Unincorporated Business Entities, 56571-56581 [2012-22382]
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Federal Register / Vol. 77, No. 178 / Thursday, September 13, 2012 / Proposed Rules
(i) Income applications. The local
educational agency must notify the
household of the children’s eligibility
and provide the eligible children the
benefits to which they are entitled
within 10 operating days of receiving
the application.
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3. Amend Part 245 by:
a. Redesignating §§ 245.11 through
245.13 as §§ 245.12 through 245.14,
respectively;
b. Adding a new § 245.11 to read as
follows:
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§ 245.11
Second review of applications.
(a) General. On an annual basis not
later than the end of each school year,
State agencies must identify local
educational agencies demonstrating a
high level of, or risk for, administrative
error associated with certification
processes and notify the affected local
educational agencies that they must
conduct a second review of applications
beginning in the following school year.
The second review of applications must
be completed prior to notifying the
household of the eligibility or
ineligibility of the household for free or
reduced price meals.
(b) State agency requirements.
(1) Selection criteria. In selecting local
educational agencies demonstrating a
high level of, or risk for, administrative
errors associated with certification
processes, State agencies must use the
following criteria:
(i) Administrative Review
Performance Standard 1 Violation. All
local educational agencies subject to a
follow-up administrative review due to
certification, benefit issuance, or
updating eligibility status violations of
Performance Standard 1 under
§ 210.18(i)(3)(i) of this chapter.
(ii) At-Risk for Administrative Review
Performance Standard 1 Violation. All
local educational agencies at risk for a
follow-up administrative review under
§ 210.18(i)(3)(i) because they claim
between 5–10 percent of the free and
reduced price lunches incorrectly for
the review period due to errors of
certification, benefit issuance or
updating of eligibility status.
(iii) Provision 2 or Provision 3 Base
Year. All local educational agencies that
are establishing a new base year in the
following school year under the special
assistance certification and
reimbursement alternatives set forth in
§ 245.9.
(iv) State agency Discretion. Of the
local educational agencies scheduled for
an administrative review under
§ 210.18(c) the following year, the State
agency must select those local
educational agencies not selected under
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paragraphs (b)(1)(i) through (b)(1)(iii)
and that are at risk for certification
error, as determined by the State agency.
(2) Reporting Requirement. By
February 1 of each year, each State
agency must submit a report, as
specified by FNS, describing the results
of the second reviews conducted by
local educational agencies in their State.
The report must include:
(i) The number of free and reduced
price applications subject to a second
review;
(ii) The number of reviewed
applications for which the eligibility
determination was changed;
(iii) The percentage of reviewed
applications for which the eligibility
determination was changed; and
(iv) A summary of the types of
changes that were made.
(c) Local educational agency
requirements. Local educational
agencies selected by the State agency to
conduct a second review of applications
must ensure that the initial eligibility
determination for each application is
reviewed for accuracy prior to notifying
the household of the eligibility or
ineligibility of the household for free
and reduced price meals. The second
review must be conducted by an
individual or entity who did not make
the initial determination. This
individual or entity is not required to be
an employee of the local educational
agency but must be trained on how to
make application determinations. All
individuals or entities who conduct a
second review of applications are
subject to the disclosure requirements
set forth in § 245.6(f) through § 245.6(k).
(1) Timeframes. The second review of
initial determinations must be
completed by the local educational
agency in a timely manner and must not
result in the delay in notifying the
household, as set forth in
§ 245.6(c)(6)(i).
(2) Duration of requirement to
conduct a second review of
applications. Selected local educational
agencies must conduct a second review
of applications until the State agency
determines that the local educational
agency is no longer demonstrating a
high level of, or is no longer at risk for,
administrative error associated with the
certification process. The State agency
makes this determination as follows:
(i) For local educational agencies
selected for second review of
applications using criterion set forth in
paragraphs (b)(1)(i), (b)(1)(ii), and
(b)(1)(iv) of this section, local
educational agency provided
documentation demonstrates that no
more than 5 percent of reviewed
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56571
applications required a change in
eligibility determination.
(ii) For local educational agencies
selected for second review of
applications using criterion set forth in
paragraph (b)(1)(iii) of this section, a
second review of applications is
required every base year of the
Provision 2 or Provision 3 cycle.
(3) Reporting Requirement. Each local
educational agency required to conduct
a second review of applications must
annually submit to the State agency the
following information on a date
established by the State agency:
(i) The number of free and reduced
price applications subject to a second
review;
(ii) The number of reviewed
applications for which the eligibility
determination was changed;
(iii) The percentage of reviewed
applications for which the eligibility
determination was changed; and
(iv) A summary of the types of
changes that were made.
Dated: September 5, 2012.
Robin D. Bailey Jr.,
Acting Administrator, Food and Nutrition
Service.
[FR Doc. 2012–22261 Filed 9–12–12; 8:45 am]
BILLING CODE 3410–30–P
FARM CREDIT ADMINISTRATION
12 CFR Parts 604, 611, 612, 619, 620,
621, 622, 623, and 630
RIN 3052–AC65
Unincorporated Business Entities
Farm Credit Administration.
Proposed rule.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA, we, or our) is
proposing to establish a regulatory
framework for Farm Credit System
(System) institutions’ use of
unincorporated business entities (UBEs)
organized under State law for certain
business activities. For purposes of this
proposed rule, a UBE includes limited
partnerships (LPs), limited liability
partnerships (LLPs), limited liability
limited partnerships (LLLPs), limited
liability companies (LLCs), and any
other unincorporated business entities,
such as unincorporated business trusts,
organized under State law. This rule
does not apply to UBEs that one or more
System institutions may establish as
Rural Business Investment Companies
(RBICs) pursuant to the institutions’
authority under the provisions of title VI
of the Farm Security and Rural
Investment Act of 2002, as amended
SUMMARY:
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Federal Register / Vol. 77, No. 178 / Thursday, September 13, 2012 / Proposed Rules
(FSRIA), and United States Department
of Agriculture (USDA) regulations
implementing FSRIA. This rule does
apply, however, to System institutions
that organize UBEs for the express
purpose of investing in RBICs.
DATES: Comments on this proposed rule
must be submitted on or before
November 13, 2012.
ADDRESSES: We offer a variety of
methods for you to submit your
comments. For accuracy and efficiency
reasons, commenters are encouraged to
submit comments by email or through
the FCA’s Web site. As facsimiles (fax)
are difficult for us to process and
achieve compliance with section 508 of
the Rehabilitation Act, we do not accept
comments submitted by fax. Regardless
of the method you use, please do not
submit your comment multiple times
via different methods. You may submit
comments by any of the following
methods:
• Email: Send us an email at regcomm@fca.gov.
• FCA Web site: https://www.fca.gov.
Select ‘‘Public Commenters,’’ then
‘‘Public Comments,’’ and follow the
directions for ‘‘Submitting a Comment.’’
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail: Barry F. Mardock, Deputy
Director, Office of Regulatory Policy,
Farm Credit Administration, 1501 Farm
Credit Drive, McLean, VA 22102–5090.
You may review copies of all comments
we receive at our office in McLean,
Virginia, or from our Web site at https://
www.fca.gov. Once you are in the Web
site, select ‘‘Public Commenters,’’ then
‘‘Public Comments,’’ and follow the
directions for ‘‘Reading Submitted
Public Comments.’’ We will show your
comments as submitted, but for
technical reasons we may omit items
such as logos and special characters.
Identifying information you provide,
such as phone numbers and addresses,
will be publicly available. However, we
will attempt to remove email addresses
to help reduce Internet spam.
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
Wendy Laguarda, Assistant General
Counsel, Office of General Counsel,
Farm Credit Administration, McLean,
VA 22102–5090, (703) 883–4020, TTY
(703) 883–4020.
SUPPLEMENTARY INFORMATION:
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I. Objectives
The objectives of this proposed rule
are to:
• Affirm FCA’s authority to regulate
and examine the System institutions’
use of UBEs, including the authority to
impose any conditions FCA deemed
necessary and appropriate on UBE
business activity, and to take
enforcement action against System
institutions’ activities involving UBEs;
• Prohibit System institutions from
using UBEs to engage in direct lending
or any activity that exceeds their
authority under the Act or circumvents
the application of cooperative
principles;
• Limit the amount of a System
institution’s equity investments in
UBEs;
• Create a process for FCA review and
approval of requests by System
institutions to organize or invest in
UBEs for certain business activity;
• Establish standards for the proper
and adequate disclosure and reporting
of System UBE activity; and
• Ensure that the System’s use of
UBEs remains transparent and free from
conflicts of interest.
II. Background
Beginning in the early 1980s, FCA
approved joint ventures among System
institutions, as well as System
institution contractual alliances with
non-System entities, that sought to
improve the reliability and delivery of
authorized products and services to
agriculture and rural America. These
collaborative initiatives enabled System
institutions to provide services and
products more efficiently and
inexpensively, resulting in improved
and less costly services and products to
the farmer and rancher System
borrowers and rural communities.
Business models and structures have
significantly evolved since the 1980s, as
more and more States have adopted
uniform statutes governing
unincorporated, largely limited liability,
business structures. The System’s use of
UBEs has been a logical outgrowth of its
earlier collaborative initiatives
implemented through joint ventures and
alliances. Like these earlier joint
initiatives, UBEs enable the System to
provide more efficient, less costly
services and products to the agricultural
or rural community, but through more
sophisticated, formal and flexible
structures that address ownership
rights, management, operations,
assumptions of liability, allocation of
profits and losses and payment of taxes.
Further, UBEs have the added advantage
of providing more protection for System
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stockholders by enabling a System
institution to limit its liability to the
amount of its equity investment in a
UBE.
III. The Statutory Basis for the
Proposed Rule
A. System Institutions’ Authority
The System’s existing investment 1
and incidental powers 2 provide the
authorities for System institutions to
invest in and form UBEs for certain
business activity. Specifically, under
§ 615.5140(e), System institutions may
exercise their investment authorities to
invest in ‘‘other investments approved
by the FCA’’ provided the funding bank
has approved the investment. System
investments in UBEs fall under this
category, and may be approved by FCA
upon a request that explains the risk
characteristics of the investment and the
System institution’s purpose and
objectives for making the investment.
Unlike the express authority to
organize service corporations under
sections 4.25 and 4.28(A) of the Act,3 no
provision under the Act explicitly
authorizes System institutions to
organize entities under State law to
engage in business activity. However,
Congress has long encouraged
coordinated initiatives by System
institutions to provide joint products,
services or functions to System
borrowers. We note that the farmerowned, cooperative and jointly liable
System, by its very establishment, is
designed to accomplish the most
efficient and effective delivery system of
credit and related services to agriculture
and its producers and rural
communities. Moreover, various
provisions in the Act have authorized or
directed System institutions to offer
joint products or services. The same
year that Congress added the service
1 Sections 1.5(15) and 3.1(13)(A) of the Act set
forth the investment authorities for System banks.
Sections 2.2(10) and 2.12(18) of the Act set forth the
investment authorities for System associations. FCA
regulations in subpart E of part 615 imbue service
corporations, chartered under section 4.25 of the
Act, with the same investment authorities as their
organizing System banks and associations.
2 Sections 1.5(3), (15) and (21); 2.2(3), (10) and
(20); 2.12(3), (18) and (19); 3.1(3) and (16) of the
Act.
3 Section 4.25 and 4.28(A), added to the Act in
1980, expressly authorize System banks and
associations to organize service corporations.
Congress stated that this authority was needed to
provide a more efficient way for System banks to
coordinate services. Service corporations, like
System banks and associations, are federally
chartered instrumentalities and subject to the same
FCA supervisory, regulatory and enforcement
oversight as System banks and associations. Service
corporations are authorized to provide the same
functions and services as banks and associations
with two significant exceptions: they cannot extend
credit or provide insurance services.
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corporation authority to the Act (1980),
it also directed System institutions to
establish programs for young, beginning
and small (YBS) farmers and ranchers
‘‘in coordination with other units of the
Farm Credit System serving the territory
and with other governmental and
private sources of credit.’’ 4 These 1980
additional authorities evidence
Congress’ intention that System
institutions be able to provide
coordinated services and products to
System borrowers and rural
communities using business structures
that can best facilitate such efforts.
In fact, System institutions, with FCA
approval, have been using their
incidental authority to enter into noncorporate joint ventures to promote
coordinated and expedient initiatives,
which in recent years have included
State-chartered UBEs.
This proposed rule will provide a
more uniform approval and oversight
process for the System’s continuing use
of UBEs. The rule emphasizes that
incidental powers can neither be the
basis for broadening or circumventing
the limitations and restrictions of a
System institution’s express powers in
carrying on the business of the bank or
association nor used to engage in
activities that are impermissible under
the Act. The delivery of System credit,
services and other products will still
chiefly be provided by System
institutions’ direct use of their express
powers to serve their eligible borrowers
and customers. As a Governmentsponsored enterprise (GSE) of
cooperative institutions owned and
controlled by their member-borrowers,
it is essential that System institutions
maintain their strong cooperative
traditions and reputations.5
In recognizing changing business
practices through the System’s use of
UBEs, the preservation of the System’s
member-focused principles remains
paramount. This proposed rule would
therefore prohibit System institutions
from engaging in direct lending
activities or any other activity through
UBEs that circumvents the application
of cooperative principles such as
borrower rights, stock ownership, voting
rights or patronage.
Finally, to provide transparency to the
public, FCA intends to post on its Web
site the name and business purpose of
UBEs organized and controlled by one
4.19 of the Act.
perspective is noted in the FCA Board’s
Policy Statement (FCA–PS–80) on Cooperative
Operating Philosophy—Serving the Members of
Farm Credit System Institutions, dated October 14,
2010, and published in the Federal Register at 75
FR 64728 on October 20, 2010.
or more System institutions that are
approved under this rule.
B. FCA Authority Over System
Investments in UBEs and UBE Business
Activity
Under part C of title V of the Act, FCA
has the ability to take an enforcement
action against a System institution in
connection with its equity investment in
and use of a UBE for business activity
to ensure an institution’s safety and
soundness.
IV. Section-by-Section Analysis
A. Unincorporated Business Entities
[New §§ 611.1150 Through 611.1158]
We propose adding a new subpart J to
part 611 that would address the purpose
and scope of unincorporated business
entities organized or invested in by
System institutions. Subpart J includes
provisions on: (1) Definitions; (2) FCA’s
regulatory, examination, enforcement,
and assessment authorities; (3) general
restrictions and prohibitions on the use
of UBEs; (4) notice-only requirements
for certain activities conducted through
UBEs; (5) FCA’s review process for
UBEs not meeting the notice-only
provisions; (6) ongoing requirements; (7)
disclosure and reporting requirements;
and (8) transparency and conflict of
interest requirements. Subpart J also
contains a grandfather provision for
those UBEs previously approved by
FCA on a case-by-case basis and for
those UBEs established under the
guidance provided in FCA Bookletter
BL–057,6 which may be rescinded once
a final rule becomes effective.
