of 1934.

The FCA agrees with commentors that a comparison of ownership structures between FCS institutions and credit unions and FHLBs has some validity, and that FCS institutions are notably different from commercial banks, thrifts and other GSEs. Nevertheless, the FCA did not intend to imply or draw a direct parallel between FCS institutions and any other type of financial institution or to use a comparison between the institutions as the sole basis for establishing or modifying the senior officer compensation disclosure requirements. The primary comparison being made was that the FCA's proposed compensation disclosure requirements were similar in many respects to those imposed on commercial banks and thrifts by other regulators. As stated in the proposed rule, the FCA believes that more detailed compensation disclosures, such as those imposed by the SEC, would satisfy the objectives of section 514 of the Act, n3 and the proposed disclosures would benefit FCS shareholders by providing them with senior officer compensation information that was comparable to that available to shareholders of other financial institutions. The proposed disclosure requirements were still, however, markedly less extensive than those established by the SEC, partly due to the many differences between commercial banks and FCS institutions. The final regulations deviate further from the SEC's compensation disclosure requirements in consideration of the uniqueness of the FCS institutions. For example, the $ 100,000 compensation threshold established by the SEC for individual senior officer compensation disclosure was one area where the FCA chose to differ. Instead, the FCA decided to adopt a $ 150,000 compensation disclosure threshold that applies only to FCS institution CEOs.

n3 The stated objective of section 514 is "to ensure that information reported by directors, officers, and employees of Farm Credit System institutions under regulations of the Farm Credit Administration requiring the disclosure of financial information and reporting of potential conflicts of interests-(1) provides the stockholders of all Farm Credit System institutions with information to assist the stockholders in making informed decisions regarding the operations of the institutions; (2) provides investors and potential investors with information necessary to make investment decisions regarding Farm Credit System obligations or institutions; and (3) provides the Farm Credit Administration with information necessary to allow the Farm Credit Administration to effectively and efficiently examine and regulate all Farm Credit System institutions and thus enhance the safety and soundness of the System."

The FCA's rationale for requiring director and senior officer compensation disclosures stems primarily from the "at-risk" nature of the stock and the significant number and wide distribution of shareholders, which are similar attributes to those of financial institutions with publicly traded stock. In terms of assets, the size of many FCS institutions is comparable to, and sometimes greater than, financial institutions whose equity and debt securities are widely held by the public. In addition, even if commentors are correct in their assertion that investors of FCS debt obligations are more concerned with the System as a whole, the FCA believes that the investor concerns addressed by the 1934 Act are not completely absent as suggested by commentors. Regardless of their motivation for purchasing the stock, borrowers make a financial investment in FCS institutions and obtain the right to participate in the affairs of those institutions. Shareholders can potentially benefit from their investment in terms of dividends and patronage refunds. Thus, shareholders need sufficient information to make intelligent decisions about the management and operation of the institutions in which they have invested and to hold directors and management accountable for their actions.

The FCA stated in the preamble to the shareholder disclosure regulations published on June 12, 1986 (51 FR 21337) that while not all FCS institutions would meet the test for public companies, many of them have in excess of 500 shareholders, and the number of institutions with fewer than 500 shareholders continues to decline in conjunction with the trend toward mergers. Further, the FCA stated that while the stock is not publicly traded on the secondary market, it is held by over 900,000 individuals and business entities that have a common interest in the financial and operating information of the institutions. The FCA Board continues to believe that the distinction between holding stock for investment and holding stock for doing business with an institution does not have a material bearing on the right of shareholders to have access to information in order to make informed decisions. Therefore, the final compensation disclosure requirements continue to place CEOs of FCS institutions with a significant amount of assets and number of shareholders under the same scrutiny as CEOs of financial institutions with publicly traded stock subject to the registration requirements of the 1934 Act.

