Organization; Definitions; Disclosure to Shareholders; Accounting and Reporting Requirements; Regulatory Accounting Practices; Title IV Conservators, Receivers, and Voluntary Liquidations; and Disclosure to Investors in System-Wide and Consolidated Bank Debt Obligations of the Farm Credit System, 13040-13050 [06-2382]

Agencies

• Farm Credit Administration

[Federal Register Volume 71, Number 49 (Tuesday, March 14, 2006)]
[Proposed Rules]
[Pages 13040-13050]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-2382]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 71, No. 49 / Tuesday, March 14, 2006 / 
Proposed Rules

[[Page 13040]]



FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 619, 620, 621, 624, 627, and 630

RIN 3052-AC11


Organization; Definitions; Disclosure to Shareholders; Accounting 
and Reporting Requirements; Regulatory Accounting Practices; Title IV 
Conservators, Receivers, and Voluntary Liquidations; and Disclosure to 
Investors in System-Wide and Consolidated Bank Debt Obligations of the 
Farm Credit System

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) is proposing 
to amend our disclosure and reporting regulations for Farm Credit 
System (System) institutions by clarifying and enhancing existing 
disclosures and reporting to System shareholders and investors. The 
rule would provide ``real time'' disclosures to shareholders, 
investors, and the public by accelerating the time period for filing 
annual and quarterly reports. The Federal Farm Credit Banks Funding 
Corporation (Funding Corporation) would have to adopt policies and 
procedures for issuing interim reports, improving the timely and 
accurate distribution of System-wide financial information. The 
proposed rule would also enhance financial accuracy certifications in 
periodic reports for all System institutions, requiring the Funding 
Corporation and larger System institutions (with over $500 million in 
assets) to review and report on internal controls. Further, the 
proposed rule would create a regulatory section on the independence of 
external auditors, adding restrictions on non-audit services and 
conflicts of interest, as well as requiring auditor rotation.

DATES: You may send comments on or before June 12, 2006.

ADDRESSES: Comments may be sent by electronic mail to reg-comm@fca.gov, 
through the Pending Regulations section of our Web site at https://
www.fca.gov, or through the Government-wide https://www.regulations.gov 
portal. You may also send written comments to Gary Van Meter, Deputy 
Director, Office of Regulatory Policy, Farm Credit Administration, 1501 
Farm Credit Drive, McLean, Virginia 22102-5090, or by facsimile 
transmission to (703) 734-5784.
    You may review copies of all comments we receive at our office in 
McLean, Virginia, or from our Web site at https://www.fca.gov. Once you 
are in the Web site, select ``Legal Info,'' and then select ``Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove electronic-mail addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: Tong-Ching Chang, Associate Director, 
Office of Regulatory Policy, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4414, TTY (703) 883-4434, or Laura D. McFarland, 
Senior Attorney, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-4020.


SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this proposed rule are to:
     Update our financial disclosure and reporting requirements 
for System institutions by incorporating recent changes in industry 
practices;
     Augment existing reporting timeframes with ``real time 
disclosure'' principles to improve shareholders, investors, and public 
access to material financial information for informed investment 
decisionmaking;
     Strengthen the independence of System financial audits;
     Streamline the financial reporting certification 
requirements to make them easier to understand and use; and
     Enhance shareholders' and investors' understanding of, and 
confidence in, the System's operations through improved transparency.

II. Background

    The Farm Credit Amendment Act of 1985 (1985 Amendments) \1\ added 
provisions to the Farm Credit Act of 1971, as amended (Act),\2\ 
requiring FCA to regulate the disclosure and reporting practices of 
System institutions. The 1985 Amendments require each System 
institution to prepare and publish annual financial reports to its 
shareholders as prescribed by us. The 1985 Amendments also require that 
annual reports contain financial statements prepared in accordance with 
generally accepted accounting principles (GAAP) and be audited by an 
independent public accountant. To implement the 1985 Amendments, we 
issued regulations at part 620--Disclosure to Shareholders and part 
621--Accounting and Reporting Requirements. These regulations establish 
the requirements for financial reports from Farm Credit banks and 
associations. When developing part 620, we primarily relied on the 
disclosure and reporting requirements of the Securities and Exchange 
Commission (SEC) in existence at the time, adapting SEC requirements to 
the cooperative nature and unique structure of the System before 
issuing the rule. Part 621 contains requirements that System 
institutions adhere to GAAP when preparing financial disclosures and 
reports to shareholders, as well as establishes accounting and 
performance requirements for classification of high-risk assets and 
loan performance. This part of our regulations also requires each 
institution's financial statements and related disclosures be audited 
annually by a qualified public accountant (auditor).
---------------------------------------------------------------------------

    \1\ Pub. L. 99-205, Dec. 23, 1985.
    \2\ Pub. L. 92-181, Dec. 10, 1971.
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    In 1994, we extended the requirements of part 621 to the Funding 
Corporation and issued additional disclosure and reporting requirements 
at part 630 for System-wide reporting to investors. When developing 
part 630, we incorporated many of the System practices in use at the 
time, especially with regard to the Funding Corporation's disclosure 
and reporting practices. Our regulations on the System-wide reporting 
responsibilities of the Funding Corporation, contained in part 630, 
additionally address the maintenance of internal controls over

[[Page 13041]]

System-wide financial disclosures and reporting.
    Our existing regulations require each System institution to prepare 
annual and quarterly reports, making quarterly reports available to 
shareholders but requiring distribution of annual reports. Our 
regulations identify the minimum informational requirements of the 
reports and include general prohibitions against making incomplete, 
inaccurate, or misleading disclosures. Our existing regulations also 
set forth reporting timeframes and signatory requirements for periodic 
reports. We adopted these regulations to enhance the integrity of the 
System's published financial reports and to ensure full and adequate 
disclosure to shareholders and other investors in System obligations. 
The regulations were intended to ensure that System institutions 
provide timely and reliable financial information to multiple 
audiences, including borrowers, shareholders, investors and the public.
    Our reporting and disclosure regulations at part 620 and 630 were 
last comprehensively revised in 1991 (56 FR 29412, June 27, 1991) and 
1994 (59 FR 46742, September 12, 1994), respectively. At the time, the 
rules were considered comprehensive up-to-date financial disclosure and 
reporting requirements. However, public sector disclosure and reporting 
practices have recently undergone significant changes that we believe 
necessitate updates to our regulations.
    In the course of developing this proposed rule, we looked 
extensively at the disclosure and reporting practices of publicly 
traded companies, reporting changes of the Federal Deposit Insurance 
Corporation (FDIC) and other federal banking regulatory agencies, and 
the financial reporting and disclosure provisions of the Sarbanes-Oxley 
Act of 2002 (Sarbanes-Oxley) and the SEC implementing regulations.\3\ 
We also considered studies and public statements of individuals and 
organizations with knowledge and expertise in financial disclosure and 
reporting practices. Throughout this process we evaluated the proposed 
changes to our rules against our role as the safety and soundness 
regulator of the System and the System's cooperative structure.
---------------------------------------------------------------------------

    \3\ Pub. L. 107-204, July 30, 2002.
---------------------------------------------------------------------------

    We believe transparency in System operations strengthens board and 
management accountability to System shareholders and increases investor 
confidence in the accuracy of System financial disclosures and reports. 
We believe all the proposed changes in this rule will ensure that 
shareholders in the System and investors in System-wide obligations 
continue to receive material and relevant information about the 
financial condition and results of operations of individual System 
institutions and of the entire System on a combined basis.