1. Purpose and Scope [New § 611.1150]
Proposed § 611.1150 affirms that
System institutions have incidental
power as may be necessary or expedient
to carry on the business of the bank or
association, as applicable. In exercising
this incidental power, System
institutions may continue to establish
UBEs, provided the UBE business
activity is necessary or expedient to the
System institution’s express authorities
in carrying on the business of the bank
or association and falls within the
parameters of the rule.
The proposed rule would apply to any
System institution that organizes or
invests in a UBE for the delivery of
services or functions. This proposed
rule also pertains to any System
institution that has an equity investment
in a System-organized and controlled
4 Section
5 This
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6 FCA Bookletter BL–057 on ‘‘Use of StateChartered Business Entities to Hold Acquired
Property,’’ dated April 2, 2009, provides guidance
on the System’s use of UBEs to acquire and manage
unusual or complex collateral associated with
loans.
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UBE regardless of the amount of the
investment. The proposed rule would
also apply to any System institution that
is a partner or member of a UBE
organized to acquire and manage
unusual or complex collateral
associated with loans under FCA
Bookletter BL–057.
Except as authorized by this rule,
System institutions cannot manage,
control, or invest in any State-chartered
or organized business entity. The
proposed rule would not permit System
institutions to make equity investments
in UBEs that are organized, controlled
or managed by a non-System entity
(third-party UBE) except as may be
approved by FCA under § 615.5140(e)
for de minimis and passive investments.
Such approvals would be considered
outside of this rule.
As previously stated, this rule is not
applicable to any UBEs that System
institutions may establish as RBICs
under their separate statutory authority.
System institutions’ activities under the
RBIC authority must be carried out in
accordance with the authority of and
regulations issued by USDA.7 However,
this rule does apply to System
institutions that organize UBEs for the
express purpose of investing in a RBIC.
2. Definitions [New § 611.1151]
We propose a definitions section in
§ 611.1151 that defines the following
relevant terms used in the proposed
rule.
Articles of Formation refers to the
relevant State documents on the
establishment, ownership, and
operation of a UBE and includes
registration certificates, charters, articles
of organization, partnership agreements,
membership or trust agreements,
operating, administration or
management agreements, fee
agreements, or any other documentation
on the establishment, ownership or
operation of a UBE.
Control 8 distinguishes whether a
System institution controls the business
7 Public Law 107–171, title VI, sec. 6029 (2002),
as amended by the Food, Conservation, and Energy
Act of 2008, Public Law 110–246, title VI, sec. 6027,
and USDA regulations at 7 CFR 4290.10 through
4290.3099. FCA has the authority to ensure that a
System institution’s investment in a RBIC is safe
and sound and that they operate the RBIC in
accordance with law and regulation.
8 The term control as it is used in the context of
this proposed rule is based on the guidance
provided in Generally Accepted Accounting
Principles (GAAP) under the Financial Accounting
Standards Board’s Accounting Standards
Codification (ASC). See primary discussion of
control at ASC 810–10–15 and ASC 810–10–25;
significant influence over an investment at ASC
323–10–15; and control for limited partnerships
and similar entities, including LLCs, etc. at ASC
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activities, operations, and actions of the
UBE. Control means that one System
institution, directly or indirectly, owns
more than 50 percent of the UBE’s
equity or serves as the general partner9
of an LLLP or constitutes the sole
manager or is the managing member of
a UBE. However, under generally
accepted accounting principles (GAAP),
the power to control may also exist with
a lesser percentage of ownership, for
example, if a System institution is the
UBE’s primary beneficiary; exercises
significant influence over the UBE; or
establishes control under other facts and
circumstances in accordance with
GAAP.
Under this definition, a System
institution also will be deemed to have
control over the UBE if it exercises
decision-making authority in a principal
capacity of the UBE as defined under
GAAP.
A System institution must divest its
ownership interest or withdraw as a
member or partner from any UBE as
soon as practicable if, after a System
institution organizes or invests in a
System-controlled UBE, non-System
persons or entities obtain control as
defined under GAAP. Alternatively, as
soon as practicable the non-System
persons or entities must relinquish
control as defined under GAAP.
Equity investment means a System
institution’s contribution of money or
assets to the operating capital of a UBE
that provides ownership rights in
return. The term is meant to include any
such contribution of money or assets
regardless of the terminology that might
be used in an individual State’s statute
or regulations. The definition of equity
investment does not include the costs of
organizing a UBE, such as the cost of the
articles of formation, attorney fees, filing
fees, etc.
System institution refers to each
System bank under titles I or III of the
Act, each association under title II of the
Act, and each service corporation
chartered by FCA under section 4.25 of
the Act.
Third-party UBE means any UBE that
is owned or controlled by one or more
non-System persons or entities.
UBE is an acronym for
Unincorporated Business Entity. As
defined for purposes of this proposed
810–20–25. See also proposed Accounting
Standards Update 2011–220 for possible revisions
to these sections.
9 The rule would allow a System institution to
serve as a general partner of an LLLP, but not an
LP, since the liability for the partnership’s debts
and obligations is limited to the amount invested
by the general partner in an LLLP but not in an LP.
We note that an LLP does not have a general partner
because all partners in an LLP have limited
liability.
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rule, the term ‘‘UBE’’ includes
unincorporated business entities that
are formally established and maintained
through applicable State law, such as
limited partnerships, limited liability
companies, and business or other trust
entities.
UBE Business Activity refers to the
delivery of services or functions by a
UBE for one or more System
institutions.
3. Regulation, Examination,
Enforcement, and Assessment Authority
[New § 611.1152]
Proposed § 611.1152 affirms that FCA
has full regulatory, supervisory,
oversight, examination and enforcement
authority over System institutions in
connection with their equity
investments in and control of UBEs and
the services and functions that a UBE
performs for the System institution.
Such authority includes FCA’s right to
require a System institution to withdraw
from a UBE through dissolution or
disassociation or to divest of any
investment in a UBE. Sections
5.17(a)(5), 5.17(a)(10), and 5.25(a) of the
Act, as well as § 615.5354, also give FCA
the authority to condition the approval
of a System institution’s equity
investment in a UBE. The FCA’s use of
these authorities ensures that System
institutions providing certain functions
and services through State-organized or
chartered UBEs remain safe and sound
and operate in accordance with law and
regulations.
Finally, this proposed section
provides that the cost of regulating and
examining equity investments in UBEs
and the services and functions that
UBEs can perform for System
institutions will be subject to FCA’s
assessment authority under section 5.15
of the Act.
4. General Restrictions and Prohibitions
on the Use of UBEs [New § 611.1153]
Proposed § 611.1153 sets forth certain
general restrictions on any function,
service or activity that a System
institution(s) conducts through a UBE.
These restrictions would ensure that the
System continues to operate in a safe
and sound manner and that its status as
a cooperative system of lending
institutions and a GSE is not
jeopardized through the use of UBEs.
The first restriction would provide
that any business a System institution
conducts through a UBE must be
necessary or expedient to the business
of the System institution. A UBE cannot
be used to deliver services or functions
or to engage in any activity that a
System institution itself could not
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engage in under the Act or
implementing regulations.
A second restriction would protect
the integrity of the System’s cooperative
structure by prohibiting System
institutions from engaging in direct
lending activities or from engaging in
any other activity through the use of a
UBE that would circumvent the
application of cooperative principles, as
determined by FCA, including borrower
rights, stock ownership, voting rights or
patronage.
A third restriction would ensure that
the use of a UBE by a System institution
is transparent to the public and free
from conflicts of interest. This provision
would require that a UBE be held out to
the public as a separate or subsidiary
entity; the business transactions,
accounts and records of the UBE are not
commingled with those of the System
institution; and all transactions between
officers, employees and agents of the
UBE and a System institution are
conducted at arm’s length, in the
interest of the System institution, and in
compliance with the standards of
conduct rules in 12 CFR part 612,
subpart A.
A fourth restriction would limit a
single System institution from
conducting business through a onemember UBE, such as a limited liability
company, other than for the limited
purposes of: (1) Acquiring and
managing unusual or complex collateral
associated with loans, as set forth under
the guidance of FCA Bookletter BL–057;
and (2) providing electronic transaction,
fixed asset, trustee or other similar
services that are integral to the daily
internal operations of System
institutions.
We are proposing this limitation for a
number of reasons. First, the Agency
does not want to set in motion a
proliferation of System-controlled UBEs
organized for numerous purposes by a
single System institution. Such a
proliferation could create a costly
administrative burden for the Agency
and complicate FCA’s oversight
authority. Moreover, the creation of onemember UBEs does not foster System
collaborative efforts aimed at providing
more efficient System operations and
improved services to agriculture,
agricultural producers, and rural
America. Just as Congress encouraged
System collaboration through the
creation of the 4.25 service corporations,
the use of UBEs would, generally, be
reasonable and supportable from a
business perspective when undertaken
through System institution partnerships
or multi-member limited liability
companies. Finally, without reasonable
and supportable reasons to form a UBE,
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including a one-member UBE, System
institutions should conduct all aspects
of their business activity either directly
or through a service corporation under
section 4.25 of the Act.
Regardless of the limitations on onemember UBEs, we recognize that the use
of a UBE to perform services integral to
a System institution’s daily internal
operations, as noted above, may lessen
administrative burdens and reduce costs
for a System institution. FCA may
determine that some of these integral
and internal services that a UBE,
including a one-member UBE, could
provide would become eligible for the
notice provision in proposed
§ 611.1154. If so, we would inform
System institutions of this development
through an FCA Bookletter or other
similar means.
We note that, under the agricultural
credit association (ACA) structure, the
ACA and its subsidiary production
credit association (PCA) and Federal
land credit association (FLCA) are
treated by FCA as one entity for most
regulatory purposes. Also, we note that
an Agricultural Credit Bank (ACB) and
its Farm Credit Bank (FCB) subsidiary
are treated by FCA as a single entity for
most regulatory purposes. Therefore, we
would consider any UBE formed solely
between an ACA and its subsidiary PCA
and FLCA or an ACB and its subsidiary
FCB as a one-member UBE (and not a
multi-member UBE) that could be
organized only for the limited purposes
set forth above.
A fifth restriction would limit a UBE
organized as a partnership to one that is
established between or among two or
more System institutions that do not
have a common board of directors. An
ACA and its PCA and FLCA
subsidiaries, which operate under a
common board of directors, are treated
by FCA as one entity for most regulatory
purposes, and could not create a
partnership between or among
themselves under this rule. Similarly,
an ACB and its FCB subsidiary, also
treated by FCA as one entity for most
regulatory purposes, could not create a
partnership between themselves.
A sixth restriction would prohibit one
or more System institutions that
organize or invest in a UBE from
creating a subsidiary of the UBE, or
enabling the UBE to create its own
subsidiary or any other type of affiliated
entity. This restriction is essential given
FCA’s obligations as an independent,
safety and soundness regulator of a GSE.
The complex arrangements that could
possibly be established between Systemowned or controlled UBEs and other
special purpose vehicles currently
permitted under various State laws
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could, as stated above, create a costly
administrative burden for the Agency
and complicate FCA’s regulatory,
examination, and enforcement oversight
of the System’s safety and soundness.
For this reason, we are prohibiting
System institutions from propagating
additional subsidiaries or any other
affiliated entities through their UBEs.
A seventh restriction requires that a
System institution’s liability be limited
to the amount of the institution’s equity
investment in the UBE, thus preserving
a significant benefit for the use of such
a business structure—the concept of
limited liability. Therefore, System
institutions could not serve as a general
partner in those UBEs organized as
limited partnerships.
An eighth restriction would limit the
aggregate amount of equity investments
that a System institution is authorized
to hold in all UBEs to one percent of the
institution’s total outstanding loans
calculated at the time of each
investment. The proposed rule allows
FCA to approve an exception to this
limitation on a case-by-case basis. In
addition, FCA may impose a limitation
that is lower than the one-percent
aggregate limit based on safety or
soundness and other relevant concerns.
We believe this limit to be reasonable
given that such an investment imposes
a financial liability on a System
institution up to the amount of its total
investments in UBEs. Such an
investment remains at-risk; it is
recovered only after the System
institution sells its interest to other
investors or the UBE owners receive
some of the proceeds from the
liquidated assets of the UBE (if any such
proceeds remain after satisfying all
other obligations of the UBE). To
calculate the investment limit under
proposed § 611.1153(h), the rule would
require that equity investments held by
a service corporation be attributed to its
System institution bank and association
owners based on their percentage of
ownership of the service corporation.
This limit would not apply to equity
investments made in one-member UBEs
organized to acquire and manage
unusual or complex collateral
associated with loans.
The ninth restriction prohibits a
System institution from making any
equity investment in a third-party UBE
except as may be authorized by FCA on
a case-by-case basis under § 615.5140(e)
for de minimis and passive investment
purposes (such requests would be
considered outside of this rule). Also, a
System institution is prohibited from
being named as the general partner,
manager or primary beneficiary of a
third-party UBE. Such arrangements
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have the potential to subject a System
institution to liability and reputational
risks created by the third-party UBE and
to result in actual or apparent conflicts
of interest that neither a System
institution nor FCA could adequately
control. Finally, such arrangements
could dilute the Agency’s oversight of
System activities and diminish FCA’s
ability to ensure the safety and
soundness of the System.
A final restriction would prohibit
non-System entities or persons from
holding any equity interest in a Systemcontrolled UBE with one exception.
Non-System entities or persons would
be able to hold up to 20 percent of the
equity of a System-controlled UBE that
is organized to provide services integral
to the daily internal operations of a
System institution. This percentage of
non-System ownership is the same nonSystem ownership percentage that FCA
regulations currently permit for service
corporations organized by one or more
System institutions under section 4.25
of the Act. The ninth and final
restrictions do not apply to UBEs
formed for the purpose of acquiring and
managing unusual or complex collateral
associated with multiple-lender loan
transactions in which non-System
persons or entities are participants.
5. Notice-Only Requirement for Certain
UBE Equity Investments [§ 611.1154]
In proposed § 611.1154, we describe
the specific types of UBEs that a System
institution may organize or invest in by
providing sufficient advance notice to
the FCA. This section also sets forth the
specific information that a System
institution must include in its notice as
well as where the notice must be filed.
This ‘‘notice-only’’ provision would
be limited to the following UBEs:
a. Those engaged in acquiring and
managing the unusual or complex
collateral associated with loans as
described in FCA Bookletter BL–057,
dated April 2, 2009; and
b. Those providing hail or multi-peril
crop insurance services in accordance
with § 618.8040.
