Golden Parachute and Indemnification Payments, 7402-7409 [06-1299]
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Federal Register / Vol. 71, No. 29 / Monday, February 13, 2006 / Rules and Regulations
Turkey, and Ukraine will be subject to
additional permit and quarantine
requirements.
TABLE 1.—VALUE OF U.S. IMPORTS OF
LIVE BIRDS AND POULTRY PRODUCTS FROM RUSSIA AND UKRAINE
Emergency Action
This rulemaking is necessary on an
emergency basis to prevent the
introduction of HPAI subtype H5N1 into
the United States. Under these
circumstances, the Administrator has
determined that prior notice and
opportunity for public comment are
contrary to the public interest and that
there is good cause under 5 U.S.C. 553
for making this rule effective less than
30 days after publication in the Federal
Register.
We will consider comments we
receive during the comment period for
this interim rule (see DATES above).
After the comment period closes, we
will publish another document in the
Federal Register. The document will
include a discussion of any comments
we receive and any amendments we are
making to the rule.
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Executive Order 12866 and Regulatory
Flexibility Act
This rule has been reviewed under
Executive Order 12866. For this action,
the Office of Management and Budget
has waived its review under Executive
Order 12866.
We are amending the regulations
concerning the importation of animals
and animal products by adding
Kazakhstan, Romania, Russia, Turkey,
and Ukraine to the list of regions in
which HPAI subtype H5N1 is
considered to exist. We are taking this
action because there have been
outbreaks of HPAI subtype H5N1 in
those countries. This action is necessary
to prevent the introduction of HPAI
subtype H5N1 into the United States.
Poultry production in Kazakhstan,
Romania, Russia, Turkey, and Ukraine
represents a small portion of world
production. Imports of poultry and
poultry products from these five
countries into the United States are not
large. In fact, from 2004 to 2005, of the
five, Russia and Ukraine were the only
countries exporting poultry and poultry
products to the United States (table 1).
In 2004, the United States imported a
total of over $2.3 million worth of live
birds and over $204 million worth of
down feathers from all countries.
Imports of poultry and poultry products
from Russia and Ukraine comprised less
than 1 percent of all imports to the
United States annually.
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Product
2004
Live birds ..........
Feathers and
down for stuffing, clean .......
2005
(January–
October)
$158,000
$28,000
786,235
991,549
Source: World Trade Atlas.
Adding Kazakhstan, Romania, Russia,
Turkey, and Ukraine to the list of
regions in which HPAI subtype H5N1 is
considered to exist is not likely to have
a measurable economic impact on the
agricultural economy as a whole or on
small entities.
Under these circumstances, the
Administrator of the Animal and Plant
Health Inspection Service has
determined that this action will not
have a significant economic impact on
a substantial number of small entities.
Executive Order 12988
This rule has been reviewed under
Executive Order 12988, Civil Justice
Reform. This rule: (1) Preempts all State
and local laws and regulations that are
in conflict with this rule; (2) has
retroactive effect to July 18, 2005, with
respect to Russia; to July 22, 2005, with
respect to Kazakhstan; to October 1,
2005, with respect to Turkey; to October
4, 2005, with respect to Romania; and to
November 25, 2005, with respect to
Ukraine; and (3) does not require
administrative proceedings before
parties may file suit in court challenging
this rule.
Paperwork Reduction Act
This rule contains no new
information collection or recordkeeping
requirements under the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501
et seq.).
List of Subjects in 9 CFR Part 94
Animal diseases, Imports, Livestock,
Meat and meat products, Milk, Poultry
and poultry products, Reporting and
recordkeeping requirements.
PART 94—RINDERPEST, FOOT-ANDMOUTH DISEASE, FOWL PEST (FOWL
PLAGUE), EXOTIC NEWCASTLE
DISEASE, AFRICAN SWINE FEVER,
CLASSICAL SWINE FEVER, AND
BOVINE SPONGIFORM
ENCEPHALOPATHY: PROHIBITED
AND RESTRICTED IMPORTATIONS
1. The authority citation for part 94
continues to read as follows:
I
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Authority: 7 U.S.C. 450, 7701–7772, 7781–
7786, and 8301–8317; 21 U.S.C. 136 and
136a; 31 U.S.C. 9701; 7 CFR 2.22, 2.80, and
371.4.
2. In § 94.6, paragraph (d) is revised to
read as follows:
I
§ 94.6 Carcasses, parts or products of
carcasses, and eggs (other than hatching
eggs) of poultry, game birds, or other birds;
importations from regions where exotic
Newcastle disease or highly pathogenic
avian influenza subtype H5N1 is considered
to exist.
*
*
*
*
*
(d) Highly pathogenic avian influenza
(HPAI) subtype H5N1 is considered to
exist in the following regions:
Cambodia, China, Indonesia, Japan,
Kazakhstan, Laos, Malaysia, Romania,
Russia, South Korea, Thailand, Turkey,
Ukraine, and Vietnam.
*
*
*
*
*
Done in Washington, DC, this 7th day of
February 2006.
Kevin Shea,
Acting Administrator, Animal and Plant
Health Inspection Service.
[FR Doc. 06–1303 Filed 2–10–06; 8:45 am]
BILLING CODE 3410–34–P
FARM CREDIT SYSTEM INSURANCE
CORPORATION
12 CFR Part 1412
RIN 3055–AA08
Golden Parachute and Indemnification
Payments
Farm Credit System Insurance
Corporation (FCSIC or Corporation).
ACTION: Final rule.
AGENCY:
SUMMARY: The FCSIC is issuing a final
rule limiting golden parachute and
indemnification payments to
institution-related parties (IRPs) by
Farm Credit System institutions,
including their subsidiaries, service
corporations and affiliates. The purpose
of the rule is to prevent abuses in golden
parachute and indemnity payments and
to protect the assets of the institution
and the Farm Credit System Insurance
Fund.
DATES: Effective Date: This regulation
will be effective 30 days after
publication in the Federal Register
during which either or both Houses of
Congress are in session. We will publish
a notice of the effective date in the
Federal Register.
FOR FURTHER INFORMATION CONTACT:
Dorothy L. Nichols, General Counsel,
Farm Credit System Insurance
Corporation, 1501 Farm Credit Drive,
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McLean, VA, 22102, 703–883–4211,
TTY 703–883–4390, Fax 703–790–9088.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
No collection of information pursuant
to section 3504(h) of the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.)
is contained in the proposed rule.
Consequently, no information was
submitted to the Office of Management
and Budget for review.
Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act (Pub. L. 96–
354, 5 U.S.C. 601 et seq.), it is certified
that the proposed rule will not have
significant impact on a substantial
number of small entities.
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Background
Section 218 of the Farm Credit System
Reform Act of 1996 (‘‘Reform Act’’)
amended the Farm Credit Act of 1971 by
adding a new section 5.61B. See Pub. L.
104–105, Feb. 10, 1996. This section
authorizes the Corporation to prohibit or
limit, by regulation or order, golden
parachute and indemnification
payments. See 12 U.S.C. 2277a–10b.
Section 5.61B is similar to legislative
authorities given to the other Federal
financial institution regulators. See e.g.
12 U.S.C. 1828(k).
The terms golden parachute and
indemnification payment are defined in
the statute at 12 U.S.C. 2277a–10b(a)(1)
and (2). In general, golden parachutes
are employment contracts that offer
substantial payments when employment
is terminated. Indemnification
payments are often used to reimburse
officers or directors for personal losses
due to judgments or litigation costs
incurred while exercising official duties.
The golden parachute portion of the rule
applies to any Farm Credit System
institution seeking to make golden
parachute payments only when the
institution is in a ‘‘troubled condition.’’
The indemnification part of the rule
applies to Farm Credit System
institutions regardless of their financial
condition. Its primary purpose is to
prohibit reimbursements that benefit
wrongdoers. For example, an institution
could not indemnify officers or directors
for legal expenses or liabilities that
result from a successful Farm Credit
Administration (FCA) administrative
action. However, if the officer or
director is cleared of the charges, legal
fees and costs can be reimbursed.
Golden Parachute Prohibition
The regulation follows the statutory
definition of a golden parachute
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payment. It is a payment (or an
agreement to make a payment) that:
• Is in the nature of compensation by
any System institution for the benefit of
any current or former institution-related
party;
• Is based on an obligation that is
contingent on termination; and
• Is received on or after, or is made
in contemplation of certain events that
signify the System institution is in a
troubled condition.
Following the criteria set out in
section 5.61B(a)(1) of the Reform Act,
the rule prohibits golden parachute
payments by institutions that are
insolvent, in conservatorship or
receivership, or rated a ‘‘4’’ or ‘‘5’’ in the
FCA Financial Institution Rating
System. Section 5.61B(a)(1)(A) also
authorizes the Corporation to define by
regulation other circumstances that
warrant a determination that an
institution is in a troubled condition.
The rule defines troubled condition to
include any institution: (1) Subject to a
cease-and-desist order or written
agreement issued by the FCA requiring
it to improve its financial condition; (2)
subject to an FCA proceeding that may
result in an order that requires
improvement in financial condition; or
(3) informed in writing by the
Corporation that it is in troubled
condition based on its most recent
report of examination or other pertinent
information. For banks, troubled
condition also includes a bank that is:
(1) Unable to make timely payments of
principal and interest on bank-insured
obligations; or (2) receiving assistance
from the Insurance Fund. For the
Federal Agricultural Mortgage
Corporation (‘‘Farmer Mac’’), troubled
condition also includes inability to
make timely payments of principal and
interest on its debt obligations or an
inability to fulfill its guarantee
obligations. The definition of troubled
condition in the rule is similar to the
definition in rules adopted by the other
Federal financial institution regulators.
See e.g., 12 CFR 359.1(f); 12 CFR
563.555 and 12 CFR 701.14.
Exceptions
The rule lists eight exceptions to the
prohibition on golden parachute
payments in § 1412.2(f)(2). Four of these
are listed in the statute: ERISA 1
qualified retirement plans; nonqualified
‘‘bona fide’’ deferred or supplemental
compensation plans; other
nondiscriminatory benefit plans; and
payments made by reason of death or
1 Employee Retirement Income Security Act of
1974, as amended. (29 U.S.C. 1002(1)).
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disability. See 12 U.S.C. 2277a–
10b(a)(1)(c).
Nondiscriminatory means a plan or
arrangement that applies to all
employees who meet customary
eligibility requirements such as
minimum length-of-service standards.
We understand that many severance
plans pay somewhat more generous
benefits to higher ranking employees.
The rule would allow a modest
disparity in nondiscriminatory
severance benefits linked to objective
criteria like job title or length of service.
The definition of nondiscriminatory
specifies a maximum 20 percent in any
one criteria, unless a request for a larger
amount is granted by the Corporation.
