Organization; Eligibility and Scope of Financing; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Definitions; and Disclosure to Shareholders; Director Elections, 18726-18745 [2010-7755]
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18726
Federal Register / Vol. 75, No. 69 / Monday, April 12, 2010 / Rules and Regulations
• Incorporate FCA interpretations and
responses to questions raised by System
institutions and FCA examiners in our
regulations.
FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 613, 615, 619 and
620
RIN 3052–AC43
Organization; Eligibility and Scope of
Financing; Funding and Fiscal Affairs,
Loan Policies and Operations, and
Funding Operations; Definitions; and
Disclosure to Shareholders; Director
Elections
Farm Credit Administration.
Final rule.
AGENCY:
ACTION:
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SUMMARY: The Farm Credit
Administration (FCA or we) issues this
final rule on Farm Credit System
(System) bank and association director
elections and other voting procedures.
The final rule clarifies director election
processes and updates FCA regulations
to incorporate interpretations made
through bookletters to System
institutions. It also consolidates general
election procedures, clarifies the role of
nominating committees, enhances
eligibility and disclosure requirements
for director candidates, and improves
annual meeting information statement
instructions. The final rule also adds
new regulations on floor nominations
and meetings of stockholders. We
expect this final rule will increase
stockholder participation, enhance
impartiality, and strengthen disclosures
in director elections.
DATES: 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: Elna
Luopa, Senior Corporate Analyst, Office
of Regulatory Policy, Farm Credit
Administration, McLean, VA 22102–
5090, (703) 883–4414, TTY (703) 883–
4434; or Laura D. McFarland, Senior
Counsel, 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 final rule are to:
• Strengthen the independence of
nominating committees;
• Encourage greater stockholder
participation in the director election
process;
• Ensure that procedures on
nominations from the floor are equitable
and known to stockholders;
• Clarify director election procedures;
• Enhance impartiality and disclosure
in the election of directors; and
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II. Background
The Farm Credit Act of 1971, as
amended (Act) (Pub. L. 92–181, 85 Stat.
583), establishes the System as a farmerowned cooperative system that provides
credit to farmers, ranchers, producers or
harvesters of aquatic products, and rural
homeowners. The System’s cooperative
structure relies on stockholder control,
participation, and ownership, supported
by accurate and timely information
provided by the directors of System
institutions. Boards of directors have the
responsibility of encouraging
stockholder participation in the
management, control, and ownership of
the cooperative. Importantly, it is also
from this pool of interested, active, and
informed stockholders that the
cooperative draws its next generation of
directors.
On April 16, 2009, we published a
proposed rule (74 FR 17612) to
strengthen certain director election
provisions and add other provisions to
ensure that stockholders’ interests
continue to be the focus in the
boardroom through their elected
directors. We further proposed
consolidating our director election rules
into subpart C of part 611, ‘‘Election of
Directors and Other Voting Procedures,’’
to keep subject matters together and
facilitate ease of use. We initially
established a 60-day comment period
but, on the request of the public,
extended that period another 60 days.1
The extended comment period for the
proposed rule closed on August 14,
2009.
III. Comments and Our Response
We received 96 comment letters to
our proposed rule from individuals and
entities associated with the System,
including the Farm Credit Council
(FCC), acting for its membership, and
each of the five Farm Credit banks. Of
the comment letters received, 62
expressed support for the FCC comment
letter, adding individual elaborations
when they deemed them appropriate.
We discuss the comments to our
proposed rule and our responses below.
Those areas of the proposed rule not
receiving comment are finalized as
proposed unless otherwise discussed in
this preamble.
A. General Issues
We received 68 comments on the
need for additional regulations on
1 See
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election processes in the System,
including one from the FCC and
multiple letters from members of
individual System associations. While
most commenters supported our
objective of improving System election
processes, the FCC, three Farm Credit
banks and several associations
questioned the need for additional
regulations. The FCC and a couple of
other commenters acknowledged that
some of the existing regulations needed
updating, but remarked that they were
unaware where the existing rules had
failed. Other commenters remarked that
we should not impose regulatory
requirements that restrict individual
institution discretion in elections. These
comments are addressed here.
1. Need for Regulation
The FCC and 49 other commenters
asked that we withdraw the rule and
work with the System to find a
nonregulatory approach to strengthen
institution elections. Many of these
commenters remarked that active
dialogue with System boards can
address any weaknesses in the current
election process, as can FCA informal
guidance and examination. The FCC
and a few other commenters remarked
that our existing rules on election
practices already exceed other
regulators and suggested we adopt the
practices of other financial regulators by
requiring each institution to have
policies in place specifying election
practices in lieu of regulations. A few
associations commented that the
election process in the System is
working and the rule would have a
negative impact and increase costs, but
one association remarked that the rule
provided many opportunities for
enhanced elections. This association
also cautioned that those opportunities
should not be forced upon the
institutions. Another association stated
that the rule does not follow best
practices and expressed dismay at the
implementation efforts that would be
required if the rule became final,
including changes to bylaws and
policies. This same association asserted
that the rule does not further the safe
and sound operations of the System.
Conversely, one association expressed
appreciation that the rule recognizes
best practices, but the commenter
questioned the need to capture best
practices in regulations. Another
commenter stated that associations are
in a better position to structure election
procedures. The FCC and other
commenters remarked that the proposed
regulatory scheme seemed unjustified
based on the limited election provisions
in the Act. Still another commenter
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remarked that adoption of the rule could
carry unintended consequences
undermining the stated objectives of the
rule. A couple of commenters expressed
concern that the rule does not give
sufficient consideration to the different
sizes and operations of various System
institutions. One commenter went so far
as to state that the rule was a regulatory
burden. Another expressed a lack of
optimism that the rule would improve
election processes. Two Farm Credit
banks cautioned FCA on regulating
election procedures within the System,
questioning if such rules are in keeping
with FCA’s status as an arm’s-length
regulator. One bank stated that the
proposed rule and existing rules are too
detailed, explaining that individual
institutions are better equipped to
control election procedures. This same
bank questioned why this rulemaking
was needed as it was not aware of any
harm or purpose that would be
addressed by the rule.
We are not withdrawing the rule, but,
in response to the comments received,
we have amended certain provisions
based on specific comments. While
voluntary administration of elections is
valuable, it does not replace the stability
that rules provide in assuring System
stakeholders of the safety and
soundness of the System, and we have
a responsibility to address this issue.
Moreover, an effective director election
process is critical to good governance,
which in turn is essential for institution
safety and soundness. The FCA is the
independent Federal agency in the
executive branch of the Government
responsible for examining and
regulating System institutions. In the
course of issuing regulations, we
consider whether the rulemaking may
duplicate other requirements, would be
ineffective, or impose burdens that are
greater than the benefits received. Also,
we promulgate rules necessary to
implement the expectations and
requirements of the Act, which, in the
case of director elections, is to support
stockholder participation in the
management, control, and ownership of
the System. We believe this rule
clarifies the intended meaning of certain
existing rules, eliminates confusion
through reorganization of the rules,
replaces outdated regulatory language
with more current terminology, and
introduces technological alternatives to
existing requirements. We also believe
that this rulemaking is not a regulatory
burden, as a large portion of it
incorporates previous informal guidance
provided to institutions and, therefore,
does not result in significant
adjustments to individual institution
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operations. We do not agree with
comments that our rule is inconsistent
with what other regulators require. The
FCA, as an independent regulator of the
System, is not required to follow the
actions of other regulators. Instead, we
consider the policy positions of other
regulators to decide if we should follow
them or take a different approach if
appropriate to implement the
requirements and expectations of the
Act.
Our election rule sets a minimum
level of performance and gives prime
consideration to the cooperative
structure of the System. We believe the
assurances derived from this regulatory
minimum standard will benefit the
System overall by increased
stockholder, investor, and public
confidence. In this rulemaking, our
intent is to ensure that appropriate
election standards exist for all System
institutions. We carefully considered
the size, complexity, risks,
interrelationships, and resources of
System institutions when developing
our rules, and incorporated variations
and flexibility as appropriate. While we
believe it is important to preserve
individual institution flexibility when
possible, our regulatory responsibility
requires us to issue regulations that we
determine appropriate for safety and
soundness reasons. While commenters
remarked that they knew of no risk or
problem that needs to be addressed in
a regulation, we explain that we are not
limited to issuing regulations only when
there is an existing problem. It is our
responsibility as a safety and soundness
regulator to be proactive in our
rulemaking and provide standards that
help avert potential problems.
2. Examination Instead of Rulemaking
Thirty-four (34) System commenters
cited our examination and enforcement
authorities as a sufficient means to
address election issues, concluding that
additional regulations are unnecessary.
Many explained that the FCA
examination function is better suited to
addressing individual problems, rather
than a rulemaking that impacts the
entire System, and that we should focus
our attention on those institutions with
election concerns instead of developing
a set of regulations impacting all
institutions. The FCC and several other
commenters suggested FCA issue an
election governance policy statement
and then use its examination authority
to verify compliance with the policy.
Commenters also stated that we have all
the enforcement powers necessary to
correct any unsafe or unsound election
practices without this rule. The FCC
commented that because there are no
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problems in election of bank directors,
there is little burden on FCA in
examining individual bank election
policies, rather than issuing regulations
and examining for compliance with
those regulations.
We examine to ensure the safety and
soundness of System institutions and
their compliance with laws and
regulations. This function is not a
substitute for our responsibility to issue
regulations implementing the Act and
ensuring the safety and soundness of
System institutions. Our examiners use
our rules as the basis for compliance
determinations and to require any
necessary corrective actions.
Regulations reduce the likelihood that
examinations will uncover unsafe and
unsound practices and provide a
minimum standard of performance to
assure stakeholders of the safe and
sound operations of System institutions.
While we agree with the commenters
that we have a high level of enforcement
authority, we do not view it as our
primary tool for ensuring the safety and
soundness of System institutions. Safe
and sound operations of individual
System institutions are ensured by a
clear set of rules and thorough
examinations.
3. Interaction With Bylaws
The FCC and eight other commenters
stated that our rulemaking efforts
conflict with section 5.17(b) of the Act.
This section of the Act precludes FCA
from approving institution bylaws. As
we have explained in other
rulemakings, issuing rules impacting
bylaws does not mean we are approving
bylaws in violation of section 5.17(b) of
the Act. The prohibition on bylaw
approval doesn’t preclude rulemaking
on matters affecting an institution’s
bylaws or the safe and sound operations
of System institutions. In fact, the Act
at section 5.17(a)(9) directs us to issue
rules and regulations ‘‘necessary or
appropriate’’ to carry out the Act. In
pursuit of ensuring a safe and sound
System and carrying out the Act,
institution bylaws and operations are
necessarily impacted by our rules.
Additionally, while the authority of
System institutions to establish bylaws
is fairly broad, it is not without limits.
Bylaws must be consistent with
applicable laws and regulations, and we
retain the responsibility to examine
institution bylaws to ensure
compliance. Consequently, we may
regulate the terms and conditions by
which institutions exercise their powers
through their bylaws, while not
approving the bylaws themselves, and
then examine compliance with our
regulations.
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4. Differences between Farm Credit
Banks and Associations
Two Farm Credit banks expressed
concern that the regulation does not
adequately recognize the differences
between bank and association election
procedures. One commenter remarked
that the rule is too restrictive for banks,
while not providing enough protection
of association rights. This commenter
asked the FCA to reevaluate the
proposed rule to recognize differences
in election procedures between banks
and associations contained in the Act.
One association remarked that FCA
should adopt the concept of 75-percent
stockholder-associations’ affirmative
vote on all bank election procedures,
similar to the current rule on
overturning cumulative voting in bank
elections. We disagree with the
suggestion that stockholder-associations
be allowed to overrule bank board
decisions on a bank’s election process.
Each Farm Credit bank may consider the
suggestions of its stockholderassociations and incorporate them into
the bank’s election policies and
procedures if the bank desires. We agree
that the rule requires further clarity in
its application to Farm Credit banks
versus associations and have made
modifications to those sections of the
rule we considered appropriate. We
addressed these specific modifications
in the section-by-section analysis of this
preamble below.
5. Implementation Date
We received five comments asking
that the implementation date of the rule
be extended to facilitate compliance. We
proposed no delayed implementation
date because we do not consider it
necessary. As stated earlier, much of
this rulemaking incorporates previous
guidance provided by FCA to the
System. We are not delaying the
implementation of the other areas of the
rule because the timing of the rule’s
effective date is not anticipated to
impact ongoing elections.
B. Specific Issues
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1. Meetings of Stockholders [New
§§ 611.100 and 611.110]
a. Definitions [New § 611.100]
We received two comments on the
definition of ‘‘mail ballots.’’ The
commenters asked that we continue to
permit mail ballots to be used by Farm
Credit banks, whether or not a
stockholders’ meeting has been held.
One of the commenters pointed out that
Farm Credit banks, as acknowledged
elsewhere in the proposed rule, do not
always have stockholders’ meetings
when conducting director elections.
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This same commenter also remarked
that proxy ballots could be used if mail
ballots were eliminated.
The commenter’s point that the
definition offered in the proposed rule
would effectively prevent banks from
using mail ballots absent a stockholders’
meeting is well made. Our proposed
definition was in no way intended to
prevent Farm Credit banks from using
mail ballots, absent a stockholders’
meeting. We are therefore removing that
portion of the definition and placing the
language explaining that mail ballots
may not be distributed prior to the
conclusion of a meeting in paragraph (d)
of § 611.340, which discusses the time
when proxy ballots may be accepted
and mail ballots may be distributed in
connection with stockholders’ meetings.
We believe this movement of language
regarding when mail ballots are
distributed from § 611.100(a) to
§ 611.340(d) clarifies that when a
stockholders’ meeting is held to conduct
elections, mail ballots may not be issued
before the conclusion of that meeting.
Although no comments were made on
the definition of mail ballots, including
by electronic means, we are clarifying
that electronic ballots classified as mail
ballots are those cast by electronic mail.
We did not intend to characterize
electronic, ‘‘real time’’ balloting
procedures, such as electronic ballot
stations or online balloting that may be
used by stockholders attending a
meeting either in a physical location or
online, as mail ballots. Those electronic
‘‘real time’’ balloting methods would
properly be characterized as in-person
voting. We also clarify that text
messaging is not an appropriate method
for balloting as it is nearly impossible to
verify the identity of the sender of text
messages.
One commenter remarked that the
definitions for online meetings and
online meeting spaces, while providing
flexibility, do not allow for meetings
without a physical space. This
commenter asked for clarification on
what business can be conducted by mail
or online without physical meetings.
This comment is better directed to
§ 611.110, ‘‘Meetings of stockholders,’’
since the definitions in § 611.100 do not
contain the limitation mentioned, but
we respond to the comment here. We
require a physical meeting space when
using online meetings for all
associations and those Farm Credit
banks allowing floor nominations. As
explained in the proposed rule
preamble, E-commerce requires each
stockholder to agree to electronic
communication in lieu of traditional
communications, so unless all
stockholders have made such an
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agreement, a physical meeting space is
needed to provide a ‘‘floor’’ for floor
nominations. Because the commenter
thought our proposed rule would
require Farm Credit banks to always
have a physical meeting space when
using online meetings, we are modifying
§ 611.110(a) to clarify this requirement
always applies to associations, since
associations must allow floor
nominations. The requirement would
only apply to Farm Credit banks
permitting floor nominations, as
reflected in § 611.326(b)(2).
We received one comment on the
definition of a quorum, asking if a
quorum applies to individual meeting
items or the entire meeting. A quorum
is the number of stockholders needed to
be present to start a meeting; it does not
vary for each agenda item. However, we
are removing the definition of a quorum
for reasons stated under section
III.B.1.d. of this preamble. We received
no comments on the other provisions of
§ 611.100 and finalize those as
proposed.
b. Stockholders’ Meetings [New
§ 611.110]
We received 22 comments, including
the FCC, on System associations’
holding annual director elections and
allowing for the use of online meetings
as part of the annual meeting process.
Many of these commenters expressed
dismay at having to have one large
meeting each year instead of individual
and localized customer appreciation
meetings. Several commenters also
stated that institutions should remain
free to determine the meeting process.
An association commented that it had
stopped holding annual meetings 12
years ago, instead using localized
customer appreciation gatherings,
which have resulted in significant
increases in stockholder participation
and attendance. Still another association
stated that it has scaled down its annual
meeting and redirected the cost savings
in separate customer appreciation
events. One commenter remarked that
annual meetings are not practical, nor
reliable, for generating stockholder
involvement. Another commenter
expressed concern that annual meetings
are viewed as the only or best means of
stockholder participation in institution
business. Still another stated that one
annual meeting, versus multiple local
meetings, is difficult to schedule in a
fair manner given the variety of
agricultural production timelines
involved. Other commenters remarked
on the growing territorial sizes and
difficulties presented in holding a single
annual meeting. One commenter stated
that even using regional meetings does
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not address timeframes or improve
stockholder participation.
The provision that associations hold
annual meetings of stockholders comes
from section 4.15 of the Act, which
provides that each association ‘‘shall
elect a nominating committee by vote of
the stockholders at the annual meeting
to serve for the following year.’’ In
addition, we are seeking to recognize,
within the general election procedures,
§ 611.1123(a)(3) of our merger
regulations. Under § 611.1123(a)(3), the
governance plan for a continuing
association must provide for the
election of at least one director at each
annual meeting held subsequent to the
date of merger. Incorporating this
requirement into general election
provisions facilitates compliance as
most associations have merged under
this rule and therefore have annual
meetings and director elections.
We assure commenters that our rule
does not require a single, large annual
meeting, only that an annual meeting be
held. Associations may use a single
location or multiple locations to hold
their annual meetings. It is up to the
association to determine how to best
meet the needs of its stockholders in
structuring the meeting, but we
encourage associations that serve
diverse types of agricultural operations
or that have large territories to consider
using sectional sessions out of
consideration for its borrowers. Annual
meetings, besides serving as a forum for
elections, provide the opportunity to
review the association’s financial
condition, discuss its progress or
setbacks over the previous year, look at
the challenges that management and
board expect to face in the year ahead,
address member concerns that warrant
the board’s attention, and discuss the
rights, privileges, and obligations of
members, individually and collectively.
The annual meeting creates the unique
setting for such discussions.
One association objected to requiring
annual director elections, explaining
that it rotates director terms each year
and, because appointed directors are
included in that rotation, a stockholderelected director seat may not be up for
election each year. Another commenter
expressed concern that the rule does not
consider special circumstances, such as
mergers, which make electing a director
every year impractical.
We disagree with comments that
annual director elections, held in
conjunction with annual meetings, are
not necessary every year. We expect
associations to stagger the terms of all
their directors, but we do not expect the
inclusion of appointed directors in a
director rotation cycle to prevent the
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election of a stockholder-elected
director each year. Since appointed
directors (either outside directors or
board-appointed stockholder directors)
are not elected by the voting
stockholders but instead, are chosen by
the other board members, they should
not be included in the director election
rotation cycle. With respect to mergers,
FCA has favorably responded to
requests from associations to suspend
director elections in a merger year or to
facilitate a planned downsizing of the
continuing board of directors.
A commenter asked us to clarify the
language in § 611.110(a) regarding the
interaction of mail ballots with annual
meetings. The rule provides that inperson (including proxy ballots) and
online elections of directors must occur
at the annual meeting, but mail ballots
may be distributed after the meeting.
Thus, associations have to elect a
director each year, but the timing of the
election ballot depends on the balloting
methods used: in-person, online, and
proxy balloting happens at the annual
meeting, but mail balloting happens
after the annual meeting concludes.
