Federal Agricultural Mortgage Corporation Governance; Standards of Conduct; Risk Management; and Disclosure and Reporting, 49139-49156 [2016-17455]
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49139
Rules and Regulations
Federal Register
Vol. 81, No. 144
Wednesday, July 27, 2016
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents. Prices of
new books are listed in the first FEDERAL
REGISTER issue of each week.
FARM CREDIT ADMINISTRATION
12 CFR Parts 650, 651, 653, and 655
RIN 3052–AC89
Federal Agricultural Mortgage
Corporation Governance; Standards of
Conduct; Risk Management; and
Disclosure and Reporting
Farm Credit Administration.
Final rule.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA, we, or our) is
finalizing new regulations related to the
Federal Agricultural Mortgage
Corporation’s (Farmer Mac or
Corporation) risk governance and
making enhancements to existing
disclosure and reporting requirements.
The risk governance regulations require
the Corporation to establish and
maintain a board-level risk management
committee and a risk officer, as well as
risk management policies and internal
controls. The changes to disclosure and
reporting requirements remove
repetitive reporting and allow for
electronic filing of reports. We also
finalize rules on the examination and
enforcement authorities held by the
FCA Office of Secondary Market
Oversight (OSMO) over the Corporation.
DATES: This regulation shall become
effective no earlier than 30 days after
publication in the Federal Register
during which either or both Houses of
Congress are in session. The FCA will
publish a notice of the effective date in
the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Joseph Connor, Associate Director for
Policy and Analysis, Office of
Secondary Market Oversight, Farm
Credit Administration, McLean, VA
22102–5090, (703) 883–4364, TTY (703)
883–4056, or Laura McFarland, Senior
Counsel, Office of General Counsel,
Farm Credit Administration, McLean,
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SUMMARY:
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VA 22102–5090, (703) 883–4020, TTY
(703) 883–4056.
SUPPLEMENTARY INFORMATION:
I. Objective
The purpose of this final rule is to:
• Enhance risk governance at the
Corporation to further its long-term
safety and soundness and mission
achievement;
• Remove repetitious disclosure and
reporting requirements, given the dual
reporting responsibilities of the
Corporation to the FCA and the
Securities and Exchange Commission
(SEC); and
• Clarify the examination and
enforcement authority of FCA.
II. Background
Farmer Mac is a stockholder-owned,
federally chartered instrumentality that
is an institution of the Farm Credit
System (System) and a Governmentsponsored enterprise (GSE). The
Corporation was established and
chartered by the Agricultural Credit Act
of 1987 (1987 Act) 1 to create a
secondary market for agricultural real
estate mortgage loans, rural housing
mortgage loans, rural utility cooperative
loans, and the guaranteed portions of
USDA-guaranteed farm and rural
development loans. Title VIII of the
Farm Credit Act of 1971, as amended,
(Act) governs the Corporation.
The Corporation has two classes of
voting common stock: Class A and Class
B. Class A voting common stock is
owned by banks, insurance companies,
and other financial institutions. Class B
voting common stock is owned by
System institutions. In addition, the
Corporation has nonvoting common
stock (Class C), the ownership of which
is not restricted and is a means for the
Corporation to raise capital. The
Corporation may also issue nonvoting
preferred stock.
The Corporation is regulated by FCA
through the Office of Secondary Market
Oversight (OSMO). Congress charged us
to issue regulations to ensure mission
compliance and the safety and
soundness of the Corporation. When
issuing regulations for the Corporation,
the Act requires FCA to consider:
• The purpose for which Farmer Mac
was created;
1 Agricultural Credit Act of 1987 (Pub. L. 100–
233, January 6, 1988).
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• The practices appropriate to the
conduct of secondary markets in
agricultural loans; and
• The reduced levels of risks
associated with appropriately structured
secondary market transactions.2
Farmer Mac, as a publicly traded
company, is also subject to many of the
governance requirements of SarbanesOxley Act of 2002 (Sarbanes-Oxley),3
Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (DoddFrank Act),4 and Securities and
Exchange Commission (SEC) disclosure
regulations for publicly traded
companies, all of which address
reporting requirements and oversight for
publicly held companies and financial
institutions. Self-regulatory
organizations (SROs), the New York
Stock Exchange (NYSE) in the
Corporation’s case, have also issued
requirements designed to enhance the
accountability and transparency of
corporate business operations.