For example, if lower-level employees
are provided 50 percent of their yearly
salary and 1 week of salary for each year
of service, higher level employees could
receive 60 percent of their yearly salary
plus 1 week of salary for each year of
service. Our hope is that this permitted
modest discrepancy would allow
System institutions to offer severance
benefits that conform to industry norms
for nondiscriminatory benefit plans. The
statute grants the Corporation authority
to determine other permissible
arrangements and four of the eight
exceptions in § 1412.2(f)(2) are
exceptions added by the Board for
System institutions. They include
payments required by state or foreign
law and a safe harbor provision.
Section 1412.2(f)(2)(viii) adds an
exception that can be used in lieu of
paragraph (f)(2)(vii) for severance pay
plans or arrangements that do not meet
the regulatory definition of
nondiscriminatory. We understand that
at times different benefit arrangements
may be made available to different
employees. For example, an institution
that is experiencing financial trouble
may want to terminate some employees
immediately while providing incentive
payments to employees with critical
functions so as to delay their departures.
The rule limits payments or
arrangements under this exception to
12-months’ base salary, unless a request
for a larger payment is granted by the
Corporation. Minor deviations in
severance benefits that involve tangible
property would also be permitted. For
example, an institution may want to
give some departing employees their
laptops but other employees would get
no additional benefits. We would not
treat this as a prohibited golden
parachute payment, as long as the cost
is reasonable and the practice
customary. We hope this provision
provides a workable safe harbor for
institutions that want to reward more
highly compensated employees that
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have greater responsibilities without
undermining the intent of the
legislation.
Section 1412.5(a)(2) permits a
troubled institution to hire a ‘‘white
knight’’, an individual hired to improve
the institution’s condition, and agree to
pay a golden parachute payment upon
termination of employment, provided
the institution obtains the prior written
consent of the FCA and the Corporation.
Such an agreement has the potential to
benefit the institution and the Insurance
Fund. We recognize that individuals
who possess the experience and
expertise necessary to reverse a troubled
institution may not take the job unless
they receive an agreement for a
severance payment reflecting market
rates, in the event that their efforts are
not successful.
Section 1412.5(a)(3) contains an
exception for a change in control. In the
proposed rule, we allowed System
institutions to pay up to 12-month’s
salary in the event of a change of control
with the prior consent of the FCA. The
Board believed 1-year’s salary would
provide a sufficient incentive for a
senior executive to objectively consider
a merger that may result in the loss of
that executive’s job at a troubled
institution. A commenter took issue
with this provision, stating that after an
informal survey of practices in the
financial industry generally and within
the Farm Credit System, an 18-month
period was more typical. The
Corporation has changed § 1412.5(a)(3)
to allow up to 18-month’s salary. This
is the only substantive change in the
final rule.
Finally, the rule in § 1412.5(a)(1) sets
out a procedure to allow System
institutions to request authority for what
would otherwise be a prohibited golden
parachute payment. This provision
recognizes that there may be valid
business reasons to seek an agreement
not covered by any of the express
exceptions, which the institution
believes should not be prohibited. If an
institution seeks such an authorization,
the statute sets out a number of factors
that the FCA and the Corporation may
consider. See 12 U.S.C. 2277a–10b(c).
The rule at § 1412.5(a)(4) and (b)
enumerates the factors that the FCA and
the Corporation will consider, including
whether the IRP committed any
fraudulent acts, breached a fiduciary
duty or played a substantial role in the
institution’s troubled condition. Under
the rule, the institution making the
request should address the factors
specified in the rule so that the FCA and
the Corporation can consider whether
the requested payment would be
contrary to the intent of the prohibition.
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The institution should include any
information of which it has knowledge
that indicates there is a reasonable basis
to believe that the IRP satisfies any of
the criteria set out in § 1412.5(a)(4) and
(b). If the applicant is not aware of any
such information, it shall certify that it
is not. A commenter suggested that
FCSIC consider the time frame in which
the severance plan was adopted. For
example, the commenter notes that an
institution could have adopted the
severance plan several years before the
institution became ‘‘troubled’’. The
comment letter suggests that it may be
inappropriate to treat such plans in the
same manner as severance plans
adopted when an institution is either in,
or near ‘‘troubled’’ status. We would
point out that the situation described
could be a factor highlighted by the
institutions if it made a request for an
exception under § 1412(a)(1) to pay
what would otherwise be a prohibited
golden parachute.
Indemnification Payments
The statute prohibits Farm Credit
System institutions from making an
indemnification payment for any
liability or legal expense arising from an
administrative or civil action brought by
FCA that results in a civil money
penalty, removal from office or a
prohibition on participation in the
System institution’s business. See 12
U.S.C. 2277a–10b(a)(2). Institutions may
purchase directors and officers
insurance to cover the legal expenses
even if the individual loses the legal
action and pays settlement costs. See 12
U.S.C. 2277a–10b(e)(l). Nevertheless,
the institution cannot use directors and
officers insurance to pay the civil
money penalty.
The rule, at § 1412.2(l), follows the
definition of a prohibited
indemnification payment set out in the
statute. It includes any payment or
agreement to pay an institution-related
party for any civil money penalty or
judgment resulting from an
administrative or civil action brought by
FCA where the person must pay a civil
money penalty, is removed from office
or is subject to a cease and desist action.
There are two exceptions in the rule.
The first allows System institutions to
purchase commercial insurance to cover
expenses other than judgments and
penalties. Second, the rule permits a
partial indemnification. If there has
been a finding that clears the individual,
indemnification is permitted for the
legal or professional expenses
attributable to these charges. In
addition, § 1412.6 sets out criteria for
permissible ‘‘up front’’ indemnification
payments. The System institution’s
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board of directors must determine that
the party requesting indemnification
acted in good faith. Also, the payment
cannot materially adversely affect the
institution’s safety and soundness.
Finally, the party must agree to
reimburse the institution for advanced
indemnification payments if they
become prohibited payments later, due
to an unfavorable ruling.
Farm Credit System Institutions
The prohibitions in 12 U.S.C. 2277a–
10b apply to all Farm Credit System
institutions. The rule at § 1412.2(b)
defines Farm Credit System institutions
to include all associations, banks,
service corporations and their
subsidiaries and affiliates, except the
Farm Credit Financial Assistance
Corporation. It also includes Farmer
Mac and its subsidiaries and affiliates,
which is described in 12 U.S.C. 2279aa–
1(a)(2) as an institution of the Farm
Credit System. Furthermore, 12 U.S.C.
2277a–10b(b) specifies that the
prohibition on golden parachute and
indemnity payments was meant to
include all Farm Credit System
institutions, including even a
conservatorship or receivership of
Farmer Mac. The legislative history of
the Reform Act makes this point clear.
It states: ‘‘New subsection (a) provides
that FCSIC has authority to prohibit or
limit golden parachutes or
indemnifications, including the Federal
Agricultural Mortgage Corporation
(Farmer Mac).’’ H.R. Rep. 104–421,
104th Cong., 1st Sess. 12 (1995).
Institution-Related Party
The rule prohibits certain golden
parachute and indemnification
payments made to or for an institutionrelated party. The term institutionrelated party (IRP) is defined in the
statute at 12 U.S.C. 2277a–10b(a)(3). It
includes directors, officers, employees
or agents for a Farm Credit System
institution, stockholders (other than
another Farm Credit System institution),
consultants, joint venture partners and
any one else who FCA determines has
participated in the affairs of the
institution. Additionally, IRPs include
independent contractors, including
attorneys, appraisers or accountants that
knowingly or recklessly participate in
an unsafe or unsound practice that
caused or is likely to cause harm to the
institution. We will examine very
closely any attempt by a Farm Credit
System institution to avoid the
regulation by employing the IRP in
some other capacity (e.g., a consultant)
and calling the arrangement consulting
compensation rather than a severance
payment or golden parachute.
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Receivership Issues
Section 1412.8 of the rule explains
that this regulation is not meant to bind
any receiver of a failed Farm Credit
System institution. The fact that FCSIC
or FCA consents to a particular payment
does not mean that the approving entity
or the receiver will be responsible for
making the payments in the event of a
receivership or that the recipient will
receive some sort of preference over
other creditors from the receivership.
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Enforcement
The statute at 12 U.S.C. 2277a–10b(b)
grants the FCSIC authority to prohibit
golden parachute and indemnity
payments by regulation or order. The
Board believes that a regulation
proscribing limits, defining ‘‘troubled
condition’’ and setting out procedures
for seeking approval of a payment that
is not specified in one of the exceptions
is usually preferable to a case-by-case
approach. Nevertheless, FCSIC could
deal with abuses on a case-by-case basis
through an enforcement proceeding.
The regulation is similar to the
regulations of the other Federal
financial regulators with similar
statutory authority. See, e.g., 12 CFR
359. Rather than prohibit all the golden
parachute payments above a certain
threshold, the regulation allows a Farm
Credit System institution that is in a
troubled condition, as defined in the
regulation, to seek approval for an
otherwise prohibited golden parachute
payment to an IRP. Similarly, the rule
on indemnity payments seeks a rational
and fair approach for determining
indemnification in order to avoid
abuses.
The statute at 12 U.S.C. 2277a–10b(c)
provides that FCSIC ‘‘shall prescribe, by
regulation, the factors to be considered
by the Corporation in taking any action
under subsection (b) [its authority to
prohibit or limit golden parachute
payments and indemnity payments].
The section also sets out a number of
illustrative factors that may be
considered when taking action under
subsection (b): for example, whether an
IRP has committed acts of fraud, breach
of fiduciary duty, or insider abuse that
has had a detrimental effect on the
financial condition of the institution;
whether there is a reasonable basis to
believe that the IRP has violated the law
or regulations; whether the IRP was in
a position of managerial or fiduciary
responsibility; and the length of time
the party was related to the institution
and the reasonableness of the
compensation. In addition, section
2277a–10b(d) specifies that certain
payments are prohibited. No Farm
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Credit System institution may prepay
the salary or any liability or legal
expense of any IRP if the payment is
made in contemplation of insolvency or
such payment has the result of
preferring one creditor over another.
The Corporation has considered the
prohibited payments and the illustrative
factors in preparing its regulation. It has
also reviewed the legislative history of
the Reform Act and the Comprehensive
Thrift and Bank Fraud Prosecution and
Taxpayer Recovery Act of 1990 (the
Fraud Act), which added similar
authority for the Federal Deposit
Insurance Corporation in a new section
18(k)(1) to the Federal Deposit
Insurance Act. Public Law 101–647,
Sec. 2523 (1990). The Corporation is
aware that the Federal financial
regulators have encountered abuses
with golden parachutes when
institutions pay substantial sums to top
executives who resign after an
institution is troubled or immediately
before the institution is sold. Ultimately,
the Corporation has concluded that to
avoid such abuses golden parachute
payments should be prohibited for Farm
Credit System institutions that are in a
troubled condition, as defined in the
regulation, except under the
circumstances set forth in the proposed
rule. If an institution in a troubled
condition or an IRP wants to make a
payment or enter into an agreement that
it believes should not be prohibited and
the payment or agreement is not covered
by one of the exceptions specified in the
regulation, it may seek approval from
FCA and FCSIC. When it does, the
regulation requires the institution or IRP
to address some of the factors listed in
the statute so that the FCA and FCSIC
can consider them in determining
whether the proposed payment or
agreement should be allowed, limited or
prohibited. The Corporation believes
this rule will best protect the financial
integrity of the institution and safeguard
its assets as Congress intended.