B. Section 514 of the 1992 Amendments

The FCA agrees with the commentors that section 514 is quite broad and its interpretation, as it applies to compensation disclosures, is a matter of the FCA's discretion. commentors stated that nothing in section 514 of the 1992 Amendments compels the disclosure of individualized senior officer compensation or concludes that the current disclosure requirements are inadequate in any respect. They felt strongly that the existing disclosure of senior officer compensation in the aggregate, coupled with the requirement that shareholders may request the individual compensation of any senior officer, or any other individual included in the aggregate whose compensation exceeds $ 50,000, was adequate.

There was no intention in the proposed rule to suggest that section 514 mandates individual disclosure of senior officer compensation. In section 514, Congress stressed the importance of disclosure of compensation paid to, loans made to, and transactions made with FCS institutions by directors and senior officers of the institution. Congress also directed the FCA to review its regulations to ensure that they meet the purpose of the section and applicable laws, but did not prescribe any specific regulation amendments. After reviewing its regulations, the FCA concluded that more detailed senior officer compensation disclosures satisfied the spirit and intent of section 514.

C. Board Accountability

commentors expressed concern that providing individual compensation information would undermine the board's authority and its ability to effectively administer the institution's salary administration program. Further, commentors asserted that the disclosure rule would dilute the board's responsibility and shift the oversight responsibility from the board of directors to the shareholders as a whole.

The FCA Board disagrees that disclosure of information undermines board accountability and responsibility. In fact, disclosure of senior officer compensation is intended to promote board accountability to shareholders rather than shift board responsibility to shareholders. The objective of this type of disclosure is to provide shareholders with information to assess whether senior officer compensation is appropriate in view of the institution's financial condition and performance and to hold the board accountable for maintaining a reasonable rationale for the level of compensation paid to its senior officers.

D. Invasion of Privacy

Although numerous reasons were cited in opposition to individualized compensation disclosure, no other issue generated the intense reaction created by concerns of "invasion of privacy." Respondents were highly concerned that the disclosure of potentially sensitive information in a public format, such as the annual report, would cause considerable staff dissension and would render management unable to effectively administer the institutions' salary programs. One commentor stated that disclosure of the individual salaries of the five highest paid senior officers will, more than likely, cause salaries to gravitate to the highest paid levels in order to maintain morale rather than "limit" compensation paid to senior officers. Several commentors expressed concern that the disclosures may cause employee flight. Additionally, some FCS associations were concerned that the individual compensation disclosures may inadvertently reach the branch officer level.

The FCA recognizes that internal conflict may be generated when the information presented is used by parties for purposes for which they were not intended, such as a means for co-workers to compare salaries or to use as a bargaining tool for salary negotiations. The FCA also believes, however, that management is ultimately responsible for maintaining employee morale and retaining competent staff through fair and reasonable compensation, and for communicating to staff how this is accomplished through the salary administration program. A primary aspect of the disclosures is to provide shareholders insight regarding the methodology and basis the boards use to determine what they consider to be "fair and reasonable" compensation, rather than to "limit" senior officer compensation as suggested by a commentor. Further, the FCA believes stockholders have valid reasons to have this type of information readily available to them and they should not be penalized because of the potential for internal conflicts.

Many commentors were opposed to the proposed disclosures because FCS institution annual reports are used as marketing tools, among other things, and made available to a wide spectrum of interested parties. Some commentors believed that the broad distribution of the reports could promote animosity among shareholders and employees throughout the FCS and possibly other members of rural communities. Several commentors also stated that in order to evaluate the reasonableness of individual senior officer compensation, shareholders would need to understand several key aspects of the employer/employee relationship, such as the experience and knowledge an employee brings to his/her job, geographical cost-of-living data, market compensation for similar positions, job responsibilities, and the competitive and regulatory environment in which the employee operates. commentors also asserted that providing just a dollar amount of compensation, without any other relevant data, would be interpreted by the readers of the annual report in terms of their own frame of reference. This could easily lead to confusion and ill feelings among employees and shareholders because they are not provided with all the facts involved in determining an individual's compensation.