FCA may determine that other UBE
business activity is also appropriate for
this ‘‘notice-only’’ provision and, in
such an event, would notify all System
institutions by bookletter or other
means. Only System institutions with a
composite FIRS rating of 1 or 2 would
qualify for the ‘‘notice-only’’ provision.
All other System institutions that intend
to form or invest in a UBE must obtain
FCA’s prior approval under the
provisions in § 611.1155 regardless of
the nature or purpose of the intended
UBE.
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A System institution that qualifies for
the ‘‘notice-only’’ provision would be
required to submit articles of formation
as defined in § 611.1151 that address
basic information on the UBE’s
ownership, control, and operations. The
System institution would also need to
specify the dollar amount of its
investment in the UBE and provide a
certified resolution from its board of
directors that the board has authorized
the UBE investment and business
activity and has given its approval to
submit the notice to FCA. A letter from
the funding bank that the bank has
approved such investment would also
be required. For those System
institutions forming a UBE for hail or
multi-purpose crop insurance services,
or for other UBE activity that FCA
determines appropriate for the ‘‘noticeonly’’ provision, the notice would need
to include a statement from the board of
directors explaining the operating
efficiencies and benefits to be gained
from the conduct of business through a
UBE. The statement must also affirm
that the UBE is necessary or expedient
to the institution’s business; that it will
operate with transparency; that it will
operate in a manner that prevents
conflicts of interest between the UBE
and the institution itself; that the UBE
will comply with all applicable Federal,
State, and local laws; and that the UBE
will not be used by the System
institution to make direct loans, perform
any functions, or provide any services
that the System institution is not
authorized to provide under the Act and
FCA regulations or that go beyond the
stated purpose of the UBE. FCA may
require additional information under
the notice provision or allow the
omission of some information. Finally,
System institutions that organize or
invest in UBEs under this ‘‘notice-only’’
provision must comply with the
ongoing requirements and disclosure
and reporting requirements of
§§ 611.1156 and 611.1157, respectively.
6. Approval Process [New § 611.1155]
In § 611.1155, we describe the
documents that FCA would require to
review a request for approval to
organize or invest in a UBE if the
request would not qualify for the
‘‘notice-only’’ provision in § 611.1154.
We would ask a System institution to
explain the risk characteristics of the
investment, the initial amount of equity
it plans to invest in the UBE, the
purpose of the UBE, and its objectives.
A System institution must provide
support for its need to establish or
invest in a UBE. We would also ask for
a statement on the operating efficiencies
that the System institutions expect to
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achieve and the benefits they expect to
derive from using the UBE. A System
institution would be required to submit
the articles of formation defined in
§ 611.1151 that address basic
information on the UBE’s ownership,
management structure, and operations.
We would also require a certified
resolution of the institution’s board of
directors approving the equity
investment in the UBE and the UBE’s
business activity as well as a letter from
the funding bank that it has approved
the institution’s investment in the UBE.
In addition, we would require that an
institution’s board of directors provide
us with a statement that the UBE is
necessary or expedient to the
institution’s business; that it will
operate with transparency; that it will
operate in a manner that prevents
conflicts of interest between the UBE
and the institution itself; that the UBE
will comply with all applicable Federal,
State, and local laws; and that the UBE
will not be used by the System
institution to make direct loans, perform
any functions, or provide any services
that the System institution is not
authorized to provide under the Act and
FCA regulations or that go beyond the
stated purpose of the UBE. The
institutions may also submit any other
information they deem necessary. FCA
may require additional information or
allow the omission of some information
depending on the complexity of the
UBE request. If FCA denies approval of
the request, we will specify in writing
our reasons for denial.
7. Ongoing Requirements [New
§ 611.1156]
Any System institution that organizes
or invests in a UBE for the delivery of
services or functions under the
provisions of this rule would be
expected to maintain and ensure FCA’s
access to all documents and records of
the UBE. Also, a System institution
would need to be prepared to divest its
ownership interest or withdraw as a
member or partner from any UBE that
conducts activities beyond its approved
limited purpose or that are contrary to
the Act or FCA regulations. Under the
proposed rule, if the FCA directed the
System institution to divest its equity
investment in, or withdraw as a
member, partner, general partner,
managing member or primary
beneficiary of, a System-owned and
controlled UBE, the institution would
be required to do so as soon as
practicable.
If a System institution fails to divest
its equity investment in, or withdraw as
a member, partner, general partner,
managing member or primary
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beneficiary of, a System-owned and
controlled UBE, as directed by the FCA
within a reasonable period of time, such
institution may be subject to an
enforcement action pursuant to FCA’s
enforcement authority under part C of
title V of the Act.
8. Disclosure and Reporting
Requirements [§ 611.1157]
All System institutions that hold
equity investments in UBEs would be
required to include information about
their equity investments and business
activities in their annual reports to
shareholders. We propose amending
§ 620.5, which prescribes the content of
the annual report to shareholders, to
include this requirement. FCA could
also direct that System institutions
holding equity investments in UBEs
make periodic reports to FCA as
required by § 621.12.
System institutions with UBEs that
are grandfathered under the rule
through the provision in § 611.1158
(discussed below) would be subject to
the ongoing requirements of § 611.1156
and all disclosure and reporting
requirements of § 611.1157.
We also propose that a System
institution dissolving a UBE that it
controls be required to provide a timely
report to FCA when the dissolution
occurs. This reporting will enable FCA
to have current information on the
status of UBE activity.
9. Grandfather Provision [New
§ 611.1158]
We propose grandfathering from the
Notice and Approval provisions of the
rule a System institution’s organization
of, or investment in, a UBE that received
specific, written approval by FCA prior
to the date this proposed rule would
become effective as a final rule. We
would also grandfather those UBEs
organized pursuant to the guidance in
FCA Bookletter BL–057. All System
institutions grandfathered would remain
subject to the conditions of approval
imposed at the time of FCA’s approval
and be subject to the ongoing
requirements of § 611.1156 and the
disclosure and reporting requirements
of § 611.1157. System institutions so
grandfathered could not change or
expand the UBE business activity,
ownership interests in, or control of the
UBE without providing notice to FCA at
least 20 business days in advance of any
change. If FCA determined that the
proposed change or expansion is
material, it could require the System
institutions to submit a new approval
request under § 611.1155.
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B. Other Miscellaneous Changes
For the reasons stated in the
preamble, parts 604, 611, 612, 619, 620,
621, 622, 623, and 630 of chapter VI,
title 12 of the Code of Federal
Regulations are proposed to be amended
as follows:
We propose conforming changes to
various FCA regulatory sections to
delete terms made obsolete by a final
UBE rule and to add new regulatory
sections cross-referenced in this
proposed regulation.
PART 604—FARM CREDIT
ADMINISTRATION BOARD MEETINGS
Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), the FCA hereby certifies that the
proposed rule would 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
1. The authority citation for part 604
continues to read as follows:
Authority: Secs. 5.9, 5.17 of the Farm
Credit Act (12 U.S.C. 2243, 2252).
§ 604.420
[Amended]
2. Section 604.420 is amended by
removing the words ‘‘service
organizations’’ in paragraph (i)(1) and
adding in their place, the words
‘‘service corporations chartered under
the Act.’’
3. The authority citation for part 611
is revised to read as follows:
12 CFR Part 604
Sunshine Act.
12 CFR Part 611
Agriculture, Banks, banking, Rural
areas.
12 CFR Part 612
Agriculture, Banks, banking, Conflict
of interests, Crime, Investigations, Rural
areas.
12 CFR Part 619
Agriculture, Banks, banking, Rural
areas.
Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12,
1.13, 2.0, 2.1, 2.2, 2.10, 2.11, 2.12, 3.0, 3.1,
3.2, 3.3, 3.7, 3.8, 3.9, 3.21, 4.3A, 4.12, 4.12A,
4.15, 4.20, 4.21, 4.25, 4.26, 4.27, 4.28A, 5.9,
5.17, 5.25, 7.0–7.13, 8.5(e) of the Farm Credit
Act (12 U.S.C. 2002, 2011, 2012, 2013, 2020,
2021, 2071, 2072, 2073, 2091, 2092, 2093,
2121, 2122, 2123, 2124, 2128, 2129, 2130,
2142, 2154a, 2183, 2184, 2203, 2208, 2209,
2211, 2212, 2213, 2214, 2243, 2252, 2261,
2279a–2279f–1, 2279aa–5(e)); secs. 411 and
412 of Pub. L. 100–233, 101 Stat. 1568, 1638;
sec. 414 of Pub. L. 100–399, 102 Stat. 989,
1004.
§ 611.1130
12 CFR Part 620
Accounting, Agriculture, Banks,
banking, Reporting and recordkeeping
requirements, Rural areas.
12 CFR Part 621
Accounting, Agriculture, Banks,
banking, Penalties, Reporting and
recordkeeping requirements, Rural
areas.
[Amended]
4. Section 611.1130 is amended in the
first sentence of paragraph (a) by
removing the words ‘‘service
organizations organized under the Act’’
and adding in their place, the words
‘‘service corporations chartered under
the Act’’.
5. Amend Part 611 by revising the
heading of subpart I to read as follows:
12 CFR Part 622
Subpart I—Service Corporations
Administrative practice and
procedure, Crime, Investigations,
Penalties.
§ 611.1136
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12 CFR Part 623
Administrative practice and
procedure.
12 CFR Part 630
Accounting, Agriculture, Banks,
banking, Organization and functions
(Government agencies), Reporting and
recordkeeping requirements, Rural
areas.
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[Amended]
6. Section 611.1136 is amended by:
a. Revising the heading of § 611.1136;
and
b. Removing the words ‘‘and
unincorporated service organizations’’
in paragraph (c); and
c. Removing the words ‘‘service
organizations’’ each place they appear
and adding in their place, the words
‘‘service corporations’’.
The revision reads as follows:
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§ 611.1136 Regulation and examination of
service corporations.
7. Part 611 is amended by adding a
new subpart J, consisting of §§ 611.1150
through 611.1158, to read as follows:
Subpart J—Unincorporated Business
Entities
Sec.
611.1150 Purpose and scope.
611.1151 Definitions.
611.1152 Authority over equity investments
in UBEs for business activity.
611.1153 General restrictions and
prohibitions on the use of UBEs.
611.1154 Notice of equity investments in
UBEs.
611.1155 Approval of equity investment in
UBEs.
611.1156 Ongoing requirements.
611.1157 Disclosure and reporting
requirements.
611.1158 Grandfather provision.
§ 611.1150
PART 611—ORGANIZATION
56577
Purpose and scope.
(a) Purpose. This subpart sets forth
the parameters for one or more Farm
Credit System (System) institutions to
organize or invest in an Unincorporated
Business Entity (UBE) in accordance
with the Farm Credit Act of 1971, as
amended (Act).
(b) Scope. Except as authorized under
these regulations, no System institution
may manage, control, become a member
or partner, or invest in a State-organized
or chartered business entity. This rule
applies to each System institution that
organizes or invests in a UBE, including
a UBE organized for the express purpose
of investing in a Rural Business
Investment Company. This rule does not
apply to UBEs that one or more System
institutions have the authority to
establish as Rural Business Investment
Companies pursuant to the provisions of
title VI of the Farm Security and Rural
Investment Act of 2002, as amended
(FSRIA) and United States Department
of Agriculture regulations implementing
FSRIA.
§ 611.1151
Definitions.
For purposes of this subpart, the
following definitions apply:
Articles of formation means
registration certificates, charters, articles
of organization, partnership agreements,
membership or trust agreements,
operating, administration or
management agreements, fee agreements
or any other documentation on the
establishment, ownership, or operation
of a UBE.
Control means that one System
institution, directly or indirectly, owns
more than 50 percent of the UBE’s
equity or serves as the general partner
of an LLLP, or constitutes the sole
manager or the managing member of a
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UBE. However, under generally
accepted accounting principles (GAAP),
the power to control may also exist with
a lesser percentage of ownership, for
example, if a System institution is the
UBE’s primary beneficiary, exercises
significant influence over the UBE or
establishes control under other facts and
circumstances in accordance with
GAAP. Under this definition, a System
institution also will be deemed to have
control over the UBE if it exercises
decision-making authority in a principal
capacity of the UBE as defined under
GAAP.
Equity investment means a System
institution’s contribution of money or
assets to the operating capital of a UBE
that provides ownership rights in
return.
System institution means each System
bank under titles I or III of the Act, each
System association under title II of the
Act, and each service corporation
chartered under section 4.25 of the Act.
Third-party UBE means a UBE that is
owned or controlled by one or more
non-System persons or entities as the
term ‘‘control’’ is defined under GAAP.
UBE means a Limited Partnership
(LP), Limited Liability Partnership
(LLP), Limited Liability Limited
Partnership (LLLP), Limited Liability
Company (LLC), Business or other Trust
Entity (TE), or other business entity
established and maintained under State
law that is not incorporated under any
law or chartered under Federal law.
UBE business activity means the
services and functions delivered by a
UBE for one or more System
institutions.
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§ 611.1152 Authority over equity
investments in UBEs for business activity.
(a) Regulation, supervisory, oversight,
examination and enforcement authority.
FCA has regulatory, supervisory,
oversight, examination and enforcement
authority over each System institution’s
equity investment in or control of a UBE
and the services and functions that a
UBE performs for the System
institution. This includes FCA’s
authority to require a System
institution’s dissolution of,
disassociation from, or divestiture of an
equity investment in a UBE, or to
otherwise condition the approval of
equity investments in UBEs.
(b) Assessing UBE investments and
business activity. In accordance with
section 5.15 of the Act and § 607.2(h),
the cost of regulating and examining
equity investments in UBEs and the
services and functions that UBEs can
perform for System institutions will be
taken into account when assessing a
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System institution for the cost of
administering the Act.
§ 611.1153 General restrictions and
prohibitions on the use of UBEs.
(a) Authorized UBE business activity.
All UBE business activity must be:
(1) Necessary or expedient, as
determined by the FCA, to the business
of one or more System institutions
owning the UBE; and
(2) In no instance greater than the
functions and services that one or more
System institutions owning the UBE are
authorized to perform under the Act and
as determined by the FCA.
(b) Circumvention of cooperative
principles. System institutions are
prohibited from using UBEs to engage in
direct lending activities or any other
activity that would circumvent the
application of cooperative principles as
determined by FCA, including borrower
rights as described in section 4.14A of
the Act, or stock ownership, voting
rights or patronage as described in
section 4.3A of the Act.
(c) Transparency and the avoidance
of conflicts of interest. Each System
institution must ensure that:
(1) The UBE is held out to the public
as a separate or subsidiary entity;
(2) The business transactions,
accounts, and records of the UBE are not
commingled with those of the System
institution; and
(3) All transactions between the UBE
and System institution directors,
officers, employees, and agents are
conducted at arm’s length, in the
interest of the System institution, and in
compliance with standards of conduct
rules in §§ 612.2130 through 612.2270.