As a GSE, the Corporation has a
public policy purpose embedded in its
corporate mission. One aspect of this
public policy mission includes financial
services to customer-stakeholders
(institutions that lend to farmers,
ranchers, rural homeowners, and rural
utility cooperatives) and the resulting
flow-through benefits to rural
borrowers. Another key aspect is the
protection of taxpayer-stakeholders
because the risk that the Corporation
accepts in the course of business
exposes both investors (debt and equity
holders) and taxpayers to potential loss.
The taxpayer’s exposure arises in part
from the Corporation’s authority to issue
debt to the Department of the Treasury
to cover guarantee losses under certain
adverse circumstances.5 Thus, an
appropriately comprehensive approach
to Board-level risk governance is
essential to promote well-reasoned, riskrelated decisions and promote public
trust in the risk management of the
Corporation.
2 Section 8.11(a)(2) of the Act (12 U.S.C. 2279aa–
11(a)(2)).
3 Public Law 107–204, July 30, 2002.
4 Public Law 111–203, 124 Stat. 1376, (H.R. 4173),
July 21, 2010.
5 According to the 1987 Act, Farmer Mac may, in
certain circumstances, borrow up to $1.5 billion
from the U.S. Treasury to ensure timely payment of
any guarantee obligations of the corporation.
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III. Comments and Our Responses:
Section-by-Section Analysis
We issued a proposed rule to amend
our standards of conduct, board
governance, and reporting regulations
for the Corporation on March 26, 2015
(80 FR 15931). The comment period for
the proposed rule closed on June 24,
2015, and 77 comment letters were
received. The comments submitted were
from Farmer Mac, stockholders in
Farmer Mac, a consultant to Farmer
Mac,6 an agent of Farmer Mac,7 the
Farm Credit Council (FCC) on behalf of
its membership, and a member of the
general public. Prior to the proposed
rulemaking, we issued an Advanced
Notice of Proposed Rulemaking
(ANPRM) to solicit opinions and
suggestions from investors,
stockholders, and other interested
parties on ways to enhance our
regulation of the Corporation’s
governance activities.8
The 77 comments submitted in
response to the proposed rule made
various suggestions for changing what
we had proposed. Of these commenters,
69 limited their remarks and suggestions
to part 651, ‘‘Standards of Conduct.’’
Comments to the Standards of Conduct
provisions involved both existing and
proposed provisions.9 These comments
were significantly different from what
was proposed and lacked uniformity in
the type of changes sought.
As a GSE, the Corporation has certain
strategic objectives that are public
policy or ‘‘mission’’ oriented. Standards
of conduct must be understood and
interpreted not only in the context of
the fiduciary responsibilities to the
Corporation and its shareholders, but
also in the context of the statutory duty
to further the Congressional purposes
the Corporation was chartered to
achieve. We believe standards of
conduct to be among the most
potentially complex and nuanced areas
of corporate governance. For this reason,
and because of the variety of comments
received to this area of the proposed
rule, we believe it prudent to address
proposed changes and related comments
on the more complex components of
standards of conduct and board
governance regulations in a separate
6 The consultant to Farmer Mac explained it had
been hired by Farmer Mac to comment on the
proposed rule.
7 The agent of Farmer Mac explained it had been
working as a consultant for Farmer Mac for over a
year on specific projects.
8 79 FR 10426, February 25, 2014. The comment
period for the ANPRM ended April 28, 2014, and
seven comment letters were received.
9 We last issued regulations on Farmer Mac Board
governance and standards of conduct on March 1,
1994 (59 FR 9622).
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rulemaking. Thus, we are not finalizing
in this rulemaking many of the
proposed changes to part 651, but
instead intend to revisit changes to part
651 in a separate rulemaking.
Proposed changes to parts 650, 653,
and 655 are finalized as proposed unless
we say otherwise in this preamble.
Included in finalized changes is the
reorganization of our rules addressing
the Corporation’s operations through the
addition of a new part 653 and
organizational revisions to existing parts
650, 651, and 655. We make no changes
to part 652 or reserved part 654.