III. Comments Received

    We received comments on our existing regulations prior to 
developing these proposed rules. The comments were in an August 9, 
2005, letter from the Funding Corporation on behalf of System 
institutions. The letter recommended we issue regulations that were 
flexible in application, rather than detailed and prescriptive. The 
letter further explained that judgment is an important element in 
determining the appropriate financial reporting and disclosure 
treatments in accordance with GAAP as well as rapid changes in the 
current financial reporting environment. The Funding Corporation 
attached to the letter a list of recommended regulation changes.
    We evaluated the recommendations in recognition of existing law and 
policy considerations, other regulator's disclosure rules, the 
differences in size and complexity among System institutions, and the 
cooperative nature of the System. We address the recommendations 
falling within the scope of this proposed rule, incorporating those 
achieving one or more of the stated objectives. The other 
recommendations will be considered for future rulemaking.

IV. Section-by-Section Analysis

A. Definition of Qualified Public Accountant [New Sec.  619.9270 and 
Sec.  621.2(i)]

    We propose to move the existing definition of qualified public 
accountant from Sec.  621.2(i) to part 619 to clarify that it applies 
to all our rules. In addition, we propose to further explain the 
meaning of ``independent'' in the definition. We are proposing that a 
qualified public accountant is not independent if he or she functions 
in the role of management, audits his or her own work, or serves as an 
advocate for the System audit client. We believe the proposed change 
facilitates preventing fundamental conflicts of interest between the 
qualified public accountant and a System institution. An external 
auditor who assumes or carries out the responsibility of providing a 
justification for a particular accounting practice in use by the client 
serves in an advocacy role. Supporting the appropriate use of any 
accounting practice is clearly the responsibility of the client's 
management. When an external auditor assumes or carries out this 
responsibility, conflicts arise that compromise who is held responsible 
for the accounting practices used to present the financial statements. 
The client should be held responsible, not the auditor. We believe this 
prohibition against external auditors serving in an advocacy role will 
prevent such conflicts and ensure System management's understanding 
that they are solely responsible for the accounting practices in use by 
their institution.
    The proposed Sec.  619.9270 would apply the definition of qualified 
public accountant to all our regulations, unless otherwise noted. We 
also propose clarifying that we mean a qualified public accountant when 
using the term ``external auditor.'' In conformance with this proposed 
change, we propose removing the Sec.  621.2(i) definition reference in 
Sec. Sec.  611.1250(a)(3), 611.1255(a)(3), 620.5(m)(1), and 630.20(l).

B. Certification and Submission of Financial Reports [Sec. Sec.  620.2, 
620.3, 627.2785(d), 630.3, 630.4 and 630.5]

    We propose removing the requirement contained in Sec. Sec.  
620.2(a) and 630.3(h) that multiple copies of reports be sent to us. We 
also propose removing the specificity of where reports are sent from 
Sec. Sec.  620.2(a), 630.3(f) and 630.3(h). We believe these changes 
will reduce an administrative burden on the System and allow 
flexibility in reporting locations.
    We also propose moving Farm Credit banks' and associations' 
financial report certification requirements from Sec.  620.2(b) and (c) 
to Sec.  620.3. We propose amendments to the certification requirements 
to establish separate components for signatory, certification of 
financial accuracy, and internal controls. A similar amendment is 
proposed to move the parallel requirements for the System-wide report 
from Sec.  630.3(h) to Sec.  630.5. We explain these changes more fully 
below.
    We propose conforming technical changes to require all reports, 
regardless of the recipient, to comply with Sec. Sec.  620.3 and 630.5. 
We also propose technical changes to Sec.  630.20(h) and (i) to correct 
cross references to the regulatory sections containing report 
availability and signatures.
1. Signatures on Financial Reports [Sec. Sec.  620.3(b) and 630.5(b)]
    The proposed rule would move the signature requirements of Sec.  
620.2(b) to Sec.  620.3(b) and change them to require the Chief 
Executive Officer (CEO), the

[[Page 13042]]