(d) Limit on one-member UBEs. A
UBE owned solely by a single System
institution (including between and
among a parent agricultural credit
association and its production credit
association and Federal land credit
association subsidiaries and between a
parent agricultural credit bank and its
subsidiary Farm Credit Bank) as a onemember UBE is limited to the following
special purposes:
(1) Acquiring and managing the
unusual or complex collateral
associated with loans; and
(2) Providing limited services such as
electronic transaction, fixed asset,
trustee or other services that are integral
to the daily internal operations of a
System institution.
(e) Limit on UBE partnerships. A
System institution operating through a
parent-subsidiary structure may not
create a UBE partnership between or
among the parent agricultural credit
association and its production credit
association and Federal land credit
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association subsidiaries or between a
parent Agricultural Credit Bank and its
Farm Credit Bank subsidiary.
(f) Prohibition on UBE subsidiaries. A
System institution is prohibited from
creating a subsidiary of a UBE that it has
organized or invested in under this
subpart or from enabling the UBE itself
to create a subsidiary or any other type
of affiliated entity.
(g) Limit on potential liability.
(1) Each System institution’s equity
investment in a UBE must be
established in a manner that will limit
potential exposure of the System
institution to no more than the amount
of its investment in the UBE.
(2) A System institution cannot
become a general partner of any
partnership other than an LLLP.
(h) Limit on amount of equity
investment in UBEs. The aggregate
amount of equity investments that a
single System institution is authorized
to hold in UBEs must not exceed one
percent of the institution’s total
outstanding loans, calculated at the time
of each investment. On a case-by-case
basis, FCA may approve an exception to
this limitation that would exceed the
one-percent aggregate limit. Conversely,
FCA may impose a percentage limit
lower than the one-percent aggregate
limit based on safety or soundness and
other relevant concerns. This onepercent aggregate limit does not apply to
equity investments in one-member
UBEs as permitted in paragraph (d)(1) of
this section. Any equity investment
made in a UBE by a service corporation
must be attributed to its System
institution owners based on the
ownership percentage of each bank or
association.
(i) Prohibition on relationship with a
third-party UBE. A System institution is
prohibited from:
(1) Making any equity investment in
a third-party UBE except as may be
authorized on a case-by-case basis under
§ 615.5140(e) for de minimis and
passive investments. Such requests
would be considered outside of this
rule.
(2) Serving as the general partner or
manager of a third-party UBE; or
(3) Being designated as the primary
beneficiary of a third-party UBE, either
alone or with other System institutions.
(j) Limitation on non-System equity
investments. Non-System persons or
entities may not invest in a UBE that is
controlled by a System institution
except that non-System persons or
entities may own 20 percent or less of
the equity of a System-controlled UBE
organized to deliver services integral to
the daily internal operations of a System
institution.
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(k) UBEs formed for acquiring and
managing collateral. The provisions of
paragraphs (i) and (j) in this section do
not apply to UBEs formed for the
purpose of acquiring and managing
unusual or complex collateral
associated with multiple-lender loan
transactions in which non-System
persons or entities are participants.
mstockstill on DSK4VPTVN1PROD with PROPOSALS
§ 611.1154
UBEs.
Notice of equity investments in
(a) Applicability. This notice
provision is applicable only to System
institutions that have a composite
Financial Institution Rating System
(FIRS) rating of 1 or 2 and wish to make
an equity investment in UBEs whose
activities are limited to the following
purposes:
(1) Acquiring and managing unusual
or complex collateral associated with
loans;
(2) Providing hail or multi-peril crop
insurance services in collaboration with
another System institution in
accordance with § 618.8040; and
(3) Any other UBE business activity
that FCA determines to be appropriate
for this ‘‘notice-only’’ provision.
(b) Notice requirements. A System
institution must provide reasonable
written notice to FCA. System
institutions are encouraged to submit
such notice as soon as possible, but it
must be submitted no later than 20
business days in advance of making an
equity investment in a UBE for
authorized UBE business activity
described in paragraph (a) of this
section. The notice must include:
(1) The UBE’s articles of formation,
including its name and the State in
which it is organized, length of time it
will exist, its partners or members, and
its management structure;
(2) The dollar amount of the System
institution’s equity investment in the
UBE;
(3) A certified resolution of the
System institution’s board of directors
authorizing the equity investment in,
and business activity of, the UBE and
the board’s approval to submit the
notice to the FCA;
(4) A letter from the funding bank that
it has approved the institution’s equity
investment in the UBE;
(5) For those UBEs identified in
paragraphs (a)(2) and (3) of this section,
a detailed statement from the System
institution’s board of directors that the
UBE:
(i) Is needed to achieve operating
efficiencies and benefits;
(ii) Is necessary or expedient to the
System institution’s business;
(iii) Will operate with transparency;
(iv) Will conduct its business activity
in a manner designed to prevent
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conflicts of interest between its purpose
and operations and the mission and
operations of the System institution(s);
(v) Will otherwise be in compliance
with applicable Federal, State, and local
laws; and
(vi) Will not be used by the System
institution to make direct loans; perform
any functions or provide any services
that the System institution is not
authorized to perform or provide under
the Act and FCA regulations; or to
exceed the stated purpose of the UBE as
set forth in its articles of formation.
(6) Any additional information the
System institution wishes to submit.
(c) Supplementation or omission of
information. FCA may require the
supplementation or allow the omission
of any information required under
paragraph (b) of this section.
(d) Other requirements. All System
institutions under this ‘‘notice-only’’
provision must also comply with the
ongoing requirements and disclosure
and reporting requirements set forth in
§§ 611.1156 and 611.1157, respectively,
of this subpart.
§ 611.1155
in UBEs.
Approval of equity investments
(a) Request. System institutions must
receive FCA approval before organizing
or investing in any UBE that does not
qualify for the ‘‘notice-only’’ provision
set forth in § 611.1154 of this subpart. A
request for approval under this section
must include the following information:
(1) A detailed statement of the risk
characteristics of the investment, as
required by § 615.5140(e) and the initial
amount of equity investment;
(2) A detailed statement on the
purpose and objectives of the UBE; the
need for the UBE and the operating
efficiencies and benefits that will be
achieved by using the UBE;
(3) The proposed articles of formation
addressing, at a minimum, the
following:
(i) The UBE’s name, the State in
which it is organized, the city and State
in which its principal office is to be
located, and its partners or members;
and management structure;
(ii) Specific business activities that
the UBE will conduct;
(iii) General powers of the UBE;
(iv) Ownership, voting, partnership,
membership and operating agreements
for the UBE;
(v) Procedures to adopt and amend
the partnership, membership or
operating agreement of the UBE;
(vi) The standards and procedures for
the application and distribution of the
UBE’s earnings; and
(vii) Length of time the UBE will
exist.
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56579
(4) A certified resolution of the
System institution’s board of directors
authorizing the equity investment in the
UBE and the UBE business activity and
the board’s approval to submit the
request to the FCA.
(5) A letter from the funding bank that
it has approved the institution’s equity
investment in the UBE;
(6) A statement from the System
institution’s board of directors that the
UBE:
(i) Is necessary or expedient to the
System institution’s business;
(ii) Will operate with transparency;
(iii) Will conduct its business activity
in a manner designed to prevent
conflicts of interest between its purpose
and operations and the mission and
operations of the System institution(s);
(iv) Will comply with applicable
Federal, State, and local laws; and
(v) Will not be used by the System
institution to make direct loans; perform
any functions or provide any services
that the System institution is not
authorized to perform or provide under
the Act and FCA regulations; or exceed
the purpose of the UBE as stated in its
articles of formation.
(7) Any additional information the
System institution wishes to submit or
any other supporting documentation
that FCA may request.
(b) Supplementation or omission of
information. FCA may require the
supplementation or allow the omission
of any information required under
paragraph (a) of this section based on
the complex or noncomplex nature of
the proposed UBE.
(c) Denial of a request. The FCA will
specify in writing to the submitting
System institutions the reasons for
denial of any request to organize or
invest in a UBE.
§ 611.1156
Ongoing requirements.
A System institution that makes an
equity investment in a UBE under
§§ 611.1154 or 611.1155 of this subpart
must also comply with the following
requirements:
(a) Maintain and ensure FCA’s access
to all books, papers, records,
agreements, reports and other
documents of each UBE necessary to
document and protect the institution’s
interest in each entity;
(b) Divest, as soon as practicable, the
institution’s equity or beneficial interest
in (or withdraw membership from) any
UBE that conducts activities beyond
those authorized to carry out its limited
purpose or that are contrary to the Act
or FCA regulations; and
(c) Divest the institution’s respective
ownership or managerial duties in the
UBE as soon as practicable, if directed
to do so by FCA.
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(d) Divest the institution’s ownership
interest or withdraw as a member or
partner from any UBE as soon as
practicable if, after a System institution
organizes or invests in a Systemcontrolled UBE, non-System persons or
entities obtain control as defined under
GAAP. Alternatively, as soon as
practicable, the non-System persons or
entities must relinquish control as
defined under GAAP. This paragraph
does not apply to UBEs formed for the
purpose of acquiring and managing
unusual or complex collateral
associated with multiple-lender loan
transactions in which non-System
persons or entities are participants.
§ 611.1157 Disclosure and reporting
requirements.
(a) Annual report to shareholders. In
its annual report to shareholders, as set
forth in § 620.5(a)(12), a System
institution must provide information on
its UBE investment and business
activity.
(b) Periodic reports as directed. As
directed by FCA, a System institution
may be required to submit periodic
reports to FCA on any equity investment
in a UBE or UBE status as provided
under § 621.12, and in accordance with
§§ 621.13 and 621.14.
(c) Dissolution of a UBE. A System
institution must submit a timely report
to FCA on the dissolution of a UBE that
it controls.
mstockstill on DSK4VPTVN1PROD with PROPOSALS
§ 611.1158
Grandfather provision.
(a) Scope. The following equity
investments in UBEs are grandfathered
from the Notice and Approval
provisions under §§ 611.1154 and
611.1155, respectively, of this subpart.
(1) Those UBE formations or equity
investments that received specific,
written approval by FCA prior to the
effective date of this regulation; and
(2) Those UBEs organized to acquire
or manage unusual or complex
collateral associated with loans.
(b) System institutions’ obligations.
All System institutions with
grandfathered UBEs:
(1) Remain subject to their conditions
of approval;
(2) Are subject to the ongoing
requirements of § 611.1156 and the
disclosure and reporting requirements
of § 611.1157 of this subpart; and
(3) May not change or expand the
UBE business activity, ownership
interests in, or control of the UBE
without providing notice of such
changes to FCA at least 20 business days
in advance of any change or expansion.
If the proposed change or expansion is
determined to be material, FCA may
require the System institution(s) to
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submit an ‘‘Approval’’ request under
§ 611.1155 of this subpart.
PART 612—STANDARDS OF
CONDUCT AND REFERRAL OF
KNOWN OR SUSPECTED CRIMINAL
VIOLATIONS
8. The authority citation for part 612
continues to read as follows:
Authority: Secs. 5.9, 5.17, 5.19 of the Farm
Credit Act (12 U.S.C. 2243, 2252, 2254).
9. Section 612.2130 is amended by
revising paragraphs (p) and (t) to read as
follows:
§ 612.2130
Definitions.
*
*
*
*
*
(p) Service corporation means each
service corporation chartered under the
Act.
*
*
*
*
*
(t) System institution and institution
mean any bank, association, or service
corporation in the Farm Credit System,
including the Farm Credit Banks, banks
for cooperatives, Agricultural Credit
Banks, Federal land bank associations,
agricultural credit associations, Federal
land credit associations, production
credit associations, the Federal Farm
Credit Banks Funding Corporation, and
service corporations chartered under the
Act.
PART 619—DEFINITIONS
10. The authority citation for part 619
is revised to read as follows:
Authority: Secs. 1.4, 1.5, 1.7, 2.1, 2.2, 2.4,
2.11, 2.12, 3.1, 3.2, 3.21, 4.9, 5.9, 5.17, 5.19,
7.0, 7.1, 7.6, 7.8, and 7.12 of the Farm Credit
Act (12 U.S.C. 2012, 2013, 2015, 2072, 2073,
2075, 2092, 2093, 2122, 2123, 2142, 2160,
2243, 2252, 2254, 2279a, 2279a–1, 2279b,
2279c–1, 2279f); sec. 514 of Pub. L. 102–552,
106 Stat. 4102.
11. Part 619 is amended by adding a
new § 619.9338 to read as follows:
§ 619.9338
entities.
Unincorporated business
An Unincorporated Business Entity
means a Limited Partnership (LP),
Limited Liability Partnership (LLP),
Limited Liability Limited Partnership
(LLLP), Limited Liability Company
(LLC), Business or other Trust Entity
(TE), or other business entity
established and maintained under State
law that is not incorporated under any
law or chartered under Federal law.
PART 620—DISCLOSURE TO
SHAREHOLDERS
Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17,
5.19 of the Farm Credit Act (12 U.S.C. 2154,
Frm 00016
Fmt 4702
Sfmt 4702
13. Section 620.5 is amended by:
a. Removing the words ‘‘service
organization’’ in paragraph (a)(3) and
adding in their place, the words
‘‘service corporation chartered under
the Act’’; and
b. Adding a new paragraph (a)(11) to
read as follows:
§ 620.5 Contents of the annual report to
shareholders.
*
*
*
*
*
(a) * * *
(11) For banks and associations,
business relationships with
unincorporated business entities
(UBEs).
(i) Except as provided in
§ 620.5(a)(12)(ii) of this section, describe
the business relationship with any UBE,
as defined in § 611.1151, that was
organized by the bank or association or
in which the bank or association has an
equity interest. Include in the
description the name of the UBE, the
type of business entity, the purpose for
which the UBE was organized, the scope
of its activities, and the level of
ownership. If the bank or association
does not have an equity interest, but
manages the operations of a UBE that is
controlled by a System institution,
describe this business relationship and
any fees received.
(ii) If the UBE is a one-member UBE
as described in § 611.1153(d)(1), the
bank or association need only disclose
the name of the UBE, the type of
business entity, and the purpose for
which the UBE was organized.
*
*
*
*
*
PART 621—ACCOUNTING AND
REPORTING REQUIREMENTS
14. The authority citation for part 621
continues to read as follows:
Authority: Secs. 5.17, 8.11 of the Farm
Credit Act (12 U.S.C. 2252, 2279aa–11); sec.
514 of Pub. L. 102–552.
§ 621.1
[Amended]
15. Section 621.1 is amended by
removing the words ‘‘service
organizations’’ and adding in their
place, the words ‘‘service corporations’’.
§ 621.2
12. The authority citation for part 620
is revised to read as follows:
PO 00000
2154a, 2207, 2243, 2252, 2254); sec. 424 of
Pub. L. 100–233, 101 Stat. 1568, 1656; sec.