The FCA disagrees that shareholders would be unable to understand and assess the senior officer compensation disclosures. In addition to reporting "dollar amounts" of compensation paid, institutions are required to provide a discussion of the compensation plans to aid the reader's understanding of the disclosures. Moreover, nothing in the regulations prevents an institution from providing explanations of the market or any other factors used in the determination of compensation. Management always has the discretion to provide such explanations if they feel they are needed to fairly portray the amounts being paid to senior officers.

The FCA Board recognizes that it should, to the extent possible, balance shareholders' needs to receive meaningful information concerning their institutions and individual privacy concerns. As expressed in the FCA Board's Policy Statement on Regulatory Philosophy, "The FCA Board is mindful that most regulatory activities will involve competing considerations and is committed to considering and weighing those competing considerations and arriving at thoughtful regulatory judgments". (Published June 22, 1994 at 59 FR 32189) Therefore, in reaching a balance between the competing considerations regarding the proposed regulation, substantial modifications were made to the senior officer disclosure requirements and are more fully explained in the section-by-section discussion.

III. Section-by-Section Discussion

A. Section 611.400-Compensation of Bank Board Members

The commentors generally expressed support for proposed 611.400, Bank Director Compensation. The FCC stated that the proposed procedure for adjusting the bank directors' compensation ceiling and the approval process for exceeding the statutory limitation in "exceptional circumstances" seemed to be both fair and well-considered.

The FCA is adopting the amendments to 611.400 as proposed with two modifications. The proposed rule included a 25-percent cap on the amount by which the FCA Board would approve a waiver of the statutory limitation on bank director compensation. The FCA received two requests for waivers of the statutory limitation since publishing the proposed rule. Based on its operational experience in reviewing those requests, the FCA Board determined that a 30-percent cap on the amount by which it would approve waivers of the statutory limitation would be more appropriate. In addition, the requirement in proposed 611.400(c)(3) that the FCA respond to requests for waivers of the statutory limitation within 30 days was modified by extending the agency's self-imposed response time to 60 days. The FCA will respond to requests for waivers as quickly as possible and anticipates replying to the vast majority of requests in well under 60 days. Nevertheless, there may be unusual circumstances that would necessitate a longer period to gather and analyze pertinent information related to the request, and the longer response period should reduce the frequency of formal extensions of the response period.

The FCA recognizes the difficulty in predicting all the exceptional circumstances under which a bank may desire to seek a waiver of the statutory limitation on bank director compensation. Therefore, the FCA would like to clarify that 611.400(d)(3), pertaining to a bank's policy on bank director compensation, need only address exceptional circumstances that the bank's board is able to identify. The policy should also include a procedure for evaluating, on a case-by-case basis, other extraordinary circumstances that may arise where the bank's board would consider seeking a waiver of the limitation.

B. Section 618.8270-Travel, Subsistence, and Other Related Expenses

commentors generally supported proposed 618.8270, but challenged whether the level of detail in policy and procedure requirements was necessary. The FCC commended the FCA Board for its open-mindedness and willingness to reconsider the existing requirement for individual disclosure of bank director reimbursable expenses and replace it with an aggregate disclosure requirement. The FCC and other commentors stated that while it is quite appropriate for the FCA to require each FCS institution's board to develop written policies concerning the reimbursement of travel, subsistence, and other related expenses, the details of such policies should be left to each board's discretion. In their judgment, the degree of detail spelled out in proposed 618.8270(a) constitutes micro-management, which they believed the current FCA Board was seeking to remove from the regulations. Another commentor responded that the administrative burden created by the detailed policy requirements, documentation, reporting, and auditing is not supported by the value, if any, that would be added to the stockholder disclosure process.

In February 1994, subsequent to publication of the proposed regulations, the FCA Board adopted the previously mentioned Policy Statement on Regulatory Philosophy (59 FR 32189, June 22, 1994) that stated "It is the FCA Board's philosophy to promulgate regulations that are necessary to implement the law and to promote the safety and soundness of the Farm Credit System." One method cited for achieving the FCA Board's regulatory objective was to issue regulations, to the extent feasible, that specify performance criteria and objectives rather than operational methods for achieving its purposes. In light of this recently adopted position, the FCA reevaluated proposed 618.8270 and made modifications accordingly.