Chief Financial Officer (CFO), and a board member sign all financial 
reports. The rule would require that the officer responsible for 
preparing financial reports must sign when an institution has no 
formally identified CFO. The rule would also require that the board 
member signing the report be formally designated by the entire board as 
the responsible signatory, with authority to sign as the representative 
of each individual board member. The rule would keep the existing 
requirement that if any of the signatories refused to sign a report, 
the person and reason for the refusal must be disclosed in the report. 
We also propose moving the System-wide report signature requirements 
from Sec.  630.3(h) to Sec.  630.5(b), with similar proposed changes to 
the signatory requirements for the System-wide report. We do not 
propose including the CFO's signature designation for System-wide 
reports, instead we propose that an officer in charge of preparing the 
financial reports be one of the signatories. We make this distinction 
out of consideration for the fact that the Funding Corporation does not 
attribute or designate its CFO as the official responsible for 
preparation of the System's report to investors. We believe adding the 
CFO or responsible financial officer to the list of individuals signing 
financial reports would be appropriate given that this officer is most 
closely associated with the preparation of the financial reports. 
Moreover, this requirement is consistent with the industry practices of 
public companies.
    Our proposed changes would require a board member signing the 
report to be formally designated by the entire board as the responsible 
signatory, with authority to sign as the representative of each 
individual board member. This would apply the existing quarterly 
reporting requirements to annual reports, no longer requiring the 
entire board sign the annual report. We believe the proposed change 
simplifies the process for obtaining signatures by reducing the burden 
on System institutions in obtaining every board member's signature for 
the annual report and makes the signatory requirements for all reports 
submitted to the FCA consistent.
2. Certification of Financial Reports Accuracy [Sec. Sec.  620.3(c), 
620.5, 630.4 and 630.5(c)]
    The proposed rule would require those officers and directors 
signing periodic reports to certify the financial accuracy of the 
reports. The rule would move the existing certification requirements of 
Sec.  620.2(b) to Sec.  620.3(c) and add a requirement that the 
signatories state in the certification that they have reviewed the 
reports. The rule would also require the certification to be included 
in all reports, regardless of who is the recipient. The rule would keep 
the existing requirement that if any of the signatories refused to 
certify a report, the person and reason for the refusal must be 
disclosed in the report. We are proposing these same changes to the 
certification requirements for System-wide reports, moving them from 
Sec.  630.3(h) to Sec.  630.5(c).
    We believe having the signatories state they reviewed the report 
they are signing enhances shareholder and investor confidence in the 
institution's financial reporting procedures by clearly establishing 
management's and board's responsibility for the accuracy of the 
published reports. We believe that such a certification of financial 
accuracy is considered valuable by shareholders and investors and is in 
line with the industry practices of disclosures to shareholders of 
public companies.
    As a conforming technical change, we are proposing to remove Sec.  
620.5(m)(2), which requires signatures and certifications on financial 
statements. The proposed changes to Sec.  620.3 would make this 
requirement unnecessary. For the same reason, we propose removing the 
requirement in Sec.  630.4(c)(5) for banks to provide a separate 
certification to the Funding Corporation. We instead propose replacing 
Sec.  630.4(c)(5) with a requirement that reporting submissions to the 
Funding Corporation comply with proposed Sec.  620.3. We propose adding 
a requirement in redesignated Sec.  630.4(c)(1) that financial 
information provided by associations to their funding bank comply with 
proposed Sec.  620.3.
3. Assessment of Internal Controls [Sec. Sec.  620.3(d) and 630.5(d)]
    We are proposing the addition of an internal controls assessment to 
the periodic reports of those institutions with total assets over $500 
million as of the end of the previous fiscal year. The rule would 
require these institutions to report that internal controls are in 
place and reviewed during the reporting period, stating that the 
results of the review were reported to the board of directors. The rule 
would also require the internal controls assessment to contain a 
statement on the conclusions reached from the review. The proposed rule 
does not specify who must conduct the review, leaving that to the 
institution's discretion. We are proposing similar requirements for the 
Funding Corporation in a new Sec.  630.5(d) with an additional 
requirement involving the external auditor that is discussed in section 
IV.A.4. of this preamble.
    We believe this assessment provision will enhance the objectives of 
Sec.  618.8430, which requires each Farm Credit institution's board of 
directors to adopt an internal control policy that includes adoption of 
internal audit and control procedures that evidence responsibility for 
review and maintenance of comprehensive and effective internal 
controls. We also believe the assessment provision is valuable to 
disclose to System shareholders, investors, and potential investors 
that the larger System institutions' internal control procedures are 
periodically reviewed. Management's responsibility for creating and 
maintaining adequate internal controls over financial reporting and 
their assessment of the effectiveness of those controls serves to 
enhance the quality of reporting, identify prospective damaging 
practices within the institution, and increase shareholder and investor 
confidence in the reports. To mitigate any perceived burden for smaller 
institutions, the proposed regulation would provide an exemption for 
institutions with assets at or below $500 million, a practice analogous 
to exemptions currently permitted by the SEC for smaller institutions 
under its oversight.
    We are not proposing prescriptive requirements for the conduct of 
the internal controls assessment. We believe practices for the conduct 
of an internal controls assessment are evolving, thus the proposed rule 
would allow System institutions the flexibility to change the conduct 
of their internal controls assessment as industry practices evolve. 
Nevertheless, we would expect the assessments made for the annual 
reports to include a fairly comprehensive review of the internal 
controls over the preparation of the financial information and 
disclosures contained in those reports. We would expect each quarterly 
assessment to be more limited, focusing more on testing changes to the 
internal controls that have occurred since the completion of the 
comprehensive annual assessment. We encourage System institutions to 
follow good judgment in the determination of the scope and conduct of 
the assessments.
    Since most institutions already plan to prepare such assessments in 
conjunction with the preparation of the System's report to investors; 
we do not believe our proposal would be overly burdensome. Various 
members of the System have informed us that most System associations 
will provide an internal controls certification to their

[[Page 13043]]

funding bank and the banks will provide an internal controls 
certification on a district-wide basis to the Funding Corporation as a 
means of facilitating the implementation of an internal control 
certification process on a System-wide basis for the report to 
investors.
4. Auditor Attestation of System-Wide Internal Controls [Sec.  
630.5(d)]
    We propose adding in Sec.  630.5(d) a requirement for the Funding 
Corporation to obtain from its external auditor an attestation of, and 
a report on, the effectiveness of management's internal control systems 
and procedures for the financial reporting of the System-wide combined 
financial statements. The attestation must be included in the annual 
report to investors. We patterned this proposed requirement after 
section 404 of Sarbanes-Oxley to enhance the transparency and maintain 
investor confidence in System-issued debt obligations. We believe that 
an attestation provision in the System-wide report to investors would 
provide the users an independent source as to the status of internal 
controls used in the preparation of the System-wide report. We believe 
this independent assurance serves as an essential external control of 
the preparation of the System's financial report to investors.
    We are not proposing an attestation provision at the bank and 
association level because an external auditor attestation of internal 
controls at the System-wide level will accomplish, at substantially 
less cost, many of the same objectives as an attestation requirement at 
the association and bank level. Further, the Funding Corporation 
informed us that it already has plans to require its external auditor 
to review the System-wide internal controls assessment and provide an 
attestation report for inclusion in the System-wide annual report, 
which should also reduce any burden this proposed provision may create.