514 of Pub. L. 102–552, 106 Stat. 4102.
[Amended]
16. In § 621.2 paragraph(e) is
amended by removing the words
‘‘service organization’’ and adding in
their place, the words ‘‘service
corporation.’’
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Federal Register / Vol. 77, No. 178 / Thursday, September 13, 2012 / Proposed Rules
PART 622—RULES OF PRACTICE AND
PROCEDURE
17. The authority citation for part 622
continues to read as follows:
Authority: Secs. 5.9, 5.10, 5.17, 5.25–5.37
of the Farm Credit Act (12 U.S.C. 2243, 2244,
2252, 2261–2273); 28 U.S.C. 2461 note; and
42 U.S.C. 4012a(f).
§ 622.2
19. The authority citation for part 623
is revised to read as follows:
Authority: Secs. 5.9, 5.10, 5.17, 5.25–5.37
of the Farm Credit Act (12 U.S.C. 2243, 2244,
2252, 2261–2273).
[Amended]
20. In § 623.2 paragraph (d) is
amended by removing the words
‘‘service organization chartered under
part E of title IV of the Act’’ and adding
in their place, the words ‘‘service
corporation chartered under the Act.’’
PART 630—DISCLOSURE TO
INVESTORS IN SYSTEMWIDE AND
CONSOLIDATED BANK DEBT
OBLIGATIONS OF THE FARM CREDIT
SYSTEM
21. The authority citation for part 630
is revised to read as follows:
Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of
the Farm Credit Act (12 U.S.C. 2153, 2160,
2243, 2252, 2254); sec. 424 of Pub. L. 100–
233, 101 Stat. 1568, 1656; sec. 514 of Pub. L.
102–552, 106 Stat. 4102.
[Amended]
mstockstill on DSK4VPTVN1PROD with PROPOSALS
22. Section 630.20 is amended by
removing the words ‘‘service
organization’’ in paragraph (a)(2) and
adding in their place, the words
‘‘service corporation.’’
Dated: September 6, 2012.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2012–22382 Filed 9–12–12; 8:45 am]
BILLING CODE 6705–01–P
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14 CFR Part 39
[Docket No. FAA–2009–1088; Directorate
Identifier 2008–SW–76–AD]
RIN 2120–AA64
Jkt 226001
Federal Aviation
Administration (FAA), DOT.
ACTION: Supplemental notice of
proposed rulemaking (NPRM);
reopening of comment period.
AGENCY:
We are revising an earlier
proposed airworthiness directive (AD)
for the Sikorsky Aircraft Corporation
(Sikorsky) Model S–92A helicopter,
which proposed revising the Rotorcraft
Flight Manual (RFM), Operating
Limitations section, to prohibit Class D
external load operations, including
human external cargo (HEC), because
this model helicopter was not
certificated to one-engine inoperative
performance standards for carrying
Class D external loads. This
Supplemental NPRM is prompted by a
recent design approval, which allows
Class D external load operations if the
appropriate operating limitations are
included in the RFM. This proposed AD
is intended to require appropriate
operating limitations to allow operators
to perform Class D external loadcombination operations, including HEC,
in this model helicopter that now meets
the Category A performance standard.
DATES: We must receive comments on
this proposed AD by November 13,
2012.
SUMMARY:
PART 623—PRACTICE BEFORE THE
FARM CREDIT ADMINISTRATION
§ 630.20
Federal Aviation Administration
Airworthiness Directives; Sikorsky
Aircraft Corporation Helicopters
[Amended]
18. In § 622.2 paragraph (d) is
amended by removing the words
‘‘service organization chartered under
part E of title IV of the Act’’ and adding
in their place, the words ‘‘service
corporation chartered under the Act.’’
§ 623.2
DEPARTMENT OF TRANSPORTATION
You may send comments by
any of the following methods:
• Federal eRulemaking Docket: Go to
https://www.regulations.gov. Follow the
online instructions for sending your
comments electronically.
• Fax: 202–493–2251.
• Mail: Send comments to the U.S.
Department of Transportation, Docket
Operations, M–30, West Building
Ground Floor, Room W12–140, 1200
New Jersey Avenue SE., Washington,
DC 20590–0001.
• Hand Delivery: Deliver to the
‘‘Mail’’ address between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays.
Examining the AD Docket: You may
examine the AD docket on the Internet
at https://www.regulations.gov or in
person at the Docket Operations Office
between 9 a.m. and 5 p.m., Monday
through Friday, except Federal holidays.
ADDRESSES:
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56581
The AD docket contains this proposed
AD, the economic evaluation, any
comments received and other
information. The street address for the
Docket Operations Office (telephone
800–647–5527) is in the ADDRESSES
section. Comments will be available in
the AD docket shortly after receipt.
For service information identified in
this proposed AD, contact Sikorsky
Aircraft Corporation, Attn: Manager,
Commercial Technical Support,
mailstop S581A, 6900 Main Street,
Stratford, CT, telephone (203) 383–4866,
email address tsslibrary@sikorsky.com,
or at https://www.sikorsky.com. You may
review a copy of the service information
at the FAA, Office of the Regional
Counsel, Southwest Region, 2601
Meacham Blvd., Room 663, Fort Worth,
Texas 76137.
FOR FURTHER INFORMATION CONTACT: John
Coffey, Flight Test Engineer, Boston
Aircraft Certification Office, 12 New
England Executive Park, Burlington, MA
01803; telephone (781) 238–7173; email:
john.coffey@faa.gov.
SUPPLEMENTARY INFORMATION:
Comments Invited
We invite you to participate in this
rulemaking by submitting written
comments, data, or views. We also
invite comments relating to the
economic, environmental, energy, or
federalism impacts that might result
from adopting the proposals in this
document. The most helpful comments
reference a specific portion of the
proposal, explain the reason for any
recommended change, and include
supporting data. To ensure the docket
does not contain duplicate comments,
commenters should send only one copy
of written comments, or if comments are
filed electronically, commenters should
submit only one time.
We will file in the docket all
comments that we receive, as well as a
report summarizing each substantive
public contact with FAA personnel
concerning this proposed rulemaking.
Before acting on this proposal, we will
consider all comments we receive on or
before the closing date for comments.
We will consider comments filed after
the comment period has closed if it is
possible to do so without incurring
expense or delay. We may change this
proposal in light of the comments we
receive.
Discussion
On October 23, 2009, we issued a
proposal to amend 14 CFR part 39 to
include an AD that would apply to
Sikorsky Model S–92 helicopters. That
NPRM was published in the Federal
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]]>Agencies
[Federal Register Volume 77, Number 178 (Thursday, September 13, 2012)]
[Proposed Rules]
[Pages 56571-56581]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22382]
=======================================================================
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FARM CREDIT ADMINISTRATION
12 CFR Parts 604, 611, 612, 619, 620, 621, 622, 623, and 630
RIN 3052-AC65
Unincorporated Business Entities
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, we, or our) is proposing
to establish a regulatory framework for Farm Credit System (System)
institutions' use of unincorporated business entities (UBEs) organized
under State law for certain business activities. For purposes of this
proposed rule, a UBE includes limited partnerships (LPs), limited
liability partnerships (LLPs), limited liability limited partnerships
(LLLPs), limited liability companies (LLCs), and any other
unincorporated business entities, such as unincorporated business
trusts, organized under State law. This rule does not apply to UBEs
that one or more System institutions may establish as Rural Business
Investment Companies (RBICs) pursuant to the institutions' authority
under the provisions of title VI of the Farm Security and Rural
Investment Act of 2002, as amended
[[Page 56572]]
(FSRIA), and United States Department of Agriculture (USDA) regulations
implementing FSRIA. This rule does apply, however, to System
institutions that organize UBEs for the express purpose of investing in
RBICs.
DATES: Comments on this proposed rule must be submitted on or before
November 13, 2012.
ADDRESSES: We offer a variety of methods for you to submit your
comments. For accuracy and efficiency reasons, commenters are
encouraged to submit comments by email or through the FCA's Web site.
As facsimiles (fax) are difficult for us to process and achieve
compliance with section 508 of the Rehabilitation Act, we do not accept
comments submitted by fax. Regardless of the method you use, please do
not submit your comment multiple times via different methods. You may
submit comments by any of the following methods:
Email: Send us an email at reg-comm@fca.gov.
FCA Web site: https://www.fca.gov. Select ``Public
Commenters,'' then ``Public Comments,'' and follow the directions for
``Submitting a Comment.''
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Barry F. Mardock, Deputy Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
You may review copies of all comments we receive at our office in
McLean, Virginia, or from our Web site at https://www.fca.gov. Once you
are in the Web site, select ``Public Commenters,'' then ``Public
Comments,'' and follow the directions for ``Reading Submitted Public
Comments.'' We will show your comments as submitted, but for technical
reasons we may omit items such as logos and special characters.
Identifying information you provide, such as phone numbers and
addresses, will be publicly available. However, we will attempt to
remove email addresses to help reduce Internet spam.
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
Wendy Laguarda, Assistant General 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 proposed rule are to:
Affirm FCA's authority to regulate and examine the System
institutions' use of UBEs, including the authority to impose any
conditions FCA deemed necessary and appropriate on UBE business
activity, and to take enforcement action against System institutions'
activities involving UBEs;
Prohibit System institutions from using UBEs to engage in
direct lending or any activity that exceeds their authority under the
Act or circumvents the application of cooperative principles;
Limit the amount of a System institution's equity
investments in UBEs;
Create a process for FCA review and approval of requests
by System institutions to organize or invest in UBEs for certain
business activity;
Establish standards for the proper and adequate disclosure
and reporting of System UBE activity; and
Ensure that the System's use of UBEs remains transparent
and free from conflicts of interest.
II. Background
Beginning in the early 1980s, FCA approved joint ventures among
System institutions, as well as System institution contractual
alliances with non-System entities, that sought to improve the
reliability and delivery of authorized products and services to
agriculture and rural America. These collaborative initiatives enabled
System institutions to provide services and products more efficiently
and inexpensively, resulting in improved and less costly services and
products to the farmer and rancher System borrowers and rural
communities.
Business models and structures have significantly evolved since the
1980s, as more and more States have adopted uniform statutes governing
unincorporated, largely limited liability, business structures. The
System's use of UBEs has been a logical outgrowth of its earlier
collaborative initiatives implemented through joint ventures and
alliances. Like these earlier joint initiatives, UBEs enable the System
to provide more efficient, less costly services and products to the
agricultural or rural community, but through more sophisticated, formal
and flexible structures that address ownership rights, management,
operations, assumptions of liability, allocation of profits and losses
and payment of taxes. Further, UBEs have the added advantage of
providing more protection for System stockholders by enabling a System
institution to limit its liability to the amount of its equity
investment in a UBE.
III. The Statutory Basis for the Proposed Rule
A. System Institutions' Authority
The System's existing investment \1\ and incidental powers \2\
provide the authorities for System institutions to invest in and form
UBEs for certain business activity. Specifically, under Sec.
615.5140(e), System institutions may exercise their investment
authorities to invest in ``other investments approved by the FCA''
provided the funding bank has approved the investment. System
investments in UBEs fall under this category, and may be approved by
FCA upon a request that explains the risk characteristics of the
investment and the System institution's purpose and objectives for
making the investment.
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\1\ Sections 1.5(15) and 3.1(13)(A) of the Act set forth the
investment authorities for System banks. Sections 2.2(10) and
2.12(18) of the Act set forth the investment authorities for System
associations. FCA regulations in subpart E of part 615 imbue service
corporations, chartered under section 4.25 of the Act, with the same
investment authorities as their organizing System banks and
associations.
\2\ Sections 1.5(3), (15) and (21); 2.2(3), (10) and (20);
2.12(3), (18) and (19); 3.1(3) and (16) of the Act.
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Unlike the express authority to organize service corporations under
sections 4.25 and 4.28(A) of the Act,\3\ no provision under the Act
explicitly authorizes System institutions to organize entities under
State law to engage in business activity. However, Congress has long
encouraged coordinated initiatives by System institutions to provide
joint products, services or functions to System borrowers. We note that
the farmer-owned, cooperative and jointly liable System, by its very
establishment, is designed to accomplish the most efficient and
effective delivery system of credit and related services to agriculture
and its producers and rural communities. Moreover, various provisions
in the Act have authorized or directed System institutions to offer
joint products or services. The same year that Congress added the
service
[[Page 56573]]
corporation authority to the Act (1980), it also directed System
institutions to establish programs for young, beginning and small (YBS)
farmers and ranchers ``in coordination with other units of the Farm
Credit System serving the territory and with other governmental and
private sources of credit.'' \4\ These 1980 additional authorities
evidence Congress' intention that System institutions be able to
provide coordinated services and products to System borrowers and rural
communities using business structures that can best facilitate such
efforts.
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\3\ Section 4.25 and 4.28(A), added to the Act in 1980,
expressly authorize System banks and associations to organize
service corporations. Congress stated that this authority was needed
to provide a more efficient way for System banks to coordinate
services. Service corporations, like System banks and associations,
are federally chartered instrumentalities and subject to the same
FCA supervisory, regulatory and enforcement oversight as System
banks and associations. Service corporations are authorized to
provide the same functions and services as banks and associations
with two significant exceptions: they cannot extend credit or
provide insurance services.
\4\ Section 4.19 of the Act.
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In fact, System institutions, with FCA approval, have been using
their incidental authority to enter into non-corporate joint ventures
to promote coordinated and expedient initiatives, which in recent years
have included State-chartered UBEs.
This proposed rule will provide a more uniform approval and
oversight process for the System's continuing use of UBEs. The rule
emphasizes that incidental powers can neither be the basis for
broadening or circumventing the limitations and restrictions of a
System institution's express powers in carrying on the business of the
bank or association nor used to engage in activities that are
impermissible under the Act. The delivery of System credit, services
and other products will still chiefly be provided by System
institutions' direct use of their express powers to serve their
eligible borrowers and customers. As a Government-sponsored enterprise
(GSE) of cooperative institutions owned and controlled by their member-
borrowers, it is essential that System institutions maintain their
strong cooperative traditions and reputations.\5\
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\5\ This perspective is noted in the FCA Board's Policy
Statement (FCA-PS-80) on Cooperative Operating Philosophy--Serving
the Members of Farm Credit System Institutions, dated October 14,
2010, and published in the Federal Register at 75 FR 64728 on
October 20, 2010.
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In recognizing changing business practices through the System's use
of UBEs, the preservation of the System's member-focused principles
remains paramount. This proposed rule would therefore prohibit System
institutions from engaging in direct lending activities or any other
activity through UBEs that circumvents the application of cooperative
principles such as borrower rights, stock ownership, voting rights or
patronage.
Finally, to provide transparency to the public, FCA intends to post
on its Web site the name and business purpose of UBEs organized and
controlled by one or more System institutions that are approved under
this rule.