In issuing the indemnification rule,
the Corporation has considered the
prohibited payments and the illustrative
factors set out in the statute as well as
the legislative history. The Corporation
believes that individuals that violate the
law or regulations should pay penalties
out of their own pockets and not be
reimbursed by a Farm Credit System
institution. The Corporation believes
that this regulation on indemnification
payments preserves the deterrent effects
of administrative enforcements and civil
actions even though it does not prohibit
all indemnification payments.
As noted, the rule sets forth
circumstances under which
indemnification payments may be
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7405
made. For example, the Corporation has
decided to allow indemnification ‘‘up
front’’ for an IRP’s legal or other
professional expenses if: (1) Its board of
directors determines that the party
requesting indemnification acted in
good faith, (2) the payment will not
materially adversely affect the
institution, and (3) the person agrees in
writing to reimburse the institution if
the alleged violations of law, regulation
or fiduciary duty are upheld. If these
criteria are met, the institution’s board
of directors will have concluded in good
faith that the party requesting
indemnification did not commit a
fraudulent act, insider abuse or some
other actionable offense that had a
material adverse effect on the financial
condition of the institution.
Consideration of these factors in this
regulatory requirement is what Congress
intended FCSIC to do in taking action
under section 5.61B(b) and (c) (12
U.S.C. 2277a–10b(b) and (c)). Also, the
Corporation has decided to permit
partial indemnification for that portion
of the liability or legal expenses
incurred where there is a determination
on part of the charges in favor of the
IRP. Finally, an institution may
purchase insurance to cover expenses
other than judgments or penalties.
FCSIC’s authority to regulate golden
parachutes and indemnity payments is
in addition to FCA’s safety and
soundness enforcement authority
pursuant to the Farm Credit Act of 1971,
as amended. Furthermore, nothing in
this regulation limits the powers,
functions, or responsibilities of the FCA.
List of Subjects in 12 CFR Part 1412
Banks, banking, Golden parachute
payment, Indemnification payment,
Institution-related party, Penalties,
Prohibitions.
For the reasons set out in the
preamble, 12 CFR part 1412 is added as
set forth below:
I
PART 1412—GOLDEN PARACHUTE
AND INDEMNIFICATION PAYMENTS
Sec.
1412.1 Scope.
1412.2 Definitions.
1412.3 Golden parachute payments
prohibited.
1412.4 Prohibited indemnification
payments.
1412.5 Permissible golden parachute
payments.
1412.6 Permissible indemnification
payments.
1412.7 Filing instructions.
1412.8 Application in the event of
receivership.
Authority: 12 U.S.C. 2277a–10b.
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§ 1412.1
Federal Register / Vol. 71, No. 29 / Monday, February 13, 2006 / Rules and Regulations
Scope.
(a) This part limits and/or prohibits,
in certain circumstances, the ability of
Farm Credit System (System)
institutions, their service corporations,
subsidiaries and affiliates from making
golden parachute and indemnification
payments to institution-related parties
(IRPs).
(b) This part applies to System
institutions in a troubled condition that
seek to make golden parachute
payments to their IRPs.
(c) The limitations on indemnification
payments apply to all System
institutions, their service corporations,
subsidiaries and affiliates regardless of
their financial health.
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§ 1412.2
Definitions.
(a) Act or Farm Credit Act means
Farm Credit Act of 1971 (12 U.S.C.
2002(a)), as amended by the Farm Credit
System Reform Act of 1996, amending
12 U.S.C. 2277a–10.
(b) Farm Credit System institution or
System institution means any
‘‘institution’’ enumerated in section 1.2
of the Act including, but not limited to,
associations, banks, service
corporations, the Federal Farm Credit
Banks Funding Corporation, the Farm
Credit Leasing Services Corporation and
their subsidiaries and affiliates, as well
as, the Federal Agricultural Mortgage
Corporation and its subsidiaries and
affiliates, as described in 12 U.S.C.
2279aa–1(a).
(c) Benefit plan means any plan,
contract, agreement or other
arrangement which is an ‘‘employee
welfare benefit plan’’ as that term is
defined in section 3(1) of the Employee
Retirement Income Security Act of 1974,
as amended (29 U.S.C. 1002(1)), or other
usual and customary plans such as
dependent care, tuition reimbursement,
group legal services or other benefits
provided under a cafeteria plan
sponsored by the System institution;
provided however, that such term shall
not include any plan intended to be
subject to paragraph (f)(2)(iii), (vii) and
(viii) of this section.
(d) Bona fide deferred compensation
plan or arrangement means any plan,
contract, agreement or other
arrangement whereby:
(1) An IRP voluntarily elects to defer
all or a portion of the reasonable
compensation, wages or fees paid for
services rendered which otherwise
would have been paid to such party at
the time the services were rendered
(including a plan that provides for the
crediting of a reasonable investment
return on such elective deferrals) and
the System institution either:
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(i) Recognizes compensation expense
and accrues a liability for the benefit
payments according to generally
accepted accounting principles (GAAP);
or
(ii) Segregates or otherwise sets aside
assets in a trust which may only be used
to pay plan and other benefits, except
that the assets of such trust may be
available to satisfy claims of the System
institution’s creditors in the case of
insolvency; or
(2) The System institution establishes
a nonqualified deferred compensation
or supplemental retirement plan, other
than an elective deferral plan described
in paragraph (d)(1) of this section:
(i) Primarily for the purpose of
providing benefits for certain IRPs in
excess of the limitations on
contributions and benefits imposed by
sections 415, 401(a)(17), 402(g) or any
other applicable provision of the
Internal Revenue Code of 1986 (26
U.S.C. 415, 401(a)(17), 402(g)); or
(ii) Primarily for the purpose of
providing supplemental retirement
benefits or other deferred compensation
for a select group of directors,
management or highly compensated
employees (excluding severance
payments described in paragraph
(f)(2)(v) of this section and permissible
golden parachute payments described in
§ 1412.5); and
(3) In the case of any nonqualified
deferred compensation or supplemental
retirement plans as described in
paragraphs (d)(1) and (2) of this section,
the following requirements shall apply:
(i) The plan was in effect at least 1
year prior to any of the events described
in paragraph (f)(1)(ii) of this section;
(ii) Any payment made pursuant to
such plan is made in accordance with
the terms of the plan as in effect no later
than 1 year prior to any of the events
described in paragraph (f)(1)(ii) of this
section and in accordance with any
amendments to such plan during such
1 year period that do not increase the
benefits payable thereunder;
(iii) The IRP has a vested right, as
defined under the applicable plan
document, at the time of termination of
employment to payments under such
plan;
(iv) Benefits under such plan are
accrued each period only for current or
prior service rendered to the employer
(except that an allowance may be made
for service with a predecessor
employer);
(v) Any payment made pursuant to
such plan is not based on any
discretionary acceleration of vesting or
accrual of benefits which occurs at any
time later than 1 year prior to any of the
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events described in paragraph (f)(1)(ii)
of this section;
(vi) The System institution has
previously recognized compensation
expense and accrued a liability for the
benefit payments according to GAAP or
segregated or otherwise set aside assets
in a trust which may only be used to
pay plan benefits, except that the assets
of such trust may be available to satisfy
claims of the System institution’s
creditors in the case of insolvency; and
(vii) Payments pursuant to such plans
shall not be in excess of the accrued
liability computed in accordance with
GAAP.
(e) Corporation or FCSIC mean the
Farm Credit System Insurance
Corporation, in its corporate capacity.
(f) Golden parachute payment. (1) The
term ‘‘golden parachute payment’’
means any payment (or any agreement
to make any payment) in the nature of
compensation by any System institution
for the benefit of any current or former
IRP pursuant to an obligation of such
System institution that:
(i) Is contingent on the termination of
such party’s primary employment or
relationship with the System institution;
and
(ii) Is received on or after, or is made
in contemplation of, any of the
following events:
(A) The insolvency (or similar event)
of the System institution which is
making the payment or bankruptcy or
insolvency (or similar event) of the
service corporation, subsidiary or
affiliate which is making the payment;
or
(B) The System institution is assigned
a composite rating of 4 or 5 by the FCA;
or
(C) The appointment of any
conservator or receiver for such System
institution; or
(D) A determination by the
Corporation, that the System institution
is in a troubled condition, as defined in
paragraph (m) of this section; and
(iii) Is payable to an IRP whose
employment by or relationship with a
System institution is terminated at a
time when the System institution by
which the IRP is employed or related
satisfies any of the conditions
enumerated in paragraphs (f)(1)(ii)(A)
through (D) of this section, or in
contemplation of any of these
conditions.
(2) Exceptions. The term ‘‘golden
parachute payment’’ shall not include:
(i) Any payment made pursuant to a
pension or retirement plan which is
qualified (or is intended within a
reasonable period of time to be
qualified) under section 401 of the
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Federal Register / Vol. 71, No. 29 / Monday, February 13, 2006 / Rules and Regulations
Internal Revenue Code of 1986 (26
U.S.C. 401); or
(ii) Any payment made pursuant to a
benefit plan as that term is defined in
paragraph (c) of this section; or
(iii) Any payment made pursuant to a
‘‘bona fide’’ deferred compensation plan
or arrangement as defined in paragraph
(d) of this section; or
(iv) Any payment made by reason of
death or by reason of termination
caused by the disability of IRP; or
(v) Any severance or similar payment
which is required to be made pursuant
to a state statute or foreign law which
is applicable to all employers within the
appropriate jurisdiction (with the
exception of employers that may be
exempt due to their small number of
employees or other similar criteria); or
(vi) Any other payment which the
Corporation determines to be
permissible in accordance with
§ 1412.6, on permissible
indemnification payments; or
(vii) Any payment made pursuant to
a nondiscriminatory severance pay plan
or arrangement that provides for
payment of severance benefits to all
eligible employees upon involuntary
termination other than for cause,
voluntary resignation, or early
retirement. Furthermore, such severance
pay plan or arrangement shall not have
been adopted or modified to increase
the amount or scope of severance
benefits at a time when the System
institution was in a condition specified
in paragraph (f)(1)(ii) of this section or
in contemplation of such a condition
without the prior written consent of the
FCA; or in lieu of a payment made
pursuant to this paragraph;
(viii) Any payment made pursuant to
a severance pay plan or arrangement
that provides severance benefits upon
involuntary termination other than for
cause, voluntary resignation, or early
retirement. No employee shall receive
any payment under this subpart which
exceeds the base compensation paid to
such employee during the 12 months (or
longer period or greater benefit as the
Corporation shall consent to)
immediately proceeding termination of
employment. Furthermore, such
severance pay plan or arrangement shall
not have been adopted or modified to
increase the amount or the scope of the
severance benefits at a time when the
System institution was in a condition
specified in paragraph (f)(1)(ii) of this
section or in contemplation of such a
condition without the written approval
of the FCA.