C. Timing of Periodic Reports to Shareholders and Investors

1. Annual and Quarterly Report Filing Deadlines [Sec. Sec.  620.4(a), 
620.10(a) and 630.3(a)]
    We propose reducing to 40 calendar days both the existing 60-day 
System-wide quarterly reporting deadline and the 45-day Farm Credit 
bank and association quarterly reporting deadline. We also propose that 
all annual reports be filed within 75 calendar days of the end of an 
institution's fiscal year, instead of the existing 90-day deadline. We 
believe significant technological advances have occurred in the last 10 
years that have both increased the market's demand for more timely 
information and improved the ability of institutions to capture, 
process, and disseminate this information. We also believe accelerating 
the time to report the financial condition of a System institution to 
shareholders, investors, and the general public improves information 
flow and facilitates shareholder and investor decisionmaking.
    We considered proposing further reductions in filing deadlines 
based on those used by SEC-accelerated filers \4\ and the practices of 
most corporate and financial entities, but viewed our proposed 
timeframe as appropriate considering the cooperative nature and 
structure of the System. We also considered the fact that some System 
institutions may not have the support structure in place to accommodate 
shorter timeframes. We recognize that sufficient time must be provided 
for the System-wide reports to investors because these reports are 
dependent on information provided from the banks and associations and, 
as a result, gathering and consolidating this information takes 
additional time. We consider these proposed timeframes as a reasonable 
compromise between industry practices and the unique cooperative 
structure of the System.
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    \4\ Accelerated SEC filers must submit annual reports within 60 
days of the end of the fiscal year and quarterly reports within 40 
days of the quarter's end.
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2. System-Wide Interim Reports [New Sec.  630.3(a)]
    The proposed rule would add a new Sec.  630.3(a)(3), requiring the 
Funding Corporation to have written policies and procedures in place 
for disclosing significant events or material changes in System-wide 
operations occurring after publication of a quarterly or annual System-
wide report to investors. The value of System-wide debt is subject to 
change based on information in the marketplace and, in keeping with 
section 409 (``real time issuer disclosures'') \5\ of Sarbanes-Oxley, 
we believe it appropriate to propose requiring the Funding Corporation 
to develop and maintain policies and procedures for the issuance of 
interim reports on the System-wide financial condition. We would expect 
the policies and procedures to incorporate appropriate best industry 
practices, taking into consideration the cooperative nature and unique 
structure of the System. We determined that, because the value of 
equity held by System stockholders is not subject to changes based on 
information disseminated in the marketplace, there was no need to 
require similar policies and procedures for interim reports from banks 
and associations. However, we expect System banks and associations to 
comply with redesignated Sec.  630.4(b) and (c) that requires them to 
provide information to the Funding Corporation necessary for 
preparation of reports to System investors.
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    \5\ Public companies disclose ``on a rapid and current basis'' 
material information regarding changes in a company's financial 
condition or operations.
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D. Auditor Independence [Sec.  621.4(b) and New Sec. Sec.  621.30, 
621.31, and 621.32]

    We are proposing new requirements in part 621 to facilitate auditor 
independence within the System. We are proposing a new subpart F, which 
would require each System institution ensure the independence of all 
external auditors conducting the institution's audit by establishing 
and maintaining policies and procedures governing the engagement of 
auditors. We believe that the proposed provision will strengthen 
auditor independence by alleviating circumstances where conflicts of 
interests may arise or impair an auditor's independence.
    As a conforming change, we are proposing to revise Sec.  621.4(b) 
to require that a qualified public accountant comply with the 
provisions of the new subpart F of this chapter when retained by a 
System institution to audit financial reports.
1. Prohibited Non-Audit Services [New Sec.  621.31]
    We propose adding a new Sec.  621.31 prohibiting external auditors 
of System institutions from providing certain non-audit services. Our 
proposed rule identifies seven specific non-audit services that would 
be prohibited, including bookkeeping, valuation services, financial 
information system design, and management services. These prohibited 
non-audit services are currently recognized within the accounting 
industry as exposing external auditors to a high risk for conflicts of 
interest with respect to their audit of a client's financial 
information. For instance, it is doubtful an auditor can maintain 
independence in conducting an audit of an information system the 
auditor helped design and implement. We believe clearly identifying a 
list of prohibited non-audit services would enhance the independent 
relationship between System institutions and their external auditors as 
well as provide stockholders, investors and the general

[[Page 13044]]

public assurances that audited reports have not been significantly 
impacted by auditor conflicts of interest. We consider this especially 
important in the current business climate, where qualified public 
accountants are subject to strict conflict-of-interest rules when 
auditing publicly traded company financial reports. We are also 
convinced that limitations on non-audit services improve the safety and 
soundness of System institutions.
    As a conforming change, we propose removing from redesignated Sec.  
630.4(b)(4) and (c)(2) the requirement that banks and associations 
include a provision in their audit engagement letters, authorizing the 
external auditors to respond to questions from funding banks and the 
Funding Corporation. We consider removal of this provision necessary to 
conform our rules to the expectations discussed in our proposed 
financial reporting certification requirements for System institutions. 
We strongly believe that each bank and association should be able to 
respond to questions on the contents of their own financial reports. We 
have proposed certification requirements for System institution 
officers and directors to state they have reviewed the financial 
reports and that the reports are accurate. These certifying officials, 
in order to make the certification, should be able to explain the 
financial reports to their funding bank or the Funding Corporation. We 
also believe this requirement must be removed to enable external 
auditors to comply with our proposed prohibitions on auditor services, 
including serving as an advocate of an institution.
2. Permitted Non-Audit Services [Sec. Sec.  620.30, New 621.31 and 
630.6]
    We propose, in new Sec.  621.31(b), requiring System institutions 
to obtain their audit committee's approval prior to contracting for 
permissible non-audit services from the auditor. The proposed rule 
recognizes that the external auditor may provide additional permissible 
services than those required to perform a financial statement audit 
pursuant to generally accepted auditing standards. We believe requiring 
audit committee approval of non-audit services will help prevent 
conflicts of interest from arising between the qualified public 
accountant and management by providing a level of board oversight. We 
also consider the involvement of an institution's audit committee in 
the non-audit duties of a qualified public accountant is necessary 
given the audit committee's responsibility for selecting and hiring an 
external auditor to perform the institution's financial audit.
    The proposed rule would also amend the authorities of the audit 
committees in Sec.  620.30(d)(2) to specifically include approval of 
non-audit services and add a new Sec.  630.6(a)(4)(ii)(C) that imposes 
the same requirement on the System Audit Committee. The proposed rule 
would also require audit committees to comply with the independent 
auditor provisions proposed at part 621 and that approved non-audit 
services be reported in the annual report.
3. Auditor Conflicts of Interest and Rotation [New Sec.  621.32]
    We are proposing a new Sec.  621.32 prohibiting a System 
institution from engaging the audit services of a qualified public 
accountant if the accountant, an accounting partner or concurring 
partner, or lead audit team member was an employee, officer or director 
of the System in the 12 months prior to contracting for audit services. 
The proposed rule would further prohibit an institution from making 
employment offers to an external auditor, accounting firm partner, 
concurring partner, or lead audit team member during the audit, or 
within 1 year of its conclusion. We believe creating a 1-year 
``cooling-off'' period for former professional relationships will 
preserve the independent judgment of audit staff, helping to ensure it 
is not impaired, either through appearance or actuality.
    We also propose prohibiting a System institution from engaging the 
audit services of a qualified public accountant, or the lead and 
reviewing audit partner, after 5 consecutive years of service to that 
institution. The proposed rule would require the institution ensure the 
lead audit and reviewing partners assigned to the institution's audit 
team are rotated out of the audit team for a 5-year ``time-out'' 
period. After the end of 5 years, the institution would again be 
authorized to engage the audit services of those audit partners. We 
believe that requiring the rotation of the lead and reviewing auditing 
partners after 5 consecutive years provides borrowers, shareholders and 
investors assurances that a ``fresh look'' is given to the accounting 
and auditing issues confronting the institution.
    We applied the ``time-out'' on an individual institution basis, 
instead of a System-wide basis, due to the separate status of each 
institution. We recognize that the System issues System-wide debt and 
may therefore be viewed by some investors as a single entity, however, 
each institution has a separate charter and issues individual quarterly 
and annual reports. It is these reports that the external auditors 
review, so permitting rotation by institution does not impinge on the 
independence of the auditor for that institution.