B. FCA Authority Over System Investments in UBEs and UBE Business
Activity
Under part C of title V of the Act, FCA has the ability to take an
enforcement action against a System institution in connection with its
equity investment in and use of a UBE for business activity to ensure
an institution's safety and soundness.
IV. Section-by-Section Analysis
A. Unincorporated Business Entities [New Sec. Sec. 611.1150 Through
611.1158]
We propose adding a new subpart J to part 611 that would address
the purpose and scope of unincorporated business entities organized or
invested in by System institutions. Subpart J includes provisions on:
(1) Definitions; (2) FCA's regulatory, examination, enforcement, and
assessment authorities; (3) general restrictions and prohibitions on
the use of UBEs; (4) notice-only requirements for certain activities
conducted through UBEs; (5) FCA's review process for UBEs not meeting
the notice-only provisions; (6) ongoing requirements; (7) disclosure
and reporting requirements; and (8) transparency and conflict of
interest requirements. Subpart J also contains a grandfather provision
for those UBEs previously approved by FCA on a case-by-case basis and
for those UBEs established under the guidance provided in FCA
Bookletter BL-057,\6\ which may be rescinded once a final rule becomes
effective.
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\6\ FCA Bookletter BL-057 on ``Use of State-Chartered Business
Entities to Hold Acquired Property,'' dated April 2, 2009, provides
guidance on the System's use of UBEs to acquire and manage unusual
or complex collateral associated with loans.
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1. Purpose and Scope [New Sec. 611.1150]
Proposed Sec. 611.1150 affirms that System institutions have
incidental power as may be necessary or expedient to carry on the
business of the bank or association, as applicable. In exercising this
incidental power, System institutions may continue to establish UBEs,
provided the UBE business activity is necessary or expedient to the
System institution's express authorities in carrying on the business of
the bank or association and falls within the parameters of the rule.
The proposed rule would apply to any System institution that
organizes or invests in a UBE for the delivery of services or
functions. This proposed rule also pertains to any System institution
that has an equity investment in a System-organized and controlled UBE
regardless of the amount of the investment. The proposed rule would
also apply to any System institution that is a partner or member of a
UBE organized to acquire and manage unusual or complex collateral
associated with loans under FCA Bookletter BL-057.
Except as authorized by this rule, System institutions cannot
manage, control, or invest in any State-chartered or organized business
entity. The proposed rule would not permit System institutions to make
equity investments in UBEs that are organized, controlled or managed by
a non-System entity (third-party UBE) except as may be approved by FCA
under Sec. 615.5140(e) for de minimis and passive investments. Such
approvals would be considered outside of this rule.
As previously stated, this rule is not applicable to any UBEs that
System institutions may establish as RBICs under their separate
statutory authority. System institutions' activities under the RBIC
authority must be carried out in accordance with the authority of and
regulations issued by USDA.\7\ However, this rule does apply to System
institutions that organize UBEs for the express purpose of investing in
a RBIC.
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\7\ Public Law 107-171, title VI, sec. 6029 (2002), as amended
by the Food, Conservation, and Energy Act of 2008, Public Law 110-
246, title VI, sec. 6027, and USDA regulations at 7 CFR 4290.10
through 4290.3099. FCA has the authority to ensure that a System
institution's investment in a RBIC is safe and sound and that they
operate the RBIC in accordance with law and regulation.
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2. Definitions [New Sec. 611.1151]
We propose a definitions section in Sec. 611.1151 that defines the
following relevant terms used in the proposed rule.
Articles of Formation refers to the relevant State documents on the
establishment, ownership, and operation of a UBE and includes
registration certificates, charters, articles of organization,
partnership agreements, membership or trust agreements, operating,
administration or management agreements, fee agreements, or any other
documentation on the establishment, ownership or operation of a UBE.
Control \8\ distinguishes whether a System institution controls the
business
[[Page 56574]]
activities, operations, and actions of the UBE. Control means that one
System institution, directly or indirectly, owns more than 50 percent
of the UBE's equity or serves as the general partner\9\ of an LLLP or
constitutes the sole manager or is the managing member of a UBE.
However, under generally accepted accounting principles (GAAP), the
power to control may also exist with a lesser percentage of ownership,
for example, if a System institution is the UBE's primary beneficiary;
exercises significant influence over the UBE; or establishes control
under other facts and circumstances in accordance with GAAP.
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\8\ The term control as it is used in the context of this
proposed rule is based on the guidance provided in Generally
Accepted Accounting Principles (GAAP) under the Financial Accounting
Standards Board's Accounting Standards Codification (ASC). See
primary discussion of control at ASC 810-10-15 and ASC 810-10-25;
significant influence over an investment at ASC 323-10-15; and
control for limited partnerships and similar entities, including
LLCs, etc. at ASC 810-20-25. See also proposed Accounting Standards
Update 2011-220 for possible revisions to these sections.
\9\ The rule would allow a System institution to serve as a
general partner of an LLLP, but not an LP, since the liability for
the partnership's debts and obligations is limited to the amount
invested by the general partner in an LLLP but not in an LP. We note
that an LLP does not have a general partner because all partners in
an LLP have limited liability.
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Under this definition, a System institution also will be deemed to
have control over the UBE if it exercises decision-making authority in
a principal capacity of the UBE as defined under GAAP.
A System institution must divest its ownership interest or withdraw
as a member or partner from any UBE as soon as practicable if, after a
System institution organizes or invests in a System-controlled UBE,
non-System persons or entities obtain control as defined under GAAP.
Alternatively, as soon as practicable the non-System persons or
entities must relinquish control as defined under GAAP.
Equity investment means a System institution's contribution of
money or assets to the operating capital of a UBE that provides
ownership rights in return. The term is meant to include any such
contribution of money or assets regardless of the terminology that
might be used in an individual State's statute or regulations. The
definition of equity investment does not include the costs of
organizing a UBE, such as the cost of the articles of formation,
attorney fees, filing fees, etc.
System institution refers to each System bank under titles I or III
of the Act, each association under title II of the Act, and each
service corporation chartered by FCA under section 4.25 of the Act.
Third-party UBE means any UBE that is owned or controlled by one or
more non-System persons or entities.
UBE is an acronym for Unincorporated Business Entity. As defined
for purposes of this proposed rule, the term ``UBE'' includes
unincorporated business entities that are formally established and
maintained through applicable State law, such as limited partnerships,
limited liability companies, and business or other trust entities.
UBE Business Activity refers to the delivery of services or
functions by a UBE for one or more System institutions.
3. Regulation, Examination, Enforcement, and Assessment Authority [New
Sec. 611.1152]
Proposed Sec. 611.1152 affirms that FCA has full regulatory,
supervisory, oversight, examination and enforcement authority over
System institutions in connection with their equity investments in and
control of UBEs and the services and functions that a UBE performs for
the System institution. Such authority includes FCA's right to require
a System institution to withdraw from a UBE through dissolution or
disassociation or to divest of any investment in a UBE. Sections
5.17(a)(5), 5.17(a)(10), and 5.25(a) of the Act, as well as Sec.
615.5354, also give FCA the authority to condition the approval of a
System institution's equity investment in a UBE. The FCA's use of these
authorities ensures that System institutions providing certain
functions and services through State-organized or chartered UBEs remain
safe and sound and operate in accordance with law and regulations.
Finally, this proposed section provides that the cost of regulating
and examining equity investments in UBEs and the services and functions
that UBEs can perform for System institutions will be subject to FCA's
assessment authority under section 5.15 of the Act.
4. General Restrictions and Prohibitions on the Use of UBEs [New Sec.
611.1153]
Proposed Sec. 611.1153 sets forth certain general restrictions on
any function, service or activity that a System institution(s) conducts
through a UBE. These restrictions would ensure that the System
continues to operate in a safe and sound manner and that its status as
a cooperative system of lending institutions and a GSE is not
jeopardized through the use of UBEs.
The first restriction would provide that any business a System
institution conducts through a UBE must be necessary or expedient to
the business of the System institution. A UBE cannot be used to deliver
services or functions or to engage in any activity that a System
institution itself could not engage in under the Act or implementing
regulations.
A second restriction would protect the integrity of the System's
cooperative structure by prohibiting System institutions from engaging
in direct lending activities or from engaging in any other activity
through the use of a UBE that would circumvent the application of
cooperative principles, as determined by FCA, including borrower
rights, stock ownership, voting rights or patronage.
A third restriction would ensure that the use of a UBE by a System
institution is transparent to the public and free from conflicts of
interest. This provision would require that a UBE be held out to the
public as a separate or subsidiary entity; the business transactions,
accounts and records of the UBE are not commingled with those of the
System institution; and all transactions between officers, employees
and agents of the UBE and a System institution are conducted at arm's
length, in the interest of the System institution, and in compliance
with the standards of conduct rules in 12 CFR part 612, subpart A.
A fourth restriction would limit a single System institution from
conducting business through a one-member UBE, such as a limited
liability company, other than for the limited purposes of: (1)
Acquiring and managing unusual or complex collateral associated with
loans, as set forth under the guidance of FCA Bookletter BL-057; and
(2) providing electronic transaction, fixed asset, trustee or other
similar services that are integral to the daily internal operations of
System institutions.
We are proposing this limitation for a number of reasons. First,
the Agency does not want to set in motion a proliferation of System-
controlled UBEs organized for numerous purposes by a single System
institution. Such a proliferation could create a costly administrative
burden for the Agency and complicate FCA's oversight authority.
Moreover, the creation of one-member UBEs does not foster System
collaborative efforts aimed at providing more efficient System
operations and improved services to agriculture, agricultural
producers, and rural America. Just as Congress encouraged System
collaboration through the creation of the 4.25 service corporations,
the use of UBEs would, generally, be reasonable and supportable from a
business perspective when undertaken through System institution
partnerships or multi-member limited liability companies. Finally,
without reasonable and supportable reasons to form a UBE,
[[Page 56575]]
including a one-member UBE, System institutions should conduct all
aspects of their business activity either directly or through a service
corporation under section 4.25 of the Act.
Regardless of the limitations on one-member UBEs, we recognize that
the use of a UBE to perform services integral to a System institution's
daily internal operations, as noted above, may lessen administrative
burdens and reduce costs for a System institution. FCA may determine
that some of these integral and internal services that a UBE, including
a one-member UBE, could provide would become eligible for the notice
provision in proposed Sec. 611.1154. If so, we would inform System
institutions of this development through an FCA Bookletter or other
similar means.
We note that, under the agricultural credit association (ACA)
structure, the ACA and its subsidiary production credit association
(PCA) and Federal land credit association (FLCA) are treated by FCA as
one entity for most regulatory purposes. Also, we note that an
Agricultural Credit Bank (ACB) and its Farm Credit Bank (FCB)
subsidiary are treated by FCA as a single entity for most regulatory
purposes. Therefore, we would consider any UBE formed solely between an
ACA and its subsidiary PCA and FLCA or an ACB and its subsidiary FCB as
a one-member UBE (and not a multi-member UBE) that could be organized
only for the limited purposes set forth above.
A fifth restriction would limit a UBE organized as a partnership to
one that is established between or among two or more System
institutions that do not have a common board of directors. An ACA and
its PCA and FLCA subsidiaries, which operate under a common board of
directors, are treated by FCA as one entity for most regulatory
purposes, and could not create a partnership between or among
themselves under this rule. Similarly, an ACB and its FCB subsidiary,
also treated by FCA as one entity for most regulatory purposes, could
not create a partnership between themselves.
A sixth restriction would prohibit one or more System institutions
that organize or invest in a UBE from creating a subsidiary of the UBE,
or enabling the UBE to create its own subsidiary or any other type of
affiliated entity. This restriction is essential given FCA's
obligations as an independent, safety and soundness regulator of a GSE.
The complex arrangements that could possibly be established between
System-owned or controlled UBEs and other special purpose vehicles
currently permitted under various State laws could, as stated above,
create a costly administrative burden for the Agency and complicate
FCA's regulatory, examination, and enforcement oversight of the
System's safety and soundness. For this reason, we are prohibiting
System institutions from propagating additional subsidiaries or any
other affiliated entities through their UBEs.
A seventh restriction requires that a System institution's
liability be limited to the amount of the institution's equity
investment in the UBE, thus preserving a significant benefit for the
use of such a business structure--the concept of limited liability.
Therefore, System institutions could not serve as a general partner in
those UBEs organized as limited partnerships.
An eighth restriction would limit the aggregate amount of equity
investments that a System institution is authorized to hold in all UBEs
to one percent of the institution's total outstanding loans calculated
at the time of each investment. The proposed rule allows FCA to approve
an exception to this limitation on a case-by-case basis. In addition,
FCA may impose a limitation that is lower than the one-percent
aggregate limit based on safety or soundness and other relevant
concerns. We believe this limit to be reasonable given that such an
investment imposes a financial liability on a System institution up to
the amount of its total investments in UBEs. Such an investment remains
at-risk; it is recovered only after the System institution sells its
interest to other investors or the UBE owners receive some of the
proceeds from the liquidated assets of the UBE (if any such proceeds
remain after satisfying all other obligations of the UBE). To calculate
the investment limit under proposed Sec. 611.1153(h), the rule would
require that equity investments held by a service corporation be
attributed to its System institution bank and association owners based
on their percentage of ownership of the service corporation. This limit
would not apply to equity investments made in one-member UBEs organized
to acquire and manage unusual or complex collateral associated with
loans.
The ninth restriction prohibits a System institution from making
any equity investment in a third-party UBE except as may be authorized
by FCA on a case-by-case basis under Sec. 615.5140(e) for de minimis
and passive investment purposes (such requests would be considered
outside of this rule). Also, a System institution is prohibited from
being named as the general partner, manager or primary beneficiary of a
third-party UBE. Such arrangements have the potential to subject a
System institution to liability and reputational risks created by the
third-party UBE and to result in actual or apparent conflicts of
interest that neither a System institution nor FCA could adequately
control. Finally, such arrangements could dilute the Agency's oversight
of System activities and diminish FCA's ability to ensure the safety
and soundness of the System.
A final restriction would prohibit non-System entities or persons
from holding any equity interest in a System-controlled UBE with one
exception. Non-System entities or persons would be able to hold up to
20 percent of the equity of a System-controlled UBE that is organized
to provide services integral to the daily internal operations of a
System institution. This percentage of non-System ownership is the same
non-System ownership percentage that FCA regulations currently permit
for service corporations organized by one or more System institutions
under section 4.25 of the Act. The ninth and final restrictions do not
apply to UBEs formed for the purpose of acquiring and managing unusual
or complex collateral associated with multiple-lender loan transactions
in which non-System persons or entities are participants.
5. Notice-Only Requirement for Certain UBE Equity Investments [Sec.
611.1154]
In proposed Sec. 611.1154, we describe the specific types of UBEs
that a System institution may organize or invest in by providing
sufficient advance notice to the FCA. This section also sets forth the
specific information that a System institution must include in its
notice as well as where the notice must be filed.