A. FCA Oversight and Rulemaking [Part
650]
Existing part 650 contains general
provisions, without subparts, on the
supervision of the Corporation. We
finalize adding a new subpart A,
entitled ‘‘Regulation, examination and
enforcement,’’ as well as moving
existing provisions into a new subpart
B, entitled ‘‘Conservators, receivers, and
liquidations.’’ We finalize the
redesignation of existing §§ 650.1 and
650.5 on appointing and removing
receivers or conservators as new
§§ 650.13 and 650.14, respectively. We
make no other changes to these existing
provisions.
We discuss comments received to this
part and any changes to the appropriate
sections below.
1. Part 650 Definitions [New § 650.1]
We finalize as proposed all
definitions in new § 650.1. We received
no comments objecting to the terms as
proposed, but a stockholder-commenter
requested we consolidate all proposed
definitions for parts 650, 651, 653 and
655 into one section and asked for the
term ‘‘agent’’ to be defined for part 650.
We cannot accommodate either of these
requests. We already maintain a global
definition section for all our rules in
part 619. Maintaining separate
definition sections for use only in
certain regulations eliminates confusion
that may arise from placing terms
having specific application for a
secondary market along with terms
applicable to Farm Credit banks and
associations. We recognize that many of
the terms for the definition sections we
proposed in parts 650, 651, 652, and 655
are duplicative, but their location in the
applicable sections avoids confusion
with usage of the terms in other
regulations. We also cannot
accommodate the request to define in
part 650 the term ‘‘agent.’’ The term
‘‘agent’’ as used in part 650 has two
different applications: (1) Agents of the
Corporation; and (2) agents of FCA. A
single definition would not capture the
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two separate applications of the term,
particularly in regards to the existing
rules on liquidation and receivership.
2. Regulatory Authority [New § 650.2]
We finalize the addition of new
§ 650.2, which provides clarity on the
situation of the Corporation having FCA
as its primary regulator, while also
being subject to certain SEC regulatory
disclosure requirements. The new
§ 650.2 identifies FCA as the ‘‘primary
regulator’’ of the Corporation,
possessing examination, enforcement,
conservatorship, liquidation, and
receivership authority over the
Corporation. We finalize this section
with one clarifying change made based
on comments received. In § 650.2(b), we
clarify that our supervisory authority to
ensure the Corporation follows laws and
regulations relates to compliance with
applicable laws and regulations.
There were four commenters to this
section: Farmer Mac, the FCC, and two
stockholders in Farmer Mac. The FCC
expressed strong support for the section
clarifying that the Corporation is a GSE
with a public mission. The stockholdercommenters also supported the section
addressing the public policy purpose of
the Corporation. Farmer Mac objected to
the provisions on FCA’s authority over
it, contending that FCA has no authority
over compliance with all laws and
regulations. Farmer Mac explained that
instead FCA is to ensure a dependable
source of credit through its examination
of the Corporation and regulation of its
safe and sound conduct. Farmer Mac
also asked us to either remove § 650.2(c)
or specify the SEC regulations to which
it is subject and exactly mirror language
from the Act when describing our role.
However, Farmer Mac added objections
to our using the language of the Act to
describe its relationship with the SEC.
In that instance, Farmer Mac asked us
to capture the ‘‘nuances of Farmer Mac’s
regulation by the SEC.’’ 10
We have clarified that the laws and
regulations referenced are those
applicable to the Corporation. We do
not name those laws and regulations as
they are subject to change. We also
decline the request to include in the
rule an analysis of the Corporation’s
relationship with both FCA and SEC,
which is not the intent of the rule. The
rule at § 650.2 is identifying us as the
primary regulator of the Corporation. As
explained in the proposed rule, the
10 Farmer Mac explained it is not subject to
complete regulation by SEC and, except for certain
mortgage-backed securities, it is not subject to the
1933 Securities Act and must only file reports
under the 1934 Securities Exchange Act. Farmer
Mac comment letter, Appendix B, pages B–2 and B–
27.
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discussions Congress had surrounding
passage of the Dodd-Frank Act
recognized the long-standing situation
where financial institutions are required
to comply with various Federal
financial laws and regulations issued
and enforced by several banking
regulators, although only one regulator
is the primary regulator. We did modify
the language of § 650.2(c) to add clarity
and removed reference to the NYSE
based on the comments received.