E. Contents of Farm Credit Banks and Associations Periodic Reports 
[Sec.  620.5]

1. Description of Property [Sec.  620.5(b)]
    We propose removing the requirement at Sec.  620.5(b) that Farm 
Credit banks and associations describe, in their annual reports, the 
terms and condition of agreements involving institution property 
subject to major encumbrances. The Funding Corporation suggested we 
delete the last sentence of this section of the rule as it asks for too 
much information. We have determined the provision is duplicative of 
requirements contained elsewhere in this section of the rule. However, 
we remind institutions that our existing regulations require disclosure 
of additional information necessary to enhance an understanding of the 
institution's financial condition or to keep the information that has 
been disclosed from being misleading.
2. Legal Proceedings and Enforcement [Sec.  620.5(c)]
    We propose removing that portion of Sec.  620.5(c)(1) requiring 
banks and associations to provide filing information on court 
proceedings, including a description of factual allegations, in annual 
reports. The Funding Corporation stated that our existing rule goes 
beyond the scope of GAAP contingency requirements, asking us to remove 
the last sentence requiring disclosure of information normally not 
disclosed under GAAP, unless the information was material to an 
understanding of the litigation.
    While we do not agree with the Funding Corporation's reasons for 
seeking removal of the language, we have identified other reasons for 
proposing its removal. While the requirements may go beyond the scope 
of GAAP for disclosure of contingencies, GAAP was never intended to 
address all disclosure issues. Disclosure of items important to 
shareholder decisions or determination of an entity's financial 
condition are reason enough to require disclosures beyond GAAP. 
Further, our existing requirement to disclose such matters in the 
narrative portion of the annual report is consistent with the 
requirements of other regulators. Nevertheless, because this section of 
our existing rule already requires a brief discussion of material 
pending legal proceedings, we are proposing the removal of the last 
sentence of this section. We make this proposal with the

[[Page 13045]]

expectation that System institutions understand that the remaining 
materiality requirement means information must be provided to enable 
readers to understand a material pending legal proceeding. We also 
reiterate that System institutions must continue to make the detailed 
disclosures required in Sec.  620.5(c)(2) for enforcement actions.
3. Selected Financial Data and Management Discussion & Analysis (MD&A) 
[Sec.  620.5(f) and (g)]
    We propose clarifying in Sec.  620.5(f), (g)(l)(iii)(A) and 
(g)(l)(iv)(E) that disclosure of selected financial data, loan 
purchases and sales involving the Federal Agricultural Mortgage 
Corporation (FAMC), and risk exposure need only be reported if they are 
material. The Funding Corporation requested we limit certain financial 
disclosure to material information, remarking that it would be 
appropriate to have some flexibility as to what is disclosed, as long 
as all material information is provided. The Funding Corporation stated 
that a materiality threshold would also eliminate immaterial data from 
the annual report, such as loan sale disclosures for institutions with 
smaller transactions. We believe that banks and associations need not 
disclose information that may not be relevant and meaningful to 
shareholders and investors. We continue to believe that shareholders 
and investors have the right to receive material and relevant 
information that could have an impact on the financial condition and 
results of operations of an institution and the System. As a related 
technical amendment, we are proposing to remove the reference in Sec.  
620.5(g)(1)(iv)(E) to section 8.7 of the Act because section 8.7 of the 
Act was repealed.
    We also propose removing the required discussion of the adequacy of 
loan loss allowances for absorbing inherent portfolio risks in Sec.  
620.5(g)(l)(iv)(B). The Funding Corporation asked us to remove the last 
portion of this paragraph of the section to accommodate best practices. 
We believe this requirement is duplicative of information already 
provided in this section and should be amended to reflect current best 
practices. We remind System institutions that we discuss our 
expectations for disclosures in this area in our April 26, 2004 
Bookletter, ``Adequacy of Farm Credit System Institutions' Allowance 
for Loan Losses and Risk Funds'' (BL-049) and our April 26, 2004 
Informational Memorandum, ``Adequacy of Farm Credit System 
Institutions' Allowance for Loan Losses and Risk Funds.'' BL-049 
provides guidance to System institutions on principles for maintenance 
of an adequate level of the allowances for loan losses (ALL) to ensure 
prudent risk funds management. BL-049 explains the acceptable minimum 
criteria to determine the adequacy of an institution's ALL and risk 
funds, while the companion Informational Memorandum contains more 
specificity on the ALL analysis through incorporating current best 
practices. The federal banking regulatory agencies issued similar 
policy statements intended to clarify their expectations regarding 
methodologies and documentation support for the ALL and the SEC-issued 
parallel guidance in a Staff Accounting Bulletin.
4. Fees to Qualified Public Accountants [Sec.  620.5(l)]
    We are proposing a new reporting requirement at Sec.  620.5(l), 
disclosing the fees paid by System institutions to their qualified 
public accountants. System institutions would annually report the fees 
paid for audit, tax, and non-audit services and indicate the audit 
committee's approval of the non-audit services. We believe disclosing 
the fees paid to qualified public accountants will improve the 
shareholders and investors understanding of the services performed and 
help shareholders and investors assess the independence of the 
institution's qualified public accountant.
5. Selected Financial Data [Sec.  630.20(f)]
    We propose clarifying that Sec.  630.20(f) requires only material 
combined financial data for 5 years, not all financial data. The 
Funding Corporation requested we limit certain financial disclosure to 
material information. We believe that System-wide reports need not 
disclose information that may not be relevant and meaningful to 
investors, potential investors, and the public. The Funding Corporation 
also asked that we remove the requirement to report all other property 
owned on a System-wide basis for each of the last 5 fiscal years. We 
believe the proposed clarification that Sec.  630.20(f) requires only 
material combined financial data for 5 years be disclosed will address 
this issue. Thus, we do not propose removing other property owned from 
the list of financial data. We believe this clarification will not 
compromise the information provided to investors since the Funding 
Corporation must still report all additional information necessary to 
enhance an understanding of the System's financial condition or to keep 
the information that has been disclosed from being misleading.