The examples of guidelines and limitations that an institution may consider addressing in their travel policy (i.e., modes of transportation; mileage rates for use of personal vehicles and per diem allowances, including maximum or limitations on lodging, meals and incidental expenses; and telephone calls and any other miscellaneous expenses) were eliminated from the final rule. The examples cited in proposed 618.8270(a)(2)(i) through (iv) were removed because many commentors interpreted them as mandatory regulatory requirements. However, the FCA Board continues to believe that the management of each FCS institution should determine to what extent the individual items cited as sample guidelines and limitations in the proposed rule are necessary to ensure that the reimbursement of expenses for directors, officers, and employees is reasonable and well-justified.

Certain aspects of proposed 618.8270 that incorporated, in part, procedures from existing 611.400(b) and (c) were eliminated from the final rule. The FCA Board believes that such detailed operating procedures should remain at the discretion of each FCS institution's management rather than be formally prescribed by regulations. Therefore, all of the procedures in proposed 618.8270(a)(3) and (4) were removed and the basic requirement for maintaining written records of expense reimbursements was assimilated into final 618.8270(a).

One commentor recommended that the last sentence in 618.8270(b) referring to "the personnel authorized to process reimbursements," be amended by substituting "approve" for "process." The commentor asserted that the persons who normally process reimbursements are accounting clerks, and stated that it is not usually part of their function to attempt to determine whether expenses are appropriate. In an effort to clarify the regulation, the last sentence was stricken from the final rule.

Two commentors misinterpreted proposed 618.8270(c) to require that an internal auditor review every expense claim and record. The FCA has clarified that the regulation only requires an internal auditor to determine whether the institution's policies and procedures are being consistently followed by testing the reimbursement process through a sampling of expense claims and records. The final rule reads that "Each board shall require a review by the institution's internal auditor (or person designated by the board) of at least a sampling of records maintained * * *." Furthermore, the requirement for an internal audit review of travel records is now contained in 618.8270(b) in the final rule.

C. Section 620.5(i)-Compensation of Directors and Senior Officers

1. Director compensation

The disclosure requirements in the final regulation remain unchanged from the proposed regulation.

2. Senior officer compensation

The senior officer compensation disclosure requirements were substantially changed in the final regulation. As previously discussed, the modifications were made because the FCA Board considered it important to balance commentors' privacy concerns with the shareholders' need for access to pertinent information regarding their institutions, and to further reflect the unique attributes of FCS institutions in the regulations. In addition, technical and clarifying changes were made to improve the understanding of the requirements and enhance the consistency of the disclosures presented to shareholders.

An alternative means for associations to disseminate senior officer compensation information was added to the final rule. Many commentors asserted that the disclosure of compensation information is more appropriate for a proxy statement. To address this issue, final 620.5(i)(2) permits associations to disclose senior officer compensation information in either the Association Annual Meeting Information Statement (AAMIS) or the annual report. By allowing associations to disclose compensation information in the AAMIS, the FCA Board aims to reduce the concern of wide distribution of potentially sensitive information in a public format. Currently, there is no other disclosure medium for banks that serves a similar purpose as the AAMIS. Thus, the banks would continue to publish senior officer compensation in the annual report.

The final rule limits the requirement for disclosure of individual compensation information to FCS institution CEOs. Proposed 620.5(i)(2)(i), which would have required institutions to make individual compensation disclosure for each of the five highest compensated senior officers, was dropped from the final rule. Final 620.5(i)(2)(i)(A) requires FCS institutions to report the total compensation and the amount of each component of compensation paid to the institution's CEO for each of the last 3 completed fiscal years. If more than one person served in the capacity of CEO during any given fiscal year, individual compensation information must be reported for each CEO. However, no disclosure need be provided for any CEO whose salary and bonus (or annualized salary and bonus, if the CEO served in that capacity less than a year) do not exceed $ 150,000, adjusted annually to reflect changes in the Consumer Price Index (CPI) for all urban consumers. The 1994 calendar year will serve as the base year for making subsequent CPI adjustments to the $ 150,000 disclosure threshold.

