Compensation, Retirement Programs, and Related Benefits, 60581-60602 [2012-23726]

Agencies

• Farm Credit Administration

[Federal Register Volume 77, Number 192 (Wednesday, October 3, 2012)]
[Rules and Regulations]
[Pages 60581-60602]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-23726]



[[Page 60581]]

Vol. 77

Wednesday,

No. 192

October 3, 2012

Part III





 Farm Credit Administration





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12 CFR Parts 611, 612, 619 et al.





 Compensation, Retirement Programs, and Related Benefits; Final Rule

Federal Register / Vol. 77, No. 192 / Wednesday, October 3, 2012 / 
Rules and Regulations

[[Page 60582]]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 612, 619, 620 and 630

RIN 3052-AC41


Compensation, Retirement Programs, and Related Benefits

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, us, we, or our) amends 
our regulations for Farm Credit System (System) banks and associations 
to require disclosure of pension benefit and supplemental retirement 
plans and a discussion of the link between senior officer compensation 
and performance. Also, we are amending our regulations to require 
timely reporting of significant or material events that occur at System 
institutions between annual reporting periods. We believe these 
requirements will promote transparency of and consistency in 
disclosures and ensure timely reporting to shareholders. In addition, 
the final rule establishes minimum responsibilities that a compensation 
committee must perform. Further, the final rule requires that System 
banks and associations provide for a non-binding, advisory vote on 
senior officer compensation by shareholders. Also, the final rule 
bifurcates existing annual reporting requirements at Sec.  620.5 and 
makes other technical changes.

DATES: Effective Date--This regulation will be effective 30 days after 
publication in the Federal Register during which either or both Houses 
of Congress are in session. We will publish a notice of the effective 
date in the Federal Register.
    Compliance Date--All provisions of this rule require compliance on 
the effective date, except advisory votes on compensation increases 
under Sec.  611.410(b). Advisory votes on compensation increases of 15 
percent or more are not required until 2014.

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

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Objective
II. Background
III. Comments and Our Responses
    A. General Issues
    1. FCA Policy Statement and Executive Orders
    2. The Farm Credit Act
    3. Examination and Enforcement
    4. Informal Guidance
    B. Specific Issues
    1. Bifurcation of Annual Reporting Requirements Sections 
[existing Sec.  620.5(h) through (k); new Sec.  620.6]
    2. Enhanced Disclosures of Senior Officer Compensation [new 
Sec.  620.6(c)]
    a. Pension Benefits Table [Sec.  620.6(c)(4)]
    b. Discussion Related to Compensation Programs of Senior 
Officers [Sec.  620.6(c)(5)]
    c. Tax Reimbursements [Sec.  620.6(c)(3)]
    d. Disclosure of Plans [Sec.  620.6(c)(5)]
    3. Compensation Committee Responsibilities [Sec. Sec.  620.31 
and 630.6(b)]
    4. Notice to Shareholders [Sec. Sec.  620.10, 620.11, 620.15, 
and 620.17]
    5. Non-binding, Advisory Vote by Shareholders on Senior Officer 
Compensation [Sec. Sec.  611.100, 620.5(a)(11) and 630.20(i); new 
Sec. Sec.  611.360, 611.410 and 620.6(c)(6)]
    a. Advisory Votes Based on Increase in Compensation
    b. Advisory Votes Based on Petitions
    c. Advisory Voting Procedures
    d. Reporting and Disclosure of Advisory Votes
    6. Disclosure of Supplemental Retirement Plans to Employees 
[Sec.  620.5(e)]
    7. Miscellaneous [Sec. Sec.  611.330(c), 611.400, 620.2(c) and 
(d), 620.4(c), 620.10(c), and 620.11]
    C. Compliance Date
IV. Regulatory Flexibility Act

I. Objective

    The objectives of the final rule are to:
     Improve the transparency and completeness of senior 
officer compensation and retirement benefits disclosures;
     Promote the continued safety and soundness of System 
institutions by establishing minimum responsibilities to be performed 
by an institution's compensation committee;
     Ensure timely communication with System shareholders on 
significant or material events that occur at institutions between 
annual reporting periods;
     Provide shareholders with a clear and complete 
understanding of their institution's obligations and commitments 
related to supplemental retirement benefit plans (SRP) for all 
employees; and
     Encourage member participation in the control and 
management of their institution by establishing criteria under which an 
institution must provide its voting shareholders the opportunity to 
cast a non-binding, advisory vote on senior officer compensation.

II. Background

    The Farm Credit Act of 1971, as amended (Act),\1\ authorizes the 
FCA to issue regulations implementing the Act's provisions.\2\ Our 
regulations are intended to ensure the safe and sound operations of 
System institutions and to govern the disclosure of financial 
information to shareholders of, and investors in, the System. Congress 
explained in section 514 of the Farm Credit Banks and Associations 
Safety and Soundness Act of 1992 (1992 Act) \3\ that disclosures of 
financial information and compensation paid to senior officers, among 
other disclosures, provide System shareholders with information 
necessary to better manage their institution and make informed 
decisions regarding the operation of their institution.
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    \1\ Public Law 92-181, 85 Stat. 583 (1971), 12 U.S.C. 2001, et 
seq.
    \2\ 12 U.S.C. 2252(a)(8), (9) and (10).
    \3\ Public Law 102-552, 106 Stat. 4131 (1992).
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    In addition, the FCA Board declared its commitment to support the 
cooperative business model and structure of System banks and 
associations in its October 14, 2010, resolution.\4\ We emphasize the 
cooperative principles of a farmer-owned, Government-sponsored 
enterprise by advancing regulatory proposals that encourage farmer- and 
rancher-borrowers to participate in the management, control, and 
ownership of their institutions.
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    \4\ Copies of the resolution may be obtained by contacting the 
FCA.
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    On November 18, 2010, we issued an advance notice of proposed 
rulemaking (ANPRM) to gather information for the development of a 
proposed rulemaking on disclosures of senior officer compensation and 
other related topics.\5\ In consideration of the responses received, 
the FCA issued a proposed rule on January 23, 2012, to amend our 
regulations governing:
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    \5\ See 75 FR 70619 (Nov. 18, 2010).
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     Enhanced disclosures of senior officer compensation and 
retirement benefits and supplemental retirement plans for all 
employees;
     Timely notices to shareholders of significant or material 
events occurring at their institution;
     Minimum responsibilities to be performed by compensation 
committees; and
     A non-binding, advisory vote by shareholders on senior 
officer compensation.\6\
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    \6\ See 77 FR 3172 (Jan. 23, 2012).

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[[Page 60583]]

III. Comments and Our Responses

    The comment period for the proposed rule closed on April 16, 
2012.\7\ We received 458 comment letters to the proposed rule from 
individuals and entities associated with the System, including each of 
the four Farm Credit banks, System associations, and the Farm Credit 
Council (Council), responding on behalf of its members. The majority of 
the comment letters supported the Council's comments. We discuss the 
comments to our proposed rule and our responses below. Unless otherwise 
discussed in this preamble, areas of the proposed rule that did not 
receive comment are finalized as proposed.
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    \7\ The FCA extended the original 60-day comment period at the 
request of interested parties. See 77 FR 16485 (Mar. 21, 2012).
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A. General Issues

    In this section of the preamble, we address comments questioning 
our authority to issue this rule, those making reference to policy 
statements, laws and our examination authority, and those suggesting 
non-regulatory methods to address the subjects within this rulemaking.
1. FCA Policy Statement and Executive Orders
    A few commenters stated that the proposed rule was inconsistent 
with FCA Board Policy Statement FCA-PS-59.\8\ FCA-PS-59 sets out our 
regulatory philosophy on developing and issuing regulations necessary 
to carry out the Act and the strategies to accomplish that philosophy. 
Commenters asserted they found no reasoned determination of the 
beneficial value of the proposed rule relative to the cost. Other 
commenters stated that our rule may not comply with the instructions of 
Executive Orders 13563 and 13579 that agencies consider quantitative 
and qualitative costs and benefits of a rulemaking.\9\ Also, commenters 
remarked that we did not specifically identify risks or problems that 
needed to be addressed in a rulemaking and that current compensation 
practices within the System are not excessive and do not pose undue 
risk. Other commenters stated we had not completed a cost-benefit 
analysis before proposing the rule. A few commenters expressed concern 
at the implementation efforts that would be required if the rule became 
final. Many commenters remarked that we should not impose regulatory 
requirements that restrict individual institution discretion in 
compensation practices. Several commenters expressed concern that the 
rule does not give sufficient consideration to the varied asset size 
and operations of System institutions. A few commenters stated the rule 
was a regulatory burden.
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    \8\ Regulatory Philosophy, 76 FR 54638 (Sept. 1, 2011), 
effective July 8, 2011.
    \9\ E.O. 13563, ``Improving Regulation and Regulatory Review,'' 
dated January 18, 2011, and E.O. 13579, ``Regulation and Independent 
Regulatory Agencies,'' dated July 11, 2011.
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    We believe that this rulemaking is consistent with FCA-PS-59 and 
the objectives of Executive Orders 13563 and 13579.\10\ FCA-PS-59 
incorporates the provisions of the Executive Orders. It states that the 
FCA will develop regulations based on a reasoned determination that the 
benefits justify the cost of regulating an issue and that preambles to 
regulations will explain the rationale for the regulatory approach 
adopted. The FCA is the independent Federal agency in the executive 
branch of the Government responsible for examining and regulating 
System institutions. When issuing regulations, we consider if the 
rulemaking duplicates other requirements, would be ineffective, or 
impose burdens greater than the benefits received. We promulgate rules 
necessary to implement the expectations and requirements of the Act, 
which in the case of compensation practices within the System, is to 
support shareholder participation in the management, control, and 
ownership of the System and, more broadly, to protect and promote the 
safety and soundness of System institutions through oversight of 
management. We believe this rule clarifies the intended meaning of 
certain existing rules, eliminates confusion through reorganization of 
the rules, enhances the consistency, transparency, and timeliness of 
disclosures to shareholders and investors, helps ensure safe and sound 
compensation practices, and enhances communication with and encourages 
participation by shareholders in the management and control of their 
institution. Therefore, in light of these benefits, we do not believe 
this rule is inconsistent with FCA-PS-59 or Executive Orders 13563 and 
13579 and does not result in a significant adjustment of or burden to 
individual institution operations.
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    \10\ Executive Order 13563 does not apply to independent 
agencies, but Executive Order 13579 requests independent regulatory 
agencies to follow the principles contained in Executive Order 
13563.
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    The provisions of FCA-PS-59 and the Executive Orders do not limit 
us to issuing regulations only when there is an existing adverse risk 
or problem. Our responsibilities as a safety and soundness regulator 
require us to be proactive and prudent in our rulemaking, as well as 
reactive by providing standards that help avert potential problems. 
This rulemaking is intended to ensure that appropriate compensation 
practices and consistent and transparent disclosure standards exist for 
all System institutions. We considered the size, complexity, risks, 
interrelationships, and resources of System institutions when 
developing this rule. While we believe it is important to preserve 
individual institution flexibility when possible, our regulatory 
responsibility requires us to issue regulations that we determine 
appropriate for safety and soundness. In keeping with today's changing 
economic and business environments, and in accordance with the findings 
of Congress under section 514 of the 1992 Act and FCA Board Policy 
Statement FCA-PS-80, ``Cooperative Operating Philosophy--Serving the 
Members of Farm Credit System Institutions,'' \11\ we believed it was 
appropriate to review and update our rules on senior officer 
compensation disclosures and other related topics.
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    \11\ See 75 FR 64728, Oct. 20, 2010.
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2. The Farm Credit Act
    Commenters claimed we did not consider the approach taken by other 
financial regulators. They questioned if this rulemaking is consistent 
with the requirements of other regulators, given the provisions of 
section 5.17(a)(8) of the Act.\12\ Section 5.17(a)(8) of the Act 
authorizes us to regulate the preparation and dissemination by System 
institutions of information on financial condition and operations to 
shareholders and investors. This section of the Act instructs the FCA 
to establish regulations on the dissemination of financial statements 
that are not more burdensome or costly than those of national banks. 
Commenters asserted that we need a compelling business justification to 
exceed the disclosure requirements of other regulated entities.
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    \12\ 12 U.S.C. 2252(a)(8).
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    We believe this rulemaking is consistent with the requirements of 
other regulators. Commenters referencing section 5.17(a)(8) of the Act 
stated that the FCA is to follow the disclosure requirements of 
financial entities that are not publicly traded. However, section 
5.17(a)(8) of the Act makes no distinction between the financial 
regulation of publicly traded and non-publicly traded national banks. 
The Act incorporates all financial regulations of commercial banks, 
regardless of whether or not the banks are publicly traded. Therefore, 
the FCA