F. Miscellaneous and Technical Changes

1. Financial Assistance Corporation [Sec. Sec.  630.2, 630.4, and 
630.20(b)]
    We propose removing references to the Financial Assistance 
Corporation (FAC) from the definition of ``disclosure entity'' in Sec.  
630.2(c) and remove Sec. Sec.  630.4(b) and 630.20(b)(3), which outline 
the reporting requirements of the FAC. Having fulfilled its statutory 
responsibilities in accordance with section 6.31 of the Act,\6\ the 
activities of the FAC will be terminated. Since the FAC will no longer 
exist as a corporate entity, we believe it necessary to remove any 
reference to the FAC in these regulations.
---------------------------------------------------------------------------

    \6\ Under section 6.31 of the Act, the Financial Assistance 
Corporation and the authority provided to such Corporation by the 
Act is to terminate on the complete discharge by the Financial 
Assistance Corporation of its responsibilities under section 6.9(e) 
and section 6.26, but in no event later than 2 years following the 
maturity and full payment of all debt obligations issued under 
section 6.26(a).
---------------------------------------------------------------------------

2. Regulatory Accounting Practices [Part 624]
    On October 13, 1988, we adopted part 624 to allow the use of 
specific regulatory accounting practices (RAP) by Farm Credit 
institutions and to implement provisions of the Agricultural Credit Act 
of 1987.\7\ Part 624 authorized System institutions to use RAP to defer 
certain interest costs and portions of the provision for loan losses. 
The Act and part 624 authorized each institution to defer costs it 
incurred until the calendar year end 1992. The regulations further 
allowed System institutions to amortize those costs over a period of 
not more than 20 years, or until calendar year end 2012. Because no 
System institution currently uses the provisions of this part, we 
believe it appropriate to remove part 624, in its entirety.
---------------------------------------------------------------------------

    \7\ See 53 FR 40049 (October 13, 1988).
---------------------------------------------------------------------------

3. Other Issues Not Resulting in Proposed Changes
    We received recommended changes to regulations covered by this 
rulemaking that we are not making and explain our reasons below.
a. Developments Impacting Earnings and Interest Rates [Sec.  
620.5(a)(4)]
    The Funding Corporation asked that we move the Sec.  620.5(a)(4) 
requirement to discuss the impact of business developments on earnings 
and interest rates to Sec.  620.5(g), Management Discussion and 
Analysis (MD&A). The

[[Page 13046]]

Funding Corporation stated that Sec.  620.5(a)(4) should be used to 
provide information material to an understanding of the general 
development of the business, not a discussion on the impact of earnings 
and interest rates. Existing Sec.  620.5(a)(4) requires a brief 
discussion of significant developments within the last 5 years that had 
or could have a material impact on earnings or interest rates to 
borrowers. If this discussion is integral to the MD&A disclosure as 
suggested by the Funding Corporation, it may be incorporated by 
reference in the MD&A section without a regulatory change. Our existing 
rule at Sec.  620.2(e) clearly states that information in any part of 
the report may be referenced or incorporated in answer or partial 
answer to any other item of the report. Section 620.2(h) provides 
further that each Farm Credit institution shall present its reports in 
a manner that provides the most meaningful disclosure to shareholders.
b. Business Concentration Disclosure [Sec.  630.20(a)]
    The Funding Corporation asked us to remove the Sec.  
630.20(a)(1)(v) requirement for a brief discussion of any business 
concentrations of more than 10 percent because a table is included in 
the MD&A setting forth this information. We continue to believe that 
the information required to be discussed in Sec.  630.20(a)(1)(v) is 
necessary for the reader to have a complete understanding of the 
business and customers of the System. Further, the Funding Corporation 
may refer the reader to the disclosures made in the MD&A in 
satisfaction of Sec.  630.20(a)(1)(v) without a regulatory change. Our 
existing rule at Sec.  630.3(e) clearly states that information in any 
part of the report may be referenced or incorporated in answer or 
partial answer to any other item of the report. Section 630.3(e) 
further states that information required by this part may be presented 
in any order deemed suitable by the Funding Corporation.
c. Reporting on Young, Beginning and Small Farmers [Sec. Sec.  
614.4165(c), 620.5(n) and 630.20(p)]
    The Funding Corporation asked us to reduce regulatory burden by 
restricting the young, beginning and small farmers (YBS) reporting 
requirement to association annual reports. The Funding Corporation 
stated that this change would eliminate the need to disclose this 
information in the annual reports of Farm Credit banks, district-wide 
reports, and System-wide reports. Additionally, the Funding Corporation 
asked that part of Sec.  614.4165(c) be deleted, stating that only a 
description and disclosure of key components and material information 
in serving YBS farmers should be required.
    We are proposing no changes to Sec. Sec.  620.5(n) and 630.20(p), 
which require annual reports to shareholders and investors include 
information on YBS lending activities. Section 4.19 of the Act requires 
Farm Credit banks to submit an annual report to FCA summarizing the YBS 
operations and achievements of their affiliated associations. We 
continue to believe reporting to shareholders and the public on the YBS 
mission underscores the importance of the System's public purpose 
mission and the YBS mission, resulting in greater transparency to the 
public on the System's accomplishment in this area. Further, we do not 
believe the consolidated YBS reporting requirements impose a regulatory 
burden on System institutions. The rule requires the banks to include 
in their annual reports to shareholders a summary report of YBS 
quantitative data received from their affiliated associations. This 
quantitative data must already be submitted to us in each bank's annual 
YBS year-end report so it is not significantly more burdensome for the 
banks to include this same data in their annual reports to 
shareholders.
4. Implementation Date
    We recognize that some System institutions may have to modify their 
annual and quarterly reports to satisfy certain provisions of the 
proposed rule. Therefore, we are proposing a delay in the 
implementation of the rule. Compliance with all provisions must be 
achieved by the start of the fiscal year immediately following the 
effective date of the final rule, unless the start of that fiscal year 
is within 3 months or less of the effective date. In that case, we 
propose that full compliance with all provisions be delayed until the 
start of the next full fiscal year.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. Each of the banks in the Farm Credit System, considered 
together with its affiliated associations, has assets and annual income 
in excess of the amounts that would qualify them as small entities. 
Therefore, Farm Credit System institutions are not ``small entities'' 
as defined in the Regulatory Flexibility Act.