(g) The FCA means the Farm Credit
Administration.
(h) Institution-related party (IRP)
means:
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(1) Any director, officer, employee, or
controlling stockholder (other than
another Farm Credit System institution)
of, or agent for a System institution;
(2) Any stockholder (other than
another Farm Credit System institution),
consultant, joint venture partner, and
any other person as determined by the
FCA (by regulation or case-by-case) who
participates in the conduct of the affairs
of a System institution; and
(3) Any independent contractor
(including any attorney, appraiser, or
accountant) who knowingly or
recklessly participates in any violation
of any law or regulation, any breach of
fiduciary duty, or any unsafe or
unsound practice, which caused or is
likely to cause more than a minimal
financial loss to, or a significant adverse
effect on, the System institution.
(i) Liability or legal expense means:
(1) Any legal or other professional
fees and expenses incurred in
connection with any claim, proceeding,
or action;
(2) The amount of, and any cost
incurred in connection with, any
settlement of any claim, proceeding, or
actions; and
(3) The amount of, any cost incurred
in connection with, any judgment or
penalty imposed with respect to any
claim, processing, or action.
(j) Nondiscriminatory means that the
plan, contract or arrangement in
question applies to all employees of a
System institution who meet reasonable
and customary eligibility requirements
applicable to all employees, such as
minimum length of service
requirements. A nondiscriminatory
plan, contract or arrangement may
provide different benefits based only on
objective criteria such as salary, total
compensation, length of service, job
grade or classification, which are
applied on a proportionate basis, with a
modest disparity in severance benefits
relating to any one criterion of 20
percent.
(k) Payment means:
(1) Any direct or indirect transfer of
any funds or any asset;
(2) Any forgiveness of any debt or
other obligation;
(3) The conferring of benefits in the
nature of compensation, including but
not limited to stock options and stock
appreciation rights; or
(4) Any segregation of any funds or
assets, the establishment or funding of
any trust or the purchase of or
arrangement for any letter of credit or
other instrument, for the purpose of
making, or pursuant to any agreement to
make, any payment on or after the date
on which such funds or assets are
segregated, or at the time of or after such
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7407
trust is established or letter of credit or
other instrument is made available,
without regard to whether the obligation
to make such payment is contingent on:
(i) The determination, after such date,
of the liability for the payment of such
amount; or
(ii) The liquidation, after such date, of
the amount of such payment.
(l) Prohibited indemnification
payment. (1) The term ‘‘prohibited
indemnification payment’’ means any
payment (or any agreement or
arrangement to make any payment) by
any System institution for the benefit of
any person who is or was an IRP of such
System institution, to pay or reimburse
such person for any civil money penalty
or judgment resulting from any
administrative or civil action instituted
by the FCA, or any other liability or
legal expense with regard to any
administrative proceeding or civil
action instituted by the FCA which
results in a final order or settlement
pursuant to which such person:
(i) Is assessed a civil money penalty;
(ii) Is removed from office or
prohibited from participating in the
conduct of the affairs of the institution;
or
(iii) Is required to cease and desist
from or take any affirmative action with
respect to such institution.
(2) Exceptions. (i) The term
‘‘prohibited indemnification’’ payment
shall not include any reasonable
payment by a System institution which
is used to purchase any commercial
insurance policy or fidelity bond,
provided that such insurance policy or
bond shall not be used to pay or
reimburse an IRP for the cost of any
judgment or civil money penalty
assessed against such person in an
administrative proceeding or civil
action commenced by the FCA, but may
pay any legal or professional expenses
incurred in connection with such
proceeding or action or the amount of
any restitution to the System institution
or receiver.
(ii) The term ‘‘prohibited
indemnification payment’’ shall not
include any reasonable payment by a
System institution that represents
partial indemnification for legal or
professional expenses specifically
attributable to particular charges for
which there has been a formal and final
adjudication or finding in connection
with a settlement that the IRP has not
violated certain FCA laws or regulations
or has not engaged in certain unsafe or
unsound practices or breaches of
fiduciary duty, unless the
administrative action or civil
proceedings has resulted in a final
prohibition order against the IRP.
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(m) Troubled condition means a
System institution that:
(1) Is subject to a cease-and-desist
order or written agreement issued by the
FCA that requires action to improve the
financial condition of the System
institution or is subject to a proceeding
initiated by the FCA which
contemplates the issuance of an order
that requires action to improve the
financial condition of the institution,
unless otherwise informed in writing by
the FCA; or
(2) Is unable to make a timely
payment of principal or interest on any
insured obligation (as defined in section
5.51(3) of the Farm Credit Act; 12 U.S.C.
2277a(3)); or
(3) Is receiving assistance as described
in section 5.61 of the Farm Credit Act,
12 U.S.C. 2277a–10; or
(4) Is unable to make timely payment
of principal or interest on debt
obligations issued under the authority of
section 8.6(e)(2) of the Farm Credit Act;
12 U.S.C. 2279aa–6(e)(2) or is unable to
fulfill the guarantee obligations
provided under section 8.6 of the Farm
Credit Act; 12 U.S.C. 2279aa–6; or
(5) Is informed in writing by the
Corporation that it is in a ‘‘troubled
condition’’ for purposes of the
requirements of this subpart on the basis
of the System institution’s most recent
report of condition or report of
examination or other information
available to the Corporation.
§ 1412.3 Golden parachute payments
prohibited.
No System institution shall make or
agree to make any golden parachute
payment, except as provided in this
part.
§ 1412.4 Prohibited indemnification
payments.
No System institution shall make or
agree to make any prohibited
indemnification payment, except as
provided in this part.
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§ 1412.5 Permissible golden parachute
payments.
(a) A System institution may agree to
make or may make a golden parachute
payment if and to the extent that:
(1) The FCA, with the written
concurrence of the Corporation,
determines that such a payment or
agreement is permissible; or
(2) Such an agreement is made in
order to hire a person to become an IRP
either at a time when the System
institution satisfies or in an effort to
prevent it from imminently satisfying
any of the criteria set forth in
§ 1412.2(f)(1)(ii), and the FCA and the
Corporation consent in writing to the
amount and terms of the golden
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parachute payment. Such consent by the
Corporation and the FCA shall not
improve the IRP’s position in the event
of the insolvency of the institution since
such consent can neither bind a receiver
nor affect the provability of receivership
claims. In the event that the institution
is placed into receivership or
conservatorship, the Corporation and/or
the FCA shall not be obligated to pay
the promised golden parachute and the
IRP shall not be accorded preferential
treatment on the basis of such prior
approval; or
(3) Such a payment is made pursuant
to an agreement which provides for a
reasonable severance payment, not to
exceed 18-months’ salary, to an IRP in
the event of a change in control of the
System institution; provided, however,
that the System institution shall obtain
the consent of the FCA prior to making
such a payment and this paragraph
(a)(3) shall not apply to any change in
control of System institution which
results from an assisted transaction as
described in section 5.61 of the Farm
Credit Act; 12 U.S.C. 2277a–10 or the
System institution being placed into
conservatorship or receivership; and
(4) A System institution or IRP
making a request pursuant to paragraphs
(a)(1) through (3) of this section shall
demonstrate that it is not aware of any
information, evidence, documents or
other materials which would indicate
that there is a reasonable basis to
believe, at the time such payment is
proposed to be made, that:
(i) The IRP has committed any
fraudulent act or omission, breach of
trust or fiduciary duty, or insider abuse
with regard to the System institution
that has had or is likely to have a
material adverse effect on the
institution;
(ii) The IRP is substantially
responsible for the insolvency of, the
appointment of a conservator or receiver
for, or the troubled condition, as defined
by applicable regulations concerning the
System institution;
(iii) The IRP has materially violated
any applicable Federal or state law or
regulation that has had or is likely to
have a material effect on the System
institution; and
(iv) The IRP has violated or conspired
to violate section 215, 657, 1006, 1014,
or 1344 of title 18 of the United States
Code or section 1341 or 1343 of such
title affecting a Farm Credit System
institution.
(b) In making a determination under
paragraphs (a)(1) through (3) of this
section the FCA and the Corporation
may consider:
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(1) Whether, and to what degree, the
IRP was in a position of managerial or
fiduciary responsibility;
(2) The length of time the IRP was
affiliated with the System institution,
and the degree to which the proposed
payment represents reasonable
compensation earned over the period of
employment and reasonable payment
for services rendered; and
(3) Any other factors or circumstances
which would indicate that the proposed
payment would be contrary to the intent
of the Act or this part.
§ 1412.6 Permissible indemnification
payments.
(a) A System institution may make or
agree to make reasonable
indemnification payments to an IRP
with respect to an administrative
proceeding or civil action initiated by
the FCA if:
(1) The System institution’s board of
directors, in good faith, determines in
writing after due investigation and
consideration that the IRP acted in good
faith and in a manner he/she believed
to be in the best interests of the
institution;
(2) The System institution’s board of
directors, in good faith, determines in
writing after due investigation and
consideration that the payment of such
expenses will not materially adversely
affect the institution’s safety and
soundness;
(3) The indemnification payments do
not constitute prohibited
indemnification payments as that term
is defined in § 1412.2(l); and
(4) The IRP agrees in writing to
reimburse the System institution, to the
extent not covered by payments from
insurance or bonds purchased pursuant
to § 1412.2(l)(2), for that portion of the
advanced indemnification payments
which subsequently become prohibited
indemnification payments, as defined
herein.
(b) An IRP requesting indemnification
payments shall not participate in any
way in the board’s discussion and
approval of such payments; provided,
however, that such IRP may present his/
her request to the board and respond to
any inquiries from the board concerning
his/her involvement in the
circumstances giving rise to the
administrative proceeding or civil
action.
(c) In the event that a majority of the
members of the board of directors are
named as respondents in an
administrative proceeding or civil
action and request indemnification, the
remaining members of the board may
authorize independent legal counsel to
review the indemnification request and
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provide the remaining members of the
board with a written opinion of counsel
as to whether the conditions delineated
in paragraph (a) of this section have
been met. If independent legal counsel
opines that said conditions have been
met, the remaining members of the
board of directors may rely on such
opinion in authorizing the requested
indemnification.
(d) In the event that all of the
members of the board of directors are
named as respondents in an
administrative proceeding or civil
action and request indemnification, the
board shall authorize independent legal
counsel to review the indemnification
request and provide the board with a
written opinion of counsel as to whether
the conditions delineated in paragraph
(a) of this section have been met. If
independent legal counsel opines that
said conditions have been met, the
board of directors may rely on such
opinion in authorizing the requested
indemnification.
