Organization; Termination of System Institution Status, 44410-44430 [06-6648]

Agencies

• Farm Credit Administration

[Federal Register Volume 71, Number 150 (Friday, August 4, 2006)]
[Rules and Regulations]
[Pages 44410-44430]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-6648]



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Part III





Federal Credit Administration





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12 CFR Part 611



Organization; Termination of System Institution Status; Final Rule

Federal Register / Vol. 71, No. 150 / Friday, August 4, 2006 / Rules 
and Regulations

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FARM CREDIT ADMINISTRATION

12 CFR Part 611

RIN 3052-AC29


Organization; Termination of System Institution Status

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, we or our) issues 
this final rule amending our regulations that allow a Farm Credit 
System (FCS, Farm Credit, or System) bank or association to terminate 
its FCS charter and become a financial institution under another 
Federal or State chartering authority. The final rule updates the 
termination procedures for System banks and associations under sections 
7.9, 7.10 and 7.11 of the Farm Credit Act of 1971, as amended, ensures 
that interested parties have sufficient time and opportunities to be 
fully informed about a termination proposal, and ensures that a 
significant proportion of equity holders are engaged in the termination 
process.

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: Thomas Dalton, Senior Staff 
Accountant, Office of Regulatory Policy, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4414; TTY (703) 883-4434; or Rebecca 
S. Orlich, Senior Counsel, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    Through this rulemaking it is our objective to:
     Update the termination procedure for FCS banks and 
associations under sections 7.9, 7.10 and 7.11 of the Farm Credit Act 
of 1971, as amended (Act);
     Ensure that the FCA, an institution's board of directors, 
and the institution's equity holders have sufficient time and 
opportunities to be fully informed about a termination proposal before 
deciding whether to approve the termination;
     Provide that we may require a terminating institution to 
obtain independent analyses and rulings regarding a proposed 
termination;
     Ensure that a significant proportion of stockholders are 
engaged in the termination process; and
     Clarify existing requirements and ensure that stockholder 
disclosure materials are informative and easy to understand.

II. Background

    The Agricultural Credit Act of 1987,\1\ among other things, amended 
the Act expressly to permit System institutions to terminate their Farm 
Credit status and become another type of financial institution. We 
first issued regulations governing terminations in 1991. At that time, 
the regulations covered only ``small'' FCS associations. Our current 
termination rule, published on April 12, 2002, covers all associations 
and banks.\2\ Since 1991, no FCS bank or association has terminated its 
charter under FCA regulations. However, in 2004 one System association 
adopted a commencement resolution to terminate its Farm Credit charter 
and subsequently be acquired by the subsidiary of a non-System bank. 
Ultimately, the association decided not to be acquired and not to 
terminate Farm Credit status. Although the association never submitted 
a termination application to us, the experience presented us with an 
actual event to evaluate the effectiveness and efficiency of our 
existing termination regulations. We found that, while the existing 
regulations provide the basic requirements to comply with the Act and 
effect a termination, certain revisions to the regulations would ensure 
a more orderly process for a FCS bank or association to terminate its 
charter.
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    \1\ Public Law 100-233, 101 Stat. 1568 (January 6, 1988).
    \2\ See 67 FR 17907.
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    On January 11, 2006, we published a proposed termination regulation 
\3\ to update the existing termination regulations to clarify our 
requirements. Our proposals included: (1) Separating our review of a 
terminating institution's disclosure information, as required by 
section 7.11 of the Act (12 U.S.C. 2279e), from our approval of the 
termination itself, as set forth in section 7.10 of the Act (12 U.S.C. 
2279d), (2) giving a terminating institution more flexibility in 
communicating with stockholders and the public during the termination 
process, (3) providing that we may require a terminating institution to 
obtain independent analyses of and rulings on matters related to the 
proposed termination, as well as to hold convenient informational 
meetings for stockholders, (4) strengthening protections for directors 
to obtain independent legal and financial advice and allow public or 
private expressions of their opinions about the termination, and (5) 
ensuring sufficient equity holder representation in voting processes by 
imposing a quorum requirement of 30 percent of voting stockholders that 
must be present in person or by proxy at the stockholder meetings for 
the termination and reconsideration votes.
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    \3\ See 71 FR 1704.
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III. Comments

    We received 51 comment letters on the proposed rule. Eight comment 
letters were from the Farm Credit Council (FCC) and seven System 
institutions (U.S. AgBank, CoBank, AgriBank, and four FCS associations) 
(collectively, System commenters). We also received 43 comment letters 
from non-System entities including Rabobank International (Rabobank), a 
cooperatively owned bank and financial services provider based in the 
Netherlands; the Independent Community Bankers of America (ICBA); the 
Independent Community Bankers of North Dakota; the American Bankers 
Association (ABA) and from 39 commercial bankers. In its letter, 
Rabobank identified itself as the bank that attempted unsuccessfully to 
acquire a System institution in 2004 and stated that its comments were 
based on that experience. In general, System commenters supported the 
rule, whereas non-System commenters expressed opposition to portions of 
the rule that they believed would create barriers to the termination 
process and would be burdensome and costly.

A. General Comments

    System commenters stated that:
     They support revising the termination regulation to more 
properly reflect the conditions and circumstances that exist when an 
institution's board votes to terminate. The facts and circumstances of 
any particular termination request must be carefully evaluated, and an 
independent analysis of various issues raised by the request may be 
appropriate. They encouraged FCA to require those studies as needed.
     They are concerned about the impact of any proposed 
termination on the System while the matter is pending and encouraged 
timely action by the Agency. They encouraged FCA to begin substantive 
review of a proposed termination as soon as possible after receipt of a 
plan of termination.
     They support the elimination of the termination authority 
from the Act.
    Non-System commenters stated that:

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     The proposal creates obstacles and impediments that make 
termination difficult to achieve.
     They support giving the terminating institution permission 
to communicate with equity holders and the public during the 
termination process.
     The proposal restricts the institutions' right to 
terminate which leads to diminished performance, weak or entrenched 
management, and inefficient operations.
     The proposed amendments are complicated due to the fact 
that there are multiple requirements that are either redundant and/or 
unnecessary.
     The proposal demonstrates a bias toward protecting the 
overall System by proposing unnecessary and unjustifiable burdens for 
an institution seeking to leave the System, to the detriment of its 
members-owners.
     It is the right of the shareholders of a terminating 
institution to make this decision, not other institutions within the 
FCS or the FCA itself.
     There is a contradiction between making termination nearly 
impossible and maintaining the status quo, and expanding System 
authorities to serve a broader market, as System institutions are 
currently promoting through their Horizons Project.
     The proposal should be withdrawn because it is anti-
termination, overwhelmingly complicated, and has provisions that are 
redundant, unnecessary, and arbitrary.