Based on this comment, we have revised
§§ 611.110(a) and 611.340(d) to make it
clear that mail ballots may only be
distributed after the annual meeting.
The FCC and one association asked
that banks not be required to have
annual meetings because the Act does
not require it. Another association asked
that banks not be required to elect
directors annually. These commenters
explained that the manner in which
banks communicate with stockholders
for election purposes should be left to
the banks. We clarify that this rule does
not require banks to have annual
meetings. While we are not requiring
Farm Credit banks to hold these types
of meetings, we believe, however, they
should do so. Thus, we are not
removing the language from § 611.110(a)
encouraging Farm Credit banks to hold
annual or periodic meetings. We
continue to strongly believe that the Act
places significant expectations on
System institutions to foster and
facilitate stockholder involvement in,
and knowledge of, the cooperative
nature of each System institution and
the System itself. Farm Credit banks
should give serious consideration to the
value of holding an organized,
structured meeting wherein
stockholder-associations can
communicate with their board members
on matters that may be of interest and
concern to them. In addition, Farm
Credit banks are required to elect at
least one director on an annual basis.
Most commenters on the online
meeting aspect of the rule indicated
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appreciation for the provision, but
expressed reservations on its usefulness,
costs and implementation. One
commenter remarked that using online
meetings may not be appropriate or
available in all locations and asked us
to clarify whether or not we were
requiring online meetings. A couple of
commenters remarked that the cost of
using technology to conduct meetings or
elections may not be justified by actual
use of the feature. One of these
commenters also stated that based on
‘‘hits’’ to its Web site, stockholders do
not prefer this manner of
communication. A couple of
commenters also stated the security
requirements for online meetings and
elections would outweigh their benefit.
One commenter stated that its
stockholders’ infrastructure and culture
did not support online meetings. Three
associations remarked that some
institution stockholders did not have
the technical skills to participate in
online meetings. Other commenters
stated that online meetings are not
viable means for increasing stockholder
participation as many stockholders
prefer not to participate in online
banking activities. Two associations
expressed concern with the
implementation issues associated with
using online meetings, such as
coordinating a virtual floor for an online
meeting. One of these commenters
stated that online meetings send the
message that the board is not interested
in personal interaction with
stockholders. A couple of commenters
observed that a number of its
stockholders do not have Internet
access, particularly in rural areas, so
would not be able to attend an online
meeting. However, 12 other commenters
favored the use of online meetings, most
welcoming a regulation identifying it as
a tool for associations to use to increase
participation as long as it is not a
requirement, but one of these
commenters stated that online
procedures should be left to the
institutions. Another stated that online
meetings should not entirely replace a
physical meeting.
The rule provides associations the
option of holding their annual meetings
in both a physical location and online.
While we recognize that associations
incur certain costs associated with
annual meetings, we believe the
association’s investment in its members
through stockholder participation and
involvement in the annual meeting
justifies the costs involved. In § 611.110,
System institutions may use online
meetings to augment the traditional
annual meetings held in a physical
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location, but are not required to do so.
In response to the comments, we are
modifying this aspect of the provision to
clarify that the use of online meetings,
online voting, and other technological
resources, is optional.
We do not view online meetings as
eliminating the board members’
personal interactions with stockholders,
but as an opportunity for enhanced
stockholder participation. Online
meetings allow online attendees to
communicate with board members and
others who are present at the physical
meeting site. Online attendees can also
nominate a person as a director
candidate from the virtual floor
provided by the online meeting, ask
questions of the meeting chair, and
engage in discussions, etc., as if they
were physically at the meeting. We
recognize that implementing online
meetings involves up-front costs to put
this technology to use. Each institution
must decide whether these costs are
justified in light of the benefits to the
institution and its stockholders in the
long run. We also recognize that there
are rural areas of the country where
broadband Internet access is not yet
available. For this reason, the rule
requires that associations must always
have a physical location for the annual
meeting. The online meeting is an
option that is available.
Unlike associations, banks are not
required to hold annual meetings or to
elect their directors or the nominating
committee as a part of the annual
meeting process. For Farm Credit banks
not using floor nominations, no physical
meeting space is required. Thus, bank
business can be conducted exclusively
online, including conducting director
elections and the election of the
nominating committees, if the bank
provides an online medium for casting
votes or uses mail ballots.
c. Stockholder Attendance [New
§ 611.110(d)]
We received 25 comments, including
one from the FCC and multiple letters
from members of individual
associations, on the proposed
requirement that Farm Credit banks and
associations actively encourage
stockholder attendance at the annual
meeting. Commenters stated that the
requirement, while well intended, was
not practical or necessary. Fourteen (14)
commenters from the same association
remarked that stockholder participation
is achieved outside the annual meeting,
such as in focus group meetings,
education programs for young,
beginning, and small farmers, and
customer appreciation days. These same
commenters observed that annual
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meetings are probably the least effective
at obtaining stockholder participation,
particularly in those associations with
larger territories. Commenters from
another association remarked that
directors are the main source of
attendance at annual meetings and that
each stockholder receives notice of the
meetings and has the freedom to attend
or not. One commenter remarked that
the regulatory provision would be
difficult to enforce. One Farm Credit
bank remarked that stockholder
participation at annual meetings is
overrated, especially when mail ballots
are used. This bank also stated that this
participation is not as important as
regular communication between
institutions and stockholders and a
sound patronage program. One
commenter also remarked that the
farming needs of stockholders also play
an important role in attendance at
annual meetings. Still another
commenter asked us to approach
member involvement more broadly,
instead of focusing on annual meetings.
The FCC commented that the proposed
provision was arbitrary and asked FCA
to allow institutions to determine the
best methods for enhancing stockholder
participation. The FCC also commented
that this provision partially conflicts
with the provision to use the Annual
Meeting Information Statement (AMIS)
for communicating other stockholder
participation opportunities. One
commenter objected to using the AMIS
as a vehicle to enhance stockholder
participation, indicating that the AMIS
is already filled with information, and
more data may dissuade stockholders
from reading the AMIS. A few
commenters stated that it would be
more appropriate for FCA to require
institutions to adopt policies
encouraging stockholder participation
in the management, ownership, and
control of their respective institutions.
One association remarked that making
encouragement of stockholder
participation a requirement would not
be beneficial or effective to the stated
objective.
We agree with comments that the
proposed requirement in § 611.110(d),
which would have required Farm Credit
banks and associations to actively
encourage stockholder attendance at the
annual meeting, would be difficult to
implement and are withdrawing it.
However, we do not agree with the
comments that encouraging stockholder
attendance at stockholder meetings is
not necessary and is overrated since
there are other means of communication
that take place between the institution
and members. Stockholder participation
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and involvement in annual meetings
reinforce communications between the
institution and members and may
suggest a need to improve
communications. In response to the
comment that FCA should require
institutions to adopt policies that
encourage stockholder participation in
the management, ownership, and
control of their institution, we believe
that institution boards should undertake
this on their own initiative. FCA
encourages System institutions to be
creative in finding ways to reach out to
member-stockholders beyond the
lending relationship, provision of
related services, and the distribution of
annual and quarterly reports and other
required disclosures.
d. Quorums
The proposed rule would have
clarified, in part, that a quorum count
may not include mail ballots. We
received 72 comments on this provision,
most objecting to preventing institutions
from including mail ballots in a quorum
count. A minority of commenters either
supported the provision or understood
its objective. The FCC expressed strong
objections to removing mail ballots from
quorum counts, arguing that using mail
ballots in a quorum count is as logical
as allowing proxy ballots in quorum
counts. The FCC further contested that
including mail ballots in quorum counts
is in keeping with cooperative
principles because it results in larger
stockholder participation. Several
commenters also remarked that
including mail ballots in quorum counts
increases stockholder participation,
giving examples whereby participation
at annual meetings increased from 3.66
to 12.76 percent when the institution
began counting mail ballots in the
quorum requirement or that using mail
balloting instead of in-person voting
tripled stockholder participation. Other
commenters argued that eliminating
mail ballots from quorum counts will
result in lower stockholder
participation, lower quorum
requirements, and increased annual
meeting costs. Commenters also asked
for confirmation that quorums be
determined by the institutions. An
association remarked that online
meetings do not justify removing mail
ballots from quorum counts. A couple of
commenters also observed that the
premise that mail balloting occurs after
a meeting is convened does not take into
consideration that the ballot itself is
approved by the institution’s board
before the meeting. Another commenter
explained its institution requires mail
ballots to be returned before the annual
meeting so voter participation is verified
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by the start of the meeting. Still another
commenter remarked that in-person
quorums are difficult to achieve through
regional meetings, so mail ballots are
necessary to the count.
Commenters supporting the proposed
rule on quorums remarked that while
proxy ballots may be used for quorums,
mail ballots are used to tally voting
results. However, these same
commenters suggested it is better left to
each institution to decide the matter. In
a separate comment, AgriBank
commented that it recognized the legal
issue involved in using mail ballots in
a quorum count, as discussed in the
proposed rule preamble, but suggested
FCA could overcome that by issuing a
rule allowing for the practice. AgriBank
offered the perspective that stockholder
participation encompasses the entire
meeting and election process, from the
start of the meeting to the
announcement of election results, so
including mail ballots in quorum counts
is justifiable.
A quorum is the minimum number of
voting stockholders needed for a
meeting to begin and business
conducted. Stockholder participation is
separate and distinct from a quorum
count. In response to comments on
ballot approval, we note that the board’s
approval of the ballot format in advance
of the meeting has no bearing on the
quorum requirement. In response to the
commenter who noted that his
institution requires mail ballots to be
returned before the annual meeting so
its voter participation is verified by the
start of the meeting, our regulations do
not permit mail ballots to be distributed
prior to the end of an annual meeting.
After considering the comments, we
are not finalizing § 611.120 in this
rulemaking. As suggested by
commenters, this provision of the
proposed rule may be better suited to
the continued discretion of each
institution’s business judgment. We
continue to expect institutions to
establish sound quorum requirements
for director elections. We are retaining
the requirement that each institution’s
bylaws identify quorum requirements.
Due to other changes in this rulemaking,
we are moving this requirement to
§ 611.110(a).
2. Eligibility for Membership on Board
of Directors [§ 611.310]
We received four comments on new
paragraph (e), which clarifies that a
person is not eligible to be a director if
that person is elected to serve on the
institution’s nominating committee and
attends a meeting of the nominating
committee. We received related
comments on the companion provision
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in § 611.325(c) and address those
comments here as well. One commenter
expressed no objection to the rule.
Another commenter suggested relaxing
the rule to allow attendance at an
organizational meeting if no director
nominees are discussed. Still another
commenter asked that the existing rule
be left alone, explaining that it is
understandable, removes the
appearance of being self-serving, and is
well received by the nominating
committee. One commenter argued that
committee members should be allowed
to recuse themselves from discussions
or decisions and then be nominated to
run for the board as long as the
nominating committee still has a
quorum after that person leaves the
committee. The FCC raised a concern
that nominating committee members
may become floor nominees after
presenting the nominating committee
report and believes that such a person
should not be eligible to be nominated
as a director candidate from the floor.
One commenter asked for clarification
on when the prohibition attaches.
While we appreciate the comments
supporting our existing rule, we believe
it is important to clarify that the existing
rule addresses a change in a person’s
status after election to, but before
service on, a nominating committee.
The rule provides that individuals
elected to the nominating committee are
permitted to resign from the committee
and run for election to the board only
if they did not attend any meetings of
the nominating committee. We
encourage institutions to elect alternate
members so the committee can function
without interruption if one of its
members were to resign. In this rule,
nominating committees will be required
to keep minutes of their meetings,
including meeting attendance, which
will enable the institution to verify that
the resigning member did not attend any
committee meetings. As we explained in
the proposed rule, attending a meeting
of the nominating committee could give
a committee member the ability to
access information that would allow
that person to judge the likelihood of a
successful run for the board, thus
creating a potential conflict of interest
that the rules in § 611.310 seek to avoid.
As long as a nominating committee
member does not attend any nominating
committee meeting, the person may
resign from the committee to run for
election to the board in the same
election cycle. Thus, we are finalizing
this provision in § 611.310(e), and the
related provision at § 611.325(c), as
proposed.
We received comments from the FCC,
a Farm Credit Bank, and two
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18731
associations on new paragraph (f) in
§ 611.310, requiring associations to
inform out-of-territory borrowers as to
the borrower’s eligibility to serve as a
director. We received related comments
on the companion provision in
§ 611.325(a) and address those
comments here as well. The FCC and
one association asked that we revise the
requirement on giving notice of
eligibility, remarking that associations
should not have to make extraordinary
disclosures to out-of-territory borrowers
for this purpose. They instead suggested
that disclosures on out-of-territory
borrowers’ eligibility to serve as
directors be part of other
communications to all stockholders on
director qualifications. The FCC then
asked that if FCA finalizes the provision
for special disclosures to out-of-territory
borrowers, the disclosure only be
required if an association’s bylaws do
not prohibit such borrowers from
serving as directors. One association
asked that the disclosure be limited to
those associations prohibiting out-ofterritory borrowers from serving as
directors. The bank raised no objection
to allowing out-of-territory borrowers to
serve as directors and suggested that
this type of disclosure should be
provided to all borrowers because a
borrower within the territory may later
move outside the territory. One
association objected to the entire
provision due to the difficulty in
knowing whether borrowers are
stockholders in multiple associations.
We agree with those commenters who
suggested that notice should only be
provided to out-of-territory borrowers
holding voting stock in those
associations that prohibit such
borrowers from running for election.
Voting stockholders have an assumed
right to run for election, so notice is not
necessary. However, because the rule
allows associations to limit this right in
the case of out-of-territory borrowers,
those borrowers should be notified of
such. Thus, we revise our proposal in
both § 611.310(f) and § 611.325(a) to
only require disclosure when an
association’s bylaws prohibit out-ofterritory borrowers who hold voting
stock in the association from serving as
a director or on the nominating
committee.
The FCC and one association
remarked that section 4.15 of the Act
directs association nominating
committees to only consider director
candidates from the institution’s
territory. We disagree because these
commenters fail to recognize that any
voting stockholder in an association is
potentially eligible to be elected as a
director of that institution, whether
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nominated by the nominating
committee or through a floor
nomination. While the language of
section 4.15 directs the nominating
committee to consider all territories of
the institution when identifying
nominees, it does not prevent the
committee from also considering other
eligible voting stockholders, such as
out-of-territory borrowers that hold
voting stock. In addition, the legislative
history behind section 4.15 indicated
Congress’ intent to make sure the
nominating committee gave due
consideration to all aspects of the
institution’s borrower base in order to
have a board of directors that is
knowledgeable of the agriculture
financed by the institution.
We received no comments on the
other provisions of § 611.310 and
finalize those as proposed.
3. Impartiality in the Election of
Directors [§ 611.320]
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a. Institution Resources [§ 611.320(c)]
We received seven comments on the
proposed clarifications to § 611.320(c),
including one from the FCC. Two
commenters agreed with the proposed
change to recognize associations’
standing as stockholders in their
funding banks, thereby allowing
stockholder-associations to use their
resources in support of a candidate to
the bank board. The FCC agreed that
each institution should adopt
procedures equitable to all candidates,
including floor nominees, and
emphasized that use of institution
resources should be a choice. The FCC
and one other commenter, however,
objected to limiting use of institution
resources for election activities to Farm
Credit Banks. The System’s only
agricultural credit bank (CoBank)
commented that this provision would
not be ‘‘workable’’ for agricultural credit
banks due to the mixed stockholder
structure of affiliated associations and
retail borrowers.
We clarify in the final rule text that
we are not requiring any bank,
including CoBank, to permit its
stockholder-associations to campaign
for bank director candidates. This type
of activity can only occur to the extent
permitted by the bank’s own policies
and procedures. We explained in the
proposed rule that the bank must
authorize this activity because it is the
bank’s director election process and the
bank should have the authority to
determine the allowable activities of its
stockholders in this process, subject to
our regulations. In the event a bank does
not choose to allow its stockholderassociations to use associations’
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property, facilities, and resources in
support of bank director candidates, no
stockholder-association in that district
would be authorized to do so in any
manner. On the other hand, if a bank
has permitted its stockholderassociations to engage in this activity in
the past and intends to allow the
activity to continue, it must now adopt
policies and procedures that comply
with the regulatory requirements of
§ 611.320(c).
The FCC and a couple of associations
suggested extending the use of
institution resources to the associations
for campaign activities in their own
elections, as long as it is done in an
equitable and prudent manner. The FCC
explained that voter access to candidate
campaign information is essential to an
informed voting public and that many
candidates are unable to finance
distribution costs, especially in larger
territories. The FCC also argued that
young, beginning, and small farmers
who might run for a director position
are most disadvantaged in the current
restrictions on an association’s ability to
pay distribution costs for candidates.
The FCC stated that an association
could not express or imply an
endorsement of any candidate. The FCC
further remarked that existing rules and
FCA guidance on this issue unduly
hamper voting stockholders’ access to
meaningful information.
Our rule in § 611.320(c) allows
candidates for directors to make use of
an institution’s property, facilities, and
resources provided the property,
facilities, and resources are
simultaneously available and it is made
known that they are available for use by
all declared candidates. As we
explained in the proposed rule, our
rules are designed to ensure fairness and
equal access to the reimbursement
opportunity. Use of an institution’s
financial resources must be reasonable,
prudent, and consistent with supporting
an election that is fair and unbiased. We
do not, however, agree with the
comments that associations should be
able to distribute campaign material for
or on behalf of candidates running for
election to the association’s board of
directors and, therefore, we are not
changing § 611.320(e).
We recognize that the larger
geographic territories of some System
institutions make it unrealistic to expect
stockholders to have meaningful
knowledge of most director candidates
without some supplemental information
beyond the required disclosures. We
also acknowledge that the large number
of stockholders in many associations
also makes it impractical or costprohibitive for candidates to mail or
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distribute information themselves. In an
FCA bookletter, ‘‘Distribution of Director
Candidate Information’’ (BL–056), dated
September 11, 2008, we clarified the
meaning of ‘‘campaign material’’ for
purposes of § 611.320(e) by
differentiating campaign material from
educational material. The bookletter
explained that System institutions may
provide, to stockholders, supplemental
material on director candidates without
violating the prohibition on distributing
campaign material when that material is
educational in nature and all candidates
have a fair and equal opportunity to
provide educational material. In
providing this clarification, we wanted
to ensure that the interpretation of
‘‘campaign material’’ did not limit the
distribution of appropriate information
on director candidates to stockholders.
We received one comment seeking
clarification on whether non-incumbent
candidates must be provided
reimbursement for travel if an
incumbent director travels at the
institution’s expense to a regional
meeting before being named by the
nominating committee as a directornominee. We direct the commenter to
our frequently asked questions (FAQs)
on the governance rule, specifically
FAQ 36, posted on FCA’s Web site
under ‘‘FCS Information.’’
We received no comments on the
other provisions of § 611.320(c) and
finalize those as proposed.
b. Involvement of Directors in Board
Elections [New § 611.320(f)]
We received a comment from the FCC
and 78 other commenters, including
multiple letters from members of
individual associations, on adding a
new paragraph (f) to address the
involvement of directors in board
elections. The FCC and several other
commenters stated strong objection to
prohibiting director activity in board
elections, citing fundamental free
speech. One commenter expressed no
objection to the rule and another stated
strong support of it. A third of the
commenters asked that the provision be
eliminated entirely, arguing directors
should be allowed to offer an opinion
on fellow board members and that doing
so presents no conflict.
Many commenters argued that the
requirement is an infringement on free
speech and unduly undermines the
notion of cooperative, open elections.