Proposed 620.5(i)(2)(ii), which would have required FCS institutions to report the aggregate amount of compensation and the components of compensation paid to all officers as a group, was revised in the final regulation. The FCA did not perceive the proposed requirement as markedly different from the existing aggregate senior officer compensation disclosure requirement. Yet, several commentors interpreted the requirement to be more extensive. The FCA decided to retain the language in the existing rule with some modifications to reduce any ambiguity that may have been raised by the proposed requirement. Final 620.5(i)(2)(i)(B) requires institutions to report the aggregate amount of compensation and the components of compensation paid during each of the last 3 completed fiscal years to all senior officers as a group, stating the number of officers in the group without naming them. As with the existing regulation, at a minimum, institutions must disclose the aggregate amount of compensation paid to the five most highly compensated officers, whether or not designated as a senior officer by the board.

A requirement for preparation of a "Summary Compensation Table" (table) was added to the final regulation to enhance the comparability of the compensation disclosures. commentors indicated there was a need to improve the consistency of reporting compensation information and suggested the regulations stipulate a format for disclosure. In response, the general definition of "compensation" was eliminated and replaced by the more descriptive table and corresponding instructions. For purposes of reporting compensation information in the table, compensation is divided into two main categories: (1) "Annual;" and (2) "Other." The separation is to distinguish normal annual compensation from compensation that is unusual, infrequent, reflects special circumstances, or is earned during the fiscal year but is not usually available to the senior officer until a later date.

The components of "Annual" compensation include salary, bonuses, deferred compensation and perquisites. Amounts shown as "salary" and "bonus" are to reflect the gross amounts earned during the fiscal year before any reductions for amounts contributed during the fiscal year to a 401(k) plan or similar plan. If, for any reason, the exact amount of salary or bonus earned in the fiscal year is not expected to be known in time for its inclusion in the report, the institution is to include in the report its best estimate of the compensation amount and provide appropriate footnote disclosure with the table. Amounts shown as "deferred/perquisites" will include such items as deferred compensation, perquisites, and any other significant personal benefits customarily paid, earned or received on an annual basis. With respect to deferred compensation, this amount should reflect all forms of deferred compensation earned during the fiscal year, whether or not paid in cash. For example, if the deferred compensation was earned during the period but payment in cash was voluntarily deferred by the senior officer to a later period (e.g., upon retirement) the amount earned must still be included in the current period's compensation amount. Consequently, cash payments under deferred compensation arrangements where the amounts were earned in previous periods would not be included as part of the current period's compensation.

The category depicted as "Other" in the table includes amounts not appropriately characterized as components of annual compensation. Section 620.5(i)(2)(i)(E) specifies two forms of compensation that should be included in this category: (1) Compensation in the form of payouts due to a senior officer's resignation, retirement, or termination from employment; and (2) contributions by the institution on behalf of the senior officer to a defined contribution plan for which cash payments from the plan are typically not available to the senior officer until a later date. Any form of compensation in this part must be specifically identified and described in a footnote to the table.

The FCA received a mixed response to proposed 620.5(i)(2)(iii), which would have required FCS institutions to provide a general discussion of compensation plans of its senior officers. While many commentors supported the proposed requirement, others believed that the disclosures would be too burdensome to compile. The FCA Board continues to believe that such discussion would be beneficial in providing explanations of compensation plans to the readers of the report. For the most part, the final regulation retains the requirements in proposed 620.5(i)(2)(iii) that FCS institutions provide a description of the compensation plans of all those senior officers covered by the regulations. Proposed 620.5(i)(2)(iii) (F) and (G), which would have required institutions to discuss the amounts paid under the plans, were dropped from the final rule because the final rule requires these comments to be disclosed in the table. The remaining compensation discussion requirements are now contained in 620.5(i)(2)(ii) in the final rule.