List of Subjects

12 CFR Part 611

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 619

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 620

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

12 CFR Part 621

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

12 CFR Part 624

    Accounting, Agriculture, Banks, banking, Rural areas.

12 CFR Part 627

    Agriculture, Banks, banking, Claims, Rural areas.

12 CFR Part 630

    Accounting, Agriculture, Banks, banking, Organization and functions 
(Government agencies), Reporting and recordkeeping requirements, Rural 
areas.

    For the reasons stated in the preamble, parts 611, 619, 620, 621, 
624, 627 and 630 of chapter VI, title 12 of the Code of Federal 
Regulations are proposed to be amended as follows:

PART 611--ORGANIZATION

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

    Authority: Secs. 1.3, 1.4, 1.13, 2.0, 2.1, 2.10, 2.11, 3.0, 3.2, 
3.21, 4.12, 4.15, 4.20, 4.21, 5.9, 5.10, 5.17, 6.9, 6.26, 7.0-7.13, 
8.5(e) of the Farm Credit Act (12 U.S.C. 2011, 2013, 2021, 2071, 
2072, 2091, 2092, 2121, 2123, 2142, 2183, 2203, 2208, 2209, 2243, 
2244, 2252, 2278a-9, 2278b-6, 2279a-2279f-1, 2279aa-5(e)); secs. 411 
and 412 of Pub. L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 
of Pub. L. 100-399, 102 Stat. 989, 1003, and 1004.

Subpart P--Termination of System Institution Status


Sec.  611.1250  [Amended]

    2. In subpart P, Sec.  611.1250(a)(3) is amended by removing the 
words ``, as defined in Sec.  621.2(i) of this chapter'' from the end 
of the second sentence.


Sec.  611.1255  [Amended]

    2a. Section 611.1255(a)(3) is amended by removing the words ``, as 
defined in Sec.  621.2(i) of this chapter'' from the end of the second 
sentence.

[[Page 13047]]

PART 619--DEFINITIONS

    3. The authority citation for part 619 is revised to read as 
follows:

    Authority: Secs. 1.4, 1.7, 2.1, 2.4, 2.11, 3.2, 3.21, 4.9, 5.9, 
5.12, 5.17, 5.18, 5.19, 6.22, 7.0, 7.1, 7.6, 7.7, 7.8, 7.12 of the 
Farm Credit Act (12 U.S.C. 2011, 2015, 2072, 2075, 2092, 2123, 2142, 
2160, 2243, 2244, 2252, 2253, 2254, 2278b-2, 2279a, 2279a-1, 2279b, 
2279b-1, 2279b-2, 2279f).

    4. Amend part 619 by adding a new Sec.  619.9270 to read as 
follows:


Sec.  619.9270  Qualified Public Accountant or External Auditor.

    A qualified public accountant or external auditor is a person who:
    (a) Holds a valid and unrevoked certificate, issued to such person 
by a legally constituted State authority, identifying such person as a 
certified public accountant;
    (b) Is licensed to practice as a public accountant by an 
appropriate regulatory authority of a State or other political 
subdivision of the United States;
    (c) Is in good standing as a certified and licensed public 
accountant under the laws of the State or other political subdivision 
of the United States in which is located the home office or corporate 
office of the institution that is to be audited;
    (d) Is not suspended or otherwise barred from practice as an 
accountant or public accountant before the Securities and Exchange 
Commission (SEC) or any other appropriate Federal or State regulatory 
authority; and
    (e) Is independent of the institution that is to be audited. For 
the purposes of this definition the term ``independent'' has the same 
meaning as under the rules and interpretations of the American 
Institute of Certified Public Accountants (AICPA). At a minimum, an 
accountant hired to audit a System institution is not independent if he 
or she functions in the role of management, audits his or her own work, 
or serves in an advocacy role for the institution.

PART 620--DISCLOSURE TO SHAREHOLDERS

    5. The authority citation for part 620 is revised to read as 
follows:

    Authority: Secs. 4.19, 5.9, 5.17, 5.19, 8.11 of the Farm Credit 
Act (12 U.S.C. 2207, 2243, 2252, 2254, 2279aa-11).

Subpart A--General

    6. Amend Sec.  620.2 as follows:
    a. Remove paragraphs (b) and (c);
    b. Add new paragraph (b);
    c. Redesignate paragraphs (d) through (j) as paragraphs (c) through 
(i), consecutively; and
    d. Revise paragraphs (a) and newly redesignated paragraph (c).
    The additions and revisions read as follows:


Sec.  620.2  Preparing and filing the reports.

    For the purposes of this part, the following shall apply:
    (a) Copies of each report required by this part, including 
financial statements and related schedules, exhibits, and all other 
papers and documents that are a part of the report must be sent to the 
Farm Credit Administration according to our instructions to you. 
Submissions must comply with the requirements of Sec.  620.3 of this 
part. The Farm Credit Administration must receive the report within the 
period prescribed under applicable subpart sections.
    (b) The reports must be available for public inspection at the 
issuing institution and the Farm Credit Administration office with 
which the reports are filed. Bank reports must also be available for 
public inspection at each related association office.
    (c) The reports sent to shareholders must comply with the 
requirements of Sec.  620.3 of this part. Shareholders must agree to 
electronic disclosures of reports required by this part.
* * * * *
    7. Revise Sec.  620.3 to read as follows:


Sec.  620.3  Accuracy of reports and internal controls.

    (a) Prohibition against incomplete, inaccurate, or misleading 
disclosures. No institution and no employee, officer, director, or 
nominee for director of the institution shall make any disclosure to 
shareholders or the general public concerning any matter required to be 
disclosed by this part that is incomplete, inaccurate, or misleading. 
When any such person makes disclosure that, in the judgment of the Farm 
Credit Administration, is incomplete, inaccurate, or misleading, 
whether or not such disclosure is made in disclosure statements 
required by this part, such institution or person shall make such 
additional or corrective disclosure as is necessary to provide 
shareholders and the general public with a full and fair disclosure.
    (b) Signatures. The name and position title of each person signing 
the report must be printed beneath his or her signature. If any person 
required to sign the report has not signed the report, the name and 
position title of the individual and the reasons such individual is 
unable or refuses to sign must be disclosed in the report. All reports 
must be dated and signed on behalf of the institution by:
    (1) The chief executive officer (CEO);
    (2) The chief financial officer (CFO), or if the institution has no 
CFO, the officer responsible for preparing financial reports; and
    (3) A board member formally designated by action of the board to 
certify reports of condition and performance on behalf of individual 
board members.
    (c) Certification of financial accuracy. The report must be 
certified as financially accurate by the signatories to the report. If 
any signatory is unable to or refuses to certify the report, the 
institution must disclose the individual's name and position title and 
the reasons such individual is unable or refuses to certify the report. 
At a minimum, the certification must include a statement that:
    (1) The signatories have reviewed the report,
    (2) The report has been prepared in accordance with all applicable 
statutory or regulatory requirements, and
    (3) The information is true, accurate, and complete to the best of 
signatories' knowledge and belief.
    (d) Internal controls assessment. The annual and quarterly reports 
of those institutions with over $500 million in assets (at the end of 
the prior fiscal year) must include an assessment of the internal 
financial controls of the institution. At a minimum, the assessment 
must:
    (1) Affirmatively state internal controls are in place,
    (2) Declare the internal controls have been reviewed during the 
reporting period,
    (3) Indicate that the details of the internal controls review were 
reported to the institution's board of directors, and
    (4) Include a conclusion on the effectiveness of the internal 
controls.