§ 1412.7
Filing instructions.
Requests to make excess
nondiscriminatory severance plan
payments and permitted golden
parachute payments shall be submitted
in writing to the FCA and the
Corporation. The request shall be in
letter form and shall contain all relevant
factual information as well as the
reasons why such approval should be
granted.
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§ 1412.8 Application in the event of
receivership.
The provisions of this part or any
consent or approval granted under the
provisions of this part by the
Corporation (in its corporate capacity),
shall not in any way bind any receiver
of a failed System institution. Any
consent or approval granted under the
provisions of this part by the
Corporation or the FCA shall not in any
way obligate such agency or receiver to
pay any claim or obligation pursuant to
any golden parachute, severance,
indemnification or other agreement.
Claims for employee welfare benefits or
other benefits which are contingent,
even if otherwise vested, when the
Corporation is appointed as receiver for
any System institution, including any
contingency for termination of
employment, are not provable claims or
actual, direct compensatory damage
claims against such receiver. Nothing in
this part may be construed to permit the
payment of salary or any liability or
legal expense of any IRP contrary to 12
U.S.C. 2277a–10b(d).
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Dated: February 7, 2006.
Roland E. Smith,
Secretary to the Board, Farm Credit System
Insurance Corporation.
[FR Doc. 06–1299 Filed 2–10–06; 8:45 am]
BILLING CODE 6710–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 71
[Docket No. FAA–2005–22398; Airspace
Docket No. 05–ASO–7]
RIN 2120–AA66
Establishment of High Altitude Area
Navigation Routes; South Central
United States
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule.
AGENCY:
SUMMARY: This action establishes 16
high altitude area navigation (RNAV)
routes in the South Central United
States in support of the High Altitude
Redesign (HAR) program. The FAA is
taking this action to enhance safety and
to facilitate the more flexible and
efficient use of the navigable airspace.
EFFECTIVE DATE: 0901 UTC, April 13,
2006.
Paul
Gallant, Airspace and Rules, Office of
System Operations Airspace and AIM,
Federal Aviation Administration, 800
Independence Avenue, SW.,
Washington, DC 20591; telephone: (202)
267–8783.
SUPPLEMENTARY INFORMATION:
FOR FURTHER INFORMATION CONTACT:
History
On September 27, 2005, the FAA
published in the Federal Register a
notice of proposed rulemaking to
establish 16 RNAV routes in the South
Central United States, within the
airspace assigned to the Memphis Air
Route Traffic Control Center (ARTCC)
(70 FR 56391). The routes were
proposed as part of the HAR program to
enhance safety and facilitate the more
flexible and efficient use of the
navigable airspace for en route
instrument flight rules (IFR) aircraft
operations. Interested parties were
invited to participate in this rulemaking
effort by submitting written comments
on this proposal to the FAA. One
comment was received in response to
the NPRM. The comment supported the
proposal.
High altitude area navigation routes
are published in paragraph 2006 of FAA
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7409
Order 7400.9N dated September 1, 2005
and effective September 15, 2005, which
is incorporated by reference in 14 CFR
71.1. The area navigation routes listed
in this document will be published
subsequently in the order.
The Rule
This action amends Title 14 Code of
Federal Regulations (14 CFR) part 71 by
establishing 16 RNAV routes in the
South Central United States, within the
airspace assigned to Memphis ARTCC.
The FAA is taking this action in support
of the HAR program to enhance safety
and to facilitate the more flexible and
efficient use of the navigable airspace
for en route instrument flight rules (IFR)
operations. This rule includes several
corrections to the route descriptions
published in the NPRM. In route Q–26,
the name of the fix ‘‘ABROC’’ is being
changed to ‘‘DEVAC.’’ In route Q–31,
the name of the waypoint ‘‘TOROS’’ is
changed to ‘‘JODOX,’’ and in route Q–
40, the waypoint name ‘‘SALVA’’ is
changed to ‘‘WINAP.’’ These changes
affect only the fix or waypoint names;
the latitude and longitude coordinates
for these points remain the same as
published in the NPRM. The name
changes are necessary to avoid
duplication with other fixes. Finally, the
order of the points listed for routes Q–
19 and Q–33 has been reversed to
comply with policy that odd numbered
routes be described with the points
listed from South to North. This does
not affect the actual alignment of routes
Q–19 and Q–33. Except for these
changes, the routes in this rule are the
same as those proposed in the NPRM.
The FAA has determined that this
regulation only involves an established
body of technical regulations for which
frequent and routine amendments are
necessary to keep them operationally
current. Therefore, this regulation: (1) Is
not a ‘‘significant regulatory action’’
under Executive Order 12866; (2) is not
a ‘‘significant rule’’ under Department of
Transportation (DOT) Regulatory
Policies and Procedures (44 FR 11034;
February 26, 1979); and (3) does not
warrant preparation of a regulatory
evaluation as the anticipated impact is
so minimal. Since this is a routine
matter that will only affect air traffic
procedures and air navigation, it is
certified that this rule, when
promulgated, will not have a significant
economic impact on a substantial
number of small entities under the
criteria of the Regulatory Flexibility Act.
Environmental Review
The FAA has determined that this
action qualifies for categorical exclusion
under the National Environmental
E:\FR\FM\13FER1.SGM
13FER1
]]>Agencies
[Federal Register Volume 71, Number 29 (Monday, February 13, 2006)]
[Rules and Regulations]
[Pages 7402-7409]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1299]
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FARM CREDIT SYSTEM INSURANCE CORPORATION
12 CFR Part 1412
RIN 3055-AA08
Golden Parachute and Indemnification Payments
AGENCY: Farm Credit System Insurance Corporation (FCSIC or
Corporation).
ACTION: Final rule.
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SUMMARY: The FCSIC is issuing a final rule limiting golden parachute
and indemnification payments to institution-related parties (IRPs) by
Farm Credit System institutions, including their subsidiaries, service
corporations and affiliates. The purpose of the rule is to prevent
abuses in golden parachute and indemnity payments and to protect the
assets of the institution and the Farm Credit System Insurance Fund.
DATES: Effective Date: This regulation will be effective 30 days after
publication in the Federal Register during which either or both Houses
of Congress are in session. We will publish a notice of the effective
date in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Dorothy L. Nichols, General Counsel,
Farm Credit System Insurance Corporation, 1501 Farm Credit Drive,
[[Page 7403]]
McLean, VA, 22102, 703-883-4211, TTY 703-883-4390, Fax 703-790-9088.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
No collection of information pursuant to section 3504(h) of the
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in the
proposed rule. Consequently, no information was submitted to the Office
of Management and Budget for review.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 96-354, 5 U.S.C. 601 et seq.), it is certified that the proposed
rule will not have significant impact on a substantial number of small
entities.
Background
Section 218 of the Farm Credit System Reform Act of 1996 (``Reform
Act'') amended the Farm Credit Act of 1971 by adding a new section
5.61B. See Pub. L. 104-105, Feb. 10, 1996. This section authorizes the
Corporation to prohibit or limit, by regulation or order, golden
parachute and indemnification payments. See 12 U.S.C. 2277a-10b.
Section 5.61B is similar to legislative authorities given to the other
Federal financial institution regulators. See e.g. 12 U.S.C. 1828(k).
The terms golden parachute and indemnification payment are defined
in the statute at 12 U.S.C. 2277a-10b(a)(1) and (2). In general, golden
parachutes are employment contracts that offer substantial payments
when employment is terminated. Indemnification payments are often used
to reimburse officers or directors for personal losses due to judgments
or litigation costs incurred while exercising official duties. The
golden parachute portion of the rule applies to any Farm Credit System
institution seeking to make golden parachute payments only when the
institution is in a ``troubled condition.'' The indemnification part of
the rule applies to Farm Credit System institutions regardless of their
financial condition. Its primary purpose is to prohibit reimbursements
that benefit wrongdoers. For example, an institution could not
indemnify officers or directors for legal expenses or liabilities that
result from a successful Farm Credit Administration (FCA)
administrative action. However, if the officer or director is cleared
of the charges, legal fees and costs can be reimbursed.
Golden Parachute Prohibition
The regulation follows the statutory definition of a golden
parachute payment. It is a payment (or an agreement to make a payment)
that:
Is in the nature of compensation by any System institution
for the benefit of any current or former institution-related party;
Is based on an obligation that is contingent on
termination; and
Is received on or after, or is made in contemplation of
certain events that signify the System institution is in a troubled
condition.
Following the criteria set out in section 5.61B(a)(1) of the Reform
Act, the rule prohibits golden parachute payments by institutions that
are insolvent, in conservatorship or receivership, or rated a ``4'' or
``5'' in the FCA Financial Institution Rating System. Section
5.61B(a)(1)(A) also authorizes the Corporation to define by regulation
other circumstances that warrant a determination that an institution is
in a troubled condition.
The rule defines troubled condition to include any institution: (1)
Subject to a cease-and-desist order or written agreement issued by the
FCA requiring it to improve its financial condition; (2) subject to an
FCA proceeding that may result in an order that requires improvement in
financial condition; or (3) informed in writing by the Corporation that
it is in troubled condition based on its most recent report of
examination or other pertinent information. For banks, troubled
condition also includes a bank that is: (1) Unable to make timely
payments of principal and interest on bank-insured obligations; or (2)
receiving assistance from the Insurance Fund. For the Federal
Agricultural Mortgage Corporation (``Farmer Mac''), troubled condition
also includes inability to make timely payments of principal and
interest on its debt obligations or an inability to fulfill its
guarantee obligations. The definition of troubled condition in the rule
is similar to the definition in rules adopted by the other Federal
financial institution regulators. See e.g., 12 CFR 359.1(f); 12 CFR
563.555 and 12 CFR 701.14.
Exceptions
The rule lists eight exceptions to the prohibition on golden
parachute payments in Sec. 1412.2(f)(2). Four of these are listed in
the statute: ERISA \1\ qualified retirement plans; nonqualified ``bona
fide'' deferred or supplemental compensation plans; other
nondiscriminatory benefit plans; and payments made by reason of death
or disability. See 12 U.S.C. 2277a-10b(a)(1)(c).
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\1\ Employee Retirement Income Security Act of 1974, as amended.
(29 U.S.C. 1002(1)).
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Nondiscriminatory means a plan or arrangement that applies to all
employees who meet customary eligibility requirements such as minimum
length-of-service standards. We understand that many severance plans
pay somewhat more generous benefits to higher ranking employees. The
rule would allow a modest disparity in nondiscriminatory severance
benefits linked to objective criteria like job title or length of
service. The definition of nondiscriminatory specifies a maximum 20
percent in any one criteria, unless a request for a larger amount is
granted by the Corporation. For example, if lower-level employees are
provided 50 percent of their yearly salary and 1 week of salary for
each year of service, higher level employees could receive 60 percent
of their yearly salary plus 1 week of salary for each year of service.