This ``notice-only'' provision would be limited to the following
UBEs:
a. Those engaged in acquiring and managing the unusual or complex
collateral associated with loans as described in FCA Bookletter BL-057,
dated April 2, 2009; and
b. Those providing hail or multi-peril crop insurance services in
accordance with Sec. 618.8040.
FCA may determine that other UBE business activity is also appropriate
for this ``notice-only'' provision and, in such an event, would notify
all System institutions by bookletter or other means. Only System
institutions with a composite FIRS rating of 1 or 2 would qualify for
the ``notice-only'' provision. All other System institutions that
intend to form or invest in a UBE must obtain FCA's prior approval
under the provisions in Sec. 611.1155 regardless of the nature or
purpose of the intended UBE.
[[Page 56576]]
A System institution that qualifies for the ``notice-only''
provision would be required to submit articles of formation as defined
in Sec. 611.1151 that address basic information on the UBE's
ownership, control, and operations. The System institution would also
need to specify the dollar amount of its investment in the UBE and
provide a certified resolution from its board of directors that the
board has authorized the UBE investment and business activity and has
given its approval to submit the notice to FCA. A letter from the
funding bank that the bank has approved such investment would also be
required. For those System institutions forming a UBE for hail or
multi-purpose crop insurance services, or for other UBE activity that
FCA determines appropriate for the ``notice-only'' provision, the
notice would need to include a statement from the board of directors
explaining the operating efficiencies and benefits to be gained from
the conduct of business through a UBE. The statement must also affirm
that the UBE is necessary or expedient to the institution's business;
that it will operate with transparency; that it will operate in a
manner that prevents conflicts of interest between the UBE and the
institution itself; that the UBE will comply with all applicable
Federal, State, and local laws; and that the UBE will not be used by
the System institution to make direct loans, perform any functions, or
provide any services that the System institution is not authorized to
provide under the Act and FCA regulations or that go beyond the stated
purpose of the UBE. FCA may require additional information under the
notice provision or allow the omission of some information. Finally,
System institutions that organize or invest in UBEs under this
``notice-only'' provision must comply with the ongoing requirements and
disclosure and reporting requirements of Sec. Sec. 611.1156 and
611.1157, respectively.
6. Approval Process [New Sec. 611.1155]
In Sec. 611.1155, we describe the documents that FCA would require
to review a request for approval to organize or invest in a UBE if the
request would not qualify for the ``notice-only'' provision in Sec.
611.1154. We would ask a System institution to explain the risk
characteristics of the investment, the initial amount of equity it
plans to invest in the UBE, the purpose of the UBE, and its objectives.
A System institution must provide support for its need to establish or
invest in a UBE. We would also ask for a statement on the operating
efficiencies that the System institutions expect to achieve and the
benefits they expect to derive from using the UBE. A System institution
would be required to submit the articles of formation defined in Sec.
611.1151 that address basic information on the UBE's ownership,
management structure, and operations. We would also require a certified
resolution of the institution's board of directors approving the equity
investment in the UBE and the UBE's business activity as well as a
letter from the funding bank that it has approved the institution's
investment in the UBE. In addition, we would require that an
institution's board of directors provide us with a statement that the
UBE is necessary or expedient to the institution's business; that it
will operate with transparency; that it will operate in a manner that
prevents conflicts of interest between the UBE and the institution
itself; that the UBE will comply with all applicable Federal, State,
and local laws; and that the UBE will not be used by the System
institution to make direct loans, perform any functions, or provide any
services that the System institution is not authorized to provide under
the Act and FCA regulations or that go beyond the stated purpose of the
UBE. The institutions may also submit any other information they deem
necessary. FCA may require additional information or allow the omission
of some information depending on the complexity of the UBE request. If
FCA denies approval of the request, we will specify in writing our
reasons for denial.
7. Ongoing Requirements [New Sec. 611.1156]
Any System institution that organizes or invests in a UBE for the
delivery of services or functions under the provisions of this rule
would be expected to maintain and ensure FCA's access to all documents
and records of the UBE. Also, a System institution would need to be
prepared to divest its ownership interest or withdraw as a member or
partner from any UBE that conducts activities beyond its approved
limited purpose or that are contrary to the Act or FCA regulations.
Under the proposed rule, if the FCA directed the System institution to
divest its equity investment in, or withdraw as a member, partner,
general partner, managing member or primary beneficiary of, a System-
owned and controlled UBE, the institution would be required to do so as
soon as practicable.
If a System institution fails to divest its equity investment in,
or withdraw as a member, partner, general partner, managing member or
primary beneficiary of, a System-owned and controlled UBE, as directed
by the FCA within a reasonable period of time, such institution may be
subject to an enforcement action pursuant to FCA's enforcement
authority under part C of title V of the Act.
8. Disclosure and Reporting Requirements [Sec. 611.1157]
All System institutions that hold equity investments in UBEs would
be required to include information about their equity investments and
business activities in their annual reports to shareholders. We propose
amending Sec. 620.5, which prescribes the content of the annual report
to shareholders, to include this requirement. FCA could also direct
that System institutions holding equity investments in UBEs make
periodic reports to FCA as required by Sec. 621.12.
System institutions with UBEs that are grandfathered under the rule
through the provision in Sec. 611.1158 (discussed below) would be
subject to the ongoing requirements of Sec. 611.1156 and all
disclosure and reporting requirements of Sec. 611.1157.
We also propose that a System institution dissolving a UBE that it
controls be required to provide a timely report to FCA when the
dissolution occurs. This reporting will enable FCA to have current
information on the status of UBE activity.
9. Grandfather Provision [New Sec. 611.1158]
We propose grandfathering from the Notice and Approval provisions
of the rule a System institution's organization of, or investment in, a
UBE that received specific, written approval by FCA prior to the date
this proposed rule would become effective as a final rule. We would
also grandfather those UBEs organized pursuant to the guidance in FCA
Bookletter BL-057. All System institutions grandfathered would remain
subject to the conditions of approval imposed at the time of FCA's
approval and be subject to the ongoing requirements of Sec. 611.1156
and the disclosure and reporting requirements of Sec. 611.1157. System
institutions so grandfathered could not change or expand the UBE
business activity, ownership interests in, or control of the UBE
without providing notice to FCA at least 20 business days in advance of
any change. If FCA determined that the proposed change or expansion is
material, it could require the System institutions to submit a new
approval request under Sec. 611.1155.
[[Page 56577]]
B. Other Miscellaneous Changes
We propose conforming changes to various FCA regulatory sections to
delete terms made obsolete by a final UBE rule and to add new
regulatory sections cross-referenced in this proposed regulation.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule
would 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 604
Sunshine Act.
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 612
Agriculture, Banks, banking, Conflict of interests, Crime,
Investigations, Rural areas.
12 CFR Part 619
Agriculture, Banks, banking, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 621
Accounting, Agriculture, Banks, banking, Penalties, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 622
Administrative practice and procedure, Crime, Investigations,
Penalties.
12 CFR Part 623
Administrative practice and procedure.
12 CFR Part 630
Accounting, Agriculture, Banks, banking, Organization and functions
(Government agencies), Reporting and recordkeeping requirements, Rural
areas.
For the reasons stated in the preamble, parts 604, 611, 612, 619,
620, 621, 622, 623, and 630 of chapter VI, title 12 of the Code of
Federal Regulations are proposed to be amended as follows:
PART 604--FARM CREDIT ADMINISTRATION BOARD MEETINGS
1. The authority citation for part 604 continues to read as
follows:
Authority: Secs. 5.9, 5.17 of the Farm Credit Act (12 U.S.C.
2243, 2252).
Sec. 604.420 [Amended]
2. Section 604.420 is amended by removing the words ``service
organizations'' in paragraph (i)(1) and adding in their place, the
words ``service corporations chartered under the Act.''
PART 611--ORGANIZATION
3. The authority citation for part 611 is revised to read as
follows:
Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2,
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 3.21, 4.3A,
4.12, 4.12A, 4.15, 4.20, 4.21, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17,
5.25, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011,
2012, 2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121,
2122, 2123, 2124, 2128, 2129, 2130, 2142, 2154a, 2183, 2184, 2203,
2208, 2209, 2211, 2212, 2213, 2214, 2243, 2252, 2261, 2279a-2279f-1,
2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568,
1638; sec. 414 of Pub. L. 100-399, 102 Stat. 989, 1004.
Sec. 611.1130 [Amended]
4. Section 611.1130 is amended in the first sentence of paragraph
(a) by removing the words ``service organizations organized under the
Act'' and adding in their place, the words ``service corporations
chartered under the Act''.
5. Amend Part 611 by revising the heading of subpart I to read as
follows:
Subpart I--Service Corporations
Sec. 611.1136 [Amended]
6. Section 611.1136 is amended by:
a. Revising the heading of Sec. 611.1136; and
b. Removing the words ``and unincorporated service organizations''
in paragraph (c); and
c. Removing the words ``service organizations'' each place they
appear and adding in their place, the words ``service corporations''.
The revision reads as follows:
Sec. 611.1136 Regulation and examination of service corporations.
7. Part 611 is amended by adding a new subpart J, consisting of
Sec. Sec. 611.1150 through 611.1158, to read as follows:
Subpart J--Unincorporated Business Entities
Sec.
611.1150 Purpose and scope.
611.1151 Definitions.
611.1152 Authority over equity investments in UBEs for business
activity.
611.1153 General restrictions and prohibitions on the use of UBEs.
611.1154 Notice of equity investments in UBEs.
611.1155 Approval of equity investment in UBEs.
611.1156 Ongoing requirements.
611.1157 Disclosure and reporting requirements.
611.1158 Grandfather provision.
Sec. 611.1150 Purpose and scope.
(a) Purpose. This subpart sets forth the parameters for one or more
Farm Credit System (System) institutions to organize or invest in an
Unincorporated Business Entity (UBE) in accordance with the Farm Credit
Act of 1971, as amended (Act).
(b) Scope. Except as authorized under these regulations, no System
institution may manage, control, become a member or partner, or invest
in a State-organized or chartered business entity. This rule applies to
each System institution that organizes or invests in a UBE, including a
UBE organized for the express purpose of investing in a Rural Business
Investment Company. This rule does not apply to UBEs that one or more
System institutions have the authority to establish as Rural Business
Investment Companies pursuant to the provisions of title VI of the Farm
Security and Rural Investment Act of 2002, as amended (FSRIA) and
United States Department of Agriculture regulations implementing FSRIA.
Sec. 611.1151 Definitions.
For purposes of this subpart, the following definitions apply:
Articles of formation means registration certificates, charters,
articles of organization, partnership agreements, membership or trust
agreements, operating, administration or management agreements, fee
agreements or any other documentation on the establishment, ownership,
or operation of a UBE.
Control means that one System institution, directly or indirectly,
owns more than 50 percent of the UBE's equity or serves as the general
partner of an LLLP, or constitutes the sole manager or the managing
member of a
[[Page 56578]]
UBE. However, under generally accepted accounting principles (GAAP),
the power to control may also exist with a lesser percentage of
ownership, for example, if a System institution is the UBE's primary
beneficiary, exercises significant influence over the UBE or
establishes control under other facts and circumstances in accordance
with GAAP. Under this definition, a System institution also will be
deemed to have control over the UBE if it exercises decision-making
authority in a principal capacity of the UBE as defined under GAAP.
Equity investment means a System institution's contribution of
money or assets to the operating capital of a UBE that provides
ownership rights in return.
System institution means each System bank under titles I or III of
the Act, each System association under title II of the Act, and each
service corporation chartered under section 4.25 of the Act.
Third-party UBE means a UBE that is owned or controlled by one or
more non-System persons or entities as the term ``control'' is defined
under GAAP.
UBE means a Limited Partnership (LP), Limited Liability Partnership
(LLP), Limited Liability Limited Partnership (LLLP), Limited Liability
Company (LLC), Business or other Trust Entity (TE), or other business
entity established and maintained under State law that is not
incorporated under any law or chartered under Federal law.
UBE business activity means the services and functions delivered by
a UBE for one or more System institutions.
Sec. 611.1152 Authority over equity investments in UBEs for business
activity.
(a) Regulation, supervisory, oversight, examination and enforcement
authority. FCA has regulatory, supervisory, oversight, examination and
enforcement authority over each System institution's equity investment
in or control of a UBE and the services and functions that a UBE
performs for the System institution. This includes FCA's authority to
require a System institution's dissolution of, disassociation from, or
divestiture of an equity investment in a UBE, or to otherwise condition
the approval of equity investments in UBEs.
(b) Assessing UBE investments and business activity. In accordance
with section 5.15 of the Act and Sec. 607.2(h), the cost of regulating
and examining equity investments in UBEs and the services and functions
that UBEs can perform for System institutions will be taken into
account when assessing a System institution for the cost of
administering the Act.
Sec. 611.1153 General restrictions and prohibitions on the use of
UBEs.
(a) Authorized UBE business activity. All UBE business activity
must be:
(1) Necessary or expedient, as determined by the FCA, to the
business of one or more System institutions owning the UBE; and
(2) In no instance greater than the functions and services that one
or more System institutions owning the UBE are authorized to perform
under the Act and as determined by the FCA.
(b) Circumvention of cooperative principles. System institutions
are prohibited from using UBEs to engage in direct lending activities
or any other activity that would circumvent the application of
cooperative principles as determined by FCA, including borrower rights
as described in section 4.14A of the Act, or stock ownership, voting
rights or patronage as described in section 4.3A of the Act.
(c) Transparency and the avoidance of conflicts of interest. Each
System institution must ensure that:
(1) The UBE is held out to the public as a separate or subsidiary
entity;
(2) The business transactions, accounts, and records of the UBE are
not commingled with those of the System institution; and
(3) All transactions between the UBE and System institution
directors, officers, employees, and agents are conducted at arm's
length, in the interest of the System institution, and in compliance
with standards of conduct rules in Sec. Sec. 612.2130 through
612.2270.
(d) Limit on one-member UBEs. A UBE owned solely by a single System
institution (including between and among a parent agricultural credit
association and its production credit association and Federal land
credit association subsidiaries and between a parent agricultural
credit bank and its subsidiary Farm Credit Bank) as a one-member UBE is
limited to the following special purposes:
(1) Acquiring and managing the unusual or complex collateral
associated with loans; and
(2) Providing limited services such as electronic transaction,
fixed asset, trustee or other services that are integral to the daily
internal operations of a System institution.
(e) Limit on UBE partnerships. A System institution operating
through a parent-subsidiary structure may not create a UBE partnership
between or among the parent agricultural credit association and its
production credit association and Federal land credit association
subsidiaries or between a parent Agricultural Credit Bank and its Farm
Credit Bank subsidiary.