[[Page 60584]]

uses all financial industry regulations as the parameters for financial 
disclosures, while also considering the cooperative structure of the 
System, and has done so in this rulemaking. Further, while FCA 
requirements governing the dissemination to shareholders of quarterly 
reports may not be more burdensome or costly than the requirements 
applicable to national banks, as an independent regulator of the System 
we are not required by section 5.17(a)(8) of the Act to mirror the 
actions of other regulators. Instead, we consider those policy 
positions and decide if we should follow them or take a different 
approach. Also, the commenters did not incorporate the admonition of 
the 1992 Act regarding compensation disclosures of System directors, 
officers, and employees. The 1992 Act requires that FCA regulations 
ensure compensation disclosures provide information necessary to assist 
shareholders in making informed decisions regarding the operation of 
their institutions.
    A few commenters asserted that we had violated the provisions in 
the Act, which provide for bank and association boards of directors to 
establish compensation for senior officers and staff. We are not 
regulating the amount or manner in which bank and association senior 
officers and employees are compensated. Instead, many of the provisions 
in the rule relate to the disclosure of that compensation. Provisions 
in the rule also address safety and soundness concerns that an 
institution must consider when establishing compensation plans. Our 
general authority at section 5.17(a)(9) and (10) of the Act empower us 
to issue regulations for the safety and soundness of the System and to 
carry out the provisions of the Act. Finally, we are promoting 
cooperative principles by providing additional avenues for shareholders 
to have a greater voice in how senior officer compensation is 
distributed. None of these actions violates provisions in the Act, 
especially those relating to determining compensation.
    Some commenters stated that our rulemaking efforts conflict with 
section 5.17(b) of the Act. This section of the Act precludes the FCA 
from approving institution bylaws. The prohibition on bylaw approval 
doesn't preclude rulemaking on matters affecting an institution's 
bylaws or the safe and sound operations of System institutions. In 
fact, section 5.17(a)(9) of the Act directs us to issue rules and 
regulations ``necessary or appropriate'' to carry out the Act. As we 
have explained in other rulemakings, issuing rules affecting bylaws 
does not mean we are approving bylaws in violation of section 5.17(b) 
of the Act. In pursuit of ensuring a safe and sound System and carrying 
out the Act, institution bylaws are necessarily impacted by our rules. 
Consequently, we may regulate the terms and conditions by which 
institutions exercise their powers through their bylaws, while not 
approving the bylaws themselves, and then examine compliance with our 
regulations.
3. Examination and Enforcement
    Many commenters cited our examination and enforcement authorities 
as a sufficient means to address disclosure issues, concluding that 
additional regulations are unnecessary. Commenters stated that because 
there is no significant safety and soundness concern currently in the 
System, the suggested approach would be to minimize the burden of 
regulatory requirements and target individual institutions with 
possible problems, rather than address the issue at the System level.
    We examine to ensure the safety and soundness of System 
institutions and their compliance with laws and regulations. This 
function is not a substitute for our responsibility to issue 
regulations implementing the Act and ensuring the safety and soundness 
of System institutions. Our regulations provide minimum standards of 
performance by System institutions. Our examiners use our rules as the 
basis for compliance determinations and to require any necessary 
corrective actions. Regulations reduce the likelihood that examinations 
will uncover unsafe and unsound practices and provide a minimum 
standard of performance to assure stakeholders of the safe and sound 
operations of System institutions.
    Also, commenters stated that we have enforcement powers necessary 
to correct any unsafe or unsound compensation practices without 
adopting this rule. Commenters asserted that the rule undermines a 
risk-based examination approach. However, the commenters did not 
elaborate on how that examination approach is compromised by this 
rulemaking. While we agree with the commenters that we have enforcement 
authority, we do not view it as our only tool for ensuring the safety 
and soundness of System institutions. Safe and sound operations of 
individual System institutions are supported by a clear set of rules, 
compliance with those rules and thorough examinations.
4. Informal Guidance
    Commenters supported our objective of improving System disclosures, 
agreeing that existing regulations needed updating. However, they 
questioned the need for additional regulations on shareholder 
involvement and the activities of the compensation committees. 
Commenters also remarked that adoption of the rule could carry 
unintended consequences and undermine the stated objectives of the 
rule. The commenters explained that a compensation committee could 
manipulate compensation in order to avoid the proposed non-binding, 
advisory vote on chief executive officer (CEO) or other senior officer 
compensation. We address comments on the non-binding, advisory vote in 
that section of this preamble.
    Commenters asked that we withdraw the rule and work with the System 
to find a non-regulatory approach to strengthen institution disclosures 
and compensation practices. Many of these commenters remarked that the 
rule is contrary to the guidance contained in ``The Director's Role'' 
handbook issued by FCA,\13\ pointing out that the handbook emphasizes 
the board's governance responsibilities for member-owners and that the 
responsibility is undermined by excessive regulation.
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    \13\ ``The Director's Role: A Guide to Leading Your Institution 
Effectively,'' (FCA publication, www.fca.gov).
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    The guidance in ``The Director's Role'' is not contradicted by this 
rulemaking. ``The Director's Role'' emphasizes the boards of directors' 
responsibilities to member-owners and the use of good governance 
practices in fulfilling those responsibilities. This rulemaking 
recognizes those responsibilities and promotes good governance through 
transparent, timely and consistent disclosures, enhancing the fiduciary 
role of the compensation committee, and providing for communication 
with and engagement by member-owners. The ``Director's Role'' 
emphasizes, as does this rulemaking, the cooperative structure of the 
System and the related accountability of directors to shareholders. 
This rulemaking supports accountability through enhanced disclosures 
and advisory votes, while setting a minimum set of responsibilities for 
the compensation committee. A voluntary or non-regulatory approach to 
strengthening disclosures and compensation is valuable, but it does not 
replace the consistency and stability that rules provide in assuring 
System stakeholders of complete, consistent and transparent disclosures 
and good governance practices over compensation. An effective 
compensation and disclosure process is critical to good governance,

[[Page 60585]]

which in turn is essential for institution safety and soundness.
    One commenter added that cooperatives are historically given great 
deference by State regulators in setting policy. The comment did not 
account for the fact that the System is a Government-sponsored 
Enterprise (GSE) with a public policy mission.\14\ In the 1992 Act, 
Congress reiterated the need for adherence to this mission, 
particularly in the area of compensation disclosures, through FCA 
regulation.
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    \14\ Section 1.1 of the Act (12 U.S.C. 2001).
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    We have analyzed the comments received and have amended certain 
provisions in this final rulemaking. We discuss comments specific to 
certain provisions in the following section of the preamble.

B. Specific Issues

1. Bifurcation of Annual Reporting Requirements Sections [existing 
Sec.  620.5(h) through (k); new Sec.  620.6]
    We proposed moving the disclosure requirements for directors and 
senior officers to new Sec.  620.6. Also, we proposed that Sec.  
620.5(h) contain a reference to Sec.  620.6, stating that the 
presentation of the Sec.  620.6 disclosures would continue to be 
required in the annual report. No changes to the current requirements 
of existing Sec.  620.5(h), (j), and (k) were made, except to remove 
redundancy and enhance clarity in the regulatory language in existing 
Sec.  620.5(i). We also clarified where to disclose the required 
statement that the information on compensation for any individual 
senior officer, as disclosed in the Summary Compensation Table 
(Compensation Table), is available to shareholders upon request. As 
conforming technical changes, we proposed changing references to the 
disclosures in the annual report related to director and senior officer 
compensation and conflicts of interest, and addressed in other sections 
of our rules, to their location in new Sec.  620.6. We received no 
comments on these organizational changes and finalize them as proposed. 
However, we received comments on existing provisions in this section, 
and discuss those comments below.
    Existing regulations require that the aggregate senior officer 
group reported in the Compensation Table include all senior officers 
plus employees whose compensation is among the five highest paid during 
the fiscal year, regardless of whether or not those employees are 
senior officers (the aggregate group). One commenter requested 
clarification on what compensation measures should be used to determine 
which employees are among the five highest paid. The commenter stated 
that if compensation included all elements identified in the 
Compensation Table, the aggregate group would be more than just senior 
officers. We clarify that compensation measures used to determine which 
employees are among the five highest paid includes all amounts included 
in the ``total'' column of the Compensation Table. We remind the 
commenter that this is not a new provision.\15\
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    \15\ This provision was added in a 1986 rulemaking. We explained 
that the rule ``* * * required that the aggregate compensation of 
senior officers (and at a minimum the top five most highly paid 
officers, whether or not designated as senior officers) be disclosed 
without naming the individuals included.'' See 51 FR 21336 (June 12, 
1986).
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    Also, existing regulations provide that shareholders may request 
information on the compensation of any individual included in the 
aggregate group.\16\ Commenters objected to our clarifying that the 
request for information on compensation could be made on any employee 
reported in the aggregate group. Commenters asserted that the 
clarification ``expanded'' shareholder access to compensation 
information on highly compensated employees reported in the aggregate 
group. They requested that we limit shareholder access solely to the 
information on the compensation of senior officers. Commenters asserted 
that employees included in the aggregate group who are not covered by 
the Sec.  619.9310 definition of ``senior officer'' should not have 
their individual compensation accessible by shareholders. Commenters 
stated that release of this information would result in personnel 
issues, including ``poaching'' of employees. However, several 
commenters acknowledged that most institutions have never received a 
request by a shareholder for information on any individual's 
compensation reported in the aggregate group.
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    \16\ The 1986 final rulemaking preamble stated disclosure of the 
salaries of individual senior officers or anyone else included in 
the aggregate is available to shareholders upon request. The 1986 
rulemaking only limited the ``upon request'' availability to those 
whose total compensation exceeded $50,000. See 51 FR 21336 (June 12, 
1986). This threshold limit was removed in the 2006 governance 
rulemaking. See 71 FR 5740 (February 2, 2006).
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    We continue to believe that it is important for shareholders to 
have access, without restriction, to individual compensation 
information of the aggregate group. We proposed no changes to the 
requirement and are not persuaded to change it now, especially as 
commenters to this rulemaking stated their institutions have never had 
a shareholder make a request under the provision. Institutions may 
neither question the reason for a shareholder request, nor record the 
request in the shareholder's files. Institutions must promptly provide 
the information to their shareholders.
    A few commenters requested we change compensation disclosures from 
a ``paid'' to an ``earned'' basis to more closely resemble generally 
accepted accounting principles (GAAP). We did not propose changes to 
this area, but may consider the matter in a future rulemaking. Deferred 
compensation reported under Sec.  620.6(c) continues to be reported on 
an earned basis.
    A few commenters asked that we remove deferred compensation from 
the Compensation Table because it is already included in reported 
salary or bonus amounts. The commenters suggested reporting deferred 
compensation only when the employee bears a risk in the investment or 
the institution provides enhanced benefits. These comments relate to an 
existing provision that requires reporting of deferred compensation in 
the Compensation Table, which has been a requirement since 1994.\17\ As 
is currently required, amounts reported in the deferred compensation/
perquisites column of the Compensation Table include the dollar value 
of other annual compensation not properly categorized as salary or 
bonus. Therefore, the existing rule addresses commenters' issues and, 
if followed, prevents duplicative reporting.
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    \17\ 59 FR 37406 (July 22, 1994).
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    A few commenters objected to the Compensation Table including 
disclosure of severance pay to senior officers and requested we allow 
institutions discretion on disclosing this information. Commenters 
noted that disclosure of this information may result in litigation for 
the institution and may limit the use of severance plans. This required 
disclosure is not a new disclosure and changes to it were not part of 
the proposed rule. In addition, we do not believe that this provision 
should be changed since severance plans continue to be used by 
institutions, notwithstanding their disclosure in the annual report. 
The final rule retains the existing requirement to include severance in 
the ``Other'' column of the Compensation Table.
    We proposed a definition of supplemental retirement plans in Sec.  
619.9335 of our general definition section. We received no comments on 
the proposed definition, but in reviewing comments on disclosure of 
these retirement plans we identified a

[[Page 60586]]

technical issue with the proposed definition. The proposed rule clearly 
explains the definition applies to all supplemental retirement plans 
funded by System institutions, not just those of the Farm Credit banks 
or associations. We are therefore making a technical correction in the 
final rule to replace the term ``Farm Credit bank or association'' with 
``Farm Credit institution'' in the Sec.  619.9335 definition of 
supplemental retirement plans.
2. Enhanced Disclosures of Senior Officer Compensation [new Sec.  
620.6(c)]
    We proposed requiring disclosure of:
     Institution obligations related to SRPs and supplemental 
executive retirement plans (SERPs);
     The overall risk and reward structure of compensation, 
pension benefit and retirement plans;
     The link between institution performance and senior 
officer compensation as reported in the Compensation Table; and
     The dollar amount of tax reimbursements or tax payments 
provided by the institution to senior officers.
    The final rule incorporates many suggestions offered by commenters 
to clarify provisions of the rule and enhance the value of the 
disclosures.
    Commenters stated their support for updating existing FCA 
regulations on compensation disclosures to ensure consistency, 
transparency, and clarity. One commenter asked that the required 
disclosures conform to its existing practices. Some commenters also 
stated existing disclosures already are more detailed than necessary, 
reducing the value of the annual report. A few others remarked that 
compensation is a sensitive subject that should not be overly 
publicized. Others remarked that disclosure requirements should be 
limited to those that are material and meaningful, stating the current 
rulemaking creates excessive disclosures that lack materiality.
    The FCA weighs the cost and burden of making disclosures against 
the value the disclosures provide shareholders and investors. Our rules 
must factor in the varied and increasingly complex compensation and 
retirement programs at all institutions. We believe the additional 
disclosures are necessary to ensure that shareholders are informed of 
all the key elements of senior officer compensation and retirement, and 
facilitate consistent disclosures among System institutions. Also, we 
remind commenters expressing concern over publicizing System 
compensation practices that, in addition to the requirement in the 1992 
Act for disclosure of compensation paid to senior officers, the System 
is a GSE with responsibility for public accountability.
    One commenter stated that reporting senior officers in the 
aggregate for both the Compensation and Pension Benefits Tables could 
produce misleading results. The commenter explained that because the 
compensation of a single member of the aggregate group might change, 
the aggregate reporting might give results not representative of the 
entire group. The commenter did not suggest an alternative reporting 
method. In this rulemaking, we did not propose disclosing compensation 
on an individual basis and the final rule does not require it. However, 
any institution may voluntarily provide clarity and transparency to the 
quantitative data by including a qualitative discussion on the 
compensation of each member of the aggregate group.
    One commenter asked that we change the definition of ``senior 
officer'' in Sec.  619.9130 to only include the CEO \18\ and the most 
senior level of officers reporting to the CEO. We proposed no changes 
to this definition and the final rule does not make one. We continue to 
believe the existing definition of senior officer, developed in 
consideration of the Securities and Exchange Commission (SEC) 
definition for ``executive officer,'' accurately captures senior staff 
at institutions.\19\ It includes those senior officer positions found 
in most lending institutions and includes other employees involved in 
setting institution policy. Therefore, the final rule retains the 
existing definition of senior officer.
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    \18\ Use of the title ``Chief Executive Officer'' includes all 
persons occupying that position or similar positions, regardless of 
the actual title used. See 12 CFR 619.9130.
    \19\ See governance rulemaking adding definition, 71 FR 5740 
(Feb. 2, 2006).
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    Commenters suggested having disclosure provisions vary by the size 
of the institution. Other commenters endorsed consistency in 
disclosures at all sizes of institutions. We continue to believe the 
required disclosures are relevant information for shareholders 
regardless of the size of the institution. This belief is expressed in 
FCA-PS-80, where we explain that System institutions are member-focused 
cooperatives deriving benefit from members participating in the 
management, control, and ownership of their institutions. Irrespective 
of size, shareholders need relevant information in order to engage in 
any meaningful way in the management and control of their institutions. 
We continue to believe that compensation information on the CEO and 
other senior officers is relevant information. Subject to applicable 
law and regulations, the quality and quantity of that information 
should be based on the compensation policies and practices of the 
institution and not driven by size.
a. Pension Benefits Table [Sec.  620.6(c)(4)]
    We proposed a new Sec.  620.6(c)(4) that would have required 
institutions to disclose certain information on pension benefit plans 
in tabular format, including disclosure of SERPs in a Pension Benefit 
Table. The information proposed to be disclosed included:
     Funded and unfunded present value of accumulated benefits 
for CEO and other senior officer pension and retirement benefit plans;
     Years of credited service; and
     Vested and unvested dollar amounts.
    Also, the proposed rule would have required the reporting of off-
balance sheet commitments related to senior officer compensation and 
pension benefits, such as benefits earned but not yet vested.
    Commenters stated support for improved annual report disclosures on 
SRPs, but made several suggested changes to enhance the disclosures. 
Commenters noted that allocations to the benefit programs are done on a 
macro basis and suggested aggregate plan reporting, which would be in 
accordance with GAAP. Commenters explained that institutions are unable 
to break out the data into vested and unvested amounts. They stated 
that individual reporting would be overly burdensome and goes beyond 
reporting required by GAAP and SEC requirements. Also, commenters noted 
that plan assets used to fund the benefits are fungible and not 
specifically assigned to individual participants. We did not intend 
that Sec.  620.6(c)(4) require disclosure by individual employee. The 
final rule clarifies that the requirement to separately report pension 
benefits was intended to separate CEO benefits from other senior 
officers in the aggregate, similar to the reporting requirements in the 
Compensation Table. Also, commenters suggested that we align the 
disclosures in the Pension Benefits Table to similar System disclosures 
and that institutions report payments made during the fiscal year and 
the present value of accumulated benefits, in lieu of funded and 
unfunded and vested and unvested amounts.
    We agree that many of these suggested changes provide more 
meaningful disclosures to shareholders and investors on pension 
benefits and are consistent with disclosure in the combined System-wide 
report to