B. Our Consideration of the Comments Received

    Upon consideration of all comments, the FCA Board has decided to 
make a number of changes to the regulations. We note that some of the 
comments are beyond the scope of this regulatory project.
    It is not our intention to put up barriers or create undue burden 
for an institution wanting to exit the System. The proposed changes are 
meant only to ensure that all important interests, including the 
interests of borrower/stockholders, are protected and to ensure that 
the Agency has all the information needed to make a decision about 
whether or not to approve the termination request.
    One commenter suggested that restricting the right of an 
institution to exit the System and ``compete in the private sector'' 
could lead to a weakened financial condition, entrenched management and 
inefficient operations in that institution. We do not believe that the 
rule restricts an institution from exiting the System. Rather, it 
provides for a deliberative process to achieve a termination of System 
status by taking into consideration the interests of the institution, 
its stockholders, and the System. After careful consideration, we do 
not find that our regulatory framework for termination of System status 
has been detrimental to the financial well-being of the System and its 
member institutions. We note that System institutions continue to 
operate in a safe and sound manner under the authorities provided by 
the Act and FCA Regulations.
    In addition to the specific comments received on the proposed 
termination regulation, some non-System entities provided comments on 
areas outside of the proposed rule, including the objectives of the 
Horizons Project, the mission of the System, and certain FCS 
institutions' patronage practices. Although these comments will be 
considered by the Agency generally, we will not respond to them in this 
final rule because they are beyond the scope of this rulemaking 
project.

IV. Section-by-Section Analysis

Section 611.1200--Applicability of This Subpart

    We did not propose any changes to this section and we received no 
comments. We adopt this section as final without changes.

Section 611.1205--Definitions That Apply in This Subpart

    We proposed to define ``days'' to mean calendar days and ``business 
days'' to mean days on which the FCA is open for business. We also 
proposed to define ``equity holders'' to mean holders of stock, 
participation certificates, or other equities such as allocated 
equities.
    We did not receive any comments on this section and adopt Sec.  
611.1205 as final without changes.

Section 611.1210--Advance Notices--Commencement Resolution and Notice 
to Equity Holders

    We proposed requiring a terminating institution to send us a draft 
of its notice to equity holders before the notice is sent. If we do not 
request modifications to the draft notice within 2 business days of 
receiving it, the terminating institution may mail the notice to its 
equity holders. We also proposed requiring the terminating institution 
to place the advance notice to equity holders on its Web site and to 
send us copies of all contracts and agreements related to the 
termination. The proposed rule also requires the board of the 
terminating institution to vote on the termination at three separate 
times during the termination process.
    We received comments from Rabobank, the ICBA, the ABA, and two 
groups of commercial bankers on the three votes required of the 
terminating institution's board of directors during the termination 
process. The first two votes are already required by the existing 
regulations. The first vote is the commencement resolution required by 
existing Sec.  611.1210(a), when the termination process begins. The 
second vote, required by existing Sec.  611.1220, specifies that the 
board must adopt a termination resolution before mailing the disclosure 
and termination plan to the FCA. The third (the new vote) is required 
by new Sec.  611.1235(a), which specifies that the board must adopt a 
reaffirmation resolution no more than 14 days before mailing the plan 
of termination, including the disclosure information, to its equity 
holders. All comments received on the three board resolutions are 
summarized here.
    Rabobank commented that the three-vote requirement does not support 
the stated purposes of the proposed rule, is burdensome, is not 
explained, and discourages a FCS institution from initiating a request. 
Rabobank asserted that the requirement is a ``de facto prohibition'' on 
exiting the System. The ICBA believed that the three-vote requirement 
is unreasonable and proves FCA's intent to prevent any entity from 
leaving the System. The ICBA noted that other procedures will ensure 
that the terminating institution's board will thoroughly ``vet'' its 
decision. The ICBA also pointed out that the regulation is arbitrary 
and capricious, and contrary to the clear statutory language, as well 
as unnecessary and inappropriate. The ABA stated that a third vote by 
the board, after FCA approves the plan, is needless and a potentially 
costly additional step that is meant to slow or derail the process. The 
ICBA and two groups of commercial bankers stated that a termination is 
not such an ``extraordinary event'' that the board has to vote three 
times and that our purpose is to create obstacles. Another group of 
commercial bankers believed that the requirement creates hurdles on 
voting procedures not found in other businesses, diluting the principle 
of local control. One group of commercial bankers suggested that a more 
honest approach would be for FCA to withdraw the proposal and ask 
Congress to pass legislation preventing terminations from the System, 
even though it acknowledged it would not support such legislation. It 
also observed that a burdensome policy does not serve the public 
interest and reflects efforts on