Farmer Mac asked that we add
language in § 650.2(a) for USDAguaranteed loans sold into the
secondary market. The Corporation has
established a secondary market for the
guaranteed portions of USDA-Farm
Service Agency guaranteed Farm
Ownership and Operating Loans and
USDA-Rural Development Guaranteed
Business and Industry, Community
Facility and Water and Environmental
Program loans.11 As noted by Farmer
Mac, we are identifying the statutory
purposes of the Corporation, we are not
enumerating all of Farmer Mac’s
business programs. However, we have
added language referencing USDAguaranteed loans.12
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3. Supervision and Enforcement [New
§ 650.3]
We finalize adding a new § 650.3 to
incorporate into our regulations the
supervision and enforcement authorities
over the Corporation that are given us
under the Act. Our enforcement
authorities provide reasonable
assurance that, among other things, the
Corporation is adequately capitalized
and operating safely. We finalize this
section with clarifying changes made
based on comments received.
There were six commenters to this
section: Farmer Mac, the FCC, three
stockholders in Farmer Mac, and an
agent of Farmer Mac. Three commenters
objected to agents being subject to FCA’s
enforcement authorities. Sections 5.25
and 5.26 of the Act specify that agents
of a System institution are subject to our
enforcement authorities and Farmer
Mac is identified as a System institution
in section 8.1(a)(2) of the Act. It is these
provisions we relied upon when
proposing the provision so we decline
to make changes based on the
comments. Two of the stockholdercommenters remarked that financial
safety and soundness oversight should
include making the Corporation subject
11 Under the Farmer Mac 2 program, Farmer
Mac’s subsidiary, Farmer Mac II LLC, buys
guaranteed portions directly from lenders. The
original lenders retain the unguaranteed portions of
these loans and continue to service the entire loan.
12 Refer to section 8.0(9) of the Act, defining
‘‘qualified loans’’.
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to the Basel III capital standards. We
decline to make changes to our rules in
response to these comments. The
existing rules addressing the
Corporation’s capital requirements
already incorporate appropriate Basel
capital standards, as well as analogous
standards of other U.S. regulators.
Farmer Mac asked for the entire
section identifying our enforcement
authorities to be removed or that we
directly quote the Act when identifying
those authorities, using no further
interpretation of the statutory language.
We are directed by section 5.17(a)(9) of
the Act to issue regulations necessary or
appropriate for the implementation of
the Act’s provisions, which involves
more than a recitation of the Act.
Farmer Mac also asked that we provide
a specific ‘‘exhaustive list’’ of our
enforcement authorities. We likewise
decline this request as our enumerated
enforcement authorities may be
amended by Congress or court
interpretations. Further, we do not agree
with Farmer Mac’s interpretation of our
authorities and decline to make changes
to the rule based on its analysis. Farmer
Mac also stated that our safety and
soundness authority should not be
viewed to include addressing board
committees, director elections, or
recordkeeping activities of the
Corporation. Again, our oversight of the
safe and sound operations of the
Corporation necessitates that we
consider the Corporation’s board
operations and the records of its
decision-making analysis and financial
condition.13
Farmer Mac objected to § 650.3(b)
referencing when the Corporation
engages in activities having ‘‘excessive
risk,’’ arguing the term is undefined.
Farmer Mac stated that all of its
activities involve risk and the provision
would allow FCA to restrict these
activities and substitute our judgment
on how to run the Corporation.
However, Farmer Mac acknowledged
section 8.37 of the Act uses the term
‘‘excessive risk’’. Farmer Mac also
objected to separating risk from its
impact on capital and suggested
objective, measureable standards be set
for risk levels. In § 650.3(b), we clarify
that risks having adverse impact to
capital, which may lead to certain
enforcement actions, generally refers to
the adequacy of the Regulatory Capital
level maintained by the Corporation.
13 See section 8.11(a)(1)(B) of the Act authorizing
OSMO ‘‘general supervision of the safe and sound
performance of the powers, functions, and duties
vested in the Corporation’’.
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4. Access to Records and Personnel
[New § 650.4]
There were three comments objecting
to the inclusion of agents in this section:
Farmer Mac, a stockholder in Farmer
Mac, and an agent of Farmer Mac. The
agent who commented objected to
classifying certain types of professional
assistance received by the Corporation
as an agency relationship, contending
that FCA has no authority over certain
types of agents (e.g. consultants,
vendors), while the stockholder
commented that the penalties were
burdensome. Farmer Mac objected to
being required to make its agents
available to our examination staff.