[[Page 60587]]

investors. Therefore, the final rule at Sec.  620.6(c)(4) replaces the 
proposed disclosures in the Pension Benefits Table with the:
     Plan name;
     Years of credited service for the CEO and the average 
years of credited service for the other senior officers;
     Present value of accumulated benefits; and
     Payments made during the reporting period.
    Also, the final rule removes the ``Total'' column from the Pension 
Benefits Table and makes corresponding changes to Sec.  620.6(c)(4)(i), 
(ii), (iii), and (iv), which describe the required Pension Benefits 
Table disclosures. Also, we are moving the requirement that 
institutions disclose off-balance sheet commitments of compensation 
earned but not yet vested from this section to Sec.  620.5(e)(4)(v).
    Also, commenters responded that assumptions used to determine the 
present value of pension benefits could vary significantly among 
institutions and between reporting periods. Commenters suggested 
disclosing changes in pension value and the reason(s) for the change. 
Disclosure of the assumptions used to determine the present value was 
not a specific requirement of the proposed rule and is not part of the 
final rule. However, we refer commenters suggesting disclosure of the 
assumptions used to determine the present value of pension benefits or 
the reason for a change in the pension value to existing Sec.  
620.5(g). Section 620.5(g) requires disclosure of information necessary 
to an understanding of the institution's financial condition, changes 
in financial condition, results of operations, known trends, 
uncertainties, commitments, etc.
    Commenters asked how information in the Pension Benefits Table is 
included in the Compensation Table. We considered the recommendations, 
the formats currently used by System institutions, and that used in the 
combined System-wide report to investors. For consistency with industry 
practice and the reporting practices of the System, the final rule 
requires that the change in pension value be included in the 
Compensation Table. The final rule removes the proposed language in 
Sec.  620.6(c)(3)(iii) discussing the inclusion of the Pension Benefit 
Table in the ``Other'' column of the Compensation Table to eliminate 
potential confusion in compensation reported. This change does not 
remove the existing requirement to include retirement paid or 
contributions made by the institution to a defined contribution plan in 
the Compensation Table.
    A few commenters requested that the header on the Pension Benefits 
Table not refer to ``annual'' but did not explain the reason for the 
request. To enhance clarity, the final rule requires that the 
information reported in the Pension Benefits Table be as of the most 
recent fiscal year end.
    A few commenters asked us to clarify the provision in Sec.  
620.6(c)(3) exempting disclosure of contributions by an institution to 
a defined contribution plan if the plan is made available to all 
employees on the same basis. These commenters asked when the 
``available to all employees'' is determined and explained that some 
plans were previously available to all employees, but are now available 
only to senior officers. We decline to make this clarification. If the 
plans are not open to all employees during the reporting period they 
must be reported in the Compensation Table.
b. Discussion Related to Compensation Programs of Senior Officers 
[Sec.  620.6(c)(5)]
    We proposed requiring a discussion of the overall risk and reward 
structure of compensation, pension benefit and retirement plans, and 
the link between institution performance and CEO and other senior 
officer compensation as reported in the Compensation Table. We received 
comments supporting the requirement to discuss the relationship of 
compensation and benefit plans to an institution's business goals and 
the link between pay and performance. Commenters explained that 
existing disclosures on compensation plans do not characterize their 
risk to the overall operations of the institution. They specifically 
supported adding incentive pay disclosure to the annual report and 
stated that the additional disclosures would benefit the System, 
shareholders, and bond investors. However, a few commenters remarked 
that the requirement was unreasonable because it was too much 
information for the institution to summarize and too much information 
for the shareholder to digest. Several commenters expressed concern 
that the proposed disclosures would not materially improve the 
disclosures and that existing disclosures were fair to employees and 
transparent to shareholders.
    The intent of the requirement is to provide shareholders with the 
information necessary to better manage their institution. We believe 
the data currently required to be disclosed and presented in the 
Compensation Table must have meaning beyond merely reporting numbers. 
Also, we believe the qualitative disclosures will provide shareholders 
with information that links pay with performance and will better enable 
them to make informed decisions regarding the operation of their 
institution. In making these disclosures, we expect institutions to 
discuss the criteria used to determine overall performance (e.g., 
capital and risk management, credit risk and risk exposure to earnings, 
liquidity management, and compliance with financing agreements). In 
addition, we expect a discussion of the benchmarks or other factors 
used to determine compensation, including incentive-based compensation. 
We reiterate that the discussions can be succinct, but should also be 
specific to the institution rather than general or boilerplate 
discussions.
    Also, in Sec.  620.6(c)(6) we proposed that the institution 
disclose in the vicinity of the Compensation Table the authority of 
shareholders to petition for an advisory vote on CEO and senior officer 
compensation. In the final rule, we are making grammatical changes to 
the language. We are not changing the intent of the rule.
c. Tax Reimbursements [Sec.  620.6(c)(3)]
    We proposed that tax reimbursements provided by the institution to 
senior officers be reported in the ``Deferred/Perquisite'' column in 
the Compensation Table as other personal benefits. Overall, commenters 
did not object to reporting tax reimbursements as part of senior 
officer compensation. However, commenters responded that such 
reimbursements are not naturally thought of as perquisites and should 
instead be included in the ``Other'' column in the Compensation Table. 
We do not object to reporting these reimbursements in the ``Other'' 
column of the Table. There is no de minimis exception for items 
required to be reported in the ``Other'' column and any item reported 
in the ``Other'' column must be described in a footnote to the 
Compensation Table. Our intent is to provide a more transparent 
disclosure of all tax reimbursements to CEOs and other senior officers, 
regardless of the dollar amount. Since the requested change fulfills 
this intent, the final rule requires tax reimbursements be reported in 
the ``Other'' column of the Compensation Table.
    Commenters requested that we revise the ``Other'' column of the 
Compensation Table to exempt de minimis items from reporting 
requirements, similar to that for perquisites. We decline to adopt this 
suggestion because we did not propose

[[Page 60588]]

a de minimis level for other compensation. We believe other 
compensation is generally of a nature requiring full disclosure.
    Also, commenters requested clarification on whether amounts 
reported in the perquisites and other compensation columns are reported 
by subcategory or by lump sum. The amounts reported in the ``Other'' 
column may be reported lump sum, but must also be described in a 
footnote. Compensation Table columns represent the entire amount for 
the reporting period. For example, if $11,600 were reported in the 
``Other'' column, existing regulations require that a footnote describe 
the dollar amount of each item comprising the $11,600, such as $4,600 
for tax reimbursements and $7,000 for severance pay. In addition, the 
$5,000 de minimis reporting exemption allowed for perquisites applies 
to the total of all perquisites for the reporting period, rather than 
each reportable perquisite. For example, if $3,100 was provided in the 
form of personal use of a company car and premiums of $2,200 were paid 
for life insurance by the institution, the $5,000 perquisite de minimis 
is exceeded and the lump sum of $5,300 would be reported in the 
Compensation Table.
d. Disclosure of Plans [Sec.  620.6(c)(5)]
    Existing disclosure regulations require that an institution 
describe ``all'' plans offered to senior officers and highly 
compensated employees reported in the aggregate pursuant to which cash 
or noncash compensation was paid or distributed during the last fiscal 
year or is proposed to be paid or distributed in the future for 
performance during the last fiscal year. We proposed clarifying that 
the required discussion of plans include compensation, incentive, 
performance, and retirement and pension plans.
    Commenters requested that we withdraw the requirement to report on 
``all'' compensation plans because this requirement would result in 
voluminous and excessive disclosures in reports. They stated that the 
additional disclosures would give the appearance that compensation 
risks are greater than other risks. Also, they stated that disclosure 
of all plans goes beyond GAAP and SEC requirements. The proposed rule 
did not add the word ``all'' to the rule.
    The requirement to report on all plans is an existing requirement. 
We are clarifying that compensation plans include all remuneration 
plans, such as salary, bonus, deferred compensation, incentive, 
performance, and retirement and benefit plans. We believe that the 
narrative disclosures can be provided in a succinct manner to include 
only those factors necessary to an overall understanding of each plan. 
We would expect the disclosures to include, at a minimum, the purpose 
or objective of each plan, the material terms of the plans, conditions 
of payments, and other information the institution considers necessary 
to further an overall understanding of the entire remuneration program 
as disclosed in the Compensation and Pension Benefits Table. As 
reporting ``all'' plans is existing language, we do not believe the 
clarification causes more excessive or burdensome disclosures. We 
believe describing all plans will result in enhanced shareholder 
understanding of the nature and scope of these plans and provide 
qualitative information to the quantified numbers reported in the 
Compensation and Pension Benefits Tables. Therefore, we finalize this 
provision of the rule as proposed.
    Commenters asked if the requirement to discuss all compensation 
plans is by individual employee or for the aggregate senior officer 
group. One commenter expressed concern that the requirement might 
include reporting performance-based compensation on an individual 
basis, which could reveal confidential personnel information. The final 
rule explains that the disclosures are to be made individually for the 
CEO and in the aggregate for other senior officers and those highly 
compensated employees included in the aggregate group.
3. Compensation Committee Responsibilities [Sec. Sec.  620.31 and 
630.6(b)]
    In 2006, the FCA issued the governance rule requiring institutions 
to establish compensation committees.\20\ In the 2009 FCA Bookletter 
BL-060, ``Compensation Committees,'' we provide guidance on how a 
compensation committee should fulfill its obligations to the 
institution and shareholders. BL-060 was issued at a time of heightened 
concern and scrutiny on senior officer compensation. Continued scrutiny 
of, and concern regarding, compensation and retirement practices 
requires us to continue our prudent and proactive approach regarding 
regulation of compensation committee oversight responsibilities, 
including key factors identified in BL-060. We proposed requiring the 
compensation committee analyze or review its institution's:
---------------------------------------------------------------------------

    \20\ See 71 FR 5740 (Feb. 2, 2006).
---------------------------------------------------------------------------

     Long-term compensation and retirement benefit obligations 
and determine they are appropriate to the services performed and not 
excessive;
     Incentive-based compensation programs and payments and 
determine they are structured to consider future losses and risks to 
the institution;
     Senior officer compensation and incentive-based programs 
and determine they support the long-term strategy and promote safe and 
sound business practices; and
     Compensation programs for other select groups of 
employees.
    Most commenters responded that the proposed requirements were too 
prescriptive and too rigid and did not follow a principles-based 
approach. Commenters stated that the guidance provided in BL-060 was 
adequate and that it provided the flexibility to adopt best practices. 
Commenters emphasized that BL-060 provided needed flexibility not 
apparent in the rule for institutions of various sizes and with 
different compensation programs. Commenters suggested that we follow 
other financial regulators and require the adoption of policies and use 
our examination authority to verify compliance with the bookletter.
    The responsibilities required by this rulemaking are derived from 
key factors identified in BL-060 and, therefore, we do not believe the 
requirements in the rule are more rigid than the BL-060 guidance. For 
example, a key factor discussed in BL-060 is that a compensation 
committee should be able to fully analyze and justify the long-term 
liability to the institution in developing compensation packages and 
evaluate that incentive programs are based on long-term financial 
performance and are consistent with prudent risk-taking and produce a 
safe and sound outcome. Also, another key factor discussed is the 
committee's responsibility to ensure that retirement benefits are 
appropriate and not excessive. Further, we believe it is prudent to 
ensure these minimum responsibilities provided as informal guidance in 
BL-060 are incorporated into our regulations and routinely considered 
by the compensation committee when performing its duties. However, in 
consideration of the comments received, the final rule clarifies that 
compensation committees must document that the minimum responsibilities 
identified in the rule were considered when performing its duties.
    Commenters discussed the perceived potential impact on the use of 
short- and long-term compensation programs under the rule. One 
commenter also questioned if the rule intended to require the use of 
claw-back provisions

[[Page 60589]]

to address risks. We did not intend the compensation committee 
responsibilities to limit or otherwise constrain the use of short- and 
long-term incentive programs, if those programs are determined 
appropriate by the committee, and have clarified the rule accordingly. 
In addition, we did not intend that the rule require or prohibit the 
use of claw-back provisions by the compensation committee. The rule, 
instead, seeks to ensure the committee considers the implications of 
incentive-based compensation programs, including providing safeguards 
that the programs are not unduly influenced by short-term performance 
expectations. The rule further clarifies that when conducting a risk 
assessment of compensation plans, the assessment is for undue risks. We 
recognize that some risks are inherent in any compensation program and 
we did not intend to require elimination of all risks.
    We continue to promote the cooperative structure of governance and 
believe the compensation committee itself should determine that 
incentive-based programs and payments:
     Are reasonable and proportionate to the services 
performed;
     Support the institution's business strategy for achieving 
stated goals and are in accord with the institution's human capital and 
marketing plans;
     Ensure that the institution's compensation practices 
support the System's basic mission to serve all types of creditworthy 
agricultural producers; and
     Are structured so payout schedules consider the potential 
for future losses or undue risks to the institution.
    We also clarify in the rule that existing regulations require that 
all compensation committees are to maintain records of meeting minutes. 
Documentation ensures that the committee's actions are memorialized, 
provides insight for future deliberations, and facilitates examination 
activities. In addition, the responsibilities of compensation 
committees at associations, banks, and the Funding Corporation are 
similar. Therefore, we are making a clarifying change in the final rule 
at Sec.  620.31(b) to reflect this.
    Commenters agreed that the compensation committee plays a key role 
in ensuring compensation programs are appropriate and do not jeopardize 
the institution's operations. However, these commenters stated that the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(Dodd-Frank Act) \21\ did not place similar risk management 
responsibilities on the compensation committees of smaller publicly 
traded companies and, therefore, the FCA should not do so. Commenters 
requested that compensation committees of smaller institutions be 
exempt from complying with the regulation. We did not propose an 
exemption to the compensation committee requirements based on the size 
of the institution and do not agree with the requested exemption. Risk 
management is essential to the overall safety and soundness of each 
System institution and we continue to believe that the proposed 
compensation committee requirements are appropriate for all 
institutions regardless of asset size. The final rule does not provide 
for an exemption for smaller institutions.
---------------------------------------------------------------------------