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behalf of the FCC, the System's lobbying organization.
    We stated in the preamble to the proposed rule that our objectives 
were to update the termination procedure and to ensure that an 
institution's board of directors, as well as FCA and the equity 
holders, have sufficient time to be fully informed about a termination 
proposal before deciding whether to approve the termination. The timing 
of each board resolution in the termination process is to ensure the 
directors are fully informed before taking the next significant step. A 
significant amount of time may elapse between adoption of the 
commencement resolution and submission of the termination plan to FCA 
for approval and distribution of the plan to stockholders prior to the 
stockholder vote. We believe that it is important and essential for the 
terminating board to validate its decision at these critical junctures 
and demonstrate continued support for the termination. The FCA and the 
terminating institution's equity holders need reassurance that the 
board of directors remains fully supportive of and committed to the 
termination throughout the process because we believe that a 
termination is an ``extraordinary event'' in the context of the 
System's congressionally mandated mission. The concept of local control 
is reinforced each time the board resolves to proceed with the 
termination process. The board can easily include its reaffirmation 
resolution with the disclosure and plan of termination at the time of 
mailing to its equity holders with a certified copy provided to FCA. 
For these reasons, we make no changes to the rule and adopt the 
provisions of Sec. Sec.  611.1210, 611.1220, and 611.1235(a) as 
proposed.
    A System bank (AgriBank) commented on the advance notice provision 
in Sec.  611.1210(e) that allows a terminating bank to continue to 
participate in the issuance of consolidated and System-wide obligations 
through the termination date. The bank stated that once a System bank 
announces its intent to exit, the remaining banks should no longer be 
required to assume the joint and several liability for the debts of 
that exiting bank and that to do otherwise requires all remaining banks 
to ignore the reality of the transaction for the sole benefit of the 
exiting bank. The commenter added that, at a minimum, the exiting bank 
should be prohibited from issuing joint debt for any purpose other than 
the refinancing of joint debt that matures during the period prior to 
the exit.
    The FCA did not propose any change to the provision in Sec.  
611.1210(e). We believe we must continue to allow funding for a 
terminating bank because, from a practical standpoint, a System bank 
does not have other available alternative funding sources until it 
terminates its System status.

Section 611.1211--Special Requirements

    We proposed a new section providing that we may require a 
terminating institution to obtain independent analyses or studies of 
and rulings on matters related to the proposed termination. We proposed 
that if expert analyses, studies, or rulings are needed, we will 
require a terminating institution to engage experts acceptable to us to 
perform such work. We further proposed that we may require such 
analyses, studies, or rulings, or summaries of them, be provided to 
equity holders as part of the plan of termination, or separately. We 
also proposed that we may require a terminating institution to hold 
regional or local informational meetings for equity holders during the 
time period after they receive notice of the proposed termination and 
before the stockholder vote on termination. Any meetings would be 
subject to the plain language requirements of proposed Sec.  
611.1217(b) regarding balanced statements of anticipated benefits and 
potential disadvantages.
    System commenters supported the FCA's proposal and encouraged FCA 
to require studies as needed. They asserted that the facts and 
circumstances of any particular termination request must be carefully 
evaluated and that an independent analysis of various issues raised by 
the request may be appropriate, including the impact on System-wide 
debt holders, the cost and credit rating of System-wide debt 
securities, tax aspects of the transaction, the valuation of 
dissenters' rights, the impact on other System institutions, and all 
the costs associated with either chartering a new institution to serve 
the applicable territory or amending the charters of other System 
institutions to serve it.
    A non-System commenter (ICBA) stated that the broad scope of issues 
the FCA suggests studying are unwarranted and not reflective of the 
Act's intent. They asserted that the impact of a departure upon the 
System would be minimal because the System is adequately capitalized, 
any exit fee would remain with the System, and because the FCA has the 
necessary authorities to re-charter territory vacated by the 
terminating institution. Other non-System commenters suggested that the 
FCA should not be able to impose special requirements, assessments, 
analyses, rulings or studies before approving a termination plan of a 
System institution without also having some time limit or limitation on 
the number of requests that FCA might make of an institution.
    Under section 7.10 of the Act, the FCA Board has broad regulatory 
authority to impose other conditions, as it considers appropriate, upon 
an institution seeking to terminate its System status. As discussed in 
the proposed rule, a termination raises issues for the FCA that are 
both significant and non-routine. Therefore, the FCA believes certain 
types of additional analysis or studies may be necessary or useful in 
evaluating a specific termination proposal. However, we believe that 
any requirements for special studies and analysis can be determined 
only on a case-by-case basis after considering the nature of the 
termination request and the extent of any studies already conducted by 
the terminating institution. The FCA agrees with the commenter's 
assessment that the System is currently strongly capitalized, as well 
as the statement that the FCA would act to address any territorial void 
that may occur as the result of an approved termination. We disagree, 
however, with the assertion that the System and the terminating 
institution's stockholders would not be impacted by a termination. 
While these capitalization and territorial issues are clearly factors 
that would be considered in any termination request, they are not the 
only factors that need to be considered or issues that may require 
additional study in evaluating the impact of a termination on the 
institution's stockholders, the System and other parties. The FCA will 
act prudently in determining the nature and extent of any required 
studies or analyses but believes it is inappropriate to limit, by 
number or amount, the requirements that we may impose in this area.
    Another non-System commenter (Rabobank) objected to this proposal 
asserting that the additional requirements for studies and analyses and 
for holding informational meetings for stockholders could delay the 
termination process for a significant period of time and the 
requirements would impose substantial costs on the terminating 
institution. They assert that the FCA has not balanced the costs and 
benefits of these proposed new requirements or shown that the existing 
informational requirements are insufficient. The commenter suggested 
that, to the extent these required studies examine the System and 
parties other

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than the terminating institution, these costs should be borne by the 
FCA, not by the institution.
    It is not the FCA's intention to delay the termination process, nor 
do we believe that any delays resulting from these requirements would 
unduly extend the process. To the extent that special studies and 
analyses and informational stockholder meetings serve to extend the 
termination process, the FCA believes that this additional time is 
necessary to ensure that the stockholders of the terminating 
institution are fully informed as to the impact of the termination on 
their interests and that the FCA has the information it needs to 
deliberate appropriately on the issues and make a reasoned decision on 
the termination request.
    The FCA is mindful of the costs of performing certain studies and 
analyses contemplated by this provision. The FCA concludes that the 
costs of studies and analyses related specifically to the impact of the 
termination on the institution and its stockholders are legitimate 
termination expenses that should be paid for by the institution and 
should not be deducted from the exit fee. However, there is merit to 
the commenter's suggestion that costs of studies that address issues 
regarding the impact of the termination on the System in general should 
be handled differently than studies that address the impact of the 
termination on the terminating institution and its stockholders. In 
response to this comment, in the final rule at Sec. Sec.  611.1250 and 
611.1255, we provide that a terminating institution required by the FCA 
to engage independent experts to conduct any assessments, analyses, or 
studies, or to request rulings that examine the impact of the 
termination on the System and parties other than the terminating 
institution and its stockholders may exclude such related expenses from 
the other termination expenses added back to assets under the 
requirements of existing Sec. Sec.  611.1250(a)(4)(i) and 
611.1255(a)(4)(i) pertaining to associations, and Sec. Sec.  
611.1250(b)(5)(i)(A) and 611.1255(b)(5)(i)(A) pertaining to banks, when 
calculating the terminating institution's preliminary and final exit 
fees. This means that the exit fee would be reduced by an amount 
approximately equal to the cost of such excluded expenses. We believe 
this change balances the responsibilities of termination expenses for 
the terminating institution (and the successor institution) with 
benefits that would be obtained from studies that examine System issues 
related to the termination request.

Section 611.1215--Communications With the Public and Equity Holders

    We proposed a new section on communications. This section would 
permit a terminating institution to communicate with the public and 
with its equity holders during the termination process, provided that 
the written communications contain a legend urging equity holders to 
read the information statement and are filed with the FCA on the date 
of first use. If we believed any communications are inaccurate or 
misleading, we would require corrections to be made. We could also 
require a terminating institution to file written communications made 
by other participants in the termination and related transactions, such 
as a merger partner. The regulation contained a safe harbor for 
unintentional failures to make timely filings with the FCA and provided 
that communications that contain no new information from previously 
filed communications do not need to be filed.
    We received comments on this proposed section from Rabobank, the 
ICBA, and a number of commercial bankers. Both Rabobank and ICBA 
supported allowing a terminating institution to communicate more freely 
with the public and equity holders during the termination process. All 
the commenters on this section recommended that we extend our 
monitoring of communications to additional parties. Rabobank 
recommended that the FCA monitor public communications about the 
termination made by other System institutions. ICBA recommended that we 
review for accuracy any information sent to the terminating 
institution's equity holders by parties opposed to the termination. The 
commercial bankers recommended that other System parties that oppose a 
termination should not be exempt from a requirement to disseminate 
accurate information. The FCA considered these recommendations but did 
not adopt them. While we do not support the dissemination of inaccurate 
information by any party, we believe that communications by the 
terminating institution require a higher level of scrutiny because of 
the disclosure requirements in section 7.11 of the Act, the fiduciary 
duties owed by the institution's management and directors to the 
institution's equity holders, and the institution's access to most all 
of the relevant facts surrounding a proposed termination. If a 
terminating institution believes other parties are making false and 
misleading statements, it will now be able to respond to such 
statements by means of public communications and direct correspondence 
with its equity holders. In addition, it is unlikely that parties other 
than the terminating institution's own equity holders would communicate 
directly with other equity holders. Under section 4.12A of the Act (12 
U.S.C. 2184) and Sec.  618.8310(b) of our regulations, the 
institution's equity holders are the only parties entitled to obtain a 
stockholder list for communications about the termination. Furthermore, 
we do not believe it is necessary or practical to monitor 
communications between equity holders.
    The FCA adopts this section as proposed.

Section 611.1216--Public Availability of Documents Related to the 
Termination

    Proposed Sec.  611.1216 provides that we may post on our Web site, 
or require a terminating institution to post on its Web site, documents 
related to the termination. Disclosure of the documents will, at an 
early stage in the termination process, enable equity holders and 
others to understand the structure and ramifications of the plan of 
termination. We indicated in the preamble to the proposed rule that we 
expect the institution to post the board of directors' resolution on 
its Web site to commence the termination process, in addition to the 
notice to equity holders. We could require the posting of other 
documents such as charter documents of the successor institution or 
contracts entered into with a merger or acquisition partner. In 
addition, we could require the posting of the results of any special 
assessments, analyses, studies, and rulings. We stated that it was not 
our intention to require the posting of confidential information, and 
the terminating institution could request us to keep specific documents 
confidential.
    The ICBA asserted that our proposal is designed to intimidate 
institutions from attempting to terminate and that the FCA does not 
have authority to deny a terminating institution's request to keep 
documents confidential. A number of commercial bankers also stated they 
disagreed with publishing sensitive information on the internet at the 
discretion of the Agency. A System commenter (AgriBank) stated its 
belief that the FCA, rather than the terminating institution, should 
determine whether information is confidential, and also that the 
information should be published on the FCA Web site.
    After carefully considering the suggestions of the commenters, the 
FCA

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has decided to adopt the final regulation without changes from the 
proposed rule. The purpose of this provision is to ensure a broad 
dissemination of the significant termination documents to equity 
holders and the public. We intend generally to accord confidential 
treatment to termination documents to the same extent we accord 
confidentiality to other documents we receive from System institutions. 
As for whether the information is on the FCA's Web site or the 
terminating institution's Web site, our intention is to ensure the 
availability of termination-related information. We will make the 
determination of which Web site is most appropriate for stockholders to 
obtain all relevant information on a case-by-case basis.

Section 611.1217--Plain Language Requirements

    We proposed to move the plain language requirements in existing 
Sec.  611.1223(a) to new Sec.  611.1217 and to apply them to all 
communications with equity holders required by these regulations, not 
just to the information statement. To help ensure a balanced 
presentation of the information, we also provided that communications 
describing the anticipated benefits of the proposed termination should 
also give similar prominence to the potential disadvantages of the 
termination.
    We did not receive any comments on this section and adopt it as 
proposed.

Section 611.1218--Role of Directors

    In this proposed new section, we intended to emphasize the 
importance of directors in the termination process, not only when they 
take action on behalf of the terminating institution, but also when 
they act individually. First, we provided that directors could not be 
prohibited by confidentiality agreements or otherwise from publicly or 
privately commenting on a termination proposal and related 
transactions. In our view, such prohibitions would not be in the best 
interests of the equity holders because they prevent directors from 
consulting with the persons they represent and prevent equity holders 
from learning the opinions of those who should have the most detailed 
knowledge of the proposal. We noted that this provision would not 
permit directors to reveal trade secrets or confidential financial 
information that they would be prohibited from revealing in the absence 
of a confidentiality agreement or similar document.
    We further proposed to provide that one or more directors have the 
right to obtain legal and financial advice on the proposed termination, 
and that the institution must pay reasonable expenses for such advice. 
This was intended to ensure that each director has the opportunity to 
obtain independent advice on the proposed transaction.
    We received a number of comments on this proposal. AgriBank 
supported the provision on confidentiality agreements and suggested 
expanding it to prohibit curbs on communications by employees of the 
terminating institution, as well as to prohibit the terminating 
institution from requiring employees to express support for the 
termination as a condition of employment. AgriBank also stated that 
directors who obtain independent financial and legal advice should not 
be required to prove the reasonableness of their cost. Rabobank opposed 
permitting individual directors to seek independent legal and financial 
advice on a proposed termination and asserted that, if directors 
consulted outside parties for all board decisions, boards could no 
longer function. The ICBA found ``particularly objectionable'' our 
proposal to permit directors to obtain independent counsel and to 
permit directors to express their opinions about the termination 
publicly; the association also asserted that the Act does not authorize 
the FCA to override a legally binding confidentiality agreement. A 
number of commercial bankers expressed the view that our proposals in 
this section regarding directors' rights and in Sec.  611.1216 
regarding the public availability of information about the termination 
have the sole purpose of placing hurdles in an institution's way in 
order to prevent it from leaving the System.
    In response to these comments, the FCA has revised its proposal in 
Sec.  611.1218(b). In the final rule, we continue to provide that one 
or more directors of a terminating institution may seek independent 
advice on the termination, but we clarify when the board may deny 
payment of expenses for such advice. The board, by at least a two-
thirds vote of the full board (the total number of current directors), 
may deny payment of such expenses if it determines that the expenses 
are unreasonable. If payment is denied, the board must specify why the 
expenses are unreasonable, notify the FCA within 1 business day of the 
denial, and explain the reasons for its determination in the disclosure 
information submitted to equity holders. We believe that this revised 
procedure more appropriately balances the rights of directors to obtain 
independent advice with the rights of the institution to avoid using 
the institution's assets for unreasonable expenses.
    We adopt the other provisions of this section as proposed. We 
disagree with the assertion that the Act does not authorize the FCA to 
override a ``legally binding'' confidentiality agreement. On the 
contrary, section 7.10(a)(7) specifically authorizes FCA to promulgate 
rules to govern the termination process. In addition, we do not support 
requiring employees, against their will or as a condition of 
employment, to express support for a termination to customers (who are 
also current or prospective equity holders of the institution). 
However, we are not persuaded that employees are likely to be coerced 
in that manner, and we note that employees are prohibited under Sec.  
611.1219(a) from making misstatements or omissions of a material fact 
to equity holders. While we agree in principle that boards could not 
function, or would have difficulty functioning, if directors consulted 
outside parties for ``all board decisions,'' that is not what we 
proposed. Terminating status as a System institution is an 
extraordinary event, and it is likely to be equally extraordinary for 
the institution's directors, who by and large are farmers and ranchers. 
In this circumstance, we believe that providing for reimbursement of 
reasonable expenses for independent advice will help ensure that the 
board members act with full knowledge and understanding of the 
termination and its consequences. Similarly, we believe that enabling 
directors who oppose termination to express their opinions to equity 
holders and the public is consistent with the directors' duties to 
stockholders and will contribute to stockholders' more complete 
understanding of the proposed transaction.

Section 611.1219--Prohibited Acts

    We proposed to move existing Sec.  611.1215 to this new Sec.  
611.1219. In Sec.  611.1219, we proposed to delete the reference to our 
preliminary approval of the termination, because we proposed to 
eliminate the preliminary approval provision. We also proposed to 
prohibit the institution and any director, officer, employee, and agent 
from making any untrue or misleading statement of a material fact, or 
failing to disclose any material fact to the FCA about the proposed 
termination and any related transactions. This prohibition already 
applied to statements made to or withheld from current or prospective 
equity holders.
    Rabobank asserted that the FCA should also expressly prohibit 
untrue or

[[Page 44415]]

misleading statements or omissions of a material fact by any System 
institution and should sanction institutions that violate the 
prohibition, stating that ``anything less would allow an opponent of a 
termination to galvanize opposition based on falsehoods and 
deception.'' Although the FCA strongly opposes the dissemination of 
misleading and deceptive information by any party, we have decided not 
to incorporate Rabobank's recommendation in the regulation. The 
terminating institution's directors, officers, employees and agents 
have specific legal duties to the terminating institution and, 
indirectly or directly, to its equity holders; other System 
institutions do not. Consequently, we will not extend the regulation's 
prohibition to them. We note that, under the communications provisions, 
the terminating institution will be free to respond publicly, or in 
correspondence with equity holders, to statements made by other 
parties.
    We adopt this section in the final rule without any changes from 
the proposal.

Section 611.1220--Termination Resolution

    Proposed Sec.  611.1220 was an expansion of the requirement in 
existing Sec.  611.1220(a) for the board to adopt a termination 
resolution. We proposed that the board must adopt a resolution no more 
than 1 week before submitting the plan of termination to us. The 
resolution must: Indicate the board's continuing support for 
termination; authorize submission of the plan of termination to us; and 
(if we approve or take no action) authorize submission of the plan of 
termination to voting stockholders.
    Except for comments on the three required board resolutions, we did 
not receive any comments on this specific provision and adopt Sec.  
611.1220 as final without changes.

Section 611.1221--Submission to FCA of Plan of Termination and 
Disclosure Information; Other Required Submissions

    Proposed Sec.  611.1221 revised the existing regulation to provide 
that a terminating institution may not file a plan of termination until 
at least 30 days after the institution has sent the notice to equity 
holders under Sec.  611.1210(b). We also proposed to remove references 
to the Financial Assistance Corporation (FAC) because all outstanding 
FAC debt has been repaid.
    We received one comment from the ICBA on the requirement that the 
terminating institution may not file its termination plan with FCA 
until at least 30 days after it mails the advance notice to its equity 
holders. The ICBA objected to FCA's applying an additional 30-day 
waiting period and stated this requirement is unnecessary because FCA 
will determine when the 60-day clock will begin and end for FCA's 
review and approval of the termination plan for submission to 
stockholders. The ICBA contended that the additional 30 days shifts the 
approval process from 60 to 90 days.
    We disagree that the 30-day time period is unnecessary. In our 
experience, it is likely that an institution will take longer than 30 
days to assemble a complete plan of termination after a decision is 
made to terminate. The 30-day waiting period will also encourage an 
institution to promptly inform us of its intention to terminate. The 
30-day time period gives FCA time to prepare for receipt and review of 
the request. FCA will still be obligated to review and take action on 
the proposed termination plan and disclosure for submission to 
stockholders within 60 days of the filing of a complete plan of 
termination or, if we take no action within 60 days, the institution 
can submit the plan of termination to its voting stockholders. We adopt 
Sec.  611.1221 as final without changes from the proposal.

Section 611.1223--Plan of Termination--Contents

    We proposed numerous changes to this section including renaming 
this section ``Plan of termination--contents.'' We proposed a 
requirement at Sec.  611.1223(b)(7) for a terminating institution to 
explain in the summary to the plan of termination whether the successor 
institution expects to engage in a corporate restructuring in the 18 
months following termination.
    We received comment letters from Rabobank and the ICBA on this 
section. Rabobank stated that the proposal does not explain why we 
would need this information or how we would use it, and that the 
requirement would inappropriately assert FCA oversight of a non-System 
entity. Rabobank further noted that if the terminating institution did 
not disclose a possible future restructuring, the successor institution 
may be discouraged from such a restructuring, despite potential 
benefits to equity holders, due to fear of interference from the FCA. 
Rabobank recommended that this requirement be eliminated. Rabobank 
stated that once an FCS institution has terminated its System charter 
and becomes a different type of financial institution, the institution 
is no longer regulated by FCA. The ICBA believed that this provision 
was without merit and should be deleted from the rule. The ICBA noted 
that an appropriate Federal or State authority charters the successor 
institution as a bank, savings and loan association, or other financial 
institution, so it is likely that this information will already be 
disclosed to voters. The commenters further stated that FCA is adding 
another legal roadblock, suggesting the successor institution could be 
sued after termination if an additional charter conversion was to 
occur.
    We believe that this requirement benefits the equity holders who 
are entitled to know what the future plans of the terminating 
institution could include. If the terminating institution's conversion 
to another financial institution involves its acquisition by another 
financial services company or corporation, stockholders need to be 
fully informed before voting on the termination proposal. In addition, 
FCA could not interfere with the actions of the successor institution 
because the successor institution will not be subject to FCA oversight 
and regulation. Our principal concern is the right of stockholders to 
know if the successor institution, within the space of 18 months or 
less, will undergo further reorganization based on business planning 
underway at the time the termination application is filed with FCA. If 
the terminating institution has no such plans or is unaware of any 
future events that might result in its subsequent reorganization within 
the 18-month period following termination, no such disclosure will be 
required. Consequently, we are not changing this provision of the rule 
and adopt it as proposed.
    We also proposed in paragraph (c)(7) to require a terminating 
institution to include summaries or copies of termination-related 
contracts and agreements, including copies of contracts and agreements 
in connection with the termination and operations of the successor 
institution; in paragraph (c)(13) to require the institution to 
disclose employment, retirement, and severance agreements; in paragraph 
(c)(26) that we may require a terminating institution to disclose 
assessments, analyses, studies, or rulings that we require the 
institution to obtain under proposed Sec.  611.1211; in paragraph 
(c)(29) that we will require the terminating institution to include 
statements by directors that desire to make individual or group 
statements regarding the proposed termination and related transactions; 
and in paragraph (c)(3) that we would require the terminating 
institution to include a copy

[[Page 44416]]

of the reaffirmation resolution, a proposed new requirement set forth 
in proposed Sec.  611.1235.
    We did not receive any comments on these other provisions and adopt 
them, except for paragraph (c)(30), as final without changes. We have 
deleted paragraph (c)(30) in the final rule because the institution 
must send us the disclosure information before the board votes on the 
reaffirmation resolution.

Section 611.1230--FCA Review and Approval--Plan of Termination

    Proposed new Sec.  611.1230 separated our approval of the plan of 
termination and the related disclosure to stockholders, as required by 
section 7.11(a)(1) of the Act, from our decision on the termination as 
required by section 7.10(a)(2) of the Act. We proposed to retain 
provisions on our section 7.11 approval in this section and to move the 
section 7.10 approval to proposed Sec.  611.1247. Our review of the 
disclosure information will precede the submission of the information 
to equity holders, as in the existing regulation, and we will begin the 
statutory review period on the date the disclosure information is 
complete, as determined by us. We proposed to review and approve or 
disapprove the termination itself after the equity holders have voted 
to approve the termination.
    We received comments on this provision from all commenters. The 
FCC, three System banks, and four System associations stated they 
recognized the need for FCA to separate the approval of the termination 
plan, for purposes of distribution for a stockholder vote, from 
approval of the termination itself. At the same time, System commenters 
urged us to begin our substantive review as soon as possible after the 
application is received and to retain flexibility to make a decision as 
early as possible in the process so that the matter is not pending for 
a lengthy period. One bank noted that while improved information, 
analysis, and transparency are important objectives, FCA must be 
prepared to act when circumstances warrant, because failure to act 
could affect the System's investors and customers. One non-System 
commenter, the ABA, agreed that separating the review of the disclosure 
information from the review of the termination itself is appropriate. 
However, it expressed concern about FCA's ability to delay the process 
by requiring an unending level of information before the plan is deemed 
complete and argued that we should impose a reasonable cut-off point so 
that the institution can move forward. Rabobank stated that FCA's two 
approvals of the termination reduce clarity and impose costs and 
administrative burdens that outweigh the benefits. Rabobank believed 
that FCA burdens and encumbers the process to a degree that Congress 
explicitly did not intend and that we lack the authority to give 
ourselves intermediate approval steps. Rabobank also stated that 
requiring preliminary FCA review of the disclosure would delay the 
termination process without contributing a significant benefit to that 
process or to the stakeholders. One group of commercial bankers 
objected to this provision because it specifies no time limit for the 
conclusion of the process. Another group of commercial bankers argued 
that we create unnecessary barriers, legal impediments, time delays, 
and other obstacles for any FCS institution that may want to exit the 
System and that these obstacles are unparalleled in the financial 
services industry.
    We agree with commenters that we should make a decision on the 
termination itself as early in the process as possible. Our separation 
of approval of the termination plan and disclosure for submission to 
stockholders from our approval (or disapproval) on the termination is 
not meant to delay unnecessarily the termination decision. We 
acknowledge that failure to act promptly and decisively may affect 
stockholders and investors' confidence. We will begin our substantive 
review as soon as possible and make a decision as early as possible. We 
disagree with other commenters that we are creating time delays and 
other obstacles by our process. We have always had the discretion, in 
our review and approval of other corporate applications (such as 
mergers and consolidations), to determine whether the application is 
complete before beginning the 60-day review. We have used our 
discretion by communicating promptly with institutions whose 
applications were incomplete and working closely with them to ensure 
completion. We will follow this approach as well for a termination 
request in determining whether it is complete and in notifying the 
terminating institution when the 60-day review period begins. In the 
alternative, FCA could reject a plan because it was incomplete, but the 
institution would need to begin the process anew. The proposal permits 
a more streamlined process. Once FCA notifies the institution that the 
termination plan and disclosure is complete, we are bound by the 
statutory requirement of section 7.11(a)(1) to act on the plan within 
60 days. Should the FCA Board fail to act within the 60-day period, the 
institution may submit the plan and related disclosure to its 
stockholders for a vote. Accordingly, we adopt this provision as 
proposed.

Section 611.1235--Plan of Termination--Distribution

    We proposed requiring the terminating institution's board of 
directors to adopt a reaffirmation resolution approving the termination 
not more than 14 days before mailing the plan to stockholders in order 
to ensure the continuing support of the board for the termination. 
Comments received on this provision and our response are included with 
the discussions of required board resolutions under Sec.  611.1210.
    We also proposed to require the terminating institution to provide 
the plan of termination to equity holders at least 45 days (instead of 
the existing regulation's 30 days) before the stockholder vote will 
occur.
    One non-System commenter, the ABA, disagreed with our extension for 
the stockholder review period from 30 days in the current rule to 45 
days, arguing that it is a needless delay and that 30 days is 
sufficient for stockholders to review and question any termination 
plan.
    On the contrary, stockholders will need to thoroughly review an 
expected extensive disclosure and may have a number of questions to ask 
the institution's board and management. The additional 15 days will 
permit informational meetings to be held throughout the institution's 
territory, as proposed in Sec.  611.1211(b), so that stockholders can 
have their questions answered and can discuss the pros and cons with 
other member-borrowers and with institution directors. These meetings 
will also give management an opportunity to explain the termination 
plan and procedures. We are finalizing this provision as proposed, 
except that we have made a non-substantive change to paragraph (a) to 
remove redundant language.

Section 611.1240--Voting Record Date and Stockholder Approval

    Except for existing Sec.  611.1240(c), which we proposed to move to 
Sec.  611.1235, we proposed to retain the remainder of existing Sec.  
611.1240 with the following revisions. In paragraph (a), we proposed to 
require the stockholder vote to take place at least 60 days after we 
have approved the plan of termination (or 60 days after the end of our 
review period) instead of no more than 60 days after. We proposed this 
change to ensure that voters have

[[Page 44417]]

enough time to review and evaluate the proposal. In paragraph (c), we 
proposed a quorum requirement of 30 percent of voting stockholders that 
must be present (in person or by proxy) at the meeting. This would not 
require 30 percent of voting stockholders to cast a vote but would 
require their presence (in person or by proxy) at the meeting. We made 
this proposal because we believe an issue of such importance to all 
equity holders should be deliberated upon by a significant number of 
the voting stockholders, regardless of the number who ultimately vote. 
In paragraph (d), we restated the requirement in section 7.10(a)(6) of 
the Act that a majority vote by voting stockholders present and voting 
in person or by proxy at a duly authorized meeting is needed to approve 
the termination.
    We also proposed to add a reference in new paragraph (e) to Sec.  
611.340, to clarify that the voting security regulation applies to this 
stockholder vote as well as Sec.  611.330, which covers confidentiality 
in voting.
    We received comments on the proposed 30-percent quorum requirement 
from a number of commenters. The System commenters supported the quorum 
requirement in this section for the first vote but not for the 
reconsideration vote in Sec.  611.1245, as discussed below. About half 
of the commercial bankers recommended a simpler, more convenient voting 
process, stating that, ``in the day of emails and the internet,'' we 
should not require 30 percent of stockholders to be physically present 
for the meeting. The ICBA, ICB of ND, and ABA also objected to 
requiring 30 percent of stockholders to be physically present during a 
termination vote because of the difficulty and cost to the 
stockholders, some of whom live in remote rural areas. In addition, the 
ABA asserted that requiring at least 60 days between FCA approval of 
the plan of termination and the stockholder vote caused an unnecessary 
delay in the termination process.
    The proposed rule does not require voting stockholders to be 
physically present at the stockholders' meeting in order to meet the 
quorum. As the rule says, voting stockholders must be present ``in 
person or by proxy.'' Voting stockholders have the option of attending 
the meeting in person, giving their proxies to another voting 
stockholder of their choice who will attend the meeting in person, or 
sending their proxies to the institution with (or without) instructions 
as to how to vote. Moreover, a voting process that permits voting via 
the Internet is not prohibited, provided the institution complies with 
the voting security and confidentiality requirements of the Act and FCA 
regulations.
    As for the 60-day minimum period between FCA approval and the 
stockholder vote, we disagree that this will cause unnecessary delay in 
the termination process. We believe that at least 2 months are 
necessary for scheduling any pre-vote or ``information'' meetings for 
stockholders that we require or that the terminating institution wishes 
to hold, and for printing and distributing the disclosure information 
for stockholders.
    We adopt this section in the final rule without any changes from 
the proposal.