Several of these commenters further
stated that good governance encourages
communication. One Farm Credit bank
and a few associations stated that
stockholder-elected directors should be
permitted to make such statements, but
only in the director’s capacity as a
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stockholder. The FCC and several other
commenters expressed concern about
the message such a restriction would
send to stockholders and questioned the
need for the rule, stating an
unawareness of any problems in this
area. A few associations commented
that the prohibition would make finding
willing and qualified candidates more
difficult, while directors from a couple
of associations argued that the provision
would limit their ability to be effective
directors. Others asserted that directors
have a duty to relate information on
candidates if the directors believe the
candidate holds views that may cause
harm to the institution. Another
commenter remarked that the
prohibition could have unintended
consequences, such as being
misinterpreted by stockholders or
preventing the board or board chairman
from providing guidance to the
nominating committee on desirable
director qualifications.
Some commenters explained that the
views of incumbent directors are
important to voting stockholders, many
arguing that corporate elections do not
have similar restrictions. Commenters
also expressed the view that limiting
director speech might be difficult to
monitor, especially oral communication.
Others considered the limitation on
making statements for other director
candidates an extreme measure that is
better addressed through standards of
conduct policies.
We understand and have thoroughly
considered the sentiments of the
commenters, and, as a result, we are
modifying the provision to limit the
prohibition to active campaigning as a
‘‘director’’ of an institution. We are
mindful of the dual role that elected
directors play (as both stockholders and
directors) in the cooperative, and we do
not want to prohibit a stockholder’s
right to support a candidate. At the
same time, we continue to believe a
director’s active support of a candidate
creates a potential for conflicts of
interest. We also clarify that our rule
does not prevent board members from
offering guidance to nominating
committees on desirable director
qualifications. This type of guidance is
not specific to any one person, but
rather addresses the board’s overall
needs. We do not believe the final
language will, as suggested, adversely
affect either the ability of directors to do
their jobs or recruitment efforts for open
board positions.
The final provision, as modified,
prevents a director from using his or her
official authority as a director to
influence or otherwise affect the result
of an election on another’s behalf.
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Examples of active campaigning for a
director candidate (except one’s self)
that would be prohibited include
writing and delivering speeches on
behalf of a candidate, organizing and
officially appearing at campaign events
on another’s behalf (attendance as an
audience member is permissible if the
director is not receiving compensation,
or reimbursement, from the institution
for the time or travel to the event),
preparing and distributing campaign
literature for a candidate, and using
official institution stationery or titles
accorded the director for board
positions (such as audit committee
chairman or board chairman) for
personal endorsements or
recommendations. Likewise, a director
would not be allowed to use any
authority associated with his or her
official ‘‘director’’ title in a manner that
could reasonably be construed to imply
that the institution either sanctions or
endorses the director’s activities on
another’s behalf for nomination or
election. With this modification, we
want to be sure that any activity
undertaken by a director on another’s
behalf remains personal in his role as a
stockholder and is not presented in a
manner that represents the director in
his or her official capacity or implies
official sanction by the institution of a
candidate. We believe this modification
addresses commenter concerns and
provides an appropriate balance
between a stockholder-elected director’s
responsibilities to remain officially
neutral in institution elections, while
still preserving the director’s personal
rights as a stockholder.
We appreciate comments concerning
difficulties in monitoring oral
communications between directors and
the membership and encourage
institutions to address this matter
through the institution’s standards of
conduct policy and procedures.
4. Nominating Committees [Existing
§ 611.325]
We received comment letters from the
FCC and 47 other commenters,
including multiple letters from members
of individual associations, on the
proposed changes to this section, only
one of which supported all the proposed
changes. Of the other 47 comments,
seven were directed at the introductory
paragraph of § 611.325. In this
paragraph, we clarified that each
institution may have only one
nominating committee in any one
election cycle. The FCC and another
commenter stated that multiple
committees are more efficient for those
institutions holding regional elections.
The FCC then requested FCA to clarify
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18733
whether subcommittees may be used if
the rule is finalized as proposed. If so,
the FCC recommended that only final
actions on nominees require full
committee vote. One commenter asked
why subcommittees are appropriate but
multiple nominating committees are
not. Two commenters suggested
permitting nominating committees to be
formed on a state or regional basis
instead of just one committee for the
institution’s entire territory.
We are not changing the rule to allow
for multiple nominating committees
within a single institution because we
do not believe multiple nominating
committees were intended by the Act.
Section 4.15 of the Act states that each
year the voting stockholders will elect a
nominating committee at the annual
meeting. Congress used the singular,
and we are not persuaded that a
different interpretation is appropriate.
As a committee of voting stockholders,
the nominating committee has the
significant task of identifying qualified
voting stockholders to stand for election
to the entire board of directors and not
a portion of the board. A single
nominating committee working in
concert makes the best possible
selections for director nominees.
However, we believe there is value in
using subcommittees to aid the full
committee in its task, especially in
institutions with large territories. Our
rule permits institutions’ nominating
committees to work in subcommittees
for the express purpose of identifying
possible director-nominees in director
nomination regions for the nominating
committee’s review and consideration.
The rule is clear that the nominating
committee as a whole must decide on
the director-nominees for the
recommended slate of candidates.
Four Farm Credit banks expressed
concern with the requirement that banks
have nominating committees. The
commenter explained that the
nominating committee is a group of
individuals who are not stockholders in
the bank and have no investment in the
bank, and thereby lack an incentive for
locating good candidates. The
commenter also asserted that Congress
recognized the distinction between
associations and banks when crafting
section 4.15 of the Act, which is why
the Act does not require nominating
committees for banks. The commenter
requested that FCA remove the bank
nominating committee requirement to
allow stockholder-associations to
nominate their own candidates to the
bank board or, in the alternative, make
bank nominating committees an
optional requirement.
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We addressed similar comments on
bank nominating committees in the
initial rulemaking for nominating
committees and have not changed our
position on this issue.2 As a
clarification, our rule requires bank
nominating committees to be elected by
voting stockholders who, at the bank
level, are stockholder-associations, and
the candidates for service on a
nominating committee also come from
the stockholder-associations. Further,
each bank may allow floor nominations
for director candidates. Therefore,
stockholder-associations are not
prohibited from participating in the
nomination process.
We received no comments opposed to
the reorganization of § 611.325 and
finalize it as proposed.
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a. Nominating Committee Composition
[Existing § 611.325(a)]
We received four comments on
requiring associations to inform out-ofterritory borrowers as to the borrower’s
eligibility to serve on an institution’s
nominating committee and addressed
these comments in the companion
provision of § 611.310(f) and discussed
in section III.B.2. of this preamble.
Consistent with changes made on the
companion provision, we are modifying
the language in 611.325(a) to require
notice to out-of-territory borrowers only
when the institution’s bylaws prohibit
out-of-territory borrowers who hold
voting stock from being eligible to serve
on the nominating committee.
b. Nominating Committee Election [New
§ 611.325(b)]
We received 26 comments, including
multiple letters from members of
individual associations, on adding new
paragraph (b) on nominating committee
elections. Of these, 19 comments were
on the provision that an institution may
use ballots that would allow
stockholders to vote for nominating
committee members as a slate, as long
as stockholders also retain the ability
and right to elect members individually.
Four commenters asked for clarification
on how such a ballot would be
structured and votes tabulated. Other
commenters expressed support for only
having a vote on the committee as a
slate, but some of these questioned the
need for the matter to be included in the
regulation. A Farm Credit bank
remarked that individual votes enable
larger stockholder-associations to
control the committee composition and
asked that the provision be removed
from the rule. One commenter
2 See preamble to final governance rule, 71 FR
5762 (February 2, 2006).
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supported the proposed rule provision
on nominating committee elections. One
commenter asked if we favor the use of
floor nominations for nominating
committees. Another commenter
objected to the slate vote provision,
explaining that voting for individual
committee members facilitates
identifying alternates.
We agree with commenters that our
proposed language in § 611.325(b)(1)
was unclear on how the ballot would be
structured and how votes would be
tabulated, which might have created
confusion for the voting stockholders in
casting such a vote. In reviewing the
issue, we believe that discussion on the
manner of achieving the ‘‘opportunity’’
for stockholders to vote either on a slate
of candidates or individuals is better
suited to informal guidance.
Consequently, we have modified this
provision to state only that institutions
must provide stockholders the
opportunity to vote on candidates for
each nominating committee position,
simultaneously clarifying that the vote
is for candidates running for each
position on the committee. As to the
comment on allowing write-in
candidates for nominating committees,
institutions may choose to use that
method in addition to others. However,
while write-in candidates on a ballot for
election to the nominating committee
are not likely to garner the number of
votes needed for election, we remind
institutions that they may permit
nominations from the floor for
nominating committee candidates. In
this manner, a floor nominee’s name can
be added to the ballot before the vote
occurs, thus significantly increasing the
floor nominee’s chances for election.
We received comments from the FCC
on § 611.325(b) that association
nominating committee members may
only be elected to serve a 1-year term.
The FCC asked us to clarify that
nominating committee members may
serve consecutive terms. A few other
commenters asked us to clarify that
nominating committee members may
serve on the following year’s committee.
We agree with commenters and for
that reason did not propose limits on
the number of consecutive 1-year terms
association nominating committee
members may serve. However,
individual members of an association
nominating committee must stand for
and be reelected in order to serve
another 1-year term, and we have
clarified this requirement in the rule.
We do not set the term that a bank
nominating committee member serves
because there is no statutory provision
specifying the term of a bank
nominating committee member. We
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encourage institutions to establish
safeguards against self-perpetuation of
the nominating committee’s
membership.
We received no comments on the
provision regarding the use of in-person
(including use of an online medium) or
mail balloting procedures to elect a
nominating committee, but we clarify
that using proxy ballots to elect a
nominating committee is also permitted.
We also received no comments on the
provision in § 611.325(b)(2) that Farm
Credit banks must use weighted voting
with no cumulative voting permitted
when electing members to serve on a
nominating committee and we finalize
this portion of the rule as proposed.
c. Nominating Committee Conflicts of
Interest [New § 611.325(c)]
We received two comments regarding
when a nominating committee member
may resign from the committee and run
for election to the board of directors.
These comments are addressed in
section III.B.2. of this preamble, where
we discuss eligibility to serve as a
director in the companion § 611.310(e).
d. Nominating Committee Duties
[Redesignated § 611.325(d)]
We received 44 comments, including
one from the FCC and letters from
multiple members of individual
associations, on clarifying that
nominating committees may not be used
for other institution business. The FCC
and many other commenters agreed that
nominating committee duties should be
limited to the business of the
nominating committee, but strongly
objected to preventing the nominating
committee from identifying candidates
for the following year’s nominating
committee. These commenters asked to
use the current nominating committee
as a vehicle for identifying members for
the following year. Several commenters
said that often nominating committee
members come across future potential
committee members in the search for
director candidates. A few commenters
questioned who would perform the task
of finding new committee members if
the sitting nominating committee were
prevented from doing so. These
commenters expressed potential
conflicts with other FCA regulations if
management has to step in and perform
the task. One association commented
that the Act does not prohibit using the
nominating committee for other duties.
Still others commented that allowing
other types of committees to identify
potential future nominating committee
members does not support cooperative
principles nor is it cost-effective. One
commenter suggested FCA regulate
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terms, providing for nominating
committee term limits to prevent selfperpetuation, while others suggested
institutions use their nominating
committee policies to control selfperpetuation matters. One commenter
suggested the listed duties in the rule be
the minimum, not the only, duties the
committee may perform. Another stated
that the existing rule is sufficient and
needs no change.
We agree with commenters that
nominating committees are well suited
to aid in the identification of candidates
for the next nominating committee, and
we are amending the rule to reflect that
it is permissible. We do not, however,
believe that the nominating committee
should perform other duties. We believe
that having other duties diverts the
nominating committee from its
significant role in the director election
process. Further, a nominating
committee may not be given the task of
verifying the eligibility or credentials of
a floor nominee.
One commenter asked that we clarify
whether the nominating committee
must nominate all eligible candidates
for open director seats. This commenter
stated that prohibiting such an action
would be objectionable. Yet another
commenter stated that it wanted to limit
the nominating committee to only
naming two candidates for each open
director seat.
The nominating committee’s
responsibilities are to identify, evaluate,
and nominate candidates for open
director positions. The committee must
evaluate their qualifications and
nominate at least two candidates for
each open director position, while also
endeavoring to ensure representation
from all areas of the territory and, as
nearly as possible, all types of
agriculture practiced within the
territory. An evaluative process must
occur, and it is within the discretion of
the nominating committee to select
those candidates who it believes are the
best qualified to serve as directors. It
rests with the nominating committee to
decide which director nominees will be
on the slate of recommended
candidates. Thus, we want to clarify
that the nominating committee is not
limited to providing just two names for
each open director position.
The FCC and two other commenters
asked for clarification on how votes are
tallied when the stockholders are
presented with more than two nominees
for one director position. The FCC used
the example of the nominating
committee identifying two nominees for
a position and then also getting a floor
nomination, which may result in there
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not being a majority of votes for any one
candidate.
We have no regulatory provision that
requires a winning candidate for a
director position to receive a majority of
the votes cast. In the situation the FCC
describes, the winning candidate could
receive a ‘‘plurality’’ of votes. An
institution’s policies and procedures on
impartiality in director elections should
recognize that a winning director
candidate may receive less than a
majority of the votes cast when there are
more than two candidates for one
director position. Should a contest
result in a tie vote between two
candidates, most institution bylaws
have provisions for dealing with it.
A bank asked for confirmation that
§ 611.325(d)(1), regarding representation
from the institution’s territory, is a
guide and not a requirement. In
response, we clarify that this aspect of
the rule is a guide based on the
legislative history of the Act, and it is
not a requirement.
e. Nominating Committee Resources
[Redesignated § 611.325(e)]
We received one comment on adding
a requirement that institutions provide
their nominating committees with FCA
rules and other FCA-issued guidance on
the operation of nominating committees.
The commenter asks us to instead
require institutions to provide
nominating committees a
comprehensive listing of resources
available, indicating those that must be
provided. The commenter explained
that presenting all the material listed in
the rule would be counterproductive
and might overwhelm the committee.
We disagree with the commenter and
believe this requirement is necessary to
ensure that the nominating committee is
aware of FCA’s rules and guidance
regarding the nominating committee’s
role in representing the institution’s
stockholders in the director elections
process and understands how it must
operate in accordance with those rules.
We are hesitant to require instead a
comprehensive listing of resources as
suggested because it might actually
discourage the nominating committee
from asking for all the material that it
should have access to without delay.
Consequently, we finalize this provision
as proposed.
We also note that the final rule
requires nominating committees to
maintain records of its meetings. We
believe it is appropriate that the
nominating committee record, within its
meeting minutes, whether it obtained
the resources it requested from the
institution. We further encourage
nominating committees to record in
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their meeting minutes whether they
were satisfied with the resources
provided or if the resources were
insufficient for the nominating
committee to fulfill its duties.
5. Floor Nominations [New § 611.326]
We received, from the FCC and 10
others, comments on incorporating into
our rules previous guidance provided to
System institutions in FCA bookletter,
‘‘Floor Nomination Procedures for
System Associations and Banks’’ (BL–
055), dated February 14, 2008, and other
floor nomination procedural
requirements. In addition to comments
specific to this section, many comment
letters included statements affirming
that floor nominations are an express
right of association stockholders.
The FCC and four other commenters
asked that the manner of conducting
floor nominations be left to each
association. The FCC and one
association further remarked that floor
nominations should not be used to
circumvent the nominating committee’s
efforts and that institutions should be
allowed to balance election procedures
to provide equal and fair treatment to all
nominees. One commenter explained
that the procedure for making floor
nominations varies by the size of the
institution. The FCC and an association
also suggested that the number of
individuals needed to support a floor
nomination be equal to the number of
people serving on the nominating
committee or the number of votes given
by nominating committee members to
those on the nominating committee
slate, rather than just a second to the
nomination.
Voting stockholders of every
association have the express right of
making nominations from the floor. We
reaffirm that this right may not be
unduly restricted in a way that
effectively weakens it, nor can the
procedures for making floor
nominations be unduly burdensome.
We believe that asking for more than
one voice in support of a floor
nomination weakens the process.
Further, permitting variations in the
procedures for making floor
nominations based solely on the size of
the institution is not appropriate
because floor nominations are an
express right of the voting stockholders
and are not dependent on institution
size. To ensure the right to make floor
nominations is not unduly inhibited,
this rulemaking sets minimum
procedural limits for the level of voting
stockholder support that can be required
by the institution before accepting a
floor nomination. We do not believe that
floor nominations are easier than being
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nominated through the nominating
committee. A floor nominee must meet
the same eligibility and disclosure
requirements as all other nominees and
must gain the support of the voting
stockholders in order to be elected. The
voting stockholders make the final
decision on who is elected to the board
of directors, and the manner of
nomination may or may not influence
the stockholders’ vote.
The rule also seeks to address the
concern that allowing nominations from
the floor may create delays and
inefficiencies at stockholders’ meetings
because the institution first has to verify
that the nominee is eligible for the
position for which he or she has been
nominated before the meeting can
proceed. Floor nominations are public
nominations of candidates that are not
previously vetted by any person or
committee. In the interest of running an
efficient stockholders’ meeting, it is the
responsibility of the association to have
ready access to a current stockholders’
list and any other needed
documentation that would allow the
association to verify that the nominee
from the floor meets the eligibility
requirements to run as a candidate for
a director position, particularly if the
voting stockholders are casting their
ballots at the meeting and are not voting
solely by mail ballot after the
stockholders’ meeting is concluded.
One commenter supported the floor
nomination process, but stated that
director eligibility should be the same
regardless of the manner in which a
person is nominated. Another
commenter stated that nominating
committee members should not be
eligible to be floor nominated director
candidates until one election cycle has
passed. We agree, and while
§ 611.326(a) does not specifically
address eligibility to serve as a floor
nominated director, our other rules do.
Our rules in §§ 611.310(e) and
611.325(c) specifically address the
commenter’s concern. Both provisions
make it clear that an individual cannot
be a candidate for a bank or an
association board of directors in the
same election cycle during which that
individual was a member of the
institution’s nominating committee and
attended any meetings of the
nominating committee. Regardless of
how the individual may be nominated,
including a nomination from the floor,
his or her membership on the
nominating committee makes the
individual ineligible to run as a
director-nominee for the duration of that
election cycle.
One commenter asked if FCA favors
the use of floor nominations for service
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on the nominating committee. The FCA
takes no position on whether
nominations from the floor should be
permitted for the nominating
committee. This is a decision that the
board of directors should make and
include in the association’s bylaws so
that voting stockholders know whether
floor nominations for the nominating
committee are accepted.
A bank commented that if banks do
not hold meetings for elections, it
cannot offer floor nominations. The
bank asserted that, given this and the
fact that there is no prohibition in the
Act against other forms of nomination,
the bank has allowed its stockholderassociations to name nominees for
vacant director seats outside the
nominating committee process. In
response, we expect the bank to let the
nominating committee complete its
duties before allowing any other type of
nominations. We do not require or
prohibit Farm Credit banks from using
floor nominations. The use of floor
nominations in bank elections is at the
discretion of each bank; however, banks
choosing to allow floor nominations
must follow the provisions of § 611.326,
and we have modified this provision to
make that clear.
We received no comments on other
provisions of new § 611.326 and finalize
them as proposed.