    \21\ Public Law 111-203, 124 Stat. 1376, (H.R. 4173), July 21, 
2010.
---------------------------------------------------------------------------

    Commenters claimed the rule would create undue costs and burdens 
for compensation committees. We believe this rule captures existing 
guidance and therefore will not cause undue additional costs and 
burdens. Commenters questioned whether the compensation committee 
should conduct a pre- or post-review of compensation plans. We would 
expect that the dynamic and sometimes complex nature of compensation 
plans require ongoing review by the committee. The rule is silent on 
when the committee should review compensation plans and allows it to 
carry out its responsibilities as it considers appropriate and 
necessary to fulfilling its stewardship role and fiduciary duties.
4. Notice to Shareholders [Sec. Sec.  620.10, 620.11, 620.15, and 
620.17]
    We proposed requiring a separate notice to shareholders of 
significant or material events occurring in intervening reporting 
periods. The notice would serve to enhance timely and transparent 
communication to institution member/owners throughout the institution's 
fiscal year. We proposed allowing institutions to distribute the 
notice:
     In direct communications with shareholders;
     Via electronic distribution (e.g., a Web site);
     By publication with circulation wide enough to be 
reasonably assured that all shareholders have timely access to the 
information; or
     In the quarterly report to shareholders.
    Also, the notice would be dated, signed and provided to the FCA at 
the same time it was distributed to shareholders.
    Commenters supported such timely notice to shareholders and 
investors on significant and material events occurring in the System. 
Other commenters stated that significant and material disclosures are 
already reported in the quarterly and annual reports and, therefore, 
additional notice is unnecessary. Also, commenters noted that the 
Federal Farm Credit Banks Funding Corporation (Funding Corporation) 
issues press releases on behalf of the System and, as such, supported 
withdrawing the requirement for additional notices. One commenter 
stated that the rule could force release of information prematurely and 
to the detriment of the institution.
    We recognize that existing quarterly and annual reports address 
material and significant disclosures of financial events. We are also 
aware that the Funding Corporation, in response to expectations of 
investors in the bond market, issues press releases for System-wide 
events. However, we proposed the notice for more than System-wide or 
financial events. We emphasized this by including a list of events that 
may require notice. Many of those events are disclosed only once a year 
in the annual report, if then. Because the notice is issued after a 
material or significant event has occurred, we do not believe issuing a 
notice is either premature or detrimental to the institution. We 
continue to believe that timely communication is important and, given 
the various means by which the institution may communicate the event, 
we do not believe an interim notice requirement is an unnecessary 
burden on institutions or that the communication will cause it to incur 
significant costs.
    We proposed a list of certain events and circumstances we believed 
might be material or significant and that, if so, should be 
communicated to shareholders in a timely manner. Commenters expressed 
reservations about the materiality or significance of items in the list 
and remarked that the list was inflexible. Commenters responded that 
institutions should have the ability and latitude to interpret if an 
event was significant or material for reporting in a notice and 
requested that accounting principles and legal standards be used to 
determine if a notice is required. Also, several commenters suggested 
we replace the list with a provision requiring notice when determined 
necessary by the FCA. Some commenters offered specific remarks about 
the list of events themselves, stating that issuing a notice for 
personnel events of the type in the list would overstate their impact.
    In response to comments, we are not including the list of events in 
the final rule. Instead, the final rule at Sec.  620.15(a)

[[Page 60590]]

requires that the institution's board of directors develop, adopt, and 
maintain a policy for providing timely notices to shareholders. In 
doing so, we believe we address comments made regarding personnel 
events listed in the proposed rule. At a minimum, the policy must:
     Identify the types of significant or material events 
affecting the institution's operations, management, etc. to be 
communicated to shareholders; \22\ and
---------------------------------------------------------------------------

    \22\ In identifying matters of importance to shareholder 
decisions, we refer institutions to the objective of section 1.1(b) 
of the Act, which encourages member-borrower participation in the 
management, control, and ownership of their institution.
---------------------------------------------------------------------------

     Discuss how the institution will determine materiality and 
significance.
    We expect the policy to provide sufficient guidance to ensure 
consistent reporting in notices of similar events. Also, the final rule 
adopts at Sec.  620.15(e) the suggestion by some commenters that the 
FCA retain the authority to require a notice when it determines there 
has been a significant or material event.
    Institutions should consider the following when identifying 
material and significant events:
     Changes to compensation, incentive, performance, or 
retirement and benefit plans;
     Changes to institution capitalization bylaws;
     Results of shareholder votes;
     Early director departures and departures of senior 
officers; \23\
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    \23\ As considered appropriate and relevant by the board, 
disclosure may or may not include the reason for the departure of a 
director prior to the end of his or her term of office or for the 
departure of a senior officer. For example, the planned departure of 
a senior officer may not rise to the level of materiality or 
significance to require notice if the departure was part of an 
institution's established succession plan.
---------------------------------------------------------------------------

     Letters of intent to merge;
     A change in the external auditor engaged to audit the 
institution's financial statements;
     A change in an external party engaged to perform internal 
audit functions, if the change was due to a disagreement with the party 
over the results or findings from the work performed; and
     Reportable FCA supervisory and enforcement actions.
    The final rule requires that, at a minimum, this part of the policy 
include the events that would be covered under the existing definitions 
for ``material'' and ``significant'' contained in Sec.  620.1. One 
commenter stated the definitions of ``material'' and ``significant'' in 
Sec.  620.1(h) and (q) are vague and subjective. We do not agree that 
the Sec.  620.1 definitions are vague or overly subjective. The 
definitions have been used by institutions for years in preparing 
financial reports and are intended to provide some flexibility and 
discretion in identifying material and significant events. This 
flexibility is necessary to accommodate variations in institution 
operations.
    Commenters expressed dislike for the requirement to place the 
notice on the first page of the quarterly report, if the quarterly 
report is used to communicate the event. They noted that the disclosure 
should be placed in the report where required by GAAP. The rule does 
not necessarily require that the notice be reported on the first page 
of the quarterly report. However, the rule requires that the notice be 
included at the beginning (i.e., in the opening section) of the 
quarterly report, that it be conspicuous, and that it not be included 
in a footnote. We continue to believe such events should be prominently 
disclosed and not marginalized. We clarify that if GAAP prescribes 
where a particular disclosure should be reported, then prominent 
disclosure would be made as required by this regulation, but with 
reference to the detailed GAAP disclosure. The final rule retains the 
requirement that, if the quarterly report is used to issue the notice, 
the notice must be prominently disclosed at the beginning of the 
report.
    The rule requires that the notice be issued as soon as possible, 
but not later than 90 days after the event occurs. Commenters requested 
clarification when using the quarterly report for notice if the event 
occurred soon after a quarterly report is issued, requesting that the 
90-day time limit be eliminated in those cases. One commenter requested 
that the notice be issued solely in the institution's quarterly report 
(or annual report for fourth quarterly period reporting). Others asked 
to use an institution's Web site for these notices.
    As previously discussed, the proposed rule provided that the notice 
could be issued by posting to the institution's Web site,\24\ by 
reporting in the quarterly report, or by any means with wide enough 
circulation to reasonably assure that all institution shareholders have 
access to the information. Given the variety of means available to 
issue the notice, we are not persuaded that any delay in issuing the 
notice, including for convenience, is warranted. We continue to believe 
that communication of significant or material events is important to 
shareholders and should be communicated in a timely manner, especially 
given the various means by which the institution may communicate the 
event. We do not believe that a 90-day requirement is an unnecessary 
burden on institutions or that communication will cause it to incur 
significant costs.\25\
---------------------------------------------------------------------------

    \24\ This includes an association using a funding bank's Web 
site, if it routinely uses its funding bank's Web site to 
communicate with its shareholders.
    \25\ Unless our rules specify ``business days'', any use of the 
term ``days'' means calendar days. The final rule states the notice 
is due within 90 days, so that would be 90 calendar days, not 
business days as some commenters stated.
---------------------------------------------------------------------------

    Also, we do not believe that limiting distribution of the notice to 
the quarterly report is sufficient. Quarterly reports traditionally 
only update financial information in the annual report. As explained, 
the purpose of the notice is timely communication of material and 
significant events occurring between annual reporting periods and which 
may not be financial events. We believe that using other means to issue 
the notice, such as a Web site posting, facilitates access to the 
notice by shareholders and investors. Therefore, if the event occurs a 
few days after the quarterly report is issued, institutions may have to 
use an alternative distribution method for the notice.
    The proposed rule included a statement in Sec.  620.11(d) that 
notices made part of a quarterly report must comply with both quarterly 
reporting requirements and the notice requirements of Sec.  620.15. 
Comments were made regarding the potential complications of satisfying 
GAAP reporting requirements and the notice requirements. We included 
this statement in Sec.  620.11(d) to clarify that the notice, no matter 
how it is communicated to the shareholders, must satisfy the provisions 
of Sec.  620.15. Since the requirement raised questions on compliance 
with GAAP for the quarterly report, the final rule removes the 
statement from Sec.  620.11(d) and places it in Sec.  620.15(b)(2). We 
believe this change clarifies that the notice does not affect GAAP and 
other quarterly reporting requirements contained in Sec.  620.11. We 
made technical changes to Sec.  620.15 in the final rule to accommodate 
these changes.
    We received few comments on the proposed consolidation into Sec.  
620.17 of the existing requirements for special notices on permanent 
capital. Those few comments received questioned the need for the 
consolidation, which we feel was adequately explained in the proposed 
rule preamble. The consolidation was a technical change and not 
substantive, designed to enhance the clarity and use

[[Page 60591]]

of the rule. Therefore, we finalize the consolidation of our rules on 
special notices for permanent capital into Sec.  620.17 as proposed.
5. Non-binding, Advisory Vote by Shareholders on Senior Officer 
Compensation [Sec. Sec.  611.100, 620.5(a)(11) and 630.20(i); new 
Sec. Sec.  611.360, 611.410 and 620.6(c)(6)]
    We proposed requiring Farm Credit banks and associations provide 
shareholders the opportunity to cast a non-binding, advisory vote on 
senior officer compensation. The vote would be required if either the 
CEO's or the aggregate of all other senior officers' compensation, as 
disclosed in the Compensation Table, increased or decreased by 15 
percent or more from the previous reporting period. We also proposed 
authority for association shareholders to petition for the vote at any 
time.
    All commenters strongly objected to the non-binding advisory vote 
and asked that it be withdrawn. Most commenters claimed we were 
applying the Dodd-Frank Act to the System, a law they state ``Congress 
specifically chose not to apply to the System.'' Commenters added that 
System institutions do not compensate staff with stock or stock 
options. They stated that compensation in the form of stock options led 
to the financial crisis of 2008 for commercial lenders and was a key 
motivator for Congress when adding section 951 of the Dodd-Frank Act. 
Section 951 of the Dodd-Frank Act requires, in part, that publicly 
traded companies hold separate non-binding shareholder advisory votes 
on the compensation of executives at least every 3 years. Section 951 
also provides that shareholders must vote at least every 6 years on 
whether to hold the advisory votes on compensation every 1, 2 or 3 
years.
    Most commenters expressed a view that advisory votes do not further 
cooperative principles or promote the safety and soundness of the 
System and would have a negative impact on the cooperative business 
model. Several comments focused on the member-controlled board of 
directors, citing that members can elect or remove directors. 
Commenters also questioned whether holding an advisory vote was a 
``best practice'' for cooperative institutions. Commenters stated that 
the vote was a referendum on an institution's board decisions and would 
result in undermining the discretion and decision-making authority of 
the board and the compensation committee. Some added that advisory 
votes would replace existing effective ``engagement mechanisms'' and 
dilute shareholders' messages to directors. Still others stated that it 
is an unfair expectation of the membership, going so far as to state 
that members did not want a vote on their institution's compensation 
practices. One commenter added that an advisory vote would not reflect 
risk assessment or market practices. Commenters asserted that each 
shareholder would have a personal view on what is reasonable 
compensation, making it difficult for the institution to use the 
``feedback'' from the vote or translate it into a practical 
recommendation to improve compensation practices. Commenters added that 
even with enhanced compensation disclosures, shareholders would not 
have the same level of detailed information or access to confidential 
information used by the board in reaching compensation decisions. They 
asserted that the votes would have to be unanimous to avoid shareholder 
dissatisfaction or lawsuits. Commenters stated that advisory votes 
could dilute voter participation in other matters, including director 
elections, and that shareholders might view the cost of conducting 
advisory votes as a misuse of funds. One commenter estimated the cost 
of a single advisory vote at $30,000. Commenters also pointed out the 
potential for little or no shareholder response on advisory votes, 
making the effort a waste of resources.
    We are not withdrawing the requirement for a non-binding advisory 
vote on compensation, but are including this provision in the final 
rule with certain changes. Further, in the proposed rule preamble, we 
did not reference the Dodd-Frank Act because its provisions on 
compensation practices and disclosures do not apply to the System. 
While the Dodd-Frank Act introduced the advisory, non-binding vote to 
the corporate community at large, it does not have exclusive 
jurisdiction over the use of such a vote. In addition, the Dodd-Frank 
Act did not prohibit the use of advisory voting by the System, nor does 
it prevent us from regulating the use of non-binding, advisory votes. 
As stated in FCA-PS-59, our rulemaking efforts seek to further the 
public policy mission of the System, which includes promoting 
shareholder involvement in the management, control, and use of the 
System. As with other laws not directly involving the System, we 
consider the goals and objectives of those laws for applicability to 
the System. The Dodd-Frank Act strives, in part, to address 
compensation excesses by increasing director accountability and 
shareholder involvement. It is true that the System did not play a role 
in the activities that led to the 2008 financial crisis, which in turn 
led to passage of the Dodd-Frank Act. However, as a GSE operating as 
cooperatives, System institutions should continually strive to operate 
under high standards. Each institution must be accountable to its 
shareholders and should embrace alternative venues for shareholder 
involvement in the management and control of the institution.
    We explained in the proposed rule preamble that the non-binding 
advisory vote was another tool for institutions to use in the 
continuous effort to operate under high standards and to further the 
System's public policy mission, as well as encourage member-owner 
participation. As such, we believe drawing the shareholders' attention 
to a matter through advisory voting is relevant to the core principle 
of System institutions being member-owned. We do not envision the vote 
requiring shareholders to have access to extensive or confidential 
compensation information. We believe institutions can provide 
shareholders with the necessary information in order that shareholders 
may judge whether compensation or compensation changes are justified 
and acceptable. The board may then use that feedback in making 
compensation decisions. Therefore, the feedback should enhance, rather 
than undermine, board decision making. We also believe that the cost of 
conducting the vote will not be burdensome since the vote is required 
only if a material increase in compensation occurs or if the voting 
shareholders petition for the vote.
    Several commenters also raised the issue of fiduciary duty, 
explaining an advisory vote is not a good exercise of prudent business 
judgment. Commenters stated advisory votes also undermine the 
responsibility and accountability of the compensation committee. We do 
not agree with these comments and continue to believe that advisory 
votes are consistent with a board's fiduciary duties of care, loyalty, 
and obedience, which require directors to investigate, review, monitor, 
and take corrective action when necessary. Boards are often presented 
with conflicting information and have to weigh the information and its 
source before making decisions. The result of prior advisory votes is 
information that should be considered by the board when reviewing or 
developing compensation plans. As a result, fiduciary duties require 
consideration of, not strict adherence to, the advisory vote results. 
As such, we see no fiduciary interference in holding advisory votes. 
Instead, we believe the votes advance