Farmer Mac contended that FCA does
not have jurisdiction over all agents of
the Corporation, as would be covered by
the existing part 651 definition of
‘‘agent.’’
We finalize this section with one
change based on comments received. In
§ 650.4(b), we replace the word ‘‘agents’’
with a more detailed explanation of the
personnel required to be available to us
when requested, which includes those
engaged by the Corporation to
participate in the business conducted by
the Corporation. For example, during an
examination it may be necessary for our
exam staff to speak with the External
Auditor. The Act specifies that
directors, officers, employees, agents,
and ‘‘other persons participating in the
conduct of the affairs’’ 14 of a System
institution are subject to our
examination and enforcement
authorities.15 We relied on this language
when developing the clarification for
this final rule. We believe the clarifying
language addresses the comments
regarding certain ‘‘vendor-type’’ service
providers. We also point out that the
part 651 definition of ‘‘agent’’ is
restricted to the provisions in part 651
and does not carryover to part 650. Also,
the stockholder-commenter objecting to
the ‘‘penalties’’ listed in this section
spoke in error, as there are no
‘‘penalties’’ identified in § 651.4.
Notwithstanding this, we believe this
comment is adequately addressed in our
earlier discussion of our enforcement
authorities, which explains the
‘‘penalties’’ identified in § 650.3 are
derived from the Act.
Farmer Mac also asked us to limit our
access to Corporation documents to
non-confidential items. In addition,
Farmer Mac asked that there be a
materiality and document age threshold
controlling which documents and
personnel we could access during our
14 See,
for example, section 5.32(a) of the Act.
to section 8.11(b)(3) of Act (12 U.S.C.
2279aa–11).
15 Refer
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examination and enforcement activities.
We decline Farmer Mac’s suggestions
regarding the scope of our access to
corporate documents. As the safety and
soundness regulator, we require full
access to the Corporation’s records.16 In
accessing these records, our activities
are already covered by confidentiality
provisions in Federal law.17 Further, we
view the act of our requesting the
records or access to personnel as
establishing the ‘‘materiality’’ to our
oversight. We could not permit the
Corporation to pre-screen records before
release to us in order for Farmer Mac to,
on its own, determine if a record is
material or not for our purposes.
Likewise, we cannot provide full
oversight if we restrict our access to a
finite period of time. It may be that the
matter under review exceeds that period
of time, or records within that time
period make key reference to other,
older records.
5. Reports of Examination and Criminal
Referrals [New §§ 650.5 and 650.6]
We finalize as proposed the addition
of new §§ 650.5 and 650.6, containing
cross-citations to existing regulatory
provisions regarding access to FCA
Reports of Examination and the
Corporation’s obligation to make
criminal referrals in certain
circumstances. We received no
comments to these two sections. We
believe these cross-cites clarify the
applicability of these provisions to the
Corporation, and thereby facilitate
compliance with them.
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B. Farmer Mac Corporate Governance
[Part 651]
Part 651 contains the existing
corporate governance provisions for
Farmer Mac, without subparts. As
explained earlier in this preamble, this
final rule does not include many of the
proposed changes to part 651 since we
intend to revisit part 651 in the future.
Although we received many comments
on the contents of part 651, no
comments opposing the proposed
organizational changes were made and,
therefore, we finalize them as proposed.
Specifically, we finalize the addition of
a new subpart A, entitled ‘‘General,’’ a
new subpart B, entitled ‘‘Standards of
Conduct,’’ and a new subpart C, entitled
‘‘Board Governance.’’ We also finalize as
proposed the movement of the existing
provisions of part 651 into the relevant
subparts and adding new sections in
reserve for future rulemaking. We
16 See section 8.11(b)(3) of Act (12 U.S.C. 2279aa–
11(b)(3)).
17 Refer to 5 U.S.C. 552(b)(8). See also 12 CFR
602.2.
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discuss other final changes to part 651,
and the comments received related to
the changed provisions, in the
appropriate sections below.
1. Part 651 Definitions [New Subpart
A; Existing § 651.1]
We finalize the proposed revisions to
our definitions in existing § 651.1, with
two changes based on comments
received. We are changing the term
‘‘potential conflict of interest’’ to
‘‘conflict of interest’’, while finalizing
the definition as proposed. Two
stockholder-commenters pointed out the
definