Disclosure to Investors in System-Wide and Consolidated Bank Debt Obligations of the Farm Credit System, 64129-64130 [E7-22312]

Agencies

• Farm Credit Administration

[Federal Register Volume 72, Number 220 (Thursday, November 15, 2007)]
[Rules and Regulations]
[Pages 64129-64130]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-22312]


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FARM CREDIT ADMINISTRATION

12 CFR Part 630

RIN 3052-AC40


Disclosure to Investors in System-Wide and Consolidated Bank Debt 
Obligations of the Farm Credit System

AGENCY: Farm Credit Administration.

ACTION: Direct final rule.

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SUMMARY: The Farm Credit Administration (FCA or we) issues this direct 
final rule amending our regulation on the external auditor's assessment 
of internal control over financial reporting concerning the System-wide 
annual report to investors. The effect of the amended rule is to 
require the external auditor of the Federal Farm Credit Banks Funding 
Corporation (Funding Corporation) to express an opinion on the 
effectiveness of internal control over financial reporting instead of 
reporting on management's assessment of internal control over financial 
reporting. The amended rule implements recent changes in industry 
practices.

DATES: If no significant adverse comment is received on or before 
December 17, 2007, these regulations shall be effective upon the 
expiration of 30 days after publication in the Federal Register during 
which either or both Houses of Congress are in session. We will publish 
notice of the effective date in the Federal Register. If we receive 
significant adverse comment on an amendment, paragraph, or section of 
this rule, and that provision may be addressed separately from the 
remainder of the rule, we will withdraw that amendment, paragraph, or 
section and adopt as final those provisions of the rule that are not 
the subject of a significant comment. In such a case, we would then 
tell you how we expect to continue further rulemaking on the provisions 
that were the subject of significant adverse comment.

ADDRESSES: We offer a variety of methods for you to submit comments. 
For accuracy and efficiency reasons, we encourage commenters to submit 
comments by e-mail, through the Agency's Web site, or the Federal 
eRulemaking Portal. Regardless of the method you use, please do not 
submit your comment multiple times via different methods. You may 
submit comments by any of the following methods:
     E-mail: Send us an e-mail at reg-comm@fca.gov.
     Agency Web site: https://www.fca.gov. Once you are at the 
Web site, select ``Public Commenters,'' then ``Public Comments.''
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Gary K. Van Meter, Deputy Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
     Fax: (703) 883-4477. Posting and processing of faxes may 
be delayed. As faxes are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act, please consider 
another means to submit your comment if possible.
    You may review copies of 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 ``Public Commenters,'' then select ``Public 
Comments,'' then select ``Submitting a Comment'' and follow the 
instructions there. We will show your comments as submitted, but for 
technical reasons we may omit items such as logos and special 
characters. Identifying information that you provide, such as phone 
numbers and addresses, will be publicly available. However, we will 
attempt to remove e-mail addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: Wade Wynn, Policy Analyst, Office of 
Regulatory Policy, Farm Credit Administration, McLean, VA 22102-5090, 
(703) 883-4414, TTY (703) 883-4434, or Laura McFarland, Senior 
Attorney, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION: 

I. Background

    The FCA adopted a final rule on December 20, 2006, amending our 
disclosure and reporting requirements for Farm Credit System (System) 
institutions.\1\ As part of that rulemaking, we added a requirement in 
Sec.  630.5(d) to include a report by management assessing the 
effectiveness of internal control over financial reporting in the 
System-wide annual report to investors. We also added a requirement 
that the external auditor of the Funding Corporation review, attest, 
and report on management's assessment of internal control over 
financial reporting. The December 2006 rulemaking adding Sec.  630.5(d) 
did not receive any objections to requiring an external auditor to 
report on management's assessment of internal control over financial 
reporting in the System-wide annual report to investors. Commenters did 
ask that the attestation reporting requirement be similar to that of 
Public Company Accounting Oversight Board (PCAOB) auditing standards, 
and we agreed. We further explained that the external auditor's 
attestation report should conform to other applicable industry 
standards, which we identified as those regulations of the Securities 
and Exchange Commission (SEC) implementing the Sarbanes-Oxley Act of 
2002 (Sarbanes-Oxley).\2\ Although the System is not covered by the 
provisions of Sarbanes-Oxley, nor regulated by the SEC, we generally 
regard SEC rules as the industry standard in this area, and we continue 
to follow this same general approach with consideration given to the 
unique cooperative structure of the System.
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    \1\ 71 FR 76111 (December 20, 2006).
    \2\ Pub. L. 107-204 (July 30, 2002).
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    On June 27, 2007, the SEC revised its requirement regarding the 
external auditor's attestation report.\3\ The SEC now requires the 
external auditor to express an opinion directly on the effectiveness of 
internal control over financial reporting instead of reporting on 
management's assessment of internal control over financial reporting. 
The SEC continues to require external auditors to evaluate whether 
management has included appropriate disclosures in its assessment 
report. Further, on July 25, 2007, the SEC approved PCAOB Auditing 
Standard No. 5, ``An Audit of Internal Control Over Financial Reporting 
That Is Integrated With an Audit of Financial Statements.'' \4\ 
Auditing Standard No. 5 is intended to increase the accuracy of 
financial reports and reduce costs by making audits more risk-based and 
scalable to company size and complexity. Auditing Standard No. 5 
requires the external auditor to form an opinion on the effectiveness 
of internal control over financial reporting except in the circumstance 
of a scope limitation that would result in the auditor disclaiming an 
opinion. The

[[Page 64130]]

external auditor generally disclaims an opinion when significant 
limitations prevent him from performing all the tests necessary to 
complete the audit and render an opinion. Auditing Standard No. 5 also 
requires the external auditor to modify his or her opinion on the 
effectiveness of internal control over financial reporting if the 
auditor determines that management's assessment is not fairly stated.
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    \3\ 72 FR 35310 (June 27, 2007).
    \4\ Auditing Standard No. 5 supersedes Auditing Standard No. 2, 
``An Audit of Internal Control Over Financial Reporting Performed in 
Conjunction With an Audit of Financial Statements'' for all audits 
of internal control ending on or after November 15, 2007.
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II. Funding Corporation External Auditor's Attestation of Internal 
Control Over Financial Reporting

    The FCA is amending Sec.  630.5(d)(2) to conform with applicable 
industry standards for auditor attestations on internal control over 
financial reporting. The requirement in Sec.  630.5(d)(2) for the 
external auditor of the Funding Corporation to review, attest, and 
report on management's assessment of internal control over financial 
reporting is no longer consistent with industry standards. Industry 
standards now require attestation reports to opine on the effectiveness 
of internal control over financial reporting. The amendment in this 
rulemaking will conform with these new standards.
    The provision of Sec.  630.5(d)(2), as amended by this direct final 
rulemaking, requires the external auditor of the Funding Corporation to 
include in the attestation report, an opinion on the effectiveness of 
internal control over financial reporting. The revised requirement 
reduces confusion, clarifies reporting, and more effectively 
communicates the external auditor's responsibility in relation to 
management's process and necessarily conveys whether management's 
assessment is fairly stated.

III. Direct Final Rule

    We are amending Sec.  630.5(d)(2) by a direct final rulemaking. The 
Administrative Conference of the United States recommends direct final 
rulemaking for Federal agencies to enact noncontroversial regulations 
on an expedited basis, without the usual notice and comment period.\5\ 
This process enables us to reduce the time and resources we need to 
develop, review, and publish a final rule while still affording the 
public an adequate opportunity to comment or object to the rule.
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    \5\ Recommendation 95-4, referencing the Administrative 
Procedure Act ``good cause'' exemption at 5 U.S.C. 553(b)(B), 
(adopted June 15, 1995).
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    In a direct final rulemaking, we notify the public that the rule 
will become final on a specified future date unless we receive 
significant adverse comment during the comment period. A significant 
adverse comment is one where the commenter explains why the rule would 
be inappropriate (including challenges to its underlying premise or 
approach), ineffective, or unacceptable without a change. In general, a 
significant adverse comment would raise an issue serious enough to 
warrant a substantive response from the agency in a notice-and-comment 
proceeding.
    We believe that a direct final rulemaking is the appropriate method 
for amending Sec.  630.5(d)(2) to conform to new industry standards. We 
do not anticipate there will be significant adverse comments. We 
received no objectionable comments to the December 2006 rulemaking that 
added the requirement for an external auditor attestation, which 
conformed with SEC requirements at the time. Further, we stated at that 
time our intent to remain consistent with industry standards in this 
area, and commenters agreed. If, however, we receive a significant 
adverse comment during the comment period, we will publish a notice of 
withdrawal of the relevant provisions of this rule that will also 
indicate how further rulemaking will proceed. If we receive no 
significant adverse comment, we will publish notice of the effective 
date of the rule following the required Congressional waiting period 
under section 5.17(c)(1) of the Farm Credit Act of 1971, as amended.

IV. 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 direct final 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 in 12 CFR Part 630

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


0
For the reasons stated in the preamble, part 630 of chapter VI, title 
12 of the Code of Federal Regulations is amended as follows:

PART 630--DISCLOSURE TO INVESTORS IN SYSTEM-WIDE AND CONSOLIDATED 
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

0
1. The authority citation for part 630 continues to read as follows:

    Authority: Secs. 5.17, 5.19 of the Farm Credit Act (12 U.S.C. 
2252, 2254).

Subpart A--General

0
2. Revise Sec.  630.5(d)(2) to read as follows:


Sec.  630.5  Accuracy of reports and assessment of internal control 
over financial reporting.

* * * * *
    (d) Management assessment of internal control over financial 
reporting.
* * * * *
    (2) The Funding Corporation must require its external auditor to 
issue an attestation report, which must express an opinion on the 
effectiveness of internal control over financial reporting. The 
resulting attestation report must accompany management's assessment and 
be included in the annual report.

    Dated: November, 8, 2007.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E7-22312 Filed 11-14-07; 8:45 am]
BILLING CODE 6705-01-P