The final rule clarifies that bank senior officer compensation information is part of the financial information that should be made available to shareholders of both the bank and its related associations upon request. When the disclosure regulations in part 620 of this chapter were initially adopted, the FCA determined that, due to the structure of the System and the impact the banks have on the financial results of the associations, there was a need for association shareholders to receive the financial information of the bank in addition to the financial information of the association. Existing 620.4(b) implements this philosophy by requiring banks to distribute their annual reports to shareholders of related associations. Likewise, under the proposed rule, both the shareholders of the bank and related associations would have received the bank's annual report containing individual compensation information on the five most highly compensated bank senior officers. Although the disclosure requirement for individual senior officer compensation information was limited to CEOs in the final rule, the FCA Board continues to believe that it is important for shareholders of related associations to have access to individual compensation information of bank senior officers included in the aggregate disclosure required by 620.5(i)(2)(i)(B).

Therefore, the required disclosure statement in proposed 620.5(i)(2)(iv) was modified to clarify its requirements and is now contained in 620.5(i)(2)(iii) in the final rule. Final 620.5(i)(2)(iii) requires institutions to include a statement in the annual report or the AAMIS (if the association chooses to include compensation information in the AAMIS) that "information concerning the total compensation paid during the last fiscal year to any senior officer or to any other officer included in the aggregate whose compensation exceeds $ 50,000 is available and will be disclosed to shareholders of the institution and shareholders of related associations (if applicable) upon request."

3. Travel, subsistence, and other related expenses

The disclosure requirements for travel, subsistence, and other related expenses in the final regulation remain unchanged from the proposed regulation with one exception. Pursuant to the preceding discussion, the final rule clarifies that the institution's policy regarding travel, subsistence, and other related expenses should also be made available to shareholders of related associations (if applicable) upon request.

List of Subjects

12 CFR Part 611

Agriculture, Banks, banking, Rural areas.

12 CFR Part 618

Agriculture, Archives and records, Banks, banking, Insurance, Reporting and recordkeeping requirements, Rural areas, Technical assistance.

12 CFR Part 620

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

For the reasons stated in the preamble, parts 611, 618, and 620 of chapter VI, title 12 of the Code of Federal Regulations is amended to read as follows:

PART 611-ORGANIZATION

1. The authority citation for part 611 is revised to read as follows:

Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15, 4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2209, 2243, 2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-399, 102 Stat. 989, 1003, and 1004.

Subpart D-Rules for Compensation of Board Members

2. Section 611.400 is revised to read as follows:

611.400 -- Compensation of bank board members.

(a) Farm Credit System banks are authorized to pay fair and reasonable compensation to directors for services performed in an official capacity at a rate not to exceed the level established in section 4.21 of the Farm Credit Act of 1971, as amended, unless the FCA determines that such a level adversely affects the safety and soundness of the institution.

(b) The bank director compensation level established in section 4.21 of the Act shall be adjusted to reflect changes in the Consumer Price Index (CPI) for all urban consumers, as published by the Bureau of Labor Statistics, in the following manner: Current year's maximum compensation = Prior year's maximum compensation adjusted by the prior year's annual average percent change in the CPI for all urban consumers. Adjustments will be made to the bank director statutory compensation limit beginning from October 28, 1992 (the date of enactment of the Farm Credit Banks and Associations Safety and Soundness Act of 1992). Additionally, each year the FCA will distribute a bookletter to all FCS banks that communicates the CPI adjusted bank director statutory compensation limit.

(c) A waiver of the compensation limitation prescribed by section 4.21 of the Act may be granted under exceptional circumstances as approved on a case-by-case basis by the FCA. However, the FCA shall not grant a waiver that allows a bank to pay any director in excess of 30 percent more than the statutory maximum compensation as determined in accordance with paragraph (b) of this section. A waiver approval shall precede any payments by the bank to its director(s) that exceed the maximum limitation determined in paragraph (b) of this section. A bank seeking a waiver shall provide the FCA Chairman with a written request that:

(1) Describes and explains the exceptional circumstance(s) that the bank believes necessitates a waiver of section 4.21 of the Act;

(2) States the amount and the terms and conditions (if any) of the proposed compensation level for each director that would exceed the statutory maximum determined in accordance with paragraph (b) of this section; and

(3) Justifies the compensation level of each director that would exceed the statutory limitation based on the extraordinary time and service devoted to bank business.

The FCA shall respond to written requests within 60 days of receipt of the preceding information and the receipt of any other additional information requested by the FCA.

(d) Each bank board shall adopt a written policy regarding compensation of bank directors. The policy shall address, at a minimum, the following areas:

(1) The activities or functions for which attendance is necessary and appropriate and may be compensated, except that a Farm Credit System bank shall not compensate any director for rendering services on behalf of any other Farm Credit System institution or a cooperative of which the director is a member, or for performing other assignments of a nonofficial nature;

(2) The methodology for determining each director's rate of compensation; and

(3) The exceptional circumstances under which the board would seek a waiver of the statutory limitation on bank director compensation for any of its directors and any limitations or conditions the board wishes to place on the availability of such waivers.

(e) Directors may also be reimbursed for reasonable travel, subsistence, and other related expenses in accordance with the policy adopted pursuant to 618.8270 of this chapter.

PART 618-GENERAL PROVISIONS

3. The authority citation for part 618 continues to read as follows:

Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7, 4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12 U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183, 2200, 2211, 2218, 2243, 2244, 2252).

Subpart F-Miscellaneous Provisions

4. Section 618.8270 is revised to read as follows:

618.8270 -- Travel, subsistence, and other related expenses.

(a) Each Farm Credit institution board shall develop a written policy and maintain written records regarding the reimbursement of travel, subsistence, and other related expenses to its directors, officers, and employees. The policy shall address, at a minimum, the authorized purposes for which reimbursement of travel, subsistence, and other related expenses may be made and the guidelines and limitations on reimbursement.

(b) Each board shall require a review by the institution's internal auditor (or person designated by the board) of at least a sampling of the records maintained pursuant to paragraph (a) of this section to determine if the policies are being consistently followed. This review shall be conducted at least annually, with the results reported to the board audit committee or the full board, if the board does not have an audit committee.

PART 620-DISCLOSURE TO SHAREHOLDERS

5. 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.

6. Section 620.5 is amended by revising paragraph (i) to read as follows:

620.5 -- Contents of the annual report to shareholders.

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(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) and state the total cash compensation paid to all directors as a group during the last fiscal year. If applicable, describe any exceptional circumstances under which a waiver of section 4.21 of the Act was granted by the FCA. For each director, state:

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

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

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

(2) Senior officer compensation. Disclose the information on senior officer compensation and compensation plans as required by this paragraph. Farm Credit System associations may disclose the information required by this paragraph in the Association Annual Meeting Information Statement (AAMIS), but must include a reference in the annual report stating that the senior officer compensation information is included in the AAMIS.

(i) The institution shall disclose the total amount of compensation paid to senior officers in substantially the same manner as the tabular form specified in the following Summary Compensation Table (table):
Summary Compensation Table
Name of individual or No. in group


(a)
Year


    (b)
Annual
Other


(f)
Total


(g)
Salary

(c)
Bonus

(d)
Deferred/ perquisites
(e)
CEO .........................................................