6. Director-Nominee Disclosures [New
§ 611.330]
We received three comments on
§ 611.330(a) objecting to disclosing
family relationships that would be
reportable under part 612 because the
disclosure unduly infringes on privacy
rights of nominees and nominees’
family members. We address this issue
in our Governance FAQ 39.
The FCC and three associations
commented on § 611.330(c)(1), stating
that including candidate disclosures as
part of the AMIS complicates the
election process. The FCC explained
that the inability to obtain disclosure
statements from floor nominees until
after the annual meeting has led to an
increase in the use of mail ballots,
resulting in reduced stockholder
attendance at annual meetings.
Commenters asked that we allow
institutions to set the process for
director candidate disclosures and only
address the process to ensure equitable
treatment. The commenters further
asked that floor nominee disclosures be
reconciled with other disclosure
procedures. Two associations
commented that floor nominee
disclosures should be left to the
institution’s policies as the rule is
favorable to floor nominations. One of
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these associations specifically asked
that floor nomination disclosures be
obtainable in advance of a meeting.
We decline the suggestion that
disclosure statements from floor
nominees be obtained before the start of
the stockholders’ meeting. Floor
nominations, by their very nature, occur
during the meeting. It is therefore
impossible to obtain disclosures in
advance of a floor nomination. While
we understand the commenters’
concerns regarding potential delays in
the meeting process to obtain these
disclosures, doing as the commenters
suggest would deny stockholders the
express right to make floor nominations.
We recognize that those institutions
using only mail ballots encounter no
such difficulties because floor nominees
provide their disclosures to the
institution before the mail ballots are
prepared. We received no comments on
the other provisions of § 611.330 and
finalize those as proposed.
7. Regional Voting in Director Elections
[New § 611.335 and Existing § 615.5230]
We received three comments on our
proposal to consolidate the regional
election provisions in new § 611.335.
We had proposed moving the existing
requirements on regional elections of
directors from existing §§ 615.5230(a)(3)
and 620.21(d)(4)(ii) to a new § 611.335
called ‘‘Regional voting in director
elections.’’ One commenter questioned
whether the proposed rule changed the
provisions for regional voting. Another
commenter asked us to clarify that
regional voting rules only address
voting and not eligibility requirements
for directors or nominating committee
members.
We did not intend our proposed
reorganization of the regional election
rules to change any provisions or cause
confusion on its applicability. We
intended no change in our rules on this
topic and, therefore, to avoid any such
confusion, we are not finalizing the
movement of the regional election
provisions from § 615.5230 into a new
§ 611.335. The regional election
provisions will remain in § 615.5230,
but in a new paragraph (b) due to the
effect of other reorganization efforts. We
received no comments on the proposed
grammatical corrections to the regional
election provisions and finalize those as
proposed at § 615.5230. We are also
finalizing the deletion of those regional
voting provisions from § 620.21(d)(4)(ii)
because existing § 620.21 is an interim
report to stockholders (AMIS) and the
regional election provisions from that
section address the distribution of
ballots in regional elections, which is
addressed elsewhere in the rule. As a
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conforming technical change, we are
changing the reference to § 615.5230 in
§ 611.1210(f) to reflect this
organizational change and adding a
cross-citation to § 611.350 in § 615.5230.
8. Confidentiality and Security in
Voting [new § 611.340]
We received no comments on adding
language to paragraph (d) to explain that
only proxy ballots may be accepted
before stockholders’ meetings are
convened for election or other voting
purposes. However, a few comments on
other areas of our rule discuss the value
of proxy ballots and we address those
comments here. A bank and a few
associations commented on the
difficulty of using proxy ballots with
floor nominations, explaining that there
is no advance knowledge of floor
nominations for stockholders to provide
voting guidance to proxy holders. Three
commenters remarked that having to use
proxy ballots instead of mail ballots
creates a disadvantage to floor
nominees. Commenters also stated
proxy ballots are more confusing for
stockholders. A few commenters asked
us to explain why proxy ballots are
better than mail ballots for quorum
counts, arguing that proxy ballots are
harmful to the floor nomination process
and reliance on them for quorum counts
would be unfair to floor nominees.
Proxy ballots should not be
problematic for floor nominations.
Proxy ballots must be returned to the
institution by the date of the
stockholders’ meeting and before
balloting begins. The stockholder voting
by proxy may withdraw the proxy
authorization and vote in person at the
meeting. Thus, a nominee from the floor
could conceivably uphold a viable
candidacy with sufficient stockholder
support from those voting at the meeting
as well as those that decide to revoke
their proxy ballots and vote in person at
the meeting. In addition, the bank or
association may give a stockholder
voting by proxy an opportunity to give
voting discretion to the designated
proxy provided the proxy is also a
voting stockholder. In such a case, the
designated proxy would have the
discretion to vote for a floor nominee.
Proxy ballots are counted towards the
quorum requirement because a proxy is
an authorization for a named agent to
act for a voting stockholder at a meeting,
including casting the vote of the
stockholder, and are treated as ‘‘present’’
and voting members when determining
if a quorum is present.
As discussed earlier in section
III.B.1.a. of this preamble, we are
modifying paragraph (d) of this section
to clarify that when a stockholders’
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meeting is held to conduct elections,
mail ballots may not be issued before
the conclusion of that meeting.
Revisions to § 611.340(d) explain that
only proxy ballots may be accepted
before stockholders’ meetings are
convened for election or other voting
purposes. Distributing and accepting
mail ballots before an annual meeting
results in those stockholders being
unable to consider any candidate
nominated from the floor since mail
ballots cannot be revoked once received
by the institution.
We received a comment from a bank
asking us to clarify that confidentiality
in voting does not prevent institution
staff from assisting the independent
tabulator, such as reminding
stockholders of voting deadlines or
providing replacement ballots when
asked. Our rule does not prevent
institution staff from providing
administrative assistance when that
assistance is limited to the type of tasks
described by the commenter. Institution
staff may not provide assistance to
either the tellers committee or the
independent third-party tabulator if that
assistance compromises the security or
the confidentiality of the ballots or the
balloting process. We received no
comments on other changes to revised
§ 611.340 and finalize them as
proposed.
9. Cooperative Principles in Elections
[existing §§ 611.350 and 615.5230]
We received one comment on moving
the existing requirement to disclose the
types of agriculture in which directors
of an institution engage to the AMIS and
address that comment in section
III.B.10. of this preamble. We received a
comment from CoBank, asking for
clarification on whether the language in
§§ 611.350(a) and 615.5230(a)(3),
regarding FCA approval of a voting
scheme, included past FCA approvals.
The language regarding exceptions to
voting provisions approved by FCA was
intended to include existing exceptions.
Thus, CoBank’s existing voting
provisions, approved by FCA several
years ago, would stand without
requiring further approval. For clarity’s
sake, this language in both sections has
been modified to make clear that any
FCA-approved voting structure, whether
past or present, satisfies the rule.
We received no comments on other
changes to § 611.350, but have made
conforming changes to this section to
restore the location of rule text on
regional voting to § 615.5230, as
discussed in section III.B.7. of this
preamble, and to address the comment
of CoBank, also discussed in that
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section of this preamble. We finalize all
other language as proposed.
We did receive a few comments,
including one from the FCC, asking that
each System institution be allowed to
adopt its own election policies and
procedures without the FCA’s imposing
additional regulatory requirements.
They suggested that FCA establish a
governance policy that addresses
delineated areas and then examine each
institution on its implementation of the
policy in light of the institution’s own
circumstances. Given the absence of any
problems with the election of bank
directors, the commenters believe that
FCA would not be burdened by
examining the institution’s compliance
with a governance policy. The
commenters further suggest that, like an
existing regulatory provision that allows
the bank to eliminate cumulative voting
in director elections upon an affirmative
vote of 75 percent of the bank’s voting
stockholders, the same concept should
be adopted for the balance of the bank’s
election procedures.
We addressed the general comments
on rulemaking versus informal guidance
in section III.A.1. of this preamble, but
believe the specifics of these comments
should be further responded to in this
section. The FCA’s final rule on
governance for Farm Credit banks and
associations, adopted in April 2006, had
the stated objective of identifying a set
of standards for banks and associations
to follow in their director elections.3
Nearly 4 years have passed since the
governance rule was put into place, and
our examination of the implementation
of the governance rule demonstrates that
having these standards in place has not
only allowed for an orderly process in
examining an institution’s compliance
with the governance rules, but has
helped minimize the amount of time
examiners must spend in this area for
those institutions with a strong
governance structure. For institutions
whose governance needs strengthening,
the rules enable the examiners to focus
on weaknesses that need to be
eliminated through corrective action by
the board. Providing a regulatory option
that would allow the bank’s
stockholders to vote to overturn the
bank’s director elections procedures as
prescribed by regulation in favor of the
bank’s own unique governance policy
would not move FCA in the direction it
has taken in building a strong
governance framework for banks and
associations.
The FCC also requested clarification
on whether cumulative voting is
required to be used by institutions if not
3 Id.
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adopted by the institution’s bylaws. As
stated earlier, we proposed moving
voting rights of each type of System
institution from § 615.5230(a)(1)(iii) to
§ 611.350(d). We intended no change in
the application of the rules, and we did
not intend for our proposed
reorganization and consolidation of
election rules to cause confusion on
their interpretation. Stockholderassociations have the right to cumulate
votes unless the Farm Credit Bank’s
bylaws provide otherwise. A Farm
Credit Bank may eliminate cumulative
voting only if 75 percent of its
stockholder-associations vote to
eliminate it. Each stockholderassociation has only one vote that is not
a weighted vote in eliminating the
provision. The provision has been in
existence for many years.4 Similarly,
voting stockholders of an association
may vote on a proposition to eliminate
cumulative voting in director elections
if they approve a change in the
association’s capitalization bylaws to
eliminate cumulative voting.
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10. Annual Meeting Information
Statement (AMIS)
We received a comment from the FCC
that Farm Credit banks should not have
to comply with all AMIS provisions, as
bank elections are conducted outside
the framework of an annual meeting.
The FCC suggested that an AMIS issued
by a bank only has to have information
for potential director candidates
regarding resources available to the
candidates.
We disagree with the FCC’s
suggestion. We believe that the AMIS
requirement remains relevant for the
banks regardless of whether they choose
to elect their directors in the context of
an annual meeting or separate and apart
from an annual meeting. It is important
that the bank include in the AMIS the
information identified in our rule.
Stockholder-associations are entitled to
updated financial information and
information on current directors
regardless of why the AMIS is being
prepared. However, because Farm
Credit banks are not required to hold
annual meetings, we have modified
§ 620.21(a)(1) to reflect that disclosure
of meeting date, time, and location need
not be part of a Farm Credit bank AMIS
if no meeting is held. However, all other
information identified in paragraph (a)
must be part of a bank’s AMIS.
We received no comments on other
organizational changes to this section of
4 The cumulative voting rule was last changed in
1997 to permit a less than unanimous consent to
overturn cumulative voting in bank director
elections. (See 62 FR 49907, September 24, 1997).
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our rule, including renaming subpart E
to clarify that an AMIS is used for more
than an annual meeting, dividing the
existing § 620.21 into two sections, one
to address preparation and distribution
of an AMIS and the other to address the
contents of an AMIS, and reorganizing
existing § 620.21 to clarify the minimum
information that must be included in an
AMIS and the additional information
that must be included in any AMIS
issued in connection with elections. We
finalize these organizational changes as
proposed.
a. Preparing and Distributing the AMIS
[New § 620.20]
We received four comments on the
proposed outside timeframe of 30
business days for distributing the AMIS
to stockholders. A System bank
commented that the 30-day timeframe
creates difficulties, as it allows
stockholder-associations in its district to
make director nominations for an
extended period of time. This
commenter also remarked that including
the slate of nominees from the
nominating committee in the AMIS
causes scheduling difficulties based on
the bank’s director nomination process
and questions the need for this time
limit. We address the comment from the
bank on its director nomination process
in section III.B.4. of this preamble.
The bank commented that the 45
calendar days it currently uses provide
ample time for stockholder-associations
to deliberate and vote. The bank
acknowledges that its 45 calendar day
timeframe is ‘‘roughly equivalent’’ to the
proposed 30 business days, but notes
that setting any timeframe removes
flexibility. Another Farm Credit bank
and one association asked that the
timeframe be expanded from 30
business days to 45 days to assist larger
institutions. These commenters did not
specify if the suggestion was for
calendar or business days. Another
association suggested a 45 business day
time limit to accommodate larger
associations.
The existing rule requires an AMIS be
provided to stockholders at least 10
days before a meeting or election to
ensure the stockholders’ receipt before
the meeting. We believe an outside
timeframe is needed to ensure that the
information in the AMIS is reasonably
current at the time that the stockholders’
meeting or director elections take place.
We carefully considered the timeframes
offered by the commenters, but decline
to change the rule. The suggested 45
business days would allow the AMIS to
be distributed 9 weeks in advance of the
annual meeting or director elections
versus the 6 weeks we proposed. We
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continue to believe that more than 6
weeks is too long for the AMIS to still
provide current information. We also
note that the suggested 45 business days
might coincide with a quarterly report
issuance, causing confusion in the
financial data that is being reported and
or updated in the AMIS. We considered
using the suggested 45 calendar days
since it is essentially equivalent to 30
business days, but believe that mixing
calendar days and business days would
create confusion while only providing
three additional days. Therefore, we are
finalizing the timeframes as proposed.
We received one comment from a
bank on the overall procedural
requirements for the AMIS, including
the signature requirements, timeframes,
Web site posting, and public access. The
bank remarked that these requirements
adversely affect the bank, since the
requirement is designed to get
information to stockholders before a
meeting. Specifically, this bank objects
to the signature and public availability
requirements, stating these are not
‘‘particularly meaningful’’ for its
stockholder-associations. We also
received a comment from another bank
that the signatures on an AMIS do not
need to be the same as for annual and
quarterly reports, stating that the AMIS
is not as formal a report. This bank
suggested that the AMIS be signed by
one senior officer, instead of the chief
executive officer, chief financial officer,
and a board designee. We further
received a comment from the FCC and
an association on § 620.20(a)(3), which
permits an AMIS to be posted on an
institution’s Web site after the AMIS is
mailed to stockholders. The commenters
asked us to clarify that the posting of the
AMIS on a Web site is optional. Both
commenters explain that the AMIS
should not be required to be on a Web
site since it is not a public document,
and institutions should not be required
to make it one.
We disagree with the commenter that
the AMIS does not require the same
signatures as the annual and quarterly
reports. The AMIS is a supplement of
those reports. Further, this is not a new
requirement. Our existing rules in
§ 620.3(b) apply for all reports,
including the AMIS, which is why we
are adding a reference in § 620.20 to
facilitate compliance with our rules. We
are not requiring institutions to post the
AMIS on their Web sites, but are
establishing timeframes for keeping an
AMIS on a Web site should an
institution decide to do so. Also, the
AMIS is a report that must be available
for public inspection as required by
§ 620.2(b).
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We received no comments on other
provisions in § 620.20 and finalize them
as proposed.
b. Contents of the AMIS [existing
§ 620.21]
i. Minimum Requirements for Each
AMIS [§ 620.21(a)]
We received one comment on the
existing requirement to disclose the
types of agriculture in which directors
of an institution engage. The commenter
stated that the information, already
contained in the annual report, does not
need to be restated in the AMIS. We
proposed no change to this requirement.
We only proposed moving the provision
from existing § 615.5230(b)(5) to
paragraph (a)(4) of this section. Further,
we remind the commenter that an AMIS
provides pertinent information on
directors and institution business in
preparation for an annual meeting or
election. As meetings and elections do
not always coincide with the issuance of
annual reports, we do not believe it is
unduly burdensome to reference this
information in the AMIS.
We received no other comments on
changes to this paragraph and, except
for the modification to § 620.21(a)(1)
regarding meeting notice for banks
mentioned earlier, we finalize those
changes as proposed.
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ii. Additional Information for Elections
[new § 620.21(b)]
We received two comments on the
provision in paragraph (b) requiring the
names of the director candidates
nominated by the nominating
committee to be listed. A bank remarked
that it customizes its AMIS based on
regions within the territory, providing
only that director candidate information
applicable to a region. The commenter
asked us whether the rule would
prohibit this process and also stated that
it sends out to all stockholders the
nominating committee report 6 weeks
before the AMIS is issued.
As stated earlier, the AMIS updates
information contained in the annual and
quarterly reports, which are available to
all stockholders regardless of regional
locations. The AMIS is also a tool that
voting stockholders can use in the
election process. We believe it is
important for stockholders to have
background information on all
incumbent directors and director
candidates for their institution.
Restricting information on directors to
regions inhibits the ability of
stockholders to decide whether the
composition of the board meets their
needs since, once elected, a director
represents the entire membership, not
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just the region from where he or she was
nominated. For these reasons, we
finalize changes to this paragraph as
proposed. We received no other
comments objecting to them. We did
receive a few comments, including one
from the FCC, agreeing with the
requirement in § 620.21(b)(3) that
procedures for making floor
nominations be disclosed in the AMIS.
11. Other Miscellaneous Changes
a. Similar Entity Participation Lending
Limit Voting [§ 613.3300]
We received no comments on the
proposed clarification to
§ 613.3300(c)(1)(i)(B) to explain that the
stockholder vote for participation
lending limits is based on the majority
of voting stockholders voting. We
finalize this change as proposed.
b. Equityholder Voting on Preferred
Stock [§ 615.5230(b)]
We received one comment on the
proposed clarification to
§ 615.5230(b)(1) to explain that the
equityholder vote on issuing preferred
stock requires the approval of the
majority of the shares voting of each
class of equities adversely affected by
the preference, voting as a class. The
commenter expressed appreciation for
the clarification. We finalize this change
as proposed.
c. Definitions [New § 619.9320]
We received no comments on the
proposed clarification that the terms
‘‘stockholder’’ and ‘‘shareholder’’ have
the same meaning for purposes of our
rules. We finalize this change as
proposed.
d. Reorganization of Existing Rules
We received three comments
supporting the consolidation of our
general director election rules, currently
located throughout our rules, into
subpart C of part 611, ‘‘Election of
Directors and Other Voting Procedures.’’
We received no comments on other
organizational changes to our rule. We
finalize the changes associated with this
consolidation and reorganization as
proposed, except where noted (e.g.,
§ 615.5230).
e. Technical Corrections
In the process of this rulemaking, we
noted cross-citations that were not
updated in prior rulemakings and make
those corrections now. In a 2006
rulemaking, the paragraphs of § 620.2
were renumbered; however, the crosscitation to § 620.2 contained in
§ 620.5(i)(2) was not updated to reflect
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18739
the renumbering of paragraphs.5 The
cross-citation should read ‘‘§ 620.2(b).’’
Likewise, in the process of addressing a
comment on cumulative voting in newly
redesignated § 615.5230(a)(3), we noted
that the rule does not specify the bylaws
involved are capitalization bylaws.6 The
original rulemaking is clear that the
bylaws involved are capitalization
bylaws, but a 1995 rulemaking to this
section mistakenly omitted the word
‘‘capitalization’’ from the sentence.7
Nothing in the 1995 rulemaking
indicates this omission was intentional
and FCA has consistently interpreted
the provision to mean capitalization
bylaws. We make that correction now.
We are correcting a grammatical error
in our rule at § 615.5330. Paragraph
(a)(1) has an ‘‘a’’ when referring to the
ratio needed instead of an ‘‘at’’ and
paragraph (b)(1) has an ‘‘a’’ instead of an
‘‘at’’ when referring to the percentage
needed. We also incorporate changes to
§ 620.21(a)(3)(ii) made in a prior
rulemaking regarding external auditors.
These changes became final in July
2009, which was after publication of our
proposed rule.
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
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
12 CFR Part 611
Agriculture, Banks, banking, Rural
areas.
12 CFR Part 613
Agriculture, Banks, banking, Credit,
Rural areas.
12 CFR Part 615
Accounting, Agriculture, Banks,
banking, Government securities,
Investments, Rural areas.
12 CFR Part 619
Agriculture, Banks, banking, Rural
areas.
5 See
71 FR 76111, December 20, 2006.
53 FR 40033, October 13, 1988.
7 See 60 FR 57919, November 24, 1995.
6 See
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12 CFR Part 620
Accounting, Agriculture, Banks,
banking, Reporting and recordkeeping
requirements, Rural areas.
■ For the reasons stated in the preamble,
parts 611, 613, 615, 619, and 620 of
chapter VI, title 12 of the Code of
Federal Regulations are amended as
follows:
PART 611—ORGANIZATION
1. The authority citation for part 611
is revised to read as follows:
■
Authority: Secs. 1.3, 1.4, 1.13, 2.0, 2.1,
2.10, 2.11, 3.0, 3.2, 3.3, 3.7, 3.8, 3.9, 3.21,
4.3A, 4.12, 4.12A, 4.15, 4.20, 4.21, 5.9, 5.10,
5.17, 7.0–7.13, 8.5(e) of the Farm Credit Act
(12 U.S.C. 2011, 2012, 2021, 2071, 2072,
2091, 2092, 2121, 2123, 2124, 2128, 2129,
2130, 2142, 2154a, 2183, 2184, 2203, 2208,
2209, 2243, 2244, 2252, 2279a–2279f–1,
2279aa–5(e)); secs. 411 and 412 of Pub. L.
100–233, 101 Stat. 1568, 1638; secs. 409 and
414 of Pub. L. 100–399, 102 Stat. 989, 1003,
and 1004.
2. Add a new subpart A, consisting of
§§ 611.100 through 611.110, to read as
follows:
■
Subpart A—General
Sec.
611.100 Definitions.
611.110 Meetings of stockholders.
Subpart A—General
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§ 611.100
Definitions.
The following definitions apply for
the purpose of this part:
(a) Mail ballot means a ballot cast by
regular or electronic mail.
(b) Online meeting means a meeting
that is conducted over the Internet
through the use of mediating
technologies, such as online services,
computer hardware and software, etc.,
where technology is used to generate
objects and environments that are
presented to users through a number of
senses (e.g., vision and hearing). The
mediating technologies allow people or
objects at remote locations to appear
locally present or at least allow them to
be treated that way during the course of
the meeting.
(c) Online meeting space means an
online environment where Farm Credit
institutions can hold stockholder
meetings that allow stockholders to
communicate, collaborate, and share
information. Any stockholder with the
necessary technology requirements and
access (e.g., password-protected
meetings) must be allowed to connect to
his or her institution’s online meeting
space.
(d) Regional election means the
apportionment of a Farm Credit
institution’s territory into regions in
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which a director or directors from a
region are elected only by those voting
stockholders who reside or conduct
agricultural or aquatic operations in that
same region.
(e) Stockholder-association means an
association within a Farm Credit bank
district holding voting stock in that
bank.
(f) Stockholder-elected director means
a director who is elected by the majority
vote of the voting stockholders voting to
serve as a member of a Farm Credit
institution’s board of directors.
§ 611.110
Meetings of stockholders.
(a) Requirement. Associations must
have annual meetings of stockholders
for the purpose of conducting annual
director elections. Farm Credit banks are
encouraged to hold annual or periodic
meetings of stockholders. The bylaws of
each Farm Credit bank and association
must specify the quorum requirements
for stockholder meetings. Associations
must elect at least one director at each
annual meeting, but the vote on the
election of a director or directors by
mail ballot may only occur in the period
following an annual meeting. An online
meeting space may be used in addition
to a physical meeting space to conduct
a stockholders’ meeting or director
election. A physical meeting space must
always exist for association meetings
involving director elections and other
stockholders’ votes.
(b) Notice. Each association, and those
Farm Credit banks holding annual
meetings, must issue an Annual Meeting
Information Statement in accordance
with the requirements of §§ 620.20 and
620.21 of this chapter.
(c) Online meeting. Each Farm Credit
bank and association using an online
meeting space as part of a meeting or
election must have policies and
procedures in place addressing how the
online meeting space will be accessed
and used by participants. The policies
and procedures must specifically
identify any technological adaptations
necessary to address the confidentiality
and security in voting requirements of
§ 611.340.
Subpart C—Election of Directors and
Other Voting Procedures
3. Amend § 611.310 by revising
paragraph (b) and adding new
paragraphs (e) and (f) to read as follows:
■
§ 611.310 Eligibility for membership on
bank and association boards and
subsequent employment.
*
*
*
*
*
(b) No bank or association director
shall be eligible to continue to serve in
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that capacity and his or her office shall
become vacant if after election as a
member of the board, he or she becomes
legally incompetent or is convicted of
any criminal offense involving
dishonesty or breach of trust or held
liable in damages for fraud.
*
*
*
*
*
(e) No person shall be eligible for
membership on a Farm Credit bank or
association board of directors in the
same election cycle for which the Farm
Credit institution’s nominating
committee is identifying candidates if
that person was elected to serve on that
institution’s nominating committee and
attended any meeting called by the
nominating committee.
(f) Out-of-territory borrowers who
hold voting stock in the association may
serve as association directors unless
prohibited by the association’s bylaws.
If an association’s bylaws prohibit it,
that association must inform, in writing
and at the time of loanmaking, each outof-territory borrower that out-of-territory
borrowers may not serve as directors.
4. Amend § 611.320 by:
a. Removing the word ‘‘System’’ and
adding the words ‘‘Farm Credit’’ each
place it appears in paragraphs (a) and
(d);
■ b. Revising paragraphs (c) and (e); and
■ c. Adding a new paragraph (f) to read
as follows:
■
■
§ 611.320 Impartiality in the election of
directors.
*
*
*
*
*
(c) No property, facilities, or
resources, including information
technology and human or financial
resources, of any Farm Credit institution
shall be used by any candidate for
nomination or election or by any other
person for the benefit of any candidate
for nomination or election, unless the
same property, facilities, or resources
are simultaneously available and made
known to be available for use by all
declared candidates, including floor
nominees. For the limited purpose of
Farm Credit bank board elections, each
Farm Credit bank may allow its
stockholder-associations to use
stockholder-association property,
facilities, or resources in support of
bank director candidates. Any Farm
Credit bank permitting this activity by
its stockholder-associations must have a
policy in place approved by its board of
directors establishing reasonable
standards that stockholder-associations
must follow, and those standards must
give appropriate consideration to the
various sizes of stockholder-associations
within a bank’s district and include a
maximum amount that a stockholder-
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association may expend in support of a
bank director candidate.
*
*
*
*
*
(e) No Farm Credit institution may in
any way distribute or mail, whether at
the expense of the institution or
another, any campaign materials for
director candidates. Institutions may
request biographical information, as
well as the disclosure information
required under § 611.330, from all
declared candidates who certify that
they are eligible, restate such
information in a standard format, and
distribute or mail it with ballots or
proxy ballots.
(f) No director of a Farm Credit
institution shall, in his or her capacity
as a director, make any statement, either
orally or in writing, which may be
construed as intending to influence any
vote in that institution’s director
nominations or elections. This
paragraph shall not prohibit director
candidates from engaging in campaign
activities on their own behalf.
■
5. Revise § 611.325 to read as follows:
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§ 611.325 Bank and association
nominating committees.
Each Farm Credit bank and
association may have only one
nominating committee in any one
election cycle. Each Farm Credit bank
and association’s board of directors
must establish and maintain policies
and procedures on its nominating
committee, describing the formation,
composition, operation, resources, and
duties of the committee, consistent with
current laws and regulations. Each
nominating committee must conduct
itself in the impartial manner prescribed
by the policies and procedures adopted
by its institution under § 611.320 and
this section.
(a) Composition. The voting
stockholders of each bank and
association must elect a nominating
committee of no fewer than three
members. Unless prohibited by
association bylaws, out-of-territory
borrowers who hold voting stock may
serve as members of an association’s
nominating committee. If an
association’s bylaws prohibit it, that
association must inform, in writing and
at the time of loanmaking, each out-ofterritory borrower that out-of-territory
borrowers may not serve on the
association’s nominating committee.
(b) Election. Farm Credit banks and
associations may use in-person
(including use of an online medium and
proxy ballots) or mail balloting
procedures to elect a nominating
committee.
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(1) Farm Credit banks and
associations must provide voting
stockholders the opportunity to vote on
the candidates for each nominating
committee position.
(2) Association nominating committee
members may only be elected to a 1-year
term. Farm Credit Banks must use
weighted voting, with no cumulative
voting permitted, when electing
members to serve on a nominating
committee. Farm Credit banks and
associations may permit nominating
committee members to be re-nominated
and stand for re-election to serve
successive terms.
(c) Conflicts of interest. No individual
may serve on a nominating committee
who, at the time of election to, or during
service on, a nominating committee, is
an employee, director, or agent of that
bank or association. A nominating
committee member may not be a
candidate for election to the board in
the same election for which the
committee is identifying nominees. A
nominating committee member may
resign from the committee to run for
election to the board only if the
individual did not attend any
nominating committee meeting.
(d) Responsibilities. It is the
responsibility of each nominating
committee to identify, evaluate, and
nominate candidates for stockholder
election to a Farm Credit bank or
association board of directors. A
nominating committee’s responsibilities
are limited to the following:
(1) Nominate individuals who the
committee determines meet the
eligibility requirements to run for open
director positions. The committee must
endeavor to ensure representation from
all areas of the Farm Credit bank’s or
association’s territory and, as nearly as
possible, all types of agriculture
practiced within the territory.
(2) Evaluate the qualifications of the
director candidates. The evaluation
process must consider whether there are
any known obstacles preventing a
candidate from performing the duties of
the position.
(3) Nominate at least two candidates
for each director position being voted on
by stockholders. If two nominees cannot
be identified, the nominating committee
must provide written explanation to the
existing board of the efforts to locate
candidates or the reasons for
disqualifying any other candidate that
resulted in fewer than two nominees.
(4) Maintain records of its meetings,
including a record of attendance at
meetings.
(5) Identify, evaluate, and nominate
eligible individuals for service on the
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18741
next nominating committee, if permitted
by the institution.
(e) Resources. Each Farm Credit bank
and association must provide its
nominating committee reasonable
access to administrative resources in
order for the committee to perform its
duties. Each Farm Credit bank and
association must, at a minimum,
provide its nominating committee with
FCA regulations and guidance on
nominating committees, a current list of
stockholders, the most recent bylaws,
the current director qualifications
policy, and a copy of the policies and
procedures that the bank or the
association has adopted pursuant to
§ 611.320(a) ensuring impartial
elections. On the request of the
nominating committee, the institution
must also provide a summary of the
current board self-evaluation. The bank
or association may require a pledge of
confidentiality by committee members
prior to releasing evaluation documents.
6. Add a new § 611.326 to subpart C
to read as follows:
■
§ 611.326 Floor nominations for open
Farm Credit bank and association director
positions.
(a) Each floor nominee must be
eligible for the director position for
which the person has been nominated.
(b)(1) Voting stockholders of
associations must be allowed to make
floor nominations for every open
stockholder-elected director position.
Associations using only mail ballots
must allow nominations from the floor
at every session of an annual meeting.
Associations permitting stockholders to
cast votes during annual meetings may
only allow nominations from the floor at
the first session of the annual meeting.
(2) If floor nominations are permitted
by a Farm Credit bank’s election
policies and procedures, voting
stockholders must be allowed to make
floor nominations for every open
stockholder-elected director position
and a physical meeting space must
exist. Before every director election by
a Farm Credit bank, the bank must
inform voting stockholders whether
floor nominations will be accepted.
(c) Each association’s board of
directors must adopt policies and
procedures for making and accepting
floor nominations of candidates to stand
for election to its board of directors.
Each Farm Credit bank’s board of
directors allowing nominations from the
floor must also adopt policies and
procedures for making and accepting
floor nominations. Policies and
procedures for floor nominations must,
at a minimum, provide that:
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(1) Floor nominations may only be
made after the nominating committee
has provided its list of directornominees.
(2) No more than a second by a voting
stockholder to a nomination from the
floor is required. After receiving a floor
nomination, the floor nominee must
state if he or she accepts the
nomination.
(3) Floor nominees must make the
disclosures required by § 611.330 of this
part.
7. Revise §§ 611.330, 611.340, and
611.350 to read as follows:
■
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§ 611.330 Disclosures of Farm Credit bank
and association director-nominees.
(a) Each Farm Credit bank and
association’s board of directors must
adopt policies and procedures that
ensure a disclosure statement is
prepared by each director-nominee. At a
minimum, each disclosure statement for
each nominee must:
(1) State the nominee’s name, city and
state of residence, business address if
any, age, and business experience
during the last 5 years, including each
nominee’s principal occupation and
employment during the last 5 years.
(2) List all business interests on
whose board of directors the nominee
serves or is otherwise employed in a
position of authority and state the
principal business in which the
business interest is engaged.
(3) Identify any family relationship of
the nominee that would be reportable
under part 612 of this chapter if elected
to the institution’s board.
(b)(1) Floor nominees who are not
incumbent directors must provide to the
Farm Credit bank or association the
information referred to in this section
and in § 620.5(j) and (k) of this chapter.
The information must be provided in
either paper or electronic form within
the time period prescribed by the
institution’s bylaws or policies and
procedures. If the institution does not
have a prescribed time period, each
floor nominee must provide this
information to the institution within 5
business days of the nomination. If
stockholders will not vote solely by mail
ballot upon conclusion of the meeting,
each floor nominee must provide the
information at the first session at which
voting is held.
(2) For each nominee who is not an
incumbent director or a nominee from
the floor, the nominee must provide the
information referred to in this section
and in § 620.5(j) and (k) of this chapter.
(c) Each Farm Credit bank and
association must distribute directornominee disclosure information to all
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stockholders eligible to vote in the
election. Institutions may either restate
such information in a standard format or
provide complete copies of each
nominee’s disclosure statement.
(1) Disclosure information for each
director-nominee must be provided as
part of the Annual Meeting Information
Statement (AMIS) issued for director
elections.
(2) Disclosure information for each
director-nominee must be distributed or
mailed with ballots or proxy ballots.
Farm Credit banks and associations
must ensure that the disclosure
information on floor nominees is
provided to voting stockholders by
delivering ballots for the election of
directors in the same format as the
comparable information contained in
the AMIS.
(d) No person may be a nominee for
director who does not make the
disclosures required by this section.
§ 611.340
voting.
Confidentiality and security in
(a) Each Farm Credit bank and
association’s board of directors must
adopt policies and procedures that:
(1) Ensure the security of all records
and materials related to a stockholder
vote including, but not limited to,
ballots, proxy ballots, and other related
materials.
(2) Ensure that ballots and proxy
ballots are provided only to
stockholders who are eligible to vote as
of the record date set for the stockholder
vote.
(3) Ensure that all information and
materials regarding how or whether an
individual stockholder has voted remain
confidential, including protecting the
information from disclosure to the
institution’s directors, stockholders, or
employees, or any other person except:
(i) An independent third party
tabulating the vote; or
(ii) The Farm Credit Administration.
(4) Provide for the establishment of a
tellers committee or an independent
third party who will be responsible for
validating ballots and proxies and
tabulating voting results. A tellers
committee may only consist of voting
stockholders who are not directors,
director-nominees, or members of that
election cycle’s nominating committee.
(b) No Farm Credit bank or
association may use signed ballots in
stockholder votes. A bank or association
may use balloting procedures, such as
an identity code on the ballot, that can
be used to identify how or whether an
individual stockholder has voted only if
the votes are tabulated by an
independent third party. In weighted
voting, the votes must be tabulated by
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an independent third party. An
independent third party that tabulates
the votes must certify in writing that
such party will not disclose to any
person (including the institution, its
directors, stockholders, or employees)
any information about how or whether
an individual stockholder has voted,
except that the information must be
disclosed to the Farm Credit
Administration if requested.
(c) Once a Farm Credit bank or
association receives a ballot, the vote of
that stockholder is final, except that a
stockholder may withdraw a proxy
ballot before balloting begins at a
stockholders’ meeting. A Farm Credit
bank or association may give a
stockholder voting by proxy an
opportunity to give voting discretion to
the proxy of the stockholder’s choice,
provided that the proxy is also a
stockholder eligible to vote.
(d) Ballots and proxy ballots must be
safeguarded before the time of
distribution or mailing to voting
stockholders and after the time of
receipt by the bank or association until
disposal. When stockholder meetings
are held for the purpose of conducting
elections or other votes, only proxy
ballots may be accepted prior to any or
all sessions of the stockholders’ meeting
and mail ballots may only be distributed
after the conclusion of the meeting. In
an election of directors, ballots, proxy
ballots, and election records must be
retained at least until the end of the
term of office of the director. In other
stockholder votes, ballots, proxy ballots,
and records must be retained for at least
3 years after the vote.
(e) An institution and its officers,
directors, and employees may not make
any public announcement of the results
of a stockholder vote before the tellers
committee or independent third party
has validated the results of the vote.
§ 611.350 Application of cooperative
principles to the election of directors.
In the election of directors, each Farm
Credit institution shall comply with the
following cooperative principles as well
as those set forth in § 615.5230 of this
chapter, unless otherwise required by
statute or regulation.
(a) Each voting stockholder of an
association or bank for cooperatives has
only one vote, regardless of the number
of shares owned or the number of loans
outstanding. Each voting stockholderassociation of a Farm Credit Bank has
only one vote that is assigned a weight
proportional to the number of that
association’s voting stockholders. Each
voting stockholder of an agricultural
credit bank has only one vote, unless
another voting scheme has been
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approved by the Farm Credit
Administration.
(b) If an association apportions its
territory into geographic regions for
director nomination or election
purposes, out-of-territory voting
stockholders must be assigned to a
geographic region.
(c) All voting stockholders of a Farm
Credit institution have the right to vote
in any stockholder vote to remove any
director.
Subpart P—Termination of System
Institution Status
Subpart C—Similar Entity Authority
Under Sections 3.1(11)(B) and 4.18A of
the Act
§ 613.3300
[Amended]
11. Amend § 613.3300(c)(1)(i)(B) by
removing the words ‘‘if a majority of the
shareholders’’ and adding in their place
the words ‘‘if a majority of voting
stockholders voting’’.
■
PART 615—FUNDING AND FISCAL
AFFAIRS, LOAN POLICIES AND
OPERATIONS, AND FUNDING
OPERATIONS
12. The authority citation for part 615
is revised to read as follows:
■
8. Amend § 611.1210 by revising the
first sentence of paragraph (f) to read as
follows:
■
§ 611.1210 Advance notices—
commencement resolution and notice to
equity holders.
*
*
*
*
*
(f) Special class of stock.
Notwithstanding any requirements to
the contrary in § 615.5230(c) of this
chapter, you may adopt bylaws
providing for the issuance of a special
class of stock and participation
certificates between the date of adoption
of a commencement resolution and the
termination date. * * *
9. Revise § 611.1240(e) to read as
follows:
■
§ 611.1240 Voting record date and
stockholder approval.
*
*
*
*
*
(e) Voting procedures. The voting
procedures must comply with § 611.340.
You must have an independent third
party count the ballots. If a voting
stockholder notifies you of the
stockholder’s intent to exercise
dissenters’ rights, the tabulator must be
able to verify to you that the stockholder
voted against the termination.
Otherwise, the votes of stockholders
must remain confidential.
*
*
*
*
*
PART 613—ELIGIBILITY AND SCOPE
OF FINANCING
10. The authority citation for part 613
continues to read as follows:
jlentini on DSKJ8SOYB1PROD with RULES2
■
Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11,
2.2, 2.4, 2.12, 3.1, 3.7, 3.8, 3.22, 4.18A, 4.25,
4.26, 4.27, 5.9, 5.17 of the Farm Credit Act
(12 U.S.C. 2013, 2015, 2017, 2018, 2019,
2073, 2075, 2093, 2122, 2128, 2129, 2143,
2206a, 2211, 2212, 2213, 2243, 2252).
VerDate Nov<24>2008
17:40 Apr 09, 2010
Jkt 220001
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12,
2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3,
4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26,
8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019,
2020, 2073, 2074, 2075, 2076, 2093, 2122,
2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b–6, 2279aa,
2279aa–3, 2279aa–4, 2279aa–6, 2279aa–8,
2279aa–10, 2279aa–12); sec. 301(a) of Pub. L.
100–233, 101 Stat. 1568, 1608.
Subpart I—Issuance of Equities
13. Amend § 615.5230 by:
a. Revising paragraph (a);
b. Redesignating existing paragraph
(b) as paragraph (c);
■ c. Adding a new paragraph (b);
■ d. Revising newly redesignated
paragraph (c)(1); and
■ e. Removing newly redesignated
paragraph (c)(5) to read as follows:
■
■
■
§ 615.5230 Implementation of cooperative
principles.
(a) Voting stockholders of Farm Credit
banks and associations shall be
accorded full voting rights in
accordance with cooperative principles,
including those set forth in § 611.350 of
this chapter. Except as otherwise
required by statute or regulation, and
except as modified by paragraphs (b)
and (c) of this section, the voting rights
of each voting shareholder are as
follows:
(1) Each voting stockholder of a Farm
Credit Bank has only one vote that is
assigned a weight proportional to the
number of that association’s voting
stockholders and has the right to vote in
the election of each stockholder-elected
director and to cumulate such votes and
distribute them among the candidates in
the stockholder’s discretion, except that
cumulative voting for directors may be
eliminated if 75 percent of the
associations that are stockholders of the
Farm Credit Bank vote in favor of
elimination. In a vote to eliminate
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18743
cumulative voting, each association
shall be accorded one vote.
(2) Each voting stockholder of an
agricultural credit bank has only one
vote, unless another voting scheme has
been approved by the Farm Credit
Administration.
(3) Each voting stockholder of an
association or bank for cooperatives has
only one vote, regardless of the number
of shares owned or the number of loans
outstanding. Unless regional election of
directors is provided for in the bylaws
pursuant to § 615.5230(b), each voting
stockholder of an association or bank for
cooperatives has the right to vote in the
election of each stockholder-elected
director. Unless otherwise provided in
the capitalization bylaws, each voting
stockholder of an association or bank for
cooperatives is allowed to cumulate
such votes and distribute them among
the candidates in the stockholder’s
discretion. Cumulative voting is not
allowed in the regional election of
stockholder-elected directors.
(b) The regional election of
stockholder-elected directors is only
permitted under the following
conditions:
(1) A bylaw establishing regional
elections is approved by a majority of
voting stockholders, voting in person or
by proxy, prior to implementation.
(2) The bylaw provides that the use of
regional election of stockholder-elected
directors does not prevent all voting
stockholders of the institution,
regardless of the region where they
reside or conduct agricultural or aquatic
operations, from voting in any
stockholder vote to remove a director.
(3) There are an approximately equal
number of voting stockholders in each
of the institution’s voting regions.
Regions will have an approximately
equal number of voting stockholders if
the number of voting stockholders in
any one region does not exceed the
number of voting stockholders in any
other region by more than 25 percent. At
least once every 3 years, the institution
must count the number of voting
stockholders in each region and, if the
regions do not have an approximately
equal number of stockholders, the
regional boundaries must be adjusted to
achieve such result.
(4) An institution may provide for
more than one director to represent a
region. Institutions providing for more
than one director to represent a region
will determine the equitability of the
regions by dividing the number of
voting stockholders in that region by the
number of director positions
representing that region, and the
resulting quotient shall be the number
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that is compared to the number of
voting stockholders in other regions.
(5) Each voting stockholder is
accorded the right to vote in the election
of each stockholder-elected director for
his or her region.
(c) * * *
(1) Each issuance of preferred stock
(other than preferred stock outstanding
on October 5, 1988, and stock into
which such outstanding stock is
converted that has substantially similar
preferences) shall be approved by a
majority of the shares voting of each
class of equities adversely affected by
the preference, voting as a class,
whether or not such classes are
otherwise authorized to vote;
*
*
*
*
*
Subpart K—Surplus and Collateral
Requirements
§ 615.5330
[Amended]
14. Amend § 615.5330 by removing
the words, ‘‘a least’’ and adding in their
place, the words ‘‘at least’’ in the first
sentence of paragraphs (a)(1) and (b)(1).
PART 619—DEFINITIONS
15. The authority citation for part 619
continues to read as follows:
■
Authority: Secs. 1.4, 1.7, 2.1, 2.4, 2.11, 3.2,
3.21, 4.9, 5.9, 5.17, 5.18, 5.19, 7.0, 7.1, 7.6,
7.8 and 7.12 of the Farm Credit Act (12
U.S.C. 2012, 2015, 2072, 2075, 2092, 2123,
2142, 2160, 2243, 2252, 2253, 2254, 2279a,
2279a–1, 2279b, 2279c–1, 2279f).
16. Add a new § 619.9320 to read as
follows:
■
Shareholder or stockholder.
A holder of any equity interest in a
Farm Credit institution.
PART 620—DISCLOSURE TO
SHAREHOLDERS
17. The authority citation for part 620
is revised to read as follows:
■
jlentini on DSKJ8SOYB1PROD with RULES2
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); sec. 424 of Pub. L.
100–233, 101 Stat. 1568, 1656; sec. 514 of
Pub. L. 102–552, 106 Stat. 4102.
Subpart A—General
§ 620.1
*
*
*
*
*
(i) Compensation of directors and
senior officers.
*
*
*
*
*
(2) Senior officer compensation.
* * * Associations exercising this
option must include a reference in the
annual report stating that the senior
officer compensation information is
included in the AMIS and that the
AMIS is available for public inspection
at the reporting association offices
pursuant to § 620.2(b).
*
*
*
*
Subpart E—Annual Meeting
Information Statements and Other
Information To Be Furnished in
Connection with Annual Meetings and
Director Elections
20. Revise the heading of subpart E to
read as set forth above.
■ 21. Amend subpart E by adding a new
§ 620.20 to read as follows:
■
§ 620.20 Preparing and distributing the
information statement.
(a)(1) Each Farm Credit bank and
association must prepare and provide an
information statement (‘‘statement’’ or
‘‘AMIS’’) to its shareholders at least 10
business days, but not more than 30
business days, before any annual
meeting or any director elections.
(2) Each Farm Credit bank and
association must provide the Farm
Credit Administration an electronic
copy of the AMIS when issued.
(3) In addition to the mailed AMIS,
each Farm Credit bank and association
may post its AMIS on its Web site. Any
AMIS posted on an institution’s Web
site must remain on the Web site for a
reasonable period of time, but not less
than 30 calendar days.
(b) Every AMIS must be dated and
signed in accordance with the
requirements of § 620.3(b) of this part.
(c) Every AMIS must be available for
public inspection at all offices of the
issuing institution pursuant to § 620.2(b)
of this part.
22. Section 620.21 is revised to read
as follows:
18. Amend § 620.1 by removing
paragraph (p) and redesignating
paragraphs (q) and (r) as paragraphs (p)
and (q).
■
17:40 Apr 09, 2010
§ 620.5 Contents of the annual report to
shareholders.
■
[Amended]
VerDate Nov<24>2008
19. Amend § 620.5 by revising the last
sentence of paragraph (i)(2) introductory
text as follows:
■
*
■
§ 619.9320
Subpart B—Annual Report to
Shareholders
Jkt 220001
§ 620.21 Contents of the information
statement.
(a) An AMIS must, at a minimum,
address the following items:
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Fmt 4701
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(1) Date, time, and place of the
meeting(s). Notice of the date, time, and
meeting location(s) must be provided at
least 10 business days, but no more than
30 business days, before the meeting. If
the Farm Credit bank or association will
use an online meeting space as part of
its meeting, the notice must also specify
the date, time, and means of accessing
the online meeting space. This
information does not need to be part of
an AMIS issued by a Farm Credit bank
if no meeting is held.
(2) Voting shareholders. For each
class of stock entitled to vote at the
meeting, state the number of
shareholders entitled to vote and, when
shareholders are asked to vote on
preferred stock, the number of shares
entitled to vote. State the record date as
of which the shareholders entitled to
vote will be determined and the voting
requirements for each matter to be voted
upon. If association directors are
nominated or elected by region, describe
the regions and state the number of
voting shareholders entitled to vote in
each region.
(3) Financial updates. Each AMIS
must reference the most recently issued
annual report required by subpart B of
this part. The AMIS must also include
such other information considered
material and necessary to make the
required contents of the AMIS, in light
of the circumstances under which it is
made, not misleading.
(i) If any transactions between the
institution and its senior officers and
directors of the type required to be
disclosed in the annual report to
shareholders under § 620.5(j), or any of
the events required to be disclosed in
the annual report to shareholders under
§ 620.5(k) have occurred since the end
of the last fiscal year and were not
disclosed in the annual report to
shareholders, the disclosures required
by § 620.5(j) and (k) shall be made with
respect to such transactions or events in
the information statement. If any
material change in the matters disclosed
in the annual report to shareholders
pursuant to § 620.5(j) and (k) has
occurred since the annual report to
shareholders was prepared, disclosure
shall be made of such change in the
information statement.
(ii) If a Farm Credit institution has
had a change or changes in its external
auditor(s) since the last annual report to
shareholders, or if a disagreement with
an external auditor has occurred, the
institution shall disclose the
information required by § 621.4(c) and
(d) of this chapter.
(4) Directors. State the names and ages
of persons currently serving as directors
of the institution, their terms of office,
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jlentini on DSKJ8SOYB1PROD with RULES2
and the periods during which such
persons have served. Institutions must
also state the type or types of agriculture
or aquaculture engaged in by each
director. No information need be given
with respect to any director whose term
of office as a director will not continue
after any meeting to which the
statement relates.
(i) Identify by name any incumbent
director who attended fewer than 75
percent of the board meetings or any
meetings of board committees on which
he or she served during the last fiscal
year.
(ii) If any director resigned or
declined to stand for reelection since
the last annual meeting because of a
policy disagreement with the board, and
if the director has provided a notice
requesting disclosure of the nature of
the disagreement, state the date of the
director’s resignation and summarize
the director’s description of the
disagreement. If the institution holds a
different view of the disagreement, the
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17:40 Apr 09, 2010
Jkt 220001
institution’s view may be summarized
as well.
(b) An AMIS issued for director
elections must also include the
information required by this paragraph.
(1) Provide the nominating
committee’s slate of director-nominees.
If fewer than two director-nominees for
each position are named, describe the
efforts of the nominating committee to
locate two willing nominees.
(2) Provide, as part of the AMIS, the
director-nominee disclosure information
collected under § 611.330 of this
chapter. Institutions may either restate
such information in a standard format or
provide complete copies of each
nominee’s disclosure statement.
(3) State whether nominations will be
accepted from the floor and explain the
procedures for making floor
nominations.
(c) When the nominating committee
will be elected during director elections,
notice to voting shareholders of this
event must be included in the AMIS.
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18745
The AMIS must describe the balloting
procedures that will be used to elect the
nominating committee, including
whether floor nominations for
committee members will be permitted.
The AMIS must state the number of
committee positions to be filled and the
names of the nominees for the
committee.
(d) If shareholders are asked to vote
on matters not normally required to be
submitted to shareholders for approval,
the AMIS must describe fully the
material circumstances surrounding the
matter, the reason shareholders are
asked to vote, and the vote required for
approval of the proposition. The AMIS
must describe any other matter that will
be discussed at the meeting upon which
shareholder vote is not required.
Dated: March 31, 2010.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. 2010–7755 Filed 4–9–10; 8:45 am]
BILLING CODE 6705–01–P
E:\FR\FM\12APR2.SGM
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Agencies
[Federal Register Volume 75, Number 69 (Monday, April 12, 2010)]
[Rules and Regulations]
[Pages 18726-18745]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-7755]
[[Page 18725]]
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Part V
Farm Credit Administration
-----------------------------------------------------------------------
12 CFR Parts 611, 613, 615 et al.
Organization; Eligibility and Scope of Financing; Funding and Fiscal
Affairs, Loan Policies and Operations, and Funding Operations;
Definitions; and Disclosure to Shareholders; Director Elections; Final
Rule
Federal Register / Vol. 75, No. 69 / Monday, April 12, 2010 / Rules
and Regulations
[[Page 18726]]
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 613, 615, 619 and 620
RIN 3052-AC43
Organization; Eligibility and Scope of Financing; Funding and
Fiscal Affairs, Loan Policies and Operations, and Funding Operations;
Definitions; and Disclosure to Shareholders; Director Elections
AGENCY: Farm Credit Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA or we) issues this final
rule on Farm Credit System (System) bank and association director
elections and other voting procedures. The final rule clarifies
director election processes and updates FCA regulations to incorporate
interpretations made through bookletters to System institutions. It
also consolidates general election procedures, clarifies the role of
nominating committees, enhances eligibility and disclosure requirements
for director candidates, and improves annual meeting information
statement instructions. The final rule also adds new regulations on
floor nominations and meetings of stockholders. We expect this final
rule will increase stockholder participation, enhance impartiality, and
strengthen disclosures in director elections.
DATES: 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: Elna Luopa, Senior Corporate Analyst,
Office of Regulatory Policy, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4414, TTY (703) 883-4434; or Laura D. McFarland,
Senior Counsel, 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 final rule are to:
Strengthen the independence of nominating committees;
Encourage greater stockholder participation in the
director election process;
Ensure that procedures on nominations from the floor are
equitable and known to stockholders;
Clarify director election procedures;
Enhance impartiality and disclosure in the election of
directors; and
Incorporate FCA interpretations and responses to questions
raised by System institutions and FCA examiners in our regulations.
II. Background
The Farm Credit Act of 1971, as amended (Act) (Pub. L. 92-181, 85
Stat. 583), establishes the System as a farmer-owned cooperative system
that provides credit to farmers, ranchers, producers or harvesters of
aquatic products, and rural homeowners. The System's cooperative
structure relies on stockholder control, participation, and ownership,
supported by accurate and timely information provided by the directors
of System institutions. Boards of directors have the responsibility of
encouraging stockholder participation in the management, control, and
ownership of the cooperative. Importantly, it is also from this pool of
interested, active, and informed stockholders that the cooperative
draws its next generation of directors.
On April 16, 2009, we published a proposed rule (74 FR 17612) to
strengthen certain director election provisions and add other
provisions to ensure that stockholders' interests continue to be the
focus in the boardroom through their elected directors. We further
proposed consolidating our director election rules into subpart C of
part 611, ``Election of Directors and Other Voting Procedures,'' to
keep subject matters together and facilitate ease of use. We initially
established a 60-day comment period but, on the request of the public,
extended that period another 60 days.\1\ The extended comment period
for the proposed rule closed on August 14, 2009.
---------------------------------------------------------------------------
\1\ See 74 FR 23961 (May 22, 2009).
---------------------------------------------------------------------------
III. Comments and Our Response
We received 96 comment letters to our proposed rule from
individuals and entities associated with the System, including the Farm
Credit Council (FCC), acting for its membership, and each of the five
Farm Credit banks. Of the comment letters received, 62 expressed
support for the FCC comment letter, adding individual elaborations when
they deemed them appropriate. We discuss the comments to our proposed
rule and our responses below. Those areas of the proposed rule not
receiving comment are finalized as proposed unless otherwise discussed
in this preamble.
A. General Issues
We received 68 comments on the need for additional regulations on
election processes in the System, including one from the FCC and
multiple letters from members of individual System associations. While
most commenters supported our objective of improving System election
processes, the FCC, three Farm Credit banks and several associations
questioned the need for additional regulations. The FCC and a couple of
other commenters acknowledged that some of the existing regulations
needed updating, but remarked that they were unaware where the existing
rules had failed. Other commenters remarked that we should not impose
regulatory requirements that restrict individual institution discretion
in elections. These comments are addressed here.
1. Need for Regulation
The FCC and 49 other commenters asked that we withdraw the rule and
work with the System to find a nonregulatory approach to strengthen
institution elections. Many of these commenters remarked that active
dialogue with System boards can address any weaknesses in the current
election process, as can FCA informal guidance and examination. The FCC
and a few other commenters remarked that our existing rules on election
practices already exceed other regulators and suggested we adopt the
practices of other financial regulators by requiring each institution
to have policies in place specifying election practices in lieu of
regulations. A few associations commented that the election process in
the System is working and the rule would have a negative impact and
increase costs, but one association remarked that the rule provided
many opportunities for enhanced elections. This association also
cautioned that those opportunities should not be forced upon the
institutions. Another association stated that the rule does not follow
best practices and expressed dismay at the implementation efforts that
would be required if the rule became final, including changes to bylaws
and policies. This same association asserted that the rule does not
further the safe and sound operations of the System. Conversely, one
association expressed appreciation that the rule recognizes best
practices, but the commenter questioned the need to capture best
practices in regulations. Another commenter stated that associations
are in a better position to structure election procedures. The FCC and
other commenters remarked that the proposed regulatory scheme seemed
unjustified based on the limited election provisions in the Act. Still
another commenter
[[Page 18727]]
remarked that adoption of the rule could carry unintended consequences
undermining the stated objectives of the rule. A couple of commenters
expressed concern that the rule does not give sufficient consideration
to the different sizes and operations of various System institutions.
One commenter went so far as to state that the rule was a regulatory
burden. Another expressed a lack of optimism that the rule would
improve election processes. Two Farm Credit banks cautioned FCA on
regulating election procedures within the System, questioning if such
rules are in keeping with FCA's status as an arm's-length regulator.
One bank stated that the proposed rule and existing rules are too
detailed, explaining that individual institutions are better equipped
to control election procedures. This same bank questioned why this
rulemaking was needed as it was not aware of any harm or purpose that
would be addressed by the rule.
We are not withdrawing the rule, but, in response to the comments
received, we have amended certain provisions based on specific
comments. While voluntary administration of elections is valuable, it
does not replace the stability that rules provide in assuring System
stakeholders of the safety and soundness of the System, and we have a
responsibility to address this issue. Moreover, an effective director
election process is critical to good governance, which in turn is
essential for institution safety and soundness. The FCA is the
independent Federal agency in the executive branch of the Government
responsible for examining and regulating System institutions. In the
course of issuing regulations, we consider whether the rulemaking may
duplicate other requirements, would be ineffective, or impose burdens
that are greater than the benefits received. Also, we promulgate rules
necessary to implement the expectations and requirements of the Act,
which, in the case of director elections, is to support stockholder
participation in the management, control, and ownership of the System.
We believe this rule clarifies the intended meaning of certain existing
rules, eliminates confusion through reorganization of the rules,
replaces outdated regulatory language with more current terminology,
and introduces technological alternatives to existing requirements. We
also believe that this rulemaking is not a regulatory burden, as a
large portion of it incorporates previous informal guidance provided to
institutions and, therefore, does not result in significant adjustments
to individual institution operations. We do not agree with comments
that our rule is inconsistent with what other regulators require. The
FCA, as an independent regulator of the System, is not required to
follow the actions of other regulators. Instead, we consider the policy
positions of other regulators to decide if we should follow them or
take a different approach if appropriate to implement the requirements
and expectations of the Act.
Our election rule sets a minimum level of performance and gives
prime consideration to the cooperative structure of the System. We
believe the assurances derived from this regulatory minimum standard
will benefit the System overall by increased stockholder, investor, and
public confidence. In this rulemaking, our intent is to ensure that
appropriate election standards exist for all System institutions. We
carefully considered the size, complexity, risks, interrelationships,
and resources of System institutions when developing our rules, and
incorporated variations and flexibility as appropriate. While we
believe it is important to preserve individual institution flexibility
when possible, our regulatory responsibility requires us to issue
regulations that we determine appropriate for safety and soundness
reasons. While commenters remarked that they knew of no risk or problem
that needs to be addressed in a regulation, we explain that we are not
limited to issuing regulations only when there is an existing problem.
It is our responsibility as a safety and soundness regulator to be
proactive in our rulemaking and provide standards that help avert
potential problems.
2. Examination Instead of Rulemaking
Thirty-four (34) System commenters cited our examination and
enforcement authorities as a sufficient means to address election
issues, concluding that additional regulations are unnecessary. Many
explained that the FCA examination function is better suited to
addressing individual problems, rather than a rulemaking that impacts
the entire System, and that we should focus our attention on those
institutions with election concerns instead of developing a set of
regulations impacting all institutions. The FCC and several other
commenters suggested FCA issue an election governance policy statement
and then use its examination authority to verify compliance with the
policy. Commenters also stated that we have all the enforcement powers
necessary to correct any unsafe or unsound election practices without
this rule. The FCC commented that because there are no problems in
election of bank directors, there is little burden on FCA in examining
individual bank election policies, rather than issuing regulations and
examining for compliance with those regulations.
We examine to ensure the safety and soundness of System
institutions and their compliance with laws and regulations. This
function is not a substitute for our responsibility to issue
regulations implementing the Act and ensuring the safety and soundness
of System institutions. Our examiners use our rules as the basis for
compliance determinations and to require any necessary corrective
actions. Regulations reduce the likelihood that examinations will
uncover unsafe and unsound practices and provide a minimum standard of
performance to assure stakeholders of the safe and sound operations of
System institutions. While we agree with the commenters that we have a
high level of enforcement authority, we do not view it as our primary
tool for ensuring the safety and soundness of System institutions. Safe
and sound operations of individual System institutions are ensured by a
clear set of rules and thorough examinations.
3. Interaction With Bylaws
The FCC and eight other commenters stated that our rulemaking
efforts conflict with section 5.17(b) of the Act. This section of the
Act precludes FCA from approving institution bylaws. As we have
explained in other rulemakings, issuing rules impacting bylaws does not
mean we are approving bylaws in violation of section 5.17(b) of the
Act. The prohibition on bylaw approval doesn't preclude rulemaking on
matters affecting an institution's bylaws or the safe and sound
operations of System institutions. In fact, the Act at section
5.17(a)(9) directs us to issue rules and regulations ``necessary or
appropriate'' to carry out the Act. In pursuit of ensuring a safe and
sound System and carrying out the Act, institution bylaws and
operations are necessarily impacted by our rules. Additionally, while
the authority of System institutions to establish bylaws is fairly
broad, it is not without limits. Bylaws must be consistent with
applicable laws and regulations, and we retain the responsibility to
examine institution bylaws to ensure compliance. Consequently, we may
regulate the terms and conditions by which institutions exercise their
powers through their bylaws, while not approving the bylaws themselves,
and then examine compliance with our regulations.
[[Page 18728]]
4. Differences between Farm Credit Banks and Associations
Two Farm Credit banks expressed concern that the regulation does
not adequately recognize the differences between bank and association
election procedures. One commenter remarked that the rule is too
restrictive for banks, while not providing enough protection of
association rights. This commenter asked the FCA to reevaluate the
proposed rule to recognize differences in election procedures between
banks and associations contained in the Act. One association remarked
that FCA should adopt the concept of 75-percent stockholder-
associations' affirmative vote on all bank election procedures, similar
to the current rule on overturning cumulative voting in bank elections.
We disagree with the suggestion that stockholder-associations be
allowed to overrule bank board decisions on a bank's election process.
Each Farm Credit bank may consider the suggestions of its stockholder-
associations and incorporate them into the bank's election policies and
procedures if the bank desires. We agree that the rule requires further
clarity in its application to Farm Credit banks versus associations and
have made modifications to those sections of the rule we considered
appropriate. We addressed these specific modifications in the section-
by-section analysis of this preamble below.
5. Implementation Date
We received five comments asking that the implementation date of
the rule be extended to facilitate compliance. We proposed no delayed
implementation date because we do not consider it necessary. As stated
earlier, much of this rulemaking incorporates previous guidance
provided by FCA to the System. We are not delaying the implementation
of the other areas of the rule because the timing of the rule's
effective date is not anticipated to impact ongoing elections.
B. Specific Issues
1. Meetings of Stockholders [New Sec. Sec. 611.100 and 611.110]
a. Definitions [New Sec. 611.100]
We received two comments on the definition of ``mail ballots.'' The
commenters asked that we continue to permit mail ballots to be used by
Farm Credit banks, whether or not a stockholders' meeting has been
held. One of the commenters pointed out that Farm Credit banks, as
acknowledged elsewhere in the proposed rule, do not always have
stockholders' meetings when conducting director elections. This same
commenter also remarked that proxy ballots could be used if mail
ballots were eliminated.
The commenter's point that the definition offered in the proposed
rule would effectively prevent banks from using mail ballots absent a
stockholders' meeting is well made. Our proposed definition was in no
way intended to prevent Farm Credit banks from using mail ballots,
absent a stockholders' meeting. We are therefore removing that portion
of the definition and placing the language explaining that mail ballots
may not be distributed prior to the conclusion of a meeting in
paragraph (d) of Sec. 611.340, which discusses the time when proxy
ballots may be accepted and mail ballots may be distributed in
connection with stockholders' meetings. We believe this movement of
language regarding when mail ballots are distributed from Sec.
611.100(a) to Sec. 611.340(d) clarifies that when a stockholders'
meeting is held to conduct elections, mail ballots may not be issued
before the conclusion of that meeting.
Although no comments were made on the definition of mail ballots,
including by electronic means, we are clarifying that electronic
ballots classified as mail ballots are those cast by electronic mail.
We did not intend to characterize electronic, ``real time'' balloting
procedures, such as electronic ballot stations or online balloting that
may be used by stockholders attending a meeting either in a physical
location or online, as mail ballots. Those electronic ``real time''
balloting methods would properly be characterized as in-person voting.
We also clarify that text messaging is not an appropriate method for
balloting as it is nearly impossible to verify the identity of the
sender of text messages.
One commenter remarked that the definitions for online meetings and
online meeting spaces, while providing flexibility, do not allow for
meetings without a physical space. This commenter asked for
clarification on what business can be conducted by mail or online
without physical meetings. This comment is better directed to Sec.
611.110, ``Meetings of stockholders,'' since the definitions in Sec.
611.100 do not contain the limitation mentioned, but we respond to the
comment here. We require a physical meeting space when using online
meetings for all associations and those Farm Credit banks allowing
floor nominations. As explained in the proposed rule preamble, E-
commerce requires each stockholder to agree to electronic communication
in lieu of traditional communications, so unless all stockholders have
made such an agreement, a physical meeting space is needed to provide a
``floor'' for floor nominations. Because the commenter thought our
proposed rule would require Farm Credit banks to always have a physical
meeting space when using online meetings, we are modifying Sec.
611.110(a) to clarify this requirement always applies to associations,
since associations must allow floor nominations. The requirement would
only apply to Farm Credit banks permitting floor nominations, as
reflected in Sec. 611.326(b)(2).
We received one comment on the definition of a quorum, asking if a
quorum applies to individual meeting items or the entire meeting. A
quorum is the number of stockholders needed to be present to start a
meeting; it does not vary for each agenda item. However, we are
removing the definition of a quorum for reasons stated under section
III.B.1.d. of this preamble. We received no comments on the other
provisions of Sec. 611.100 and finalize those as proposed.
b. Stockholders' Meetings [New Sec. 611.110]
We received 22 comments, including the FCC, on System associations'
holding annual director elections and allowing for the use of online
meetings as part of the annual meeting process. Many of these
commenters expressed dismay at having to have one large meeting each
year instead of individual and localized customer appreciation
meetings. Several commenters also stated that institutions should
remain free to determine the meeting process. An association commented
that it had stopped holding annual meetings 12 years ago, instead using
localized customer appreciation gatherings, which have resulted in
significant increases in stockholder participation and attendance.
Still another association stated that it has scaled down its annual
meeting and redirected the cost savings in separate customer
appreciation events. One commenter remarked that annual meetings are
not practical, nor reliable, for generating stockholder involvement.
Another commenter expressed concern that annual meetings are viewed as
the only or best means of stockholder participation in institution
business. Still another stated that one annual meeting, versus multiple
local meetings, is difficult to schedule in a fair manner given the
variety of agricultural production timelines involved. Other commenters
remarked on the growing territorial sizes and difficulties presented in
holding a single annual meeting. One commenter stated that even using
regional meetings does
[[Page 18729]]
not address timeframes or improve stockholder participation.
The provision that associations hold annual meetings of
stockholders comes from section 4.15 of the Act, which provides that
each association ``shall elect a nominating committee by vote of the
stockholders at the annual meeting to serve for the following year.''
In addition, we are seeking to recognize, within the general election
procedures, Sec. 611.1123(a)(3) of our merger regulations. Under Sec.
611.1123(a)(3), the governance plan for a continuing association must
provide for the election of at least one director at each annual
meeting held subsequent to the date of merger. Incorporating this
requirement into general election provisions facilitates compliance as
most associations have merged under this rule and therefore have annual
meetings and director elections.
We assure commenters that our rule does not require a single, large
annual meeting, only that an annual meeting be held. Associations may
use a single location or multiple locations to hold their annual
meetings. It is up to the association to determine how to best meet the
needs of its stockholders in structuring the meeting, but we encourage
associations that serve diverse types of agricultural operations or
that have large territories to consider using sectional sessions out of
consideration for its borrowers. Annual meetings, besides serving as a
forum for elections, provide the opportunity to review the
association's financial condition, discuss its progress or setbacks
over the previous year, look at the challenges that management and
board expect to face in the year ahead, address member concerns that
warrant the board's attention, and discuss the rights, privileges, and
obligations of members, individually and collectively. The annual
meeting creates the unique setting for such discussions.
One association objected to requiring annual director elections,
explaining that it rotates director terms each year and, because
appointed directors are included in that rotation, a stockholder-
elected director seat may not be up for election each year. Another
commenter expressed concern that the rule does not consider special
circumstances, such as mergers, which make electing a director every
year impractical.
We disagree with comments that annual director elections, held in
conjunction with annual meetings, are not necessary every year. We
expect associations to stagger the terms of all their directors, but we
do not expect the inclusion of appointed directors in a director
rotation cycle to prevent the election of a stockholder-elected
director each year. Since appointed directors (either outside directors
or board-appointed stockholder directors) are not elected by the voting
stockholders but instead, are chosen by the other board members, they
should not be included in the director election rotation cycle. With
respect to mergers, FCA has favorably responded to requests from
associations to suspend director elections in a merger year or to
facilitate a planned downsizing of the continuing board of directors.
A commenter asked us to clarify the language in Sec. 611.110(a)
regarding the interaction of mail ballots with annual meetings. The
rule provides that in-person (including proxy ballots) and online
elections of directors must occur at the annual meeting, but mail
ballots may be distributed after the meeting. Thus, associations have
to elect a director each year, but the timing of the election ballot
depends on the balloting methods used: in-person, online, and proxy
balloting happens at the annual meeting, but mail balloting happens
after the annual meeting concludes. Based on this comment, we have
revised Sec. Sec. 611.110(a) and 611.340(d) to make it clear that mail
ballots may only be distributed after the annual meeting.
The FCC and one association asked that banks not be required to
have annual meetings because the Act does not require it. Another
association asked that banks not be required to elect directors
annually. These commenters explained that the manner in which banks
communicate with stockholders for election purposes should be left to
the banks. We clarify that this rule does not require banks to have
annual meetings. While we are not requiring Farm Credit banks to hold
these types of meetings, we believe, however, they should do so. Thus,
we are not removing the language from Sec. 611.110(a) encouraging Farm
Credit banks to hold annual or periodic meetings. We continue to
strongly believe that the Act places significant expectations on System
institutions to foster and facilitate stockholder involvement in, and
knowledge of, the cooperative nature of each System institution and the
System itself. Farm Credit banks should give serious consideration to
the value of holding an organized, structured meeting wherein
stockholder-associations can communicate with their board members on
matters that may be of interest and concern to them. In addition, Farm
Credit banks are required to elect at least one director on an annual
basis.
Most commenters on the online meeting aspect of the rule indicated
appreciation for the provision, but expressed reservations on its
usefulness, costs and implementation. One commenter remarked that using
online meetings may not be appropriate or available in all locations
and asked us to clarify whether or not we were requiring online
meetings. A couple of commenters remarked that the cost of using
technology to conduct meetings or elections may not be justified by
actual use of the feature. One of these commenters also stated that
based on ``hits'' to its Web site, stockholders do not prefer this
manner of communication. A couple of commenters also stated the
security requirements for online meetings and elections would outweigh
their benefit. One commenter stated that its stockholders'
infrastructure and culture did not support online meetings. Three
associations remarked that some institution stockholders did not have
the technical skills to participate in online meetings. Other
commenters stated that online meetings are not viable means for
increasing stockholder participation as many stockholders prefer not to
participate in online banking activities. Two associations expressed
concern with the implementation issues associated with using online
meetings, such as coordinating a virtual floor for an online meeting.
One of these commenters stated that online meetings send the message
that the board is not interested in personal interaction with
stockholders. A couple of commenters observed that a number of its
stockholders do not have Internet access, particularly in rural areas,
so would not be able to attend an online meeting. However, 12 other
commenters favored the use of online meetings, most welcoming a
regulation identifying it as a tool for associations to use to increase
participation as long as it is not a requirement, but one of these
commenters stated that online procedures should be left to the
institutions. Another stated that online meetings should not entirely
replace a physical meeting.
The rule provides associations the option of holding their annual
meetings in both a physical location and online. While we recognize
that associations incur certain costs associated with annual meetings,
we believe the association's investment in its members through
stockholder participation and involvement in the annual meeting
justifies the costs involved. In Sec. 611.110, System institutions may
use online meetings to augment the traditional annual meetings held in
a physical
[[Page 18730]]
location, but are not required to do so. In response to the comments,
we are modifying this aspect of the provision to clarify that the use
of online meetings, online voting, and other technological resources,
is optional.
We do not view online meetings as eliminating the board members'
personal interactions with stockholders, but as an opportunity for
enhanced stockholder participation. Online meetings allow online
attendees to communicate with board members and others who are present
at the physical meeting site. Online attendees can also nominate a
person as a director candidate from the virtual floor provided by the
online meeting, ask questions of the meeting chair, and engage in
discussions, etc., as if they were physically at the meeting. We
recognize that implementing online meetings involves up-front costs to
put this technology to use. Each institution must decide whether these
costs are justified in light of the benefits to the institution and its
stockholders in the long run. We also recognize that there are rural
areas of the country where broadband Internet access is not yet
available. For this reason, the rule requires that associations must
always have a physical location for the annual meeting. The online
meeting is an option that is available.
Unlike associations, banks are not required to hold annual meetings
or to elect their directors or the nominating committee as a part of
the annual meeting process. For Farm Credit banks not using floor
nominations, no physical meeting space is required. Thus, bank business
can be conducted exclusively online, including conducting director
elections and the election of the nominating committees, if the bank
provides an online medium for casting votes or uses mail ballots.
c. Stockholder Attendance [New Sec. 611.110(d)]
We received 25 comments, including one from the FCC and multiple
letters from members of individual associations, on the proposed
requirement that Farm Credit banks and associations actively encourage
stockholder attendance at the annual meeting. Commenters stated that
the requirement, while well intended, was not practical or necessary.
Fourteen (14) commenters from the same association remarked that
stockholder participation is achieved outside the annual meeting, such
as in focus group meetings, education programs for young, beginning,
and small farmers, and customer appreciation days. These same
commenters observed that annual meetings are probably the least
effective at obtaining stockholder participation, particularly in those
associations with larger territories. Commenters from another
association remarked that directors are the main source of attendance
at annual meetings and that each stockholder receives notice of the
meetings and has the freedom to attend or not. One commenter remarked
that the regulatory provision would be difficult to enforce. One Farm
Credit bank remarked that stockholder participation at annual meetings
is overrated, especially when mail ballots are used. This bank also
stated that this participation is not as important as regular
communication between institutions and stockholders and a sound
patronage program. One commenter also remarked that the farming needs
of stockholders also play an important role in attendance at annual
meetings. Still another commenter asked us to approach member
involvement more broadly, instead of focusing on annual meetings. The
FCC commented that the proposed provision was arbitrary and asked FCA
to allow institutions to determine the best methods for enhancing
stockholder participation. The FCC also commented that this provision
partially conflicts with the provision to use the Annual Meeting
Information Statement (AMIS) for communicating other stockholder
participation opportunities. One commenter objected to using the AMIS
as a vehicle to enhance stockholder participation, indicating that the
AMIS is already filled with information, and more data may dissuade
stockholders from reading the AMIS. A few commenters stated that it
would be more appropriate for FCA to require institutions to adopt
policies encouraging stockholder participation in the management,
ownership, and control of their respective institutions. One
association remarked that making encouragement of stockholder
participation a requirement would not be beneficial or effective to the
stated objective.
We agree with comments that the proposed requirement in Sec.
611.110(d), which would have required Farm Credit banks and
associations to actively encourage stockholder attendance at the annual
meeting, would be difficult to implement and are withdrawing it.
However, we do not agree with the comments that encouraging stockholder
attendance at stockholder meetings is not necessary and is overrated
since there are other means of communication that take place between
the institution and members. Stockholder participation and involvement
in annual meetings reinforce communications between the institution and
members and may suggest a need to improve communications. In response
to the comment that FCA should require institutions to adopt policies
that encourage stockholder participation in the management, ownership,
and control of their institution, we believe that institution boards
should undertake this on their own initiative. FCA encourages System
institutions to be creative in finding ways to reach out to member-
stockholders beyond the lending relationship, provision of related
services, and the distribution of annual and quarterly reports and
other required disclosures.
d. Quorums
The proposed rule would have clarified, in part, that a quorum
count may not include mail ballots. We received 72 comments on this
provision, most objecting to preventing institutions from including
mail ballots in a quorum count. A minority of commenters either
supported the provision or understood its objective. The FCC expressed
strong objections to removing mail ballots from quorum counts, arguing
that using mail ballots in a quorum count is as logical as allowing
proxy ballots in quorum counts. The FCC further contested that
including mail ballots in quorum counts is in keeping with cooperative
principles because it results in larger stockholder participation.