Our hope is that this permitted modest discrepancy would allow System
institutions to offer severance benefits that conform to industry norms
for nondiscriminatory benefit plans. The statute grants the Corporation
authority to determine other permissible arrangements and four of the
eight exceptions in Sec. 1412.2(f)(2) are exceptions added by the
Board for System institutions. They include payments required by state
or foreign law and a safe harbor provision.
Section 1412.2(f)(2)(viii) adds an exception that can be used in
lieu of paragraph (f)(2)(vii) for severance pay plans or arrangements
that do not meet the regulatory definition of nondiscriminatory. We
understand that at times different benefit arrangements may be made
available to different employees. For example, an institution that is
experiencing financial trouble may want to terminate some employees
immediately while providing incentive payments to employees with
critical functions so as to delay their departures. The rule limits
payments or arrangements under this exception to 12-months' base
salary, unless a request for a larger payment is granted by the
Corporation. Minor deviations in severance benefits that involve
tangible property would also be permitted. For example, an institution
may want to give some departing employees their laptops but other
employees would get no additional benefits. We would not treat this as
a prohibited golden parachute payment, as long as the cost is
reasonable and the practice customary. We hope this provision provides
a workable safe harbor for institutions that want to reward more highly
compensated employees that
[[Page 7404]]
have greater responsibilities without undermining the intent of the
legislation.
Section 1412.5(a)(2) permits a troubled institution to hire a
``white knight'', an individual hired to improve the institution's
condition, and agree to pay a golden parachute payment upon termination
of employment, provided the institution obtains the prior written
consent of the FCA and the Corporation. Such an agreement has the
potential to benefit the institution and the Insurance Fund. We
recognize that individuals who possess the experience and expertise
necessary to reverse a troubled institution may not take the job unless
they receive an agreement for a severance payment reflecting market
rates, in the event that their efforts are not successful.
Section 1412.5(a)(3) contains an exception for a change in control.
In the proposed rule, we allowed System institutions to pay up to 12-
month's salary in the event of a change of control with the prior
consent of the FCA. The Board believed 1-year's salary would provide a
sufficient incentive for a senior executive to objectively consider a
merger that may result in the loss of that executive's job at a
troubled institution. A commenter took issue with this provision,
stating that after an informal survey of practices in the financial
industry generally and within the Farm Credit System, an 18-month
period was more typical. The Corporation has changed Sec. 1412.5(a)(3)
to allow up to 18-month's salary. This is the only substantive change
in the final rule.
Finally, the rule in Sec. 1412.5(a)(1) sets out a procedure to
allow System institutions to request authority for what would otherwise
be a prohibited golden parachute payment. This provision recognizes
that there may be valid business reasons to seek an agreement not
covered by any of the express exceptions, which the institution
believes should not be prohibited. If an institution seeks such an
authorization, the statute sets out a number of factors that the FCA
and the Corporation may consider. See 12 U.S.C. 2277a-10b(c). The rule
at Sec. 1412.5(a)(4) and (b) enumerates the factors that the FCA and
the Corporation will consider, including whether the IRP committed any
fraudulent acts, breached a fiduciary duty or played a substantial role
in the institution's troubled condition. Under the rule, the
institution making the request should address the factors specified in
the rule so that the FCA and the Corporation can consider whether the
requested payment would be contrary to the intent of the prohibition.
The institution should include any information of which it has
knowledge that indicates there is a reasonable basis to believe that
the IRP satisfies any of the criteria set out in Sec. 1412.5(a)(4) and
(b). If the applicant is not aware of any such information, it shall
certify that it is not. A commenter suggested that FCSIC consider the
time frame in which the severance plan was adopted. For example, the
commenter notes that an institution could have adopted the severance
plan several years before the institution became ``troubled''. The
comment letter suggests that it may be inappropriate to treat such
plans in the same manner as severance plans adopted when an institution
is either in, or near ``troubled'' status. We would point out that the
situation described could be a factor highlighted by the institutions
if it made a request for an exception under Sec. 1412(a)(1) to pay
what would otherwise be a prohibited golden parachute.
Indemnification Payments
The statute prohibits Farm Credit System institutions from making
an indemnification payment for any liability or legal expense arising
from an administrative or civil action brought by FCA that results in a
civil money penalty, removal from office or a prohibition on
participation in the System institution's business. See 12 U.S.C.
2277a-10b(a)(2). Institutions may purchase directors and officers
insurance to cover the legal expenses even if the individual loses the
legal action and pays settlement costs. See 12 U.S.C. 2277a-10b(e)(l).
Nevertheless, the institution cannot use directors and officers
insurance to pay the civil money penalty.
The rule, at Sec. 1412.2(l), follows the definition of a
prohibited indemnification payment set out in the statute. It includes
any payment or agreement to pay an institution-related party for any
civil money penalty or judgment resulting from an administrative or
civil action brought by FCA where the person must pay a civil money
penalty, is removed from office or is subject to a cease and desist
action. There are two exceptions in the rule. The first allows System
institutions to purchase commercial insurance to cover expenses other
than judgments and penalties. Second, the rule permits a partial
indemnification. If there has been a finding that clears the
individual, indemnification is permitted for the legal or professional
expenses attributable to these charges. In addition, Sec. 1412.6 sets
out criteria for permissible ``up front'' indemnification payments. The
System institution's board of directors must determine that the party
requesting indemnification acted in good faith. Also, the payment
cannot materially adversely affect the institution's safety and
soundness. Finally, the party must agree to reimburse the institution
for advanced indemnification payments if they become prohibited
payments later, due to an unfavorable ruling.
Farm Credit System Institutions
The prohibitions in 12 U.S.C. 2277a-10b apply to all Farm Credit
System institutions. The rule at Sec. 1412.2(b) defines Farm Credit
System institutions to include all associations, banks, service
corporations and their subsidiaries and affiliates, except the Farm
Credit Financial Assistance Corporation. It also includes Farmer Mac
and its subsidiaries and affiliates, which is described in 12 U.S.C.
2279aa-1(a)(2) as an institution of the Farm Credit System.
Furthermore, 12 U.S.C. 2277a-10b(b) specifies that the prohibition on
golden parachute and indemnity payments was meant to include all Farm
Credit System institutions, including even a conservatorship or
receivership of Farmer Mac. The legislative history of the Reform Act
makes this point clear. It states: ``New subsection (a) provides that
FCSIC has authority to prohibit or limit golden parachutes or
indemnifications, including the Federal Agricultural Mortgage
Corporation (Farmer Mac).'' H.R. Rep. 104-421, 104th Cong., 1st Sess.
12 (1995).
Institution-Related Party
The rule prohibits certain golden parachute and indemnification
payments made to or for an institution-related party. The term
institution-related party (IRP) is defined in the statute at 12 U.S.C.
2277a-10b(a)(3). It includes directors, officers, employees or agents
for a Farm Credit System institution, stockholders (other than another
Farm Credit System institution), consultants, joint venture partners
and any one else who FCA determines has participated in the affairs of
the institution. Additionally, IRPs include independent contractors,
including attorneys, appraisers or accountants that knowingly or
recklessly participate in an unsafe or unsound practice that caused or
is likely to cause harm to the institution. We will examine very
closely any attempt by a Farm Credit System institution to avoid the
regulation by employing the IRP in some other capacity (e.g., a
consultant) and calling the arrangement consulting compensation rather
than a severance payment or golden parachute.
[[Page 7405]]
Receivership Issues
Section 1412.8 of the rule explains that this regulation is not
meant to bind any receiver of a failed Farm Credit System institution.
The fact that FCSIC or FCA consents to a particular payment does not
mean that the approving entity or the receiver will be responsible for
making the payments in the event of a receivership or that the
recipient will receive some sort of preference over other creditors
from the receivership.
Enforcement
The statute at 12 U.S.C. 2277a-10b(b) grants the FCSIC authority to
prohibit golden parachute and indemnity payments by regulation or
order. The Board believes that a regulation proscribing limits,
defining ``troubled condition'' and setting out procedures for seeking
approval of a payment that is not specified in one of the exceptions is
usually preferable to a case-by-case approach. Nevertheless, FCSIC
could deal with abuses on a case-by-case basis through an enforcement
proceeding.
The regulation is similar to the regulations of the other Federal
financial regulators with similar statutory authority. See, e.g., 12
CFR 359. Rather than prohibit all the golden parachute payments above a
certain threshold, the regulation allows a Farm Credit System
institution that is in a troubled condition, as defined in the
regulation, to seek approval for an otherwise prohibited golden
parachute payment to an IRP. Similarly, the rule on indemnity payments
seeks a rational and fair approach for determining indemnification in
order to avoid abuses.
The statute at 12 U.S.C. 2277a-10b(c) provides that FCSIC ``shall
prescribe, by regulation, the factors to be considered by the
Corporation in taking any action under subsection (b) [its authority to
prohibit or limit golden parachute payments and indemnity payments].
The section also sets out a number of illustrative factors that may be
considered when taking action under subsection (b): for example,
whether an IRP has committed acts of fraud, breach of fiduciary duty,
or insider abuse that has had a detrimental effect on the financial
condition of the institution; whether there is a reasonable basis to
believe that the IRP has violated the law or regulations; whether the
IRP was in a position of managerial or fiduciary responsibility; and
the length of time the party was related to the institution and the
reasonableness of the compensation. In addition, section 2277a-10b(d)
specifies that certain payments are prohibited. No Farm Credit System
institution may prepay the salary or any liability or legal expense of
any IRP if the payment is made in contemplation of insolvency or such
payment has the result of preferring one creditor over another.
The Corporation has considered the prohibited payments and the
illustrative factors in preparing its regulation. It has also reviewed
the legislative history of the Reform Act and the Comprehensive Thrift
and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 (the Fraud
Act), which added similar authority for the Federal Deposit Insurance
Corporation in a new section 18(k)(1) to the Federal Deposit Insurance
Act. Public Law 101-647, Sec. 2523 (1990). The Corporation is aware
that the Federal financial regulators have encountered abuses with
golden parachutes when institutions pay substantial sums to top
executives who resign after an institution is troubled or immediately
before the institution is sold. Ultimately, the Corporation has
concluded that to avoid such abuses golden parachute payments should be
prohibited for Farm Credit System institutions that are in a troubled
condition, as defined in the regulation, except under the circumstances
set forth in the proposed rule. If an institution in a troubled
condition or an IRP wants to make a payment or enter into an agreement
that it believes should not be prohibited and the payment or agreement
is not covered by one of the exceptions specified in the regulation, it
may seek approval from FCA and FCSIC. When it does, the regulation
requires the institution or IRP to address some of the factors listed
in the statute so that the FCA and FCSIC can consider them in
determining whether the proposed payment or agreement should be
allowed, limited or prohibited. The Corporation believes this rule will
best protect the financial integrity of the institution and safeguard
its assets as Congress intended.
In issuing the indemnification rule, the Corporation has considered
the prohibited payments and the illustrative factors set out in the
statute as well as the legislative history. The Corporation believes
that individuals that violate the law or regulations should pay
penalties out of their own pockets and not be reimbursed by a Farm
Credit System institution. The Corporation believes that this
regulation on indemnification payments preserves the deterrent effects
of administrative enforcements and civil actions even though it does
not prohibit all indemnification payments.
As noted, the rule sets forth circumstances under which
indemnification payments may be made. For example, the Corporation has
decided to allow indemnification ``up front'' for an IRP's legal or
other professional expenses if: (1) Its board of directors determines
that the party requesting indemnification acted in good faith, (2) the
payment will not materially adversely affect the institution, and (3)
the person agrees in writing to reimburse the institution if the
alleged violations of law, regulation or fiduciary duty are upheld. If
these criteria are met, the institution's board of directors will have
concluded in good faith that the party requesting indemnification did
not commit a fraudulent act, insider abuse or some other actionable
offense that had a material adverse effect on the financial condition
of the institution. Consideration of these factors in this regulatory
requirement is what Congress intended FCSIC to do in taking action
under section 5.61B(b) and (c) (12 U.S.C. 2277a-10b(b) and (c)). Also,
the Corporation has decided to permit partial indemnification for that
portion of the liability or legal expenses incurred where there is a
determination on part of the charges in favor of the IRP. Finally, an
institution may purchase insurance to cover expenses other than
judgments or penalties.
FCSIC's authority to regulate golden parachutes and indemnity
payments is in addition to FCA's safety and soundness enforcement
authority pursuant to the Farm Credit Act of 1971, as amended.
Furthermore, nothing in this regulation limits the powers, functions,
or responsibilities of the FCA.
List of Subjects in 12 CFR Part 1412
Banks, banking, Golden parachute payment, Indemnification payment,
Institution-related party, Penalties, Prohibitions.
0
For the reasons set out in the preamble, 12 CFR part 1412 is added as
set forth below:
PART 1412--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS
Sec.
1412.1 Scope.
1412.2 Definitions.
1412.3 Golden parachute payments prohibited.
1412.4 Prohibited indemnification payments.
1412.5 Permissible golden parachute payments.
1412.6 Permissible indemnification payments.
1412.7 Filing instructions.
1412.8 Application in the event of receivership.
Authority: 12 U.S.C. 2277a-10b.
[[Page 7406]]
Sec. 1412.1 Scope.
(a) This part limits and/or prohibits, in certain circumstances,
the ability of Farm Credit System (System) institutions, their service
corporations, subsidiaries and affiliates from making golden parachute
and indemnification payments to institution-related parties (IRPs).
(b) This part applies to System institutions in a troubled
condition that seek to make golden parachute payments to their IRPs.
(c) The limitations on indemnification payments apply to all System
institutions, their service corporations, subsidiaries and affiliates
regardless of their financial health.
Sec. 1412.2 Definitions.
(a) Act or Farm Credit Act means Farm Credit Act of 1971 (12 U.S.C.
2002(a)), as amended by the Farm Credit System Reform Act of 1996,
amending 12 U.S.C. 2277a-10.
(b) Farm Credit System institution or System institution means any
``institution'' enumerated in section 1.2 of the Act including, but not
limited to, associations, banks, service corporations, the Federal Farm
Credit Banks Funding Corporation, the Farm Credit Leasing Services
Corporation and their subsidiaries and affiliates, as well as, the
Federal Agricultural Mortgage Corporation and its subsidiaries and
affiliates, as described in 12 U.S.C. 2279aa-1(a).
(c) Benefit plan means any plan, contract, agreement or other
arrangement which is an ``employee welfare benefit plan'' as that term
is defined in section 3(1) of the Employee Retirement Income Security
Act of 1974, as amended (29 U.S.C. 1002(1)), or other usual and
customary plans such as dependent care, tuition reimbursement, group
legal services or other benefits provided under a cafeteria plan
sponsored by the System institution; provided however, that such term
shall not include any plan intended to be subject to paragraph
(f)(2)(iii), (vii) and (viii) of this section.
(d) Bona fide deferred compensation plan or arrangement means any
plan, contract, agreement or other arrangement whereby:
(1) An IRP voluntarily elects to defer all or a portion of the
reasonable compensation, wages or fees paid for services rendered which
otherwise would have been paid to such party at the time the services
were rendered (including a plan that provides for the crediting of a
reasonable investment return on such elective deferrals) and the System
institution either:
(i) Recognizes compensation expense and accrues a liability for the
benefit payments according to generally accepted accounting principles
(GAAP); or
(ii) Segregates or otherwise sets aside assets in a trust which may
only be used to pay plan and other benefits, except that the assets of
such trust may be available to satisfy claims of the System
institution's creditors in the case of insolvency; or
(2) The System institution establishes a nonqualified deferred
compensation or supplemental retirement plan, other than an elective
deferral plan described in paragraph (d)(1) of this section:
(i) Primarily for the purpose of providing benefits for certain
IRPs in excess of the limitations on contributions and benefits imposed
by sections 415, 401(a)(17), 402(g) or any other applicable provision
of the Internal Revenue Code of 1986 (26 U.S.C. 415, 401(a)(17),
402(g)); or
(ii) Primarily for the purpose of providing supplemental retirement
benefits or other deferred compensation for a select group of
directors, management or highly compensated employees (excluding
severance payments described in paragraph (f)(2)(v) of this section and
permissible golden parachute payments described in Sec. 1412.5); and
(3) In the case of any nonqualified deferred compensation or
supplemental retirement plans as described in paragraphs (d)(1) and (2)
of this section, the following requirements shall apply:
(i) The plan was in effect at least 1 year prior to any of the
events described in paragraph (f)(1)(ii) of this section;
(ii) Any payment made pursuant to such plan is made in accordance
with the terms of the plan as in effect no later than 1 year prior to
any of the events described in paragraph (f)(1)(ii) of this section and
in accordance with any amendments to such plan during such 1 year
period that do not increase the benefits payable thereunder;
(iii) The IRP has a vested right, as defined under the applicable
plan document, at the time of termination of employment to payments
under such plan;
(iv) Benefits under such plan are accrued each period only for
current or prior service rendered to the employer (except that an
allowance may be made for service with a predecessor employer);
(v) Any payment made pursuant to such plan is not based on any
discretionary acceleration of vesting or accrual of benefits which
occurs at any time later than 1 year prior to any of the events
described in paragraph (f)(1)(ii) of this section;
(vi) The System institution has previously recognized compensation
expense and accrued a liability for the benefit payments according to
GAAP or segregated or otherwise set aside assets in a trust which may
only be used to pay plan benefits, except that the assets of such trust
may be available to satisfy claims of the System institution's
creditors in the case of insolvency; and
(vii) Payments pursuant to such plans shall not be in excess of the
accrued liability computed in accordance with GAAP.
(e) Corporation or FCSIC mean the Farm Credit System Insurance
Corporation, in its corporate capacity.
(f) Golden parachute payment. (1) The term ``golden parachute
payment'' means any payment (or any agreement to make any payment) in
the nature of compensation by any System institution for the benefit of
any current or former IRP pursuant to an obligation of such System
institution that:
(i) Is contingent on the termination of such party's primary
employment or relationship with the System institution; and
(ii) Is received on or after, or is made in contemplation of, any
of the following events:
(A) The insolvency (or similar event) of the System institution
which is making the payment or bankruptcy or insolvency (or similar
event) of the service corporation, subsidiary or affiliate which is
making the payment; or
(B) The System institution is assigned a composite rating of 4 or 5
by the FCA; or
(C) The appointment of any conservator or receiver for such System
institution; or
(D) A determination by the Corporation, that the System institution
is in a troubled condition, as defined in paragraph (m) of this
section; and
(iii) Is payable to an IRP whose employment by or relationship with
a System institution is terminated at a time when the System
institution by which the IRP is employed or related satisfies any of
the conditions enumerated in paragraphs (f)(1)(ii)(A) through (D) of
this section, or in contemplation of any of these conditions.
(2) Exceptions. The term ``golden parachute payment'' shall not
include:
(i) Any payment made pursuant to a pension or retirement plan which
is qualified (or is intended within a reasonable period of time to be
qualified) under section 401 of the
[[Page 7407]]
Internal Revenue Code of 1986 (26 U.S.C. 401); or
(ii) Any payment made pursuant to a benefit plan as that term is
defined in paragraph (c) of this section; or
(iii) Any payment made pursuant to a ``bona fide'' deferred
compensation plan or arrangement as defined in paragraph (d) of this
section; or
(iv) Any payment made by reason of death or by reason of
termination caused by the disability of IRP; or
(v) Any severance or similar payment which is required to be made
pursuant to a state statute or foreign law which is applicable to all
employers within the appropriate jurisdiction (with the exception of
employers that may be exempt due to their small number of employees or
other similar criteria); or
(vi) Any other payment which the Corporation determines to be
permissible in accordance with Sec. 1412.6, on permissible
indemnification payments; or
(vii) Any payment made pursuant to a nondiscriminatory severance
pay plan or arrangement that provides for payment of severance benefits
to all eligible employees upon involuntary termination other than for
cause, voluntary resignation, or early retirement. Furthermore, such
severance pay plan or arrangement shall not have been adopted or
modified to increase the amount or scope of severance benefits at a
time when the System institution was in a condition specified in
paragraph (f)(1)(ii) of this section or in contemplation of such a
condition without the prior written consent of the FCA; or in lieu of a
payment made pursuant to this paragraph;
(viii) Any payment made pursuant to a severance pay plan or
arrangement that provides severance benefits upon involuntary
termination other than for cause, voluntary resignation, or early
retirement. No employee shall receive any payment under this subpart
which exceeds the base compensation paid to such employee during the 12
months (or longer period or greater benefit as the Corporation shall
consent to) immediately proceeding termination of employment.
Furthermore, such severance pay plan or arrangement shall not have been
adopted or modified to increase the amount or the scope of the
severance benefits at a time when the System institution was in a
condition specified in paragraph (f)(1)(ii) of this section or in
contemplation of such a condition without the written approval of the
FCA.
(g) The FCA means the Farm Credit Administration.
(h) Institution-related party (IRP) means:
(1) Any director, officer, employee, or controlling stockholder
(other than another Farm Credit System institution) of, or agent for a
System institution;
(2) Any stockholder (other than another Farm Credit System
institution), consultant, joint venture partner, and any other person
as determined by the FCA (by regulation or case-by-case) who
participates in the conduct of the affairs of a System institution; and
(3) Any independent contractor (including any attorney, appraiser,
or accountant) who knowingly or recklessly participates in any
violation of any law or regulation, any breach of fiduciary duty, or
any unsafe or unsound practice, which caused or is likely to cause more
than a minimal financial loss to, or a significant adverse effect on,
the System institution.