[[Page 60592]]

the special fiduciary duty of cooperative boards to be accountable to 
shareholders as well as local, State, and Federal government 
authorities.
    Commenters remarked that section 951 of the Dodd-Frank Act does not 
reference increasing shareholder participation, the reason given in the 
FCA proposed rule for an advisory vote. Commenters challenged our 
statutory basis for the advisory vote, arguing that section 1.1(b) of 
the Act does not authorize the FCA to regulate communications between 
shareholders and their institutions. Other commenters added that the 
FCA has not shown there are existing deficiencies in shareholder 
communication or participation to support the requirement.
    As we stated earlier, we are not limited to issuing regulations 
only when there is a deficiency in institution operations. Section 
1.1(b) of the Act states that the objective of the Act is to ``continue 
to encourage farmer- and rancher-borrowers participation in the 
management, control, and ownership of a permanent system of credit for 
agriculture.'' \26\ Further, Congress reiterated in the 1992 Act the 
need for shareholder awareness and involvement in the compensation 
practices of their institutions. Specifically, the 1992 Act states one 
purpose of enhanced compensation disclosures is to assist shareholders 
in managing their cooperatives. We do not believe an advisory vote 
regulates communications, but rather provides another tool for 
shareholders to participate in the management of their institutions. We 
recognize that the election of the board of directors by members has 
been the primary means for member participation in the management of 
their institution. However, we do not believe that it need be the only 
tool for shareholder participation.
---------------------------------------------------------------------------

    \26\ 12 U.S.C. 2001.
---------------------------------------------------------------------------

    Other commenters suggested we require a compensation expert on the 
board of directors or require disclosure of the reason for compensation 
changes instead of a vote. For the reasons stated above, we continue to 
believe an advisory vote on compensation is valuable, notwithstanding 
these suggestions. We encourage institutions to consider these 
suggestions for their operations, but are not requiring such at this 
time.
    A few commenters asked why the vote would be non-binding and 
limited to senior officer compensation if the objective is to increase 
member participation. We believe that a non-binding vote, as opposed to 
a binding vote, will provide meaningful feedback to the board of 
directors while also allowing the board to use that feedback in the 
manner it considers most appropriate. The nature of a binding vote 
would require a definite action by the board. Also, we require the vote 
solely on the CEO and other senior officer compensation because it is 
those employees who make the decisions, or provide information for the 
board to make decisions, on institution policy, strategic direction and 
operations. However, institutions are not prohibited from seeking 
shareholder input on compensation in ways other than holding a non-
binding vote nor does it limit the shareholder votes solely to CEO and 
other senior officer compensation. We encourage institutions to expand 
shareholder votes as they consider appropriate.
    Other commenters pointed out that several financial regulators 
chose not to extend a Dodd-Frank Act type of mandatory advisory vote to 
their regulated entities not already subject to it. We also chose not 
to impose the Dodd-Frank Act style advisory vote on System 
institutions. Instead, we determined that material increases in 
compensation or the desire of the voting shareholders should determine 
if a vote is required.
    One commenter suggested that if the vote is required it should be 
based on cash compensation instead of all compensation. The commenter 
explained that it would be unfair to have a vote on compensation 
changes that are beyond the control of the institution or employee, 
such as changes in investment values of retirement plans. We do not 
agree that an advisory vote on compensation should be limited to cash 
outlays. Shareholders should be able to express support or disagreement 
with all components of compensation. However, we agree that changes in 
pension value may be unrelated to compensation earned or paid and 
should not be included in the calculation of the increase. The final 
rule at Sec.  611.410(b)(1) explains that the calculation of 
compensation increases does not include changes in pension value. We 
also clarify that the compensation subject to the vote is that reported 
under the provisions of Sec.  620.6(c)(3).
a. Advisory Votes Based on Increase in Compensation
    A few commenters stated that 15 percent is an arbitrary threshold. 
We do not agree. We selected 15 percent as a threshold based on our 
review of reported compensation changes within the System that looked 
at recent percentage changes to bank and association CEOs' and other 
senior officers' compensation. We chose a threshold that was equal to 
or exceeded the olympic average \27\ of percent changes for the 3 years 
observed to reflect what may be, in a given year, a significant 
increase. The olympic average indicated that 15 percent was a material 
increase, an unusual and infrequent occurrence and, therefore, an 
advisory vote triggered by the 15-percent increase should not be a 
recurring burden on System institutions.
---------------------------------------------------------------------------

    \27\ An Olympic average is the average removing the high and low 
values.
---------------------------------------------------------------------------

    Still others suggested an advisory vote triggered by a percentage 
change in reported compensation could result in a vote on the 
institution's performance when most of the compensation change is due 
to incentive pay programs. We agree with the comments that an advisory 
vote on compensation changes may be viewed as providing shareholder 
feedback on the overall performance of the institution. As we have 
explained, the compensation committee should be reviewing incentive and 
performance-based compensation programs to ensure they support the 
overall positive performance of the institution and discuss the 
relationship between compensation and performance in accordance with 
new Sec.  620.6(c)(5).
    Commenters expressed concern with the burden and complexity 
involved in holding advisory votes based on compensation changes of 15 
percent or more for the aggregate group. Some explained the inclusion 
of highly compensated employees in the aggregate group could lead to a 
15-percent overall increase, and therefore a vote, when there was no 
corresponding change in senior officer pay. We agree that including 
highly compensated employees in the 15-percent calculation for the 
aggregate group may unnecessarily trigger a vote on all senior officer 
compensation included in the aggregate amount. We did not intend to 
trigger a vote strictly due to changes in pay from commission 
activities for highly compensated employees. We recognize incentive pay 
for increased lending and related services activities may place 
employees who are not involved in the institution's decision-making 
processes in the aggregate group. The final rule at Sec.  611.410(b)(2) 
provides that the compensation of highly compensated employees, who are 
not senior officers, may be removed from the aggregate senior officer 
compensation before calculating compensation increases to determine if

[[Page 60593]]

an advisory vote is required. The rule also clarifies that a separate 
vote is held if the reported compensation for the CEO, individually, or 
other senior officers, in the aggregate, as defined in Sec.  619.9310, 
meets or exceeds 15 percent from the previous fiscal year. That is, 
compensation increases for the CEO is subject to its own advisory vote, 
notwithstanding what occurs to the compensation of the aggregate group.
    When proposing the advisory vote on compensation, we used the CEO 
and aggregate group because that data is disclosed in the Compensation 
Table. The final rule does not require the vote on senior officers in 
the aggregate to include highly compensated employees whose 
compensation is reported in the aggregate group but who are not 
considered senior officers. Therefore, if these employees' compensation 
is reported in the aggregate group, institutions should discuss in the 
voting material that the vote is solely on the compensation increase of 
senior officers (excluding the CEO) and not the compensation of the 
entire aggregate group as may be disclosed in the Compensation Table.
    Institutions should also ensure the voting information provided to 
shareholders is meaningful and relevant and facilitates the 
shareholder's decision. In this rulemaking, we did not propose that 
senior officer compensation, excluding CEO compensation, be disclosed 
in the Compensation Table by individual. However, institutions may make 
such individual disclosures without being in conflict with our 
regulations. We may reconsider the appropriateness of aggregate 
reporting in a future rulemaking, but currently have retained our 
aggregate reporting requirements. We emphasize the importance of 
providing complete and clear information to shareholders on senior 
officer compensation. Transparent disclosure allows them to make 
informed decisions on compensation.
    One commenter noted that requiring an advisory vote due to a 15-
percent threshold change may have the unintended consequence of causing 
compensation committees to discontinue or significantly limit the use 
of performance-based incentives as part of executive compensation plans 
in order to avoid a vote. Other commenters stated that the 15-percent 
threshold may actually lead to inflation of executive compensation over 
time, as well as compensation plans which are less impacted by overall 
association performance. They noted that the board could elect to shift 
a greater share of total compensation from ``at-risk'' variable 
performance to base pay in order to avoid triggering a vote.
    Common law fiduciary duties prohibit directors from seeking to 
avoid compliance with our rules. The compensation committee has final 
authority over the compensation plans and practices of its 
institutions. Also, its responsibilities include those discussed in our 
rules, including the enhancements made in this rulemaking. Our rules 
require that:
     Compensation committees determine and document the 
performance of its duties related to incentive-based compensation 
programs;
     Programs are reasonable and proportionate to the services 
performed;
     Payout schedules consider the potential for future losses 
or undue risks to the institution; and
     Programs support the institution's long-term business 
strategy, as well as promote safe and sound business practices.
    Also, our rules require compensation committees to act responsibly 
and in the best interest of the institution when making compensation 
decisions. We remind compensation committees of their duty to the 
safety and soundness of the institution. Further, manipulation of 
performance-based incentives solely for the purpose of avoiding a vote 
would be difficult to justify upon examination by the FCA.
    A few commenters stated that CEO compensation increases may easily 
exceed the 15-percent threshold, especially when there is a change in 
the CEO during the reporting year. Section 611.410(b)(3) provides that 
institutions will not be required to hold an advisory vote when 
compensation increases 15 percent or more and results from either a 
change in personnel or an increase in the number of senior officer 
positions included in the aggregate group. Other commenters questioned 
the value of holding the vote when compensation decreased. We agree 
with the comments that a vote on decreases in compensation is 
unnecessary and we are not finalizing that requirement.
b. Advisory Votes Based on Petitions
    We proposed that associations hold advisory votes if 5 percent of 
the institution's voting shareholders petition for the vote. One 
commenter objected to the petition component of the rule explaining 
that, without a link between the authority to petition and impropriety 
in compensation practices, a petition could be initiated at-will and by 
a low percentage of shareholders, creating a nuisance to the 
institution. Commenters suggested that institution bylaws, which 
provide for shareholder petitions for special meetings, are sufficient 
to address any compensation concerns. We do not agree that a 
shareholder advisory vote resulting from a petition is either improper 
or a nuisance. Institutions have a duty to provide shareholders 
opportunities to voice concerns and petitioning for advisory votes is 
such an opportunity.
    Commenters noted that institutions currently employ ``engagement 
mechanisms'' by which shareholders may express their opinions to the 
board. Those mechanisms are generally structured or planned by the 
institution's management. In contrast, petition authority gives 
shareholders the ability to initiate the process and express their 
opinion on compensation through an advisory vote. Also, in response to 
other matters, commenters noted that most institution bylaws provide 
petition authority to shareholders to call a special meeting. While we 
believe institutions recognize the value of shareholder-controlled 
engagement at their cooperatives, commenters did not discuss the 
percentage of shareholder signatures required to petition under these 
authorities. Percentage requirements may vary among institutions and, 
in some cases, may even exceed average voter turnout. Therefore, we 
believe a regulatory provision on shareholder petition authority for an 
advisory vote on compensation is a more effective mechanism for 
allowing shareholders to express their opinion, if they so desire.
    The final rule at Sec.  611.410(c) retains the requirement that 
associations hold an advisory vote if petitioned by 5 percent of their 
voting shareholders. Since the final rule does not require highly 
compensated employees who are not senior officers to be included in the 
calculation of the 15-percent increase or to be subject to the vote, 
the final rule makes a corresponding change to the petition provision 
for advisory votes.
c. Advisory Voting Procedures
    Commenters requested guidance on when advisory votes are held, 
explaining there appears to be several opportunities for a vote. They 
remarked that it is unclear if compensation committees are to delay 
work until the receipt of advisory vote results. One commenter 
specifically suggested that votes be tied to annual reports to limit 
the vote to once a year. Another commenter asked if a record date of 
shareholders eligible to vote would be required for advisory votes as 
it is for director elections. One commenter asked how to conduct the 
votes, stating

[[Page 60594]]

their institution only holds in-person voting.
    In Sec.  611.360 of the final rule, we clarify that institutions 
are expected to have policies and procedures to implement advisory 
voting. When we proposed the rule, we envisioned the advisory vote 
being held in conjunction with the annual meeting or director 
elections, absent a shareholder petition for the vote. This process 
would reduce costs and allow the use of the same stockholder record 
list for all voting activities. We also envisioned that shareholders 
would vote ``yes'' or ``no'' on CEO and other senior officer 
compensation changes. Shareholders would base their vote on 
compensation disclosures provided by the institution or through 
discussions with the board. However, we did not propose regulations 
limiting the vote in this manner, nor does the final rule contain any.
    The final rule provides institutions with the flexibility to 
determine when and how advisory votes occur. The final rule requires 
institutions to address such matters by adopting and maintaining 
written policies and procedures. However, the final rule includes a 
requirement in Sec.  611.360(a)(1)(i) that an advisory vote on 
compensation triggered because of a 15-percent increase in compensation 
from the previous fiscal period must occur within 12 months after the 
fiscal period in which the increase occurred. This timeframe allows the 
institution to provide for the vote at annual meetings or in 
conjunction with director elections, thereby reducing the cost to the 
institution. Also, it ensures that results of the vote are available 
for disclosure in the next annual report.
    The final rule at Sec.  611.360(a)(1)(ii) makes clear that the 
institution's policies and procedures must identify if votes will be 
conducted in-person, by proxy, or by mail. Institutions may choose any 
combination of these balloting methods under the final rule. While not 
addressed in the regulatory text, we expect compensation committees or 
the board to document how it used the vote results and its reasoning. 
We also expect institutions to follow normal voting procedures by 
setting a record date list of voting shareholders.
    Commenters stated that the subject matters of the advisory vote are 
not specified in the rule, expressing concern at opening advisory votes 
to more than compensation matters. One commenter had no objection to 
advisory votes covering more than compensation, and that advisory votes 
should be determined by policies at each institution, including the 
subject, timing, and manner of the advisory vote. Another commenter 
objected to requiring policies on advisory votes of any kind. Since the 
rule only requires an advisory vote on senior officer compensation, the 
final rule removes the proposed requirement to identify subject matters 
of advisory votes. Likewise, the final rule revises the definition of 
advisory votes at Sec.  611.100(a) to remove the reference to 
compensation practices.
    One commenter objected to providing advisory votes at banks on a 
one-member, one-vote basis instead of allowing weighted and cumulative 
voting. The commenter asserted that giving equal voice to a Farm Credit 
bank's shareholders is contrary to cooperative principles. Conversely, 
a few commenters expressed concern that one bank shareholder could 
control the vote's ``message'' sent to the funding bank if weighted 
voting was used. We do not believe that requiring non-binding, advisory 
votes be cast on a one-member, one-vote basis is contrary to 
cooperative principles. We proposed that all advisory votes be cast on 
a one-member, one-vote basis, with no weighted or cumulative voting 
allowed. This provision ensures that all bank shareholders, regardless 
of asset size or the size of membership, have an equal voice on the 
compensation matter. We finalize in Sec.  611.360(c) the requirement 
that advisory votes be cast on a one-member, one-vote basis.
    A few commenters asserted that an advisory vote would be harmful to 
the lender-borrower structure of the System. They stated that giving 
members direct influence over the compensation of the managers 
administering member loans was inappropriate. Some commenters stated 
that institution management could take retribution against shareholders 
if the vote resulted in a decrease in pay. The rule at Sec.  611.360(b) 
requires all advisory votes to be treated under the confidentiality and 
security in voting rules at Sec.  611.340. The confidentiality of the 
vote resolves many of the concerns raised, including those questioning 
the likelihood of retaliation, undue influence, or improper lender-
borrower actions. Applying the confidentiality voting provisions of 
Sec.  611.340 to advisory votes ensures that only the results of the 
vote will be reviewed by the board and management, not the identity of 
the voter. Further, existing conflicts of interest rules prohibit 
directors, officers, and employees from inappropriately seeking to 
influence votes or retaliate against the voter.
    Comments regarding the funding bank relationship raised the concern 
of retaliation, asserting that bank senior officers would not treat 
member-associations fairly if those same associations voted on their 
compensation. We believe that associations face this same 
accountability to member shareholders and this accountability is a core 
cooperative principle. We continue to believe confidential advisory 
votes, cast using a one-member one-vote scheme, provide accountability 
to the member-owners, while protecting members from retaliatory 
actions.
d. Reporting and Disclosure of Advisory Votes
    Commenters requested clarification regarding the timing of 
disclosures on the results of advisory votes. Another commenter asked 
if the disclosure requirement included the cost of conducting the 
advisory vote. The rule provides flexibility to the institution in that 
it does not require and does not prohibit disclosure of the cost of the 
vote. The final rule at Sec.  611.360(d) clarifies that reporting 
advisory votes is required only if an advisory vote was held during the 
fiscal period covered by the annual report. Also, reporting of advisory 
votes may be required in accordance with policies adopted by the board 
to comply with the new Sec.  620.15 disclosure requirements for notices 
to shareholders. Institution boards should consider if the results of 
the vote would be a material or significant event that would require 
reporting to shareholders in a Sec.  620.15 notice.
    To facilitate clarity, the final rule removes redundancies in the 
disclosure and reporting requirements for advisory votes. The final 
rule consolidates the disclosure of advisory votes in the annual report 
into Sec.  620.5(a)(11). The rule also clarifies that disclosures are 
required only if advisory votes are held during the reporting period. 
Those disclosures must include the types and results of the votes, and 
if the vote occurred due to a petition request. The rule retains the 
requirement to disclose to shareholders their authority to petition for 
an advisory vote in Sec.  620.6(c)(6), but requires a cross-reference 
to the disclosures made under Sec.  620.5(a)(11), if any. The rule 
finalizes as proposed the advisory vote disclosure requirements in 
Sec.  630.20 for the System-wide report to investors.
6. Disclosure of Supplemental Retirement Plans to Employees [Sec.  
620.5(e)]
    In new Sec.  620.5(e)(4), we proposed requiring disclosures of an 
institution's

[[Page 60595]]

obligations and other information for SRPs provided to all employees, 
excluding the CEO and other senior officers whose benefits would be 
reported in the Pension Benefits Table. The proposed disclosures were 
to include a description of the plans, the funded and unfunded 
obligations of the plans, and the vested and unvested dollar amounts of 
the plans.
    Commenters expressed support for the requirement to report funded 
and unfunded amounts of SRP liabilities, but requested that we not 
require the disclosure of vested and unvested amounts for SERPs and 
SRPs citing GAAP considerations. Other commenters explained that GAAP 
only requires reporting of the present value of earned benefits, as of 
the reporting date. These commenters explained that the proposed 
requirement might result in reporting potential benefits, a speculative 
process that could only harm shareholders' understanding and trust of 
the disclosure. Some commenters stated support for reporting vested and 
unvested amounts in Sec.  620.5(e)(4) as long as it was done in total 
and aggregated for all plans.
    In finalizing the rule, we revised this section to be consistent 
with the changes we are making to the reporting of SERPs. The final 
rule on SRP disclosures allows aggregate reporting for all SRPs, 
including SERPs provided to senior officers and disclosed in the 
Pension Benefits Table. With this change, shareholders will be able to 
compare the total amount(s) reported in Sec.  620.5(e)(4) with the data 
reported in the Pension Benefit Table, enabling shareholders to 
identify the proportionate liability of SRPs and SERPs for the CEO and 
aggregate group. The SRP disclosures must include the name(s) of the 
plan(s), present value of accumulated benefits, funded and unfunded 
obligations, and payments made during the year.
    A few commenters asked how to determine the ``funded'' amount for 
Sec.  620.5(e)(4), asking if the amount was based on the entire plan, 
the Rabbi Trust supporting the SERP or something else. In discussing 
such plans, the institution should include a discussion of funding from 
whatever source and any other disclosures that the institution believes 
would be appropriate in order to provide clarity and facilitate an 
understanding of the information presented.
    We are finalizing the requirement to disclose off-balance sheet 
commitments, such as benefits earned but not yet vested. The 
requirement is located in this section instead of the proposed 
requirement to disclose it with the Pension Benefits Table in 
conformance with comments received.
7. Miscellaneous [Sec. Sec.  611.330(c), 611.400, 620.2(c) & (d), 
620.4(c), 620.10(c) and 620.11]
    In the process of consolidating provisions, some regulatory 
language was proposed to be changed to remove redundancy and enhance 
clarity. We received no comments on these miscellaneous technical 
changes and, except for Sec.  620.2(c), final those provisions as 
proposed. In Sec.  620.2(c) we proposed clarifying the language 
regarding the electronic delivery of reports to shareholders. We 
received no comments on the proposed clarification, but we are making 
grammatical corrections to the language in the final rule. The final 
language continues to state that electronic distribution of reports may 
only occur with shareholder consent and that the provision applies only 
to those reports individually sent to shareholders, not all reports.

C. Compliance Date

    All provisions of this rule require compliance on the effective 
date except the provision of Sec.  611.410(b) requiring advisory votes 
for increases in senior officer compensation of 15 percent or more. 
Advisory votes on increases of 15 percent or more in CEO or the 
aggregate of other senior officers' compensation are not required until 
2014. We believe delaying compliance minimizes the potential for 
variations in implementation of the vote by establishing the 
compensation reported in the 2012 annual report as the ``base line'' 
from which initial compensation increases are measured. Therefore, an 
advisory vote would be required in 2014 if the CEO's or other senior 
officers' compensation increased by 15 percent or more in fiscal 2013 
compared to fiscal 2012. Results of the advisory vote on increases in 
compensation would then be disclosed in the 2014 annual report and 
possibly in an interim notice under Sec.  620.15.
    We are not delaying compliance in holding advisory votes resulting 
from shareholder petitions. Petitions for advisory votes are not tied 
to a specific report or disclosure, so establishment of a baseline is 
unnecessary. Further, shareholders can currently petition their 
institution for special elections or special meetings. Policies and 
procedures are in place at institutions to facilitate these petitions. 
This familiarity with petition procedures also negates a need for 
delayed compliance.

IV. 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 final 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 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 630

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

    For the reasons stated in the preamble, parts 611, 612, 619, 620, 
and 630 of chapter VI, title 12 of the Code of Federal Regulations are 
amended as follows:

PART 611--ORGANIZATION

0
1. The authority citation for part 611 is revised to read as follows:

    Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.13, 2.0, 2.1, 2.2, 2.10, 
2.11, 2.12, 3.0, 3.1, 3.2, 3.21, 4.12, 4.12A, 4.15, 4.20, 4.21, 5.9, 
5.17, 6.9, 6.26, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 
2002, 2011, 2012, 2013, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 
2121, 2122, 2123, 2142, 2183, 2184, 2203, 2208, 2209, 2243, 2252, 
2278a-9, 2278b-6, 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.


0
2. Section 611.100 is amended by:
0
a. Redesignating paragraphs (a) through (f) as paragraphs (c) through 
(h), respectively; and
0
b. Adding new paragraphs (a) and (b) to read as follows:

[[Page 60596]]

Sec.  611.100  Definitions.

* * * * *
    (a) Advisory vote means a non-binding vote by the voting 
stockholders on certain events of the institution.
    (b) Business day means a day the institution is open for business, 
excluding the legal public holidays identified in 5 U.S.C. 6103(a).
* * * * *


Sec.  611.330  [Amended]

0
3. Section 611.330 is amended by:
0
a. Removing the reference ``Sec.  620.5(j) and (k)'' and adding in its 
place, the reference, ``Sec.  620.6(e) and (f)'' in the first sentence 
of paragraphs (b)(1) and (b)(2); and
0
b. Adding the words ``in accordance with Sec.  620.21(b) of this 
chapter'' to the end of paragraph (c)(1).

0
4. A new Sec.  611.360 is added to subpart C to read as follows:


Sec.  611.360  Advisory votes.

    (a) Each Farm Credit bank and association must establish and 
maintain written policies and procedures to implement advisory votes. 
Advisory votes must be held in accordance with the policies and 
procedures, which, at a minimum, must:
    (1) Establish the timing, manner, and notice of the vote.
    (i) Votes held due to a 15-percent or more increase in compensation 
must occur within 12 months after the fiscal year end in which the 
increase occurred.
    (ii) Votes may be conducted in-person, by proxy, by mail, or any 
combination thereof.
    (iii) If the vote will be held in connection with an annual meeting 
or director elections, notice of the advisory vote must be part of the 
Annual Meeting Information Statement, pursuant to Sec.  620.21(d) of 
this chapter.
    (2) If an association, explain the process for petitioning for an 
advisory vote. Associations must allow stockholders to petition for 
advisory votes on senior officer compensation under Sec.  611.410.
    (3) If a Farm Credit bank that allows stockholders to petition for 
advisory votes, explain the process for petitioning for an advisory 
vote.
    (b) Advisory votes are subject to the requirements of Sec.  611.340 
and the provisions of section 4.20 of the Act (12 U.S.C. 2208).
    (c) Advisory votes must be cast using a ``one-member, one-vote'' 
voting scheme and are not subject to the provisions in Sec.  615.5230 
of this chapter regarding weighted, cumulative, and other voting 
schemes.
    (d) Each Farm Credit bank and association must make the disclosures 
required by Sec.  620.5(a)(11) of this chapter for advisory votes held 
during the annual reporting period.

Subpart D--Compensation Practices of Farm Credit Banks and 
Associations

0
5. Revise the heading of subpart D to read as set forth above.


Sec.  611.400  [Amended]

0
6. Section 611.400 is amended by:
0
a. Removing the words ``Farm Credit System banks'' and adding in their 
place ``Farm Credit banks'' in paragraph (a);
0
b. Removing the words ``distribute a bookletter to all FCS banks that 
communicates'' and adding in their place the word ``communicate'' in 
the last sentence of paragraph (b).
0
c. Removing the words ``Farm Credit System bank'' and adding in their 
place ``Farm Credit bank'' in paragraph (d)(1); and

0
7. A new Sec.  611.410 is added to subpart D to read as follows:


Sec.  611.410  Advisory votes on senior officer compensation.

    (a) Farm Credit banks and associations must hold advisory votes on 
the compensation for all senior officers meeting the definition of 
Sec.  619.9310 of this chapter and the requirements of paragraphs (b) 
and (c) of this section. Stockholders must be allowed to cast an 
advisory vote on the compensation of the chief executive officer that 
is separate from the advisory vote on other senior officer 
compensation. Advisory votes on compensation must be held in accordance 
with the policies and procedures established under Sec.  611.360.
    (b) If compensation, as reported in the most recent annual report, 
for either the chief executive officer or the aggregate senior officer 
group increased 15 percent or more from the previous reporting period, 
the Farm Credit bank or association must hold an advisory vote.
    (1) All compensation reported in the Compensation Table of the 
annual report (or the annual meeting information statement), except 
changes in pension benefits value reported under Sec.  
620.6(c)(3)(iii)(D) of this chapter, must be included in the 
calculation to determine if an increase of 15 percent or more occurred 
in reported compensation amounts.
    (2) Compensation of employees reported in the Compensation Table of 
the annual report (or the annual meeting information statement) 
pursuant to Sec.  620.6(c)(2)(i) of this chapter may be excluded when 
determining if an increase of 15 percent or more occurred.
    (3) No advisory vote is required if the 15 percent or more increase 
in compensation is solely because of a change during the reporting 
period in the senior officers included in the aggregate or the chief 
executive officer.
    (c) Each association must hold an advisory vote on senior officer 
compensation when 5 percent of the voting stockholders petition for the 
vote.
    (1) Stockholders may petition for an advisory vote on the 
compensation of the chief executive officer, the aggregate senior 
officer group, or both.
    (2) Employees reported in the Compensation Table of the annual 
report (or the annual meeting information statement) pursuant to Sec.  
620.6(c)(2)(i) of this chapter may be excluded when holding a vote by 
petition.
    (3) The association must disclose the petition authority in the 
annual report to shareholders pursuant to Sec.  620.6(c)(6) of this 
chapter.

PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED 
CRIMINAL VIOLATIONS

0
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).


Sec.  612.2145  [Amended]

0
9. Section 612.2145 is amended by removing the reference ``Sec.  
620.5(k)'' and adding in its place, the reference ``Sec.  620.6 (f)'' 
in paragraph (a)(2).


Sec.  612.2155  [Amended]

0
10. Section 612.2155 is amended by removing the reference ``Sec.  
620.5(k)'' and adding in its place, the reference ``Sec.  620.6(f)'' in 
paragraph (a)(2).