Subpart B--Annual Report to Shareholders


Sec.  620.4  [Amended]

    8. Amend Sec.  620.4(a) by removing the word ``shall'' and adding 
in its place, the word ``must'; and by removing the reference ``90'' 
and adding in its place, the reference ``75 calendar''.
    9. Amend Sec.  620.5 as follows:
    a. Remove the word ``shall'' and add in its place, the word 
``must'' in paragraph (a) introductory text;
    b. Remove the last sentence in paragraphs (b) and (c)(1);
    c. Add the words '', if material'' at the end of paragraph (f) 
introductory text;
    d. Add the word ``material'' before the word ``participation'' in 
paragraph (g)(1)(iii)(A);
    e. Remove the words ``to absorb the risk inherent in the 
institution's loan

[[Page 13048]]

portfolio'' at the end of paragraph (g)(1)(iv)(B);
    f. Add the word ``material'' before the word ``obligations'' and 
before the word ``contributions'' in the first sentence of paragraph 
(g)(1)(iv)(E) and remove the words ``pursuant to section 8.7 of the 
Act'' at the end of the first sentence;
    g. Revise paragraph (l); and
    h. Remove the words ``, as defined in Sec.  621.2(i) of this 
chapter,'' in paragraph (m)(1); remove existing paragraph (m)(2) and 
redesignate paragraph (m)(3) as new paragraph (m)(2).
    The revision reads as follows:


Sec.  620.5  Contents of the annual report to shareholders.

* * * * *
    (l) Relationship with qualified public accountant.
    (1) If a change or changes in qualified public accountants have 
taken place since the last annual report to shareholders or if a 
disagreement with a qualified public accountant has occurred that the 
institution would be required to report to the Farm Credit 
Administration under part 621 of this chapter, the information required 
by Sec.  621.4(c) and (d) of this chapter must be disclosed.
    (2) Disclose the total fees, by the category of services provided, 
paid during the reporting period to the qualified public accountant or 
accounting firm. At a minimum, identify fees paid for audit services, 
tax services, and non-audit related services. The types of non-audit 
services must be identified and indicate audit committee approval of 
the services.
* * * * *

Subpart C--Quarterly Report


Sec.  620.10  [Amended]

    10. Amend Sec.  620.10(a) by removing the word ``shall'' and adding 
in its place, the word ``must'' and by removing the reference ``45'' 
and adding in its place, the reference ``40 calendar''.

Subpart F--Bank and Association Audit and Compensation Committees

    11. Amend Sec.  620.30 by adding new paragraphs (d)(2)(iii) and 
(iv) to read as follows:


Sec.  620.30  Audit committees.

    (d) * * *
    (2) * * *
    (iii) Give prior approval for any non-audit services performed by 
the external auditor, except those non-audit services specifically 
prohibited by FCA regulation; and
    (iv) Comply with the auditor independence provisions of part 621 of 
this chapter.
* * * * *

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

    12. The authority citation for part 621 is revised to read as 
follows:

    Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C. 
2252, 2279aa-11); sec. 514 of Pub. L. 102-552.

Subpart A--Purpose and Definitions

    13. Amend Sec.  621.2 by removing paragraph (i); and by 
redesignating paragraph (j) as (i).

Subpart B--General Rules

    14. Amend Sec.  621.4 by revising paragraph (b) to read as follows:


Sec.  621.4  Audit by qualified public accountant.

* * * * *
    (b) The qualified public accountant's opinion of each institution's 
financial statements must be included as a part of each annual report 
to shareholders. The accountant must comply with the auditor 
independence provisions of subpart F of this part.
* * * * *
    15. Add a new subpart F, consisting of Sec. Sec.  621.30, 621.31, 
and 621.32, to read as follows:
Subpart F--Auditor Independence
Sec.
621.30 General.
621.31 Non-audit services.
621.32 Conflicts of interest and rotation.

Subpart F--Auditor Independence


Sec.  621.30  General.

    System institutions must ensure the independence of all qualified 
public accountants conducting the institution's audit by establishing 
and maintaining policies and procedures governing the engagement of 
external auditors. The policies and procedures must incorporate the 
provisions of this section and Sec.  612.2260 of this chapter.


Sec.  621.31  Non-audit services.

    Non-audit services are any professional services provided by a 
qualified public accountant during the period of an audit engagement 
which are not connected to an audit or review of an institution's 
financial statements.
    (a) A qualified public accountant engaged to conduct a System 
institution's audit may not perform the following non-audit services 
for that institution:
    (1) Bookkeeping,
    (2) Financial information systems design,
    (3) Appraisal and valuation services,
    (4) Actuarial services,
    (5) Internal audit outsourcing services,
    (6) Management or human resources functions,
    (7) Legal and expert services unrelated to the audit, and
    (8) Advocating an institution's interests in litigation, regulatory 
or administrative investigations and proceedings.
    (b) A qualified public accountant engaged to conduct a System 
institution's audit may only perform non-audit services, not otherwise 
prohibited in this section, if the institution's audit committee pre-
approves the services and the services are fully disclosed in the 
annual report.


Sec.  621.32  Conflicts of interest and rotation.

    (a) Conflicts of interest. (1) A System institution may not engage 
a qualified public accountant to conduct the institution's audit if the 
accountant uses a partner, concurring partner, or lead member in the 
audit engagement team who was a director, officer or employee of the 
System institution within the past year.
    (2) A System institution may not make an employment offer to a 
partner, concurring partner, or lead member serving on the 
institution's audit engagement team during the audit or within 1 year 
of the conclusion of the audit engagement.
    (b) Rotation. Each institution may engage the same lead and 
reviewing audit partners of a qualified public accountant to conduct 
the institution's audit for no more than 5 consecutive years. The 
institution must then require the lead audit and rev