Aggregate No. of Senior Officers (X) .............................................................
(X) .............................................................
(X) .............................................................
199X
199X
199X

199X
199X
199X


(A) Report the total amount of compensation paid and the amount of each component of compensation paid to the institution's chief executive officer (CEO) for each of the last 3 completed fiscal years, naming the individual. If more than one person served in the capacity of CEO during any given fiscal year, individual compensation disclosures must be provided for each CEO. Except that, no disclosure need be provided for any CEO whose salary and bonus (or annualized salary and bonus, if the CEO served in that capacity less than a year) do not exceed $ 150,000, adjusted annually to reflect changes in the Consumer Price Index (CPI) for all urban consumers, as published by the Bureau of Labor Statistics. The threshold for individually disclosing CEO compensation information shall be adjusted in the following manner: Current year's compensation disclosure threshold = Prior year's compensation disclosure threshold adjusted by the prior year's annual average percent change in the CPI for all urban consumers. The 1994 calendar year shall serve as the base year for making subsequent CPI adjustments to the $ 150,000 compensation disclosure threshold.

(B) Report the aggregate amount of compensation paid and the components of compensation paid during each of the last 3 completed fiscal years to all senior officers as a group, stating the number of officers in the group without naming them. At a minimum, disclose the aggregate amount of compensation paid to the five most highly compensated officers, whether or not designated as a senior officer by the board.

(C) Amounts shown as "Salary" (column (c)) and "Bonus" (column (d)) shall reflect the dollar value of salary and bonus earned by the senior officer during the fiscal year. Amounts contributed during the fiscal year by the senior officer pursuant to a plan established under section 401(k) of the Internal Revenue Code, or similar plan, shall be included in the salary column or bonus column, as appropriate. If the amount of salary or bonus earned during the fiscal year is not calculable by the time the report is prepared, the reporting institution shall provide its best estimate of the compensation amount(s) and disclose that fact in a footnote to the table.

(D) Amounts shown as "deferred/perquisites" (column (e)) shall reflect the dollar value of other annual compensation not properly categorized as salary or bonus, including but not limited to:

(1) Deferred compensation earned during the fiscal year, whether or not paid in cash; or

(2) Perquisites and other personal benefits unless the aggregate value of such compensation is the lesser of either $ 25,000 or 10 percent of the total of annual salary and bonus reported for the senior officer in columns (c) and (d).

(E) Compensation amounts reported under the category "Other" (column (f)) shall reflect the dollar value of all other compensation not properly reportable in any other column. Items reported in this column shall be specifically identified and described in a footnote to the table. Such compensation includes, but is not limited to:

(1) The amount paid to the senior officer pursuant to a plan or arrangement in connection with the resignation, retirement, or termination of such officer's employment with the institution; or

(2) The amount of contributions by the institution on behalf of the senior officer to a vested or unvested defined contribution plan unless the plan is made available to all employees on the same basis.

(F) Amounts displayed under "Total" (column (g)) shall reflect the sum total of amounts reported in columns (c), (d), (e), and (f).

(ii) Provide a description of all plans pursuant to which cash or noncash compensation was paid or distributed during the last fiscal year, or is proposed to be paid or distributed in the future for performance during the last fiscal year, to those individuals described in paragraph (i)(2)(i) of this section. The description of each plan must include, but not be limited to:

(A) A summary of how the plan operates and who is covered by the plan;

(B) The criteria used to determine amounts payable, including any performance formula or measure;

(C) The time periods over which the measurement of compensation will be determined;

(D) Payment schedules; and

(E) Any material amendments to the plan during the last fiscal year.

(iii) The annual report or AAMIS shall include a statement that disclosure of information on the total compensation paid during the last fiscal year to any senior officer or to any other officer included in the aggregate whose compensation exceeds $ 50,000 is available and will be disclosed to shareholders of the institution and shareholders of related associations (if applicable) upon request.

(3) Travel, subsistence, and other related expenses.

(i) Briefly describe the policy adopted pursuant to 618.8270 of this chapter addressing reimbursements for travel, subsistence, and other related expenses as it applies to directors and senior officers. The report shall include a statement that a copy of the policy is available to shareholders of the institution and shareholders of related associations (if applicable) upon request.

(ii) For each of the last 3 fiscal years, state the aggregate amount of reimbursement for travel, subsistence, and other related expenses for all directors as a group.

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Dated: July 15, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-17906 Filed 7-21-94; 8:45 am]

BILLING CODE 6705-01-P