Sec.  612.2165  [Amended]

0
11. Section 612.2165 is amended by removing the reference ``Sec.  
620.5'' and adding in its place ``Sec. Sec.  620.5 and 620.6'' in 
paragraph (b)(12).

PART 619--DEFINITIONS

0
12. 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.


0
13. A new Sec.  619.9335 is added to read as follows:

[[Page 60597]]

Sec.  619.9335  Supplemental retirement plan or supplemental executive 
retirement plan.

    A nonqualified retirement plan that provides benefits in addition 
to those covered by other retirement plans for all employees and funded 
in whole or part by a Farm Credit institution.

PART 620--DISCLOSURE TO SHAREHOLDERS

0
14. 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.


0
15. Section 620.2 is amended by revising the section heading and 
paragraphs (c) and (d) to read as follows:


Sec.  620.2  Preparing and filing reports.

* * * * *
    (c) The reports sent to shareholders must comply with the 
requirements of Sec.  620.3 and electronic delivery of those reports 
requires shareholder agreement.
    (d) Information in any part of a report may be incorporated by 
reference in answer or partial answer to any other item of the report, 
unless instructions for the report state otherwise.
* * * * *

0
16. Section 620.4 is amended by revising paragraph (c) to read as 
follows:


Sec.  620.4  Preparing and providing the annual report.

* * * * *
    (c) The report must contain, at a minimum, the information required 
by Sec. Sec.  620.5 and 620.6. In addition, the report must contain 
such other information as is necessary to make the required statements, 
in light of the circumstances under which they are made, not 
misleading.

0
17. Section 620.5 is amended by:
0
a. Adding new paragraphs (a)(11) and (e)(4);
0
b. Revising paragraph (h);
0
c. Removing paragraphs (i), (j), and (k); and
0
d. Redesignating existing paragraphs (l), (m), and (n) as paragraphs 
(i), (j), and (k), respectively.
    The additions and revisions read as follows:


Sec.  620.5  Contents of the annual report to shareholders.

* * * * *
    (a) * * *
    (11) Any advisory votes held during the reporting period, including 
the types and results of the votes. If an advisory vote resulted from a 
shareholder petition, the institution must also discuss the petition.
* * * * *
    (e) * * *
    (4) Describe supplemental retirement plans funded by the 
institution on behalf of senior officers and employees. The description 
for each plan must include the:
    (i) Plan name;
    (ii) Present value of accumulated benefits;
    (iii) Payments made during the reporting period;
    (iv) Funded and unfunded obligations; and
    (v) Off-balance sheet amounts, including benefits earned but not 
vested.
* * * * *
    (h) Directors and senior officers. In a separate section of the 
annual report, make the disclosures required in Sec.  620.6 of this 
part.
* * * * *

0
18. A new Sec.  620.6 is added to subpart B to read as follows:


Sec.  620.6  Disclosures in the annual report to shareholders relating 
to directors and senior officers.

    (a) General. (1) List the names of all directors and senior 
officers of the institution, indicating the position title and term of 
office of each director, and the position, title, and date each senior 
officer commenced employment in his or her current position.
    (2) Briefly describe the business experience during the past 5 
years of each director and senior officer, including each person's 
principal occupation and employment during the past 5 years.
    (3) For each director and senior officer, list any other business 
interest where the director or senior officer serves on the board of 
directors or as a senior officer. Name the position held and state the 
principal business in which the business is engaged.
    (b) Compensation of directors. Describe the arrangements under 
which directors of the institution are compensated for all services as 
a director (including total cash compensation and noncash 
compensation). Noncash compensation with an annual aggregate value of 
less than $5,000 does not have to be reported. State the total cash and 
reportable noncash compensation paid to all directors as a group during 
the last fiscal year. For the purposes of this paragraph, disclosure of 
compensation paid to and days served by directors applies to any 
director who served in that capacity at any time during the reporting 
period. If applicable, describe any exceptional circumstances 
justifying the additional director compensation as authorized by Sec.  
611.400(c) of this chapter. For each director, state:
    (1) The number of days served at board meetings;
    (2) The total number of days served in other official activities, 
including any board committee(s);
    (3) Any additional compensation paid for service on a board 
committee, naming the committee; and
    (4) The total cash and noncash compensation paid to each director 
during the last fiscal year. Reportable compensation includes cash and 
the value of noncash items provided by a third party to a director for 
services rendered by the director on behalf of the reporting Farm 
Credit institution. Noncash compensation with an annual aggregate value 
of less than $5,000 does not have to be reported.
    (c) Compensation of senior officers. Disclose the information on 
senior officer compensation and compensation plans as required by this 
paragraph. The institution must disclose the total amount of 
compensation paid to senior officers in substantially the same manner 
as the tabular form specified in the Summary Compensation Table 
(Compensation Table), located in paragraph (c)(3) of this section.
    (1) For each of the last 3 completed fiscal years, report the total 
amount of compensation paid and the amount of each component of 
compensation paid to the institution's chief executive officer (CEO), 
naming the individual. If more than one person served in the capacity 
of CEO during any given fiscal year, individual compensation 
disclosures must be provided for each CEO.
    (2) For each of the last 3 completed fiscal years, report the 
aggregate amount of compensation paid, and the components of 
compensation paid, to all senior officers as a group, stating the 
number of officers in the group without naming them.
    (i) If applicable, when any employee who is not a senior officer 
has annual compensation at a level that is among the five highest paid 
by the institution during the reporting period, include the highly 
compensated employee(s) in the aggregate number and amount of 
compensation reported in the Compensation Table.
    (ii) The report containing the aggregate compensation disclosure 
must include a statement that disclosure of information on the total 
compensation paid during the last fiscal year to any senior officer, or 
to any other employee

[[Page 60598]]

included in the aggregate, is available and will be disclosed to 
shareholders of the institution and shareholders of related 
associations (if applicable) upon request. This statement must be 
located directly beneath the Compensation Table.
    (3) The institution must complete the Compensation Table, or 
something substantially similar, according to the following 
instructions:

                                                               Summary Compensation Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Annual
---------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Deferred/
       Name of individual or number in group              Year            Salary           Bonus          perquisite         Other            Total
(a)                                                            (b)              (c)              (d)              (e)              (f)              (g)
--------------------------------------------------------------------------------------------------------------------------------------------------------
CEO...............................................            20XX                $                $                $                $                $
                                                              20XX
                                                              20XX
Aggregate No. of Senior Officers (& other highly
 compensated employees, if applicable):
    (X)...........................................            20XX
    (X)...........................................            20XX
    (X)...........................................            20XX
--------------------------------------------------------------------------------------------------------------------------------------------------------

     (i) Amounts shown as ``Salary'' (column (c)) and ``Bonus'' (column 
(d)) must reflect the dollar value of salary and bonus earned by the 
senior officer during the fiscal year. Amounts contributed during the 
fiscal year by the senior officer pursuant to a plan established under 
section 401(k) of the Internal Revenue Code, or similar plan, must be 
included in the salary column or bonus column, as appropriate. If the 
amount of salary or bonus earned during the fiscal year is not 
calculable by the time the report is prepared, the reporting 
institution must provide its best estimate of the compensation 
amount(s) and disclose that fact in a footnote to the table.
    (ii) Amounts shown as ``deferred/perquisites'' (column (e)) must 
reflect the dollar value of other annual compensation not properly 
categorized as salary or bonus, including but not limited to:
    (A) Deferred compensation earned during the fiscal year, whether or 
not paid in cash; or
    (B) Perquisites and other personal benefits, including the value of 
noncash items, unless the annual aggregate value of such perquisites is 
less than $5,000. Reportable perquisites include cash and the value of 
noncash items provided by a third party to a senior officer for 
services rendered by the officer on behalf of the reporting 
institution.
    (iii) Compensation amounts reported under the category ``Other'' 
(column (f)) must reflect the dollar value of all other compensation 
not properly reportable in any other column. Items reported in this 
column must be specifically identified and described in a footnote to 
the table. ``Other'' compensation includes, but is not limited to:
    (A) The amount paid to the senior officer pursuant to a plan or 
arrangement in connection with the resignation, retirement, or 
termination of such officer's employment with the institution.
    (B) The amount of contributions by the institution on behalf of the 
senior officer to a vested or unvested defined contribution plan unless 
the plan is made available to all employees on the same basis.
    (C) The dollar value of any tax reimbursement provided by the 
institution.
    (D) Any changes in the value of pension benefits.
    (iv) Amounts displayed under ``Total'' (column (g)) shall reflect 
the sum total of amounts reported in columns (c), (d), (e), and (f).
    (4) If the institution provides a defined benefit plan or a 
supplemental executive retirement plan (SERP) to its senior officers, 
the institution must complete the following Pension Benefits Table, or 
something substantially similar, for each plan according to the 
following instructions:

                                             Pension Benefits Table
----------------------------------------------------------------------------------------------------------------
                                        As of most recent fiscal year-end
-----------------------------------------------------------------------------------------------------------------
                                                                             Present value of    Payments made
                   Name of individual                    Years of credited     accumulated      during reporting
                                                              service            benefits            period
----------------------------------------------------------------------------------------------------------------
CEO....................................................  .................                 $                  $
Senior Officers as a Group (& other highly compensated
 employees, if applicable).
----------------------------------------------------------------------------------------------------------------

     (i) Report the credited years of service for the CEO and the 
average credited years of service for the senior officer group under 
the plan.
    (ii) Report the present value of accumulated benefits for the CEO 
and the senior officer group under the plan.
    (iii) Report payments made during the reporting period under the 
plan for the CEO and the senior officer group.
    (5) Provide a description of all compensation, retirement, 
incentive, and performance plans (plans) pursuant to which cash or 
noncash compensation was paid or distributed during the last fiscal 
year, or is proposed to be paid or distributed in the future for 
performance during the last fiscal year, to those individuals included 
in the Compensation Table. Provide the information individually for the 
chief executive officer and as a group for the senior officers. 
Information provided for

[[Page 60599]]

the senior officer group includes any highly compensated employees 
whose compensation is reported in the Compensation Table. The 
description of each plan must include, but not be limited to:
    (i) A summary of how each plan operates and who is covered by the 
plan. The summary must include the criteria used to determine amounts 
payable, including any performance formula or measure, as well as the 
time period over which the measurement of compensation will be 
determined, payment schedules, and any material amendments to the plan 
during the last fiscal year.
    (ii) The overall risk and reward structure of the plan as it 
relates to senior officers' compensation. The description must include, 
at a minimum, how each plan is compatible with and promotes the 
institution's goals and business strategy and the mission as a 
Government-sponsored enterprise.
    (iii) A discussion of the relationship between the CEO and senior 
officers' compensation to the reporting institution's overall 
performance. The disclosure must also discuss the relationship between 
the CEO's and senior officers' compensation to their performance.
    (6) Adjacent to the Compensation Table, discuss the authority of 
shareholders to petition for an advisory vote on CEO and senior officer 
compensation. Include a reference to the location in the report where 
the discussion of any advisory votes held during the reporting period 
is contained.
    (7) Associations may disclose the information required by paragraph 
(c) of this section in the Annual Meeting Information Statement (AMIS) 
pursuant to subpart E of this part. Associations exercising this option 
must include a reference in the annual report stating that the senior 
officer compensation information is included in the AMIS and that the 
AMIS is available for public inspection at the reporting association 
offices pursuant to Sec.  620.2(b).
    (d) Travel, subsistence, and other related expenses. (1) Briefly 
describe your policy addressing reimbursements for travel, subsistence, 
and other related expenses as it applies to directors and senior 
officers. The report shall include a statement that a copy of the 
policy is available to shareholders of the institution and shareholders 
of related associations (if applicable) upon request.
    (2) For each of the last 3 fiscal years, state the aggregate amount 
of reimbursement for travel, subsistence, and other related expenses 
for all directors as a group.
    (e) Transactions with senior officers and directors. (1) State the 
institution's policies, if any, on loans to and transactions with 
officers and directors of the institution.
    (2) Transactions other than loans. For each person who served as a 
senior officer or director on January 1 of the year following the 
fiscal year of which the report is filed, or at any time during the 
fiscal year just ended, describe briefly any transaction or series of 
transactions other than loans that occurred at any time since the last 
annual meeting between the institution and such person, any member of 
the immediate family of such person, or any organization with which 
such person is affiliated.
    (i) For transactions relating to the purchase or retirement of 
preferred stock issued by the institution, state the name of each 
senior officer or director that held preferred stock issued by the 
institution during the reporting period, the current amount of 
preferred stock held by the senior officer or director, the average 
dividend rate on the preferred stock currently held, and the amount of 
purchases and retirements by the individual during the reporting 
period.
    (ii) For all other transactions, state the name of the senior 
officer or director who entered into the transaction or whose immediate 
family member or affiliated organization entered into the transaction, 
the nature of the person's interest in the transaction, and the terms 
of the transaction. No information need be given where the purchase 
price, fees, or charges involved were determined by competitive bidding 
or where the amount involved in the transaction (including the total of 
all periodic payments) does not exceed $5,000, or the interest of the 
person arises solely as a result of his or her status as a stockholder 
of the institution and the benefit received is not a special or extra 
benefit not available to all stockholders.
    (3) Loans to senior officers and directors. (i) To the extent 
applicable, state that the institution (or in the case of an 
association that does not carry loans to its senior officers and 
directors on its books, its related bank) has had loans outstanding 
during the last full fiscal year to date to its senior officers and 
directors, their immediate family members, and any organizations with 
which such senior officers or directors are affiliated that:
    (A) Were made in the ordinary course of business; and
    (B) Were made on the same terms, including interest rate, 
amortization schedule, and collateral, as those prevailing at the time 
for comparable transactions with other persons.
    (ii) To the extent applicable, state that no loan to a senior 
officer or director, or to any organization affiliated with such 
person, or to any immediate family member who resides in the same 
household as such person or in whose loan or business operation such 
person has a material financial or legal interest, involved more than 
the normal risk of collectability; provided that no such statement need 
be made with respect to any director or senior officer who has resigned 
before the time for filing the applicable report with the Farm Credit 
Administration (but in no case later than the actual filing), or whose 
term of office will expire or terminate no later than the date of the 
meeting of stockholders to which the report relates.
    (iii) If the conditions stated in paragraphs (e)(3)(i) and (ii) of 
this section do not apply to the loans of the persons or organizations 
specified therein, with respect to such loans state:
    (A) The name of the officer or director to whom the loan was made 
or to whose relative or affiliated organization the loan was made.
    (B) The largest aggregate amount of each indebtedness outstanding 
at any time during the last fiscal year.
    (C) The nature of the loan(s);
    (D) The amount outstanding as of the latest practicable date.
    (E) The reasons the loan does not comply with the criteria 
contained in paragraphs (e)(3)(i) and (e)(3)(ii) of this section.
    (F) If the loan does not comply with paragraph (e)(3)(i)(B) of this 
section, the rate of interest payable on the loan and the repayment 
terms.
    (G) If the loan does not comply with paragraph (e)(3)(ii) of this 
section, the amount past due, if any, and the reason the loan is deemed 
to involve more than a normal risk of collectability.
    (f) Involvement in certain legal proceedings. Describe any of the 
following events that occurred during the past 5 years and that are 
material to an evaluation of the ability or integrity of any person who 
served as director or senior officer on January 1 of the year following 
the fiscal year for which the report is filed or at any time during the 
fiscal year just ended:
    (1) A petition under the Federal bankruptcy laws or any State 
insolvency law was filed by or against, or a receiver, fiscal agent, or 
similar officer was appointed by a court for the business or property 
of such person, or any partnership in which such person was a general 
partner at or within 2 years before the time of such filing, or any 
corporation or business association

[[Page 60600]]

of which such person was a senior officer at or within 2 years before 
the time of such filing;
    (2) Such person was convicted in a criminal proceeding or is a 
named party in a pending criminal proceeding (excluding traffic 
violations and other misdemeanors);
    (3) Such person was the subject of any order, judgment, or decree, 
not subsequently reversed, suspended, or vacated, by any court of 
competent jurisdiction, permanently or temporarily enjoining or 
otherwise limiting such person from engaging in any type of business 
practice.