(i) Liability or legal expense means:
(1) Any legal or other professional fees and expenses incurred in
connection with any claim, proceeding, or action;
(2) The amount of, and any cost incurred in connection with, any
settlement of any claim, proceeding, or actions; and
(3) The amount of, any cost incurred in connection with, any
judgment or penalty imposed with respect to any claim, processing, or
action.
(j) Nondiscriminatory means that the plan, contract or arrangement
in question applies to all employees of a System institution who meet
reasonable and customary eligibility requirements applicable to all
employees, such as minimum length of service requirements. A
nondiscriminatory plan, contract or arrangement may provide different
benefits based only on objective criteria such as salary, total
compensation, length of service, job grade or classification, which are
applied on a proportionate basis, with a modest disparity in severance
benefits relating to any one criterion of 20 percent.
(k) Payment means:
(1) Any direct or indirect transfer of any funds or any asset;
(2) Any forgiveness of any debt or other obligation;
(3) The conferring of benefits in the nature of compensation,
including but not limited to stock options and stock appreciation
rights; or
(4) Any segregation of any funds or assets, the establishment or
funding of any trust or the purchase of or arrangement for any letter
of credit or other instrument, for the purpose of making, or pursuant
to any agreement to make, any payment on or after the date on which
such funds or assets are segregated, or at the time of or after such
trust is established or letter of credit or other instrument is made
available, without regard to whether the obligation to make such
payment is contingent on:
(i) The determination, after such date, of the liability for the
payment of such amount; or
(ii) The liquidation, after such date, of the amount of such
payment.
(l) Prohibited indemnification payment. (1) The term ``prohibited
indemnification payment'' means any payment (or any agreement or
arrangement to make any payment) by any System institution for the
benefit of any person who is or was an IRP of such System institution,
to pay or reimburse such person for any civil money penalty or judgment
resulting from any administrative or civil action instituted by the
FCA, or any other liability or legal expense with regard to any
administrative proceeding or civil action instituted by the FCA which
results in a final order or settlement pursuant to which such person:
(i) Is assessed a civil money penalty;
(ii) Is removed from office or prohibited from participating in the
conduct of the affairs of the institution; or
(iii) Is required to cease and desist from or take any affirmative
action with respect to such institution.
(2) Exceptions. (i) The term ``prohibited indemnification'' payment
shall not include any reasonable payment by a System institution which
is used to purchase any commercial insurance policy or fidelity bond,
provided that such insurance policy or bond shall not be used to pay or
reimburse an IRP for the cost of any judgment or civil money penalty
assessed against such person in an administrative proceeding or civil
action commenced by the FCA, but may pay any legal or professional
expenses incurred in connection with such proceeding or action or the
amount of any restitution to the System institution or receiver.
(ii) The term ``prohibited indemnification payment'' shall not
include any reasonable payment by a System institution that represents
partial indemnification for legal or professional expenses specifically
attributable to particular charges for which there has been a formal
and final adjudication or finding in connection with a settlement that
the IRP has not violated certain FCA laws or regulations or has not
engaged in certain unsafe or unsound practices or breaches of fiduciary
duty, unless the administrative action or civil proceedings has
resulted in a final prohibition order against the IRP.
[[Page 7408]]
(m) Troubled condition means a System institution that:
(1) Is subject to a cease-and-desist order or written agreement
issued by the FCA that requires action to improve the financial
condition of the System institution or is subject to a proceeding
initiated by the FCA which contemplates the issuance of an order that
requires action to improve the financial condition of the institution,
unless otherwise informed in writing by the FCA; or
(2) Is unable to make a timely payment of principal or interest on
any insured obligation (as defined in section 5.51(3) of the Farm
Credit Act; 12 U.S.C. 2277a(3)); or
(3) Is receiving assistance as described in section 5.61 of the
Farm Credit Act, 12 U.S.C. 2277a-10; or
(4) Is unable to make timely payment of principal or interest on
debt obligations issued under the authority of section 8.6(e)(2) of the
Farm Credit Act; 12 U.S.C. 2279aa-6(e)(2) or is unable to fulfill the
guarantee obligations provided under section 8.6 of the Farm Credit
Act; 12 U.S.C. 2279aa-6; or
(5) Is informed in writing by the Corporation that it is in a
``troubled condition'' for purposes of the requirements of this subpart
on the basis of the System institution's most recent report of
condition or report of examination or other information available to
the Corporation.
Sec. 1412.3 Golden parachute payments prohibited.
No System institution shall make or agree to make any golden
parachute payment, except as provided in this part.
Sec. 1412.4 Prohibited indemnification payments.
No System institution shall make or agree to make any prohibited
indemnification payment, except as provided in this part.
Sec. 1412.5 Permissible golden parachute payments.
(a) A System institution may agree to make or may make a golden
parachute payment if and to the extent that:
(1) The FCA, with the written concurrence of the Corporation,
determines that such a payment or agreement is permissible; or
(2) Such an agreement is made in order to hire a person to become
an IRP either at a time when the System institution satisfies or in an
effort to prevent it from imminently satisfying any of the criteria set
forth in Sec. 1412.2(f)(1)(ii), and the FCA and the Corporation
consent in writing to the amount and terms of the golden parachute
payment. Such consent by the Corporation and the FCA shall not improve
the IRP's position in the event of the insolvency of the institution
since such consent can neither bind a receiver nor affect the
provability of receivership claims. In the event that the institution
is placed into receivership or conservatorship, the Corporation and/or
the FCA shall not be obligated to pay the promised golden parachute and
the IRP shall not be accorded preferential treatment on the basis of
such prior approval; or
(3) Such a payment is made pursuant to an agreement which provides
for a reasonable severance payment, not to exceed 18-months' salary, to
an IRP in the event of a change in control of the System institution;
provided, however, that the System institution shall obtain the consent
of the FCA prior to making such a payment and this paragraph (a)(3)
shall not apply to any change in control of System institution which
results from an assisted transaction as described in section 5.61 of
the Farm Credit Act; 12 U.S.C. 2277a-10 or the System institution being
placed into conservatorship or receivership; and
(4) A System institution or IRP making a request pursuant to
paragraphs (a)(1) through (3) of this section shall demonstrate that it
is not aware of any information, evidence, documents or other materials
which would indicate that there is a reasonable basis to believe, at
the time such payment is proposed to be made, that:
(i) The IRP has committed any fraudulent act or omission, breach of
trust or fiduciary duty, or insider abuse with regard to the System
institution that has had or is likely to have a material adverse effect
on the institution;
(ii) The IRP is substantially responsible for the insolvency of,
the appointment of a conservator or receiver for, or the troubled
condition, as defined by applicable regulations concerning the System
institution;
(iii) The IRP has materially violated any applicable Federal or
state law or regulation that has had or is likely to have a material
effect on the System institution; and
(iv) The IRP has violated or conspired to violate section 215, 657,
1006, 1014, or 1344 of title 18 of the United States Code or section
1341 or 1343 of such title affecting a Farm Credit System institution.
(b) In making a determination under paragraphs (a)(1) through (3)
of this section the FCA and the Corporation may consider:
(1) Whether, and to what degree, the IRP was in a position of
managerial or fiduciary responsibility;
(2) The length of time the IRP was affiliated with the System
institution, and the degree to which the proposed payment represents
reasonable compensation earned over the period of employment and
reasonable payment for services rendered; and
(3) Any other factors or circumstances which would indicate that
the proposed payment would be contrary to the intent of the Act or this
part.
Sec. 1412.6 Permissible indemnification payments.
(a) A System institution may make or agree to make reasonable
indemnification payments to an IRP with respect to an administrative
proceeding or civil action initiated by the FCA if:
(1) The System institution's board of directors, in good faith,
determines in writing after due investigation and consideration that
the IRP acted in good faith and in a manner he/she believed to be in
the best interests of the institution;
(2) The System institution's board of directors, in good faith,
determines in writing after due investigation and consideration that
the payment of such expenses will not materially adversely affect the
institution's safety and soundness;
(3) The indemnification payments do not constitute prohibited
indemnification payments as that term is defined in Sec. 1412.2(l);
and
(4) The IRP agrees in writing to reimburse the System institution,
to the extent not covered by payments from insurance or bonds purchased
pursuant to Sec. 1412.2(l)(2), for that portion of the advanced
indemnification payments which subsequently become prohibited
indemnification payments, as defined herein.
(b) An IRP requesting indemnification payments shall not
participate in any way in the board's discussion and approval of such
payments; provided, however, that such IRP may present his/her request
to the board and respond to any inquiries from the board concerning
his/her involvement in the circumstances giving rise to the
administrative proceeding or civil action.
(c) In the event that a majority of the members of the board of
directors are named as respondents in an administrative proceeding or
civil action and request indemnification, the remaining members of the
board may authorize independent legal counsel to review the
indemnification request and
[[Page 7409]]
provide the remaining members of the board with a written opinion of
counsel as to whether the conditions delineated in paragraph (a) of
this section have been met. If independent legal counsel opines that
said conditions have been met, the remaining members of the board of
directors may rely on such opinion in authorizing the requested
indemnification.
(d) In the event that all of the members of the board of directors
are named as respondents in an administrative proceeding or civil
action and request indemnification, the board shall authorize
independent legal counsel to review the indemnification request and
provide the board with a written opinion of counsel as to whether the
conditions delineated in paragraph (a) of this section have been met.
If independent legal counsel opines that said conditions have been met,
the board of directors may rely on such opinion in authorizing the
requested indemnification.
Sec. 1412.7 Filing instructions.
Requests to make excess nondiscriminatory severance plan payments
and permitted golden parachute payments shall be submitted in writing
to the FCA and the Corporation. The request shall be in letter form and
shall contain all relevant factual information as well as the reasons
why such approval should be granted.
Sec. 1412.8 Application in the event of receivership.
The provisions of this part or any consent or approval granted
under the provisions of this part by the Corporation (in its corporate
capacity), shall not in any way bind any receiver of a failed System
institution. Any consent or approval granted under the provisions of
this part by the Corporation or the FCA shall not in any way obligate
such agency or receiver to pay any claim or obligation pursuant to any
golden parachute, severance, indemnification or other agreement. Claims
for employee welfare benefits or other benefits which are contingent,
even if otherwise vested, when the Corporation is appointed as receiver
for any System institution, including any contingency for termination
of employment, are not provable claims or actual, direct compensatory
damage claims against such receiver. Nothing in this part may be
construed to permit the payment of salary or any liability or legal
expense of any IRP contrary to 12 U.S.C. 2277a-10b(d).
Dated: February 7, 2006.
Roland E. Smith,
Secretary to the Board, Farm Credit System Insurance Corporation.
[FR Doc. 06-1299 Filed 2-10-06; 8:45 am]
BILLING CODE 6710-01-P