Section 611.1245--Stockholder Reconsideration

    In paragraph (b) of this section, we proposed adding a quorum 
requirement of at least 30 percent of voting stockholders for the same 
reasons we proposed a quorum requirement for the first stockholder 
vote. The stockholder reconsideration vote is provided for in section 
7.9 of the Act (12 U.S.C. 2279c-2), which gives stockholders opposing 
an intra-System merger, transfer of lending authority, or termination 
the right to petition their institution for a re-vote (reconsideration 
vote) following any approval of the transaction. The petition must be 
signed by at least 15 percent of the voting stockholders and must be 
delivered to the FCA within 35 days after the mailing of the notice to 
stockholders of the results of the first vote. If a majority of the 
voting stockholders votes against the transaction in the 
reconsideration vote, the transaction cannot take place.
    All of the System commenters objected to having a 30-percent quorum 
requirement for the reconsideration vote, even though they supported 
the 30-percent quorum requirement for the first vote. They asserted 
that it was unduly burdensome and contrary to the Act. They did not 
specify how they believed it was contrary to the Act, but they said 
that the quorum requirement could create an incentive for stockholders 
supporting termination to boycott the reconsideration vote meeting. 
Non-System commenters opposed what they believed was a requirement that 
stockholders be physically present to count towards the quorum for the 
reconsideration vote; as we explain above, this interpretation is 
incorrect, and there is no requirement for stockholders to be 
physically present to make up the quorum for either vote.
    We have considered the recommendation to eliminate the quorum 
requirement for the reconsideration vote and have decided to retain it. 
The quorum requirements for the reconsideration vote, as well as for 
the first stockholder vote, are consistent with our authorities under 
the Act to regulate the termination process. If we were to incorporate 
the System commenters' recommendation, it would be more difficult for 
the terminating institution to obtain the first vote than for 
stockholders to obtain a reconsideration vote. Furthermore, without the 
same quorum requirement for the reconsideration vote, there would be a 
possibility that a termination could be blocked by a significantly 
smaller number of stockholders in a reconsideration vote than the 
number of stockholders who originally voted in favor of it. We believe 
this result would be unfair. Under our proposal, it will be no more 
difficult to achieve a quorum for the reconsideration vote than for the 
first vote.
    We adopt this section in the final rule without any changes from 
the proposal.

Section 611.1246--Filing of Termination Application and Its Contents

    Proposed new Sec.  611.1246 provides that, within 90 days of 
notifying us that voting stockholders have approved the plan of 
termination, a terminating institution may submit a termination 
application containing the information that is required by the 
termination regulations and any additional information that we request 
or that the terminating institution's board wishes to submit.
    We received no comments that directly relate to the filing of the 
termination application with FCA following the stockholder vote. We 
adopt the provision as proposed.

Section 611.1247--FCA Review and Approval--Termination

    We proposed new Sec.  611.1247 that would provide for a separate 
approval of the termination application. As we noted above in the 
preamble discussion of Sec.  611.1230, we proposed to review the 
termination application after our review of the plan of termination 
required by section 7.11(a)(1) of the Act and after a stockholder vote 
approving the termination. In this proposed new section, paragraph (a) 
stated that, after we receive the termination application, we will 
review it and either approve or disapprove the termination. Paragraph 
(b) stated that we will disapprove the termination if we determine that 
there are one or more appropriate reasons for disapproval, consistent 
with our statutory and regulatory authorities. We proposed to delete 
existing Sec.  611.1230(b), which provides that we

[[Page 44418]]

may disapprove a termination if we determine it would have a ``material 
adverse effect on the ability of the remaining System institutions to 
fulfill their statutory purpose.'' While we did not rule out 
disapproval of a termination based on its ``material adverse effect'' 
on the remaining System institutions, we stated that we may disapprove 
a termination for any appropriate reason.
    Proposed paragraph (c) set forth conditions required for our 
approval of the termination. In proposed paragraph (d), we provided 
that, when we approve a termination, we will also determine an 
effective date for the termination. Such date could be no earlier than 
the last to occur of the following events: (1) Fulfillment of the 
conditions in paragraph (c) of this section; (2) the terminating 
institution's proposed termination date; (3) 90 days after we received 
the termination application; or (4) 15 days after any reconsideration 
vote.
    We received 33 comment letters on this provision of the proposed 
rule. In their comments on proposed Sec.  611.1230, eight System 
commenters urged FCA to begin our substantive review as soon as 
possible after the application is received and to retain flexibility to 
make a decision as early as possible in the process so the matter is 
not pending for a lengthy period. One System bank noted that while 
improved information, analysis, and transparency are important 
objectives, FCA must be prepared to act when circumstances warrant, 
because failure to act could affect the System's investors and 
customers. In our response above to the comments on Sec.  611.1230, we 
agreed on the importance of decisive action as early as possible. One 
System bank commented that we should approve a termination only if the 
institution's exit further fulfills the congressionally mandated 
mission and, at a minimum, any approval of a request should not be 
detrimental to the remaining institutions' ability to fulfill the 
mission. Rabobank stated that FCA's second vote, which would follow 
stockholder approval and three votes by the board of directors, is 
unfair to stockholders because it would veto the equity holders' 
mandate and undercut the democratic principles that give the 
stockholder-owners the right to make decisions governing their 
institution. Rabobank commented that our failure to impose a timeframe 
for FCA's vote could delay the process indefinitely. Rabobank also 
objected to our removal of all references to criteria that we may use 
or reasons we may give for disapproval, giving System institutions no 
way to ascertain whether a termination will be approved until an 
extraordinary amount of time and money has been expended. In 
particular, Rabobank objected to our removal of the criterion of 
``material adverse effect'' from the regulation that governs our 
review, and argued that it is the only reason for disapproving a 
termination request, assuming all regulations were satisfied. It asked 
that this criterion be preserved from the current rule and that FCA 
clarify that we will disapprove a termination only based on a 
determination that the termination would have a material adverse 
effect. In the alternative, Rabobank asked FCA to identify additional 
criteria for disapproval and then republish its proposed rule with 
criteria for public comment. Rabobank stated that FCA owes System 
institutions greater transparency in how it will evaluate termination 
requests and recommended that we articulate clear standards for how we 
would review the request and make the decision after board and 
stockholder approval. The ICBA commented that the ``material adverse 
effect'' criterion should stay in the regulation as it is the one that 
makes the most sense in directing our approval process, and that all 
other issues, such as impact on stockholders, would have already been 
thoroughly vetted during the disclosure review process. The ICBA 
further noted that the payment of the exit fee and debt obligations 
will already ensure there is not an adverse effect on System 
institutions. The ABA noted that FCA retains the right to deny a 
termination if it has a materially adverse impact on the rest of the 
System even though the proposed rule eliminated this as a specified 
reason for denial. Also, the ABA expressed concern that ``materially 
adverse effect'' is not quantified in the proposed rule and suggested 
that FCA set forth a rule for public comment on the level of impact 
that we would consider material. In addition, the ABA criticized us for 
setting no time limit for approval or disapproval and establishing no 
criteria by which we w