0
19. Section 620.10 is amended by:
0
a. Revising paragraph (a); and
0
b. Adding a new paragraph (c) to read as follows:


Sec.  620.10  Preparing the quarterly report.

    (a) Each institution of the Farm Credit System must:
    (1) Prepare and send to the Farm Credit Administration an 
electronic copy of its quarterly report within 40 calendar days after 
the end of each fiscal quarter, except that no report need be prepared 
for the fiscal quarter that coincides with the end of the fiscal year 
of the institution;
    (2) Publish a copy of its quarterly report on its Web site when it 
electronically sends the report to the Farm Credit Administration; and
    (3) Ensure the report complies with the applicable provisions of 
Sec. Sec.  620.2 and 620.3.
* * * * *
    (c) Institutions may use the quarterly report to deliver any notice 
required under Sec.  620.15. Notices required under Sec.  620.17 must 
be issued separately from the quarterly report, unless otherwise 
authorized by the Farm Credit Administration.

0
20. Section 620.11 is amended by:
0
a. Revising the introductory text of paragraph (b);
0
b. Revising paragraphs (c) and (d); and
0
c. Removing paragraphs (e) and (f).
    The revisions read as follows:


Sec.  620.11  Content of quarterly report to shareholders.

* * * * *
    (b) Rules for condensation. For purposes of this section, major 
captions to be provided in the financial statements are the same as 
those provided in the financial statements contained in the 
institution's annual report to shareholders, except that the financial 
statements included in the quarterly report may be condensed into major 
captions in accordance with the rules prescribed under this paragraph. 
If any amount that would otherwise be required to be shown by this 
subpart with respect to any item is not material, it need not be 
separately shown. The combination of insignificant items is permitted.
* * * * *
    (c) Required content. A quarterly report must, at a minimum, 
contain the following items:
    (1) Management's discussion and analysis of financial condition and 
results of operations. Discuss material changes, if any, to the 
information provided to shareholders pursuant to Sec.  620.5(g) that 
have occurred during the periods specified in paragraphs (c)(2)(i) and 
(ii) of this section. Such additional information as is needed to 
enable the reader to assess material changes in financial condition and 
results of operations between the periods specified in paragraphs 
(c)(2)(i) and (ii) of this section shall be provided.
    (i) Material changes in financial condition. Discuss any material 
changes in financial condition from the end of the preceding fiscal 
year to the date of the most recent interim balance sheet provided. If 
the interim financial statements include an interim balance sheet as of 
the corresponding interim date of the preceding fiscal year, any 
material changes in financial conditions from that date to the date of 
the most recent interim balance sheet provided also shall be discussed. 
If discussions of changes from both the end and the corresponding 
interim date of the preceding fiscal year are required, the discussions 
may be combined at the discretion of the institution.
    (ii) Material changes in results of operations. Discuss any 
material changes in the institution's results of operations with 
respect to the most recent fiscal year-to-date period for which an 
income statement is provided and the corresponding year-to-date period 
of the preceding fiscal year. Such discussion also shall cover material 
changes with respect to that fiscal quarter and the corresponding 
fiscal quarter in the preceding fiscal year. In addition, if the 
institution has elected to provide an income statement for the 12-month 
period ended as of the date of the most recent interim balance sheet 
provided, the discussion also shall cover material changes with respect 
to that 12-month period and the 12-month period ended as of the 
corresponding interim balance sheet date of the preceding fiscal year.
    (2) Interim financial statements. The following financial 
statements must be provided:
    (i) An interim balance sheet as of the end of the most recent 
fiscal quarter and as of the end of the preceding fiscal year. A 
balance sheet for the comparable quarter of the preceding fiscal year 
is optional.
    (ii) Interim statements of income for the most recent fiscal 
quarter, for the period between the end of the preceding fiscal year 
and the end of the most recent fiscal quarter, and for the comparable 
periods for the previous fiscal year.
    (iii) Interim statements of changes in protected borrower capital 
and at-risk capital for the period between the end of the preceding 
fiscal year and the end of the most recent fiscal quarter, and for the 
comparable period for the preceding fiscal year.
    (iv) For banks, interim statements of cash flows for the period 
between the end of the preceding fiscal year and the end of the most 
recent fiscal quarter, and for the comparable period for the preceding 
fiscal year. For associations, interim statements of cash flows are 
optional.
    (3) Other related financial items. State that the financial 
statements were prepared under the oversight of the audit committee. 
The interim financial information need not be audited or reviewed by a 
qualified public accountant or external auditor prior to filing. If, 
however, a review of the data is made in accordance with the 
established professional standards and procedures for such a review, 
the institution may state that a qualified public accountant or 
external auditor has performed such a review under the supervision of 
the institution's audit committee. If such a statement is made, the 
report of a qualified public accountant or external auditor on such 
review must accompany the interim financial information.
    (d) Notices. Institutions using the quarterly report to deliver any 
notice required under Sec.  620.15 must put the notice information at 
the beginning of the quarterly report. The notice must be conspicuous 
and may not be part of any footnotes to the quarterly report.

0
21. Sections 620.15 and 620.17 are revised to read as follows:


Sec.  620.15  Notice of significant or material events.

    When a Farm Credit bank or association determines that it has a 
significant or material event, the institution must prepare and provide 
to its shareholders and the Farm Credit Administration a notice 
disclosing the event(s).
    (a) Each bank and association board of directors must establish and 
maintain a policy identifying the categories and types of events that 
may result in a

[[Page 60601]]

notice under this section. At a minimum, events covered under this 
provision include significant events defined in Sec.  620.1(q) and 
material events defined in Sec.  620.1(h). The policy must identify how 
the significance or materiality of an event will be determined.
    (b) A notice issued under this section must be made as soon as 
possible, but not later than 90 days after occurrence of the event.
    (1) Each institution must electronically provide the notice to the 
Farm Credit Administration at the same time as distribution of the 
notice to shareholders.
    (2) Delivery of the notice to shareholders may be accomplished by 
direct communications with the shareholders, posting the notice on the 
institution's Web site, as part of the quarterly report to 
shareholders, or by publishing the notice in any publication with 
circulation wide enough to reasonably assure that all of the 
institution's shareholders have access to the information in a timely 
manner. No matter how the notice is distributed, it must comply with 
all the provisions of this section.
    (c) Every notice must be dated and signed in a manner similar to 
the requirements of Sec.  620.3(b).
    (d) The information required to be included in a notice issued 
under this section must be conspicuous, easily understandable, 
complete, accurate, and not misleading.
    (e) A Farm Credit System institution may be required to issue a 
notice under this section at the direction of the Farm Credit 
Administration.


Sec.  620.17  Special notice provisions for events related to minimum 
permanent capital.

    (a) When a Farm Credit bank or association determines that it is 
not in compliance with the minimum permanent capital standard 
prescribed under Sec.  615.5205 of this chapter, that institution must 
prepare and provide to its shareholders and the Farm Credit 
Administration a notice stating that the institution has initially 
determined it is not in compliance with minimum permanent capital 
standards. Such notice must be given within 30 days following the month 
end.
    (b) When notice is given under paragraph (a) of this section, the 
institution must also notify its shareholders and the Farm Credit 
Administration when the institution's permanent capital ratio decreases 
by one half of 1 percent or more from the level reported in the 
original notice, or from that reported in a subsequent notice provided 
under this paragraph. This notice must be given within 45 days 
following the end of every quarter at which the institution's permanent 
capital ratio decreases as specified.
    (c) Each institution required to prepare a notice under paragraph 
(a) or (b) of this section shall provide the notice to shareholders or 
publish it in any publication with circulation wide enough to be 
reasonably assured that all of the institution's shareholders have 
access to the information in a timely manner. The information required 
to be included in this notice must be conspicuous, easily 
understandable, and not misleading.
    (d) A notice, at a minimum, shall include:
    (1) A statement that:
    (i) Briefly describes the regulatory minimum permanent capital 
standard established by the Farm Credit Administration and the notice 
requirement of paragraph (a) of this section;
    (ii) Indicates the institution's current level of permanent 
capital; and
    (iii) Notifies shareholders that the institution's permanent 
capital is below the Farm Credit Administration regulatory minimum 
standard.
    (2) A statement of the effect that noncompliance has had on the 
institution and its shareholders, including whether the institution is 
currently prohibited by statute or regulation from retiring stock or 
distributing earnings or whether the Farm Credit Administration has 
issued a capital directive or other enforcement action to the 
institution.
    (3) A complete description of any event(s) that may have 
significantly contributed to the institution's noncompliance with the 
minimum permanent capital standard.
    (4) A statement that the institution is required by regulation to 
provide another notice to shareholders within 45 days following the end 
of any subsequent quarter at which the institution's permanent capital 
ratio decreases by one half of 1 percent or more from the level 
reported in the notice.

0
22. Section 620.21 is amended by revising paragraph (a)(3)(i) to read 
as follows:


Sec.  620.21  Contents of the information statement.

    (a) * * *
    (3) * * *
    (i) If any transactions between the institution and its senior 
officers and directors of the type required to be disclosed in the 
annual report to shareholders under Sec.  620.6(e), or any of the 
events required to be disclosed in the annual report to shareholders 
under Sec.  620.6(f) have occurred since the end of the last fiscal 
year and were not disclosed in the annual report to shareholders, the 
disclosures required by Sec.  620.6(e) and (f) shall be made with 
respect to such transactions or events in the information statement. If 
any material change in the matters disclosed in the annual report to 
shareholders pursuant to Sec.  620.6(e) and (f) has occurred since the 
annual report to shareholders was prepared, disclosure shall be made of 
such change in the information statement.
* * * * *

0
23. Section 620.31 is revised to read as follows:


Sec.  620.31  Compensation committees.

    Each Farm Credit bank and association must establish and maintain a 
compensation committee by adopting a written charter describing the 
committee's composition, authorities, and responsibilities in 
accordance with this section. The compensation committee must report 
only to the board of directors. All compensation committees are 
required to maintain records of meetings, including attendance, for at 
least 3 fiscal years.
    (a) Composition. Each compensation committee must consist of at 
least three members and all committee members must be members of the 
institution's board of directors. Every member must be free from any 
relationship that, in the opinion of the board, would interfere with 
the exercise of independent judgment as a committee member.
    (b) Responsibilities. It is the responsibility of each compensation 
committee to review the compensation policies and plans for senior 
officers and employees and to approve the overall compensation program 
for senior officers. In fulfilling its responsibilities, the 
compensation committee must document that it determined the:
    (1) Institution's projected long-term compensation and retirement 
benefit obligations are appropriate to the services performed and not 
excessive;
    (2) Incentive-based compensation programs and payments are 
reasonable and proportionate to the services performed and structured 
so the payout schedule considers the potential for future losses or 
undue risks to the institution;
    (3) Senior officer compensation, incentive, and benefit programs 
support the institution's long-term business strategy and mission, as 
well as promote safe and sound business practices; and
    (4) Compensation programs designed for specific groups of 
employees, other

[[Page 60602]]

than senior officers, pose no imprudent risks to the institution.
    (c) Resources. Each institution must provide monetary and 
nonmonetary resources to enable its compensation committee to perform 
its duties.

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

0
24. 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.


0
25. Section 630.6 is amended by revising paragraph (b) to read as 
follows:


Sec.  630.6  Funding Corporation committees.

* * * * *
    (b) Compensation committee. The Funding Corporation must establish 
and maintain a compensation committee by adopting a written charter 
describing the committee's composition, authorities, and 
responsibilities in accordance with this section. The compensation 
committee must report only to the board of directors. The compensation 
committee is required to maintain records of meetings, including 
attendance, for at least 3 fiscal years.
    (1) Composition. The committee must consist of at least three 
members and all members must be members of the Funding Corporation's 
board of directors. Every compensation committee member must be free 
from any relationship that, in the opinion of the board, would 
interfere with the exercise of independent judgment as a committee 
member.
    (2) Responsibilities. It is the responsibility of the compensation 
committee to review the compensation policies and plans for senior 
officers and employees and to approve the overall compensation program 
for senior officers. In fulfilling its responsibilities, the 
compensation committee must document that it determined the:
    (i) Funding Corporation's projected long-term compensation and 
retirement benefit obligations are appropriate to the services 
performed and not excessive;
    (ii) Incentive-based compensation programs and payments are 
reasonable and proportionate to the services performed and structured 
so the payout schedule considers the potential for future losses or 
undue risks to the Funding Corporation; and
    (iii) Senior officer compensation, incentive, and benefit programs 
support the Funding Corporation's long-term business strategy and 
mission, as well as promote safe and sound business practices.
    (3) Resources. The Funding Corporation must provide monetary and 
nonmonetary resources to enable its compensation committee to perform 
its duties.

0
26. Section 630.20 is amended by revising paragraph (i) to read as 
follows:


Sec.  630.20  Contents of the annual report to investors.

* * * * *
    (i) Compensation of directors and senior officers. State that 
information on the compensation of directors and senior officers of 
Farm Credit banks is contained in each bank's annual report to 
shareholders and that the annual report of each bank is available to 
investors upon request pursuant to Sec.  630.3(g). State whether 
advisory votes were held in any of the disclosure entities during the 
reporting period and the results of such vote.
* * * * *

    Dated: September 20, 2012.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2012-23726 Filed 10-2-12; 8:45 am]
BILLING CODE 6705-01-P