(f) Prohibition on UBE subsidiaries. A System institution is
prohibited from creating a subsidiary of a UBE that it has organized or
invested in under this subpart or from enabling the UBE itself to
create a subsidiary or any other type of affiliated entity.
(g) Limit on potential liability.
(1) Each System institution's equity investment in a UBE must be
established in a manner that will limit potential exposure of the
System institution to no more than the amount of its investment in the
UBE.
(2) A System institution cannot become a general partner of any
partnership other than an LLLP.
(h) Limit on amount of equity investment in UBEs. The aggregate
amount of equity investments that a single System institution is
authorized to hold in UBEs must not exceed one percent of the
institution's total outstanding loans, calculated at the time of each
investment. On a case-by-case basis, FCA may approve an exception to
this limitation that would exceed the one-percent aggregate limit.
Conversely, FCA may impose a percentage limit lower than the one-
percent aggregate limit based on safety or soundness and other relevant
concerns. This one-percent aggregate limit does not apply to equity
investments in one-member UBEs as permitted in paragraph (d)(1) of this
section. Any equity investment made in a UBE by a service corporation
must be attributed to its System institution owners based on the
ownership percentage of each bank or association.
(i) Prohibition on relationship with a third-party UBE. A System
institution is prohibited from:
(1) Making any equity investment in a third-party UBE except as may
be authorized on a case-by-case basis under Sec. 615.5140(e) for de
minimis and passive investments. Such requests would be considered
outside of this rule.
(2) Serving as the general partner or manager of a third-party UBE;
or
(3) Being designated as the primary beneficiary of a third-party
UBE, either alone or with other System institutions.
(j) Limitation on non-System equity investments. Non-System persons
or entities may not invest in a UBE that is controlled by a System
institution except that non-System persons or entities may own 20
percent or less of the equity of a System-controlled UBE organized to
deliver services integral to the daily internal operations of a System
institution.
[[Page 56579]]
(k) UBEs formed for acquiring and managing collateral. The
provisions of paragraphs (i) and (j) in this section do not apply to
UBEs formed for the purpose of acquiring and managing unusual or
complex collateral associated with multiple-lender loan transactions in
which non-System persons or entities are participants.
Sec. 611.1154 Notice of equity investments in UBEs.
(a) Applicability. This notice provision is applicable only to
System institutions that have a composite Financial Institution Rating
System (FIRS) rating of 1 or 2 and wish to make an equity investment in
UBEs whose activities are limited to the following purposes:
(1) Acquiring and managing unusual or complex collateral associated
with loans;
(2) Providing hail or multi-peril crop insurance services in
collaboration with another System institution in accordance with Sec.
618.8040; and
(3) Any other UBE business activity that FCA determines to be
appropriate for this ``notice-only'' provision.
(b) Notice requirements. A System institution must provide
reasonable written notice to FCA. System institutions are encouraged to
submit such notice as soon as possible, but it must be submitted no
later than 20 business days in advance of making an equity investment
in a UBE for authorized UBE business activity described in paragraph
(a) of this section. The notice must include:
(1) The UBE's articles of formation, including its name and the
State in which it is organized, length of time it will exist, its
partners or members, and its management structure;
(2) The dollar amount of the System institution's equity investment
in the UBE;
(3) A certified resolution of the System institution's board of
directors authorizing the equity investment in, and business activity
of, the UBE and the board's approval to submit the notice to the FCA;
(4) A letter from the funding bank that it has approved the
institution's equity investment in the UBE;
(5) For those UBEs identified in paragraphs (a)(2) and (3) of this
section, a detailed statement from the System institution's board of
directors that the UBE:
(i) Is needed to achieve operating efficiencies and benefits;
(ii) Is necessary or expedient to the System institution's
business;
(iii) Will operate with transparency;
(iv) Will conduct its business activity in a manner designed to
prevent conflicts of interest between its purpose and operations and
the mission and operations of the System institution(s);
(v) Will otherwise be in compliance with applicable Federal, State,
and local laws; and
(vi) Will not be used by the System institution to make direct
loans; perform any functions or provide any services that the System
institution is not authorized to perform or provide under the Act and
FCA regulations; or to exceed the stated purpose of the UBE as set
forth in its articles of formation.
(6) Any additional information the System institution wishes to
submit.
(c) Supplementation or omission of information. FCA may require the
supplementation or allow the omission of any information required under
paragraph (b) of this section.
(d) Other requirements. All System institutions under this
``notice-only'' provision must also comply with the ongoing
requirements and disclosure and reporting requirements set forth in
Sec. Sec. 611.1156 and 611.1157, respectively, of this subpart.
Sec. 611.1155 Approval of equity investments in UBEs.
(a) Request. System institutions must receive FCA approval before
organizing or investing in any UBE that does not qualify for the
``notice-only'' provision set forth in Sec. 611.1154 of this subpart.
A request for approval under this section must include the following
information:
(1) A detailed statement of the risk characteristics of the
investment, as required by Sec. 615.5140(e) and the initial amount of
equity investment;
(2) A detailed statement on the purpose and objectives of the UBE;
the need for the UBE and the operating efficiencies and benefits that
will be achieved by using the UBE;
(3) The proposed articles of formation addressing, at a minimum,
the following:
(i) The UBE's name, the State in which it is organized, the city
and State in which its principal office is to be located, and its
partners or members; and management structure;
(ii) Specific business activities that the UBE will conduct;
(iii) General powers of the UBE;
(iv) Ownership, voting, partnership, membership and operating
agreements for the UBE;
(v) Procedures to adopt and amend the partnership, membership or
operating agreement of the UBE;
(vi) The standards and procedures for the application and
distribution of the UBE's earnings; and
(vii) Length of time the UBE will exist.
(4) A certified resolution of the System institution's board of
directors authorizing the equity investment in the UBE and the UBE
business activity and the board's approval to submit the request to the
FCA.
(5) A letter from the funding bank that it has approved the
institution's equity investment in the UBE;
(6) A statement from the System institution's board of directors
that the UBE:
(i) Is necessary or expedient to the System institution's business;
(ii) Will operate with transparency;
(iii) Will conduct its business activity in a manner designed to
prevent conflicts of interest between its purpose and operations and
the mission and operations of the System institution(s);
(iv) Will comply with applicable Federal, State, and local laws;
and
(v) Will not be used by the System institution to make direct
loans; perform any functions or provide any services that the System
institution is not authorized to perform or provide under the Act and
FCA regulations; or exceed the purpose of the UBE as stated in its
articles of formation.
(7) Any additional information the System institution wishes to
submit or any other supporting documentation that FCA may request.
(b) Supplementation or omission of information. FCA may require the
supplementation or allow the omission of any information required under
paragraph (a) of this section based on the complex or noncomplex nature
of the proposed UBE.
(c) Denial of a request. The FCA will specify in writing to the
submitting System institutions the reasons for denial of any request to
organize or invest in a UBE.
Sec. 611.1156 Ongoing requirements.
A System institution that makes an equity investment in a UBE under
Sec. Sec. 611.1154 or 611.1155 of this subpart must also comply with
the following requirements:
(a) Maintain and ensure FCA's access to all books, papers, records,
agreements, reports and other documents of each UBE necessary to
document and protect the institution's interest in each entity;
(b) Divest, as soon as practicable, the institution's equity or
beneficial interest in (or withdraw membership from) any UBE that
conducts activities beyond those authorized to carry out its limited
purpose or that are contrary to the Act or FCA regulations; and
(c) Divest the institution's respective ownership or managerial
duties in the UBE as soon as practicable, if directed to do so by FCA.
[[Page 56580]]
(d) Divest the institution's ownership interest or withdraw as a
member or partner from any UBE as soon as practicable if, after a
System institution organizes or invests in a System-controlled UBE,
non-System persons or entities obtain control as defined under GAAP.
Alternatively, as soon as practicable, the non-System persons or
entities must relinquish control as defined under GAAP. This paragraph
does not apply to UBEs formed for the purpose of acquiring and managing
unusual or complex collateral associated with multiple-lender loan
transactions in which non-System persons or entities are participants.
Sec. 611.1157 Disclosure and reporting requirements.
(a) Annual report to shareholders. In its annual report to
shareholders, as set forth in Sec. 620.5(a)(12), a System institution
must provide information on its UBE investment and business activity.
(b) Periodic reports as directed. As directed by FCA, a System
institution may be required to submit periodic reports to FCA on any
equity investment in a UBE or UBE status as provided under Sec.
621.12, and in accordance with Sec. Sec. 621.13 and 621.14.
(c) Dissolution of a UBE. A System institution must submit a timely
report to FCA on the dissolution of a UBE that it controls.
Sec. 611.1158 Grandfather provision.
(a) Scope. The following equity investments in UBEs are
grandfathered from the Notice and Approval provisions under Sec. Sec.
611.1154 and 611.1155, respectively, of this subpart.
(1) Those UBE formations or equity investments that received
specific, written approval by FCA prior to the effective date of this
regulation; and
(2) Those UBEs organized to acquire or manage unusual or complex
collateral associated with loans.
(b) System institutions' obligations. All System institutions with
grandfathered UBEs:
(1) Remain subject to their conditions of approval;
(2) Are subject to the ongoing requirements of Sec. 611.1156 and
the disclosure and reporting requirements of Sec. 611.1157 of this
subpart; and
(3) May not change or expand the UBE business activity, ownership
interests in, or control of the UBE without providing notice of such
changes to FCA at least 20 business days in advance of any change or
expansion. If the proposed change or expansion is determined to be
material, FCA may require the System institution(s) to submit an
``Approval'' request under Sec. 611.1155 of this subpart.
PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED
CRIMINAL VIOLATIONS
8. The authority citation for part 612 continues to read as
follows:
Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12
U.S.C. 2243, 2252, 2254).
9. Section 612.2130 is amended by revising paragraphs (p) and (t)
to read as follows:
Sec. 612.2130 Definitions.
* * * * *
(p) Service corporation means each service corporation chartered
under the Act.
* * * * *
(t) System institution and institution mean any bank, association,
or service corporation in the Farm Credit System, including the Farm
Credit Banks, banks for cooperatives, Agricultural Credit Banks,
Federal land bank associations, agricultural credit associations,
Federal land credit associations, production credit associations, the
Federal Farm Credit Banks Funding Corporation, and service corporations
chartered under the Act.
PART 619--DEFINITIONS
10. The authority citation for part 619 is revised to read as
follows:
Authority: Secs. 1.4, 1.5, 1.7, 2.1, 2.2, 2.4, 2.11, 2.12, 3.1,
3.2, 3.21, 4.9, 5.9, 5.17, 5.19, 7.0, 7.1, 7.6, 7.8, and 7.12 of the
Farm Credit Act (12 U.S.C. 2012, 2013, 2015, 2072, 2073, 2075, 2092,
2093, 2122, 2123, 2142, 2160, 2243, 2252, 2254, 2279a, 2279a-1,
2279b, 2279c-1, 2279f); sec. 514 of Pub. L. 102-552, 106 Stat. 4102.
11. Part 619 is amended by adding a new Sec. 619.9338 to read as
follows:
Sec. 619.9338 Unincorporated business entities.
An Unincorporated Business Entity means a Limited Partnership (LP),
Limited Liability Partnership (LLP), Limited Liability Limited
Partnership (LLLP), Limited Liability Company (LLC), Business or other
Trust Entity (TE), or other business entity established and maintained
under State law that is not incorporated under any law or chartered
under Federal law.
PART 620--DISCLOSURE TO SHAREHOLDERS
12. The authority citation for part 620 is revised to read as
follows:
Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254); sec. 424
of Pub. L. 100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-
552, 106 Stat. 4102.
13. Section 620.5 is amended by:
a. Removing the words ``service organization'' in paragraph (a)(3)
and adding in their place, the words ``service corporation chartered
under the Act''; and
b. Adding a new paragraph (a)(11) to read as follows:
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(a) * * *
(11) For banks and associations, business relationships with
unincorporated business entities (UBEs).
(i) Except as provided in Sec. 620.5(a)(12)(ii) of this section,
describe the business relationship with any UBE, as defined in Sec.
611.1151, that was organized by the bank or association or in which the
bank or association has an equity interest. Include in the description
the name of the UBE, the type of business entity, the purpose for which
the UBE was organized, the scope of its activities, and the level of
ownership. If the bank or association does not have an equity interest,
but manages the operations of a UBE that is controlled by a System
institution, describe this business relationship and any fees received.
(ii) If the UBE is a one-member UBE as described in Sec.
611.1153(d)(1), the bank or association need only disclose the name of
the UBE, the type of business entity, and the purpose for which the UBE
was organized.
* * * * *
PART 621--ACCOUNTING AND REPORTING REQUIREMENTS
14. The authority citation for part 621 continues to read as
follows:
Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C.
2252, 2279aa-11); sec. 514 of Pub. L. 102-552.
Sec. 621.1 [Amended]
15. Section 621.1 is amended by removing the words ``service
organizations'' and adding in their place, the words ``service
corporations''.
Sec. 621.2 [Amended]
16. In Sec. 621.2 paragraph(e) is amended by removing the words
``service organization'' and adding in their place, the words ``service
corporation.''
[[Page 56581]]
PART 622--RULES OF PRACTICE AND PROCEDURE
17. The authority citation for part 622 continues to read as
follows:
Authority: Secs. 5.9, 5.10, 5.17, 5.25-5.37 of the Farm Credit
Act (12 U.S.C. 2243, 2244, 2252, 2261-2273); 28 U.S.C. 2461 note;
and 42 U.S.C. 4012a(f).
Sec. 622.2 [Amended]
18. In Sec. 622.2 paragraph (d) is amended by removing the words
``service organization chartered under part E of title IV of the Act''
and adding in their place, the words ``service corporation chartered
under the Act.''
PART 623--PRACTICE BEFORE THE FARM CREDIT ADMINISTRATION
19. The authority citation for part 623 is revised to read as
follows:
Authority: Secs. 5.9, 5.10, 5.17, 5.25-5.37 of the Farm Credit
Act (12 U.S.C. 2243, 2244, 2252, 2261-2273).
Sec. 623.2 [Amended]
20. In Sec. 623.2 paragraph (d) is amended by removing the words
``service organization chartered under part E of title IV of the Act''
and adding in their place, the words ``service corporation chartered
under the Act.''
PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM
21. The authority citation for part 630 is revised to read as
follows:
Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of the Farm Credit
Act (12 U.S.C. 2153, 2160, 2243, 2252, 2254); sec. 424 of Pub. L.
100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-552, 106
Stat. 4102.
Sec. 630.20 [Amended]
22. Section 630.20 is amended by removing the words ``service
organization'' in paragraph (a)(2) and adding in their place, the words
``service corporation.''
Dated: September 6, 2012.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2012-22382 Filed 9-12-12; 8:45 am]
BILLING CODE 6705-01-P