Several commenters also remarked that including mail ballots in quorum
counts increases stockholder participation, giving examples whereby
participation at annual meetings increased from 3.66 to 12.76 percent
when the institution began counting mail ballots in the quorum
requirement or that using mail balloting instead of in-person voting
tripled stockholder participation. Other commenters argued that
eliminating mail ballots from quorum counts will result in lower
stockholder participation, lower quorum requirements, and increased
annual meeting costs. Commenters also asked for confirmation that
quorums be determined by the institutions. An association remarked that
online meetings do not justify removing mail ballots from quorum
counts. A couple of commenters also observed that the premise that mail
balloting occurs after a meeting is convened does not take into
consideration that the ballot itself is approved by the institution's
board before the meeting. Another commenter explained its institution
requires mail ballots to be returned before the annual meeting so voter
participation is verified
[[Page 18731]]
by the start of the meeting. Still another commenter remarked that in-
person quorums are difficult to achieve through regional meetings, so
mail ballots are necessary to the count.
Commenters supporting the proposed rule on quorums remarked that
while proxy ballots may be used for quorums, mail ballots are used to
tally voting results. However, these same commenters suggested it is
better left to each institution to decide the matter. In a separate
comment, AgriBank commented that it recognized the legal issue involved
in using mail ballots in a quorum count, as discussed in the proposed
rule preamble, but suggested FCA could overcome that by issuing a rule
allowing for the practice. AgriBank offered the perspective that
stockholder participation encompasses the entire meeting and election
process, from the start of the meeting to the announcement of election
results, so including mail ballots in quorum counts is justifiable.
A quorum is the minimum number of voting stockholders needed for a
meeting to begin and business conducted. Stockholder participation is
separate and distinct from a quorum count. In response to comments on
ballot approval, we note that the board's approval of the ballot format
in advance of the meeting has no bearing on the quorum requirement. In
response to the commenter who noted that his institution requires mail
ballots to be returned before the annual meeting so its voter
participation is verified by the start of the meeting, our regulations
do not permit mail ballots to be distributed prior to the end of an
annual meeting.
After considering the comments, we are not finalizing Sec. 611.120
in this rulemaking. As suggested by commenters, this provision of the
proposed rule may be better suited to the continued discretion of each
institution's business judgment. We continue to expect institutions to
establish sound quorum requirements for director elections. We are
retaining the requirement that each institution's bylaws identify
quorum requirements. Due to other changes in this rulemaking, we are
moving this requirement to Sec. 611.110(a).
2. Eligibility for Membership on Board of Directors [Sec. 611.310]
We received four comments on new paragraph (e), which clarifies
that a person is not eligible to be a director if that person is
elected to serve on the institution's nominating committee and attends
a meeting of the nominating committee. We received related comments on
the companion provision in Sec. 611.325(c) and address those comments
here as well. One commenter expressed no objection to the rule. Another
commenter suggested relaxing the rule to allow attendance at an
organizational meeting if no director nominees are discussed. Still
another commenter asked that the existing rule be left alone,
explaining that it is understandable, removes the appearance of being
self-serving, and is well received by the nominating committee. One
commenter argued that committee members should be allowed to recuse
themselves from discussions or decisions and then be nominated to run
for the board as long as the nominating committee still has a quorum
after that person leaves the committee. The FCC raised a concern that
nominating committee members may become floor nominees after presenting
the nominating committee report and believes that such a person should
not be eligible to be nominated as a director candidate from the floor.
One commenter asked for clarification on when the prohibition attaches.
While we appreciate the comments supporting our existing rule, we
believe it is important to clarify that the existing rule addresses a
change in a person's status after election to, but before service on, a
nominating committee. The rule provides that individuals elected to the
nominating committee are permitted to resign from the committee and run
for election to the board only if they did not attend any meetings of
the nominating committee. We encourage institutions to elect alternate
members so the committee can function without interruption if one of
its members were to resign. In this rule, nominating committees will be
required to keep minutes of their meetings, including meeting
attendance, which will enable the institution to verify that the
resigning member did not attend any committee meetings. As we explained
in the proposed rule, attending a meeting of the nominating committee
could give a committee member the ability to access information that
would allow that person to judge the likelihood of a successful run for
the board, thus creating a potential conflict of interest that the
rules in Sec. 611.310 seek to avoid. As long as a nominating committee
member does not attend any nominating committee meeting, the person may
resign from the committee to run for election to the board in the same
election cycle. Thus, we are finalizing this provision in Sec.
611.310(e), and the related provision at Sec. 611.325(c), as proposed.
We received comments from the FCC, a Farm Credit Bank, and two
associations on new paragraph (f) in Sec. 611.310, requiring
associations to inform out-of-territory borrowers as to the borrower's
eligibility to serve as a director. We received related comments on the
companion provision in Sec. 611.325(a) and address those comments here
as well. The FCC and one association asked that we revise the
requirement on giving notice of eligibility, remarking that
associations should not have to make extraordinary disclosures to out-
of-territory borrowers for this purpose. They instead suggested that
disclosures on out-of-territory borrowers' eligibility to serve as
directors be part of other communications to all stockholders on
director qualifications. The FCC then asked that if FCA finalizes the
provision for special disclosures to out-of-territory borrowers, the
disclosure only be required if an association's bylaws do not prohibit
such borrowers from serving as directors. One association asked that
the disclosure be limited to those associations prohibiting out-of-
territory borrowers from serving as directors. The bank raised no
objection to allowing out-of-territory borrowers to serve as directors
and suggested that this type of disclosure should be provided to all
borrowers because a borrower within the territory may later move
outside the territory. One association objected to the entire provision
due to the difficulty in knowing whether borrowers are stockholders in
multiple associations.
We agree with those commenters who suggested that notice should
only be provided to out-of-territory borrowers holding voting stock in
those associations that prohibit such borrowers from running for
election. Voting stockholders have an assumed right to run for
election, so notice is not necessary. However, because the rule allows
associations to limit this right in the case of out-of-territory
borrowers, those borrowers should be notified of such. Thus, we revise
our proposal in both Sec. 611.310(f) and Sec. 611.325(a) to only
require disclosure when an association's bylaws prohibit out-of-
territory borrowers who hold voting stock in the association from
serving as a director or on the nominating committee.
The FCC and one association remarked that section 4.15 of the Act
directs association nominating committees to only consider director
candidates from the institution's territory. We disagree because these
commenters fail to recognize that any voting stockholder in an
association is potentially eligible to be elected as a director of that
institution, whether
[[Page 18732]]
nominated by the nominating committee or through a floor nomination.
While the language of section 4.15 directs the nominating committee to
consider all territories of the institution when identifying nominees,
it does not prevent the committee from also considering other eligible
voting stockholders, such as out-of-territory borrowers that hold
voting stock. In addition, the legislative history behind section 4.15
indicated Congress' intent to make sure the nominating committee gave
due consideration to all aspects of the institution's borrower base in
order to have a board of directors that is knowledgeable of the
agriculture financed by the institution.
We received no comments on the other provisions of Sec. 611.310
and finalize those as proposed.
3. Impartiality in the Election of Directors [Sec. 611.320]
a. Institution Resources [Sec. 611.320(c)]
We received seven comments on the proposed clarifications to Sec.
611.320(c), including one from the FCC. Two commenters agreed with the
proposed change to recognize associations' standing as stockholders in
their funding banks, thereby allowing stockholder-associations to use
their resources in support of a candidate to the bank board. The FCC
agreed that each institution should adopt procedures equitable to all
candidates, including floor nominees, and emphasized that use of
institution resources should be a choice. The FCC and one other
commenter, however, objected to limiting use of institution resources
for election activities to Farm Credit Banks. The System's only
agricultural credit bank (CoBank) commented that this provision would
not be ``workable'' for agricultural credit banks due to the mixed
stockholder structure of affiliated associations and retail borrowers.
We clarify in the final rule text that we are not requiring any
bank, including CoBank, to permit its stockholder-associations to
campaign for bank director candidates. This type of activity can only
occur to the extent permitted by the bank's own policies and
procedures. We explained in the proposed rule that the bank must
authorize this activity because it is the bank's director election
process and the bank should have the authority to determine the
allowable activities of its stockholders in this process, subject to
our regulations. In the event a bank does not choose to allow its
stockholder-associations to use associations' property, facilities, and
resources in support of bank director candidates, no stockholder-
association in that district would be authorized to do so in any
manner. On the other hand, if a bank has permitted its stockholder-
associations to engage in this activity in the past and intends to
allow the activity to continue, it must now adopt policies and
procedures that comply with the regulatory requirements of Sec.
611.320(c).
The FCC and a couple of associations suggested extending the use of
institution resources to the associations for campaign activities in
their own elections, as long as it is done in an equitable and prudent
manner. The FCC explained that voter access to candidate campaign
information is essential to an informed voting public and that many
candidates are unable to finance distribution costs, especially in
larger territories. The FCC also argued that young, beginning, and
small farmers who might run for a director position are most
disadvantaged in the current restrictions on an association's ability
to pay distribution costs for candidates. The FCC stated that an
association could not express or imply an endorsement of any candidate.
The FCC further remarked that existing rules and FCA guidance on this
issue unduly hamper voting stockholders' access to meaningful
information.
Our rule in Sec. 611.320(c) allows candidates for directors to
make use of an institution's property, facilities, and resources
provided the property, facilities, and resources are simultaneously
available and it is made known that they are available for use by all
declared candidates. As we explained in the proposed rule, our rules
are designed to ensure fairness and equal access to the reimbursement
opportunity. Use of an institution's financial resources must be
reasonable, prudent, and consistent with supporting an election that is
fair and unbiased. We do not, however, agree with the comments that
associations should be able to distribute campaign material for or on
behalf of candidates running for election to the association's board of
directors and, therefore, we are not changing Sec. 611.320(e).
We recognize that the larger geographic territories of some System
institutions make it unrealistic to expect stockholders to have
meaningful knowledge of most director candidates without some
supplemental information beyond the required disclosures. We also
acknowledge that the large number of stockholders in many associations
also makes it impractical or cost-prohibitive for candidates to mail or
distribute information themselves. In an FCA bookletter, ``Distribution
of Director Candidate Information'' (BL-056), dated September 11, 2008,
we clarified the meaning of ``campaign material'' for purposes of Sec.
611.320(e) by differentiating campaign material from educational
material. The bookletter explained that System institutions may
provide, to stockholders, supplemental material on director candidates
without violating the prohibition on distributing campaign material
when that material is educational in nature and all candidates have a
fair and equal opportunity to provide educational material. In
providing this clarification, we wanted to ensure that the
interpretation of ``campaign material'' did not limit the distribution
of appropriate information on director candidates to stockholders.
We received one comment seeking clarification on whether non-
incumbent candidates must be provided reimbursement for travel if an
incumbent director travels at the institution's expense to a regional
meeting before being named by the nominating committee as a director-
nominee. We direct the commenter to our frequently asked questions
(FAQs) on the governance rule, specifically FAQ 36, posted on FCA's Web
site under ``FCS Information.''
We received no comments on the other provisions of Sec. 611.320(c)
and finalize those as proposed.
b. Involvement of Directors in Board Elections [New Sec. 611.320(f)]
We received a comment from the FCC and 78 other commenters,
including multiple letters from members of individual associations, on
adding a new paragraph (f) to address the involvement of directors in
board elections. The FCC and several other commenters stated strong
objection to prohibiting director activity in board elections, citing
fundamental free speech. One commenter expressed no objection to the
rule and another stated strong support of it. A third of the commenters
asked that the provision be eliminated entirely, arguing directors
should be allowed to offer an opinion on fellow board members and that
doing so presents no conflict.
Many commenters argued that the requirement is an infringement on
free speech and unduly undermines the notion of cooperative, open
elections. Several of these commenters further stated that good
governance encourages communication. One Farm Credit bank and a few
associations stated that stockholder-elected directors should be
permitted to make such statements, but only in the director's capacity
as a
[[Page 18733]]
stockholder. The FCC and several other commenters expressed concern
about the message such a restriction would send to stockholders and
questioned the need for the rule, stating an unawareness of any
problems in this area. A few associations commented that the
prohibition would make finding willing and qualified candidates more
difficult, while directors from a couple of associations argued that
the provision would limit their ability to be effective directors.
Others asserted that directors have a duty to relate information on
candidates if the directors believe the candidate holds views that may
cause harm to the institution. Another commenter remarked that the
prohibition could have unintended consequences, such as being
misinterpreted by stockholders or preventing the board or board
chairman from providing guidance to the nominating committee on
desirable director qualifications.
Some commenters explained that the views of incumbent directors are
important to voting stockholders, many arguing that corporate elections
do not have similar restrictions. Commenters also expressed the view
that limiting director speech might be difficult to monitor, especially
oral communication. Others considered the limitation on making
statements for other director candidates an extreme measure that is
better addressed through standards of conduct policies.
We understand and have thoroughly considered the sentiments of the
commenters, and, as a result, we are modifying the provision to limit
the prohibition to active campaigning as a ``director'' of an
institution. We are mindful of the dual role that elected directors
play (as both stockholders and directors) in the cooperative, and we do
not want to prohibit a stockholder's right to support a candidate. At
the same time, we continue to believe a director's active support of a
candidate creates a potential for conflicts of interest. We also
clarify that our rule does not prevent board members from offering
guidance to nominating committees on desirable director qualifications.
This type of guidance is not specific to any one person, but rather
addresses the board's overall needs. We do not believe the final
language will, as suggested, adversely affect either the ability of
directors to do their jobs or recruitment efforts for open board
positions.
The final provision, as modified, prevents a director from using
his or her official authority as a director to influence or otherwise
affect the result of an election on another's behalf. Examples of
active campaigning for a director candidate (except one's self) that
would be prohibited include writing and delivering speeches on behalf
of a candidate, organizing and officially appearing at campaign events
on another's behalf (attendance as an audience member is permissible if
the director is not receiving compensation, or reimbursement, from the
institution for the time or travel to the event), preparing and
distributing campaign literature for a candidate, and using official
institution stationery or titles accorded the director for board
positions (such as audit committee chairman or board chairman) for
personal endorsements or recommendations. Likewise, a director would
not be allowed to use any authority associated with his or her official
``director'' title in a manner that could reasonably be construed to
imply that the institution either sanctions or endorses the director's
activities on another's behalf for nomination or election. With this
modification, we want to be sure that any activity undertaken by a
director on another's behalf remains personal in his role as a
stockholder and is not presented in a manner that represents the
director in his or her official capacity or implies official sanction
by the institution of a candidate. We believe this modification
addresses commenter concerns and provides an appropriate balance
between a stockholder-elected director's responsibilities to remain
officially neutral in institution elections, while still preserving the
director's personal rights as a stockholder.
We appreciate comments concerning difficulties in monitoring oral
communications between directors and the membership and encourage
institutions to address this matter through the institution's standards
of conduct policy and procedures.
4. Nominating Committees [Existing Sec. 611.325]
We received comment letters from the FCC and 47 other commenters,
including multiple letters from members of individual associations, on
the proposed changes to this section, only one of which supported all
the proposed changes. Of the other 47 comments, seven were directed at
the introductory paragraph of Sec. 611.325. In this paragraph, we
clarified that each institution may have only one nominating committee
in any one election cycle. The FCC and another commenter stated that
multiple committees are more efficient for those institutions holding
regional elections. The FCC then requested FCA to clarify whether
subcommittees may be used if the rule is finalized as proposed. If so,
the FCC recommended that only final actions on nominees require full
committee vote. One commenter asked why subcommittees are appropriate
but multiple nominating committees are not. Two commenters suggested
permitting nominating committees to be formed on a state or regional
basis instead of just one committee for the institution's entire
territory.
We are not changing the rule to allow for multiple nominating
committees within a single institution because we do not believe
multiple nominating committees were intended by the Act. Section 4.15
of the Act states that each year the voting stockholders will elect a
nominating committee at the annual meeting. Congress used the singular,
and we are not persuaded that a different interpretation is
appropriate. As a committee of voting stockholders, the nominating
committee has the significant task of identifying qualified voting
stockholders to stand for election to the entire board of directors and
not a portion of the board. A single nominating committee working in
concert makes the best possible selections for director nominees.
However, we believe there is value in using subcommittees to aid the
full committee in its task, especially in institutions with large
territories. Our rule permits institutions' nominating committees to
work in subcommittees for the express purpose of identifying possible
director-nominees in director nomination regions for the nominating
committee's review and consideration. The rule is clear that the
nominating committee as a whole must decide on the director-nominees
for the recommended slate of candidates.
Four Farm Credit banks expressed concern with the requirement that
banks have nominating committees. The commenter explained that the
nominating committee is a group of individuals who are not stockholders
in the bank and have no investment in the bank, and thereby lack an
incentive for locating good candidates. The commenter also asserted
that Congress recognized the distinction between associations and banks
when crafting section 4.15 of the Act, which is why the Act does not
require nominating committees for banks. The commenter requested that
FCA remove the bank nominating committee requirement to allow
stockholder-associations to nominate their own candidates to the bank
board or, in the alternative, make bank nominating committees an
optional requirement.
[[Page 18734]]
We addressed similar comments on bank nominating committees in the
initial rulemaking for nominating committees and have not changed our
position on this issue.\2\ As a clarification, our rule requires bank
nominating committees to be elected by voting stockholders who, at the
bank level, are stockholder-associations, and the candidates for
service on a nominating committee also come from the stockholder-
associations. Further, each bank may allow floor nominations for
director candidates. Therefore, stockholder-associations are not
prohibited from participating in the nomination process.
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\2\ See preamble to final governance rule, 71 FR 5762 (February
2, 2006).
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We received no comments opposed to the reorganization of Sec.
611.325 and finalize it as proposed.
a. Nominating Committee Composition [Existing Sec. 611.325(a)]
We received four comments on requiring associations to inform out-
of-territory borrowers as to the borrower's eligibility to serve on an
institution's nominating committee and addressed these comments in the
companion provision of Sec. 611.310(f) and discussed in section
III.B.2. of this preamble. Consistent with changes made on the
companion provision, we are modifying the language in 611.325(a) to
require notice to out-of-territory borrowers only when the
institution's bylaws prohibit out-of-territory borrowers who hold
voting stock from being eligible to serve on the nominating committee.
b. Nominating Committee Election [New Sec. 611.325(b)]
We received 26 comments, including multiple letters from members of
individual associations, on adding new paragraph (b) on nominating
committee elections. Of these, 19 comments were on the provision that
an institution may use ballots that would allow stockholders to vote
for nominating committee members as a slate, as long as stockholders
also retain the ability and right to elect members individually. Four
commenters asked for clarification on how such a ballot would be
structured and votes tabulated. Other commenters expressed support for
only having a vote on the committee as a slate, but some of these
questioned the need for the matter to be included in the regulation. A
Farm Credit bank remarked that individual votes enable larger
stockholder-associations to control the committee composition and asked
that the provision be removed from the rule. One commenter supported
the proposed rule provision on nominating committee elections. One
commenter asked if we favor the use of floor nominations for nominating
committees. Another commenter objected to the slate vote provision,
explaining that voting for individual committee members facilitates
identifying alternates.
We agree with commenters that our proposed language in Sec.
611.325(b)(1) was unclear on how the ballot would be structured and how
votes would be tabulated, which might have created confusion for the
voting stockholders in casting such a vote. In reviewing the issue, we
believe that discussion on the manner of achieving the ``opportunity''
for stockholders to vote either on a slate of candidates or individuals
is better suited to informal guidance. Consequently, we have modified
this provision to state only that institutions must provide
stockholders the opportunity to vote on candidates for each nominating
committee position, simultaneously clarifying that the vote is for
candidates running for each position on the committee. As to the
comment on allowing write-in candidates for nominating committees,
institutions may choose to use that method in addition to others.
However, while write-in candidates on a ballot for election to the
nominating committee are not likely to garner the number of votes
needed for election, we remind institutions that they may permit
nominations from the floor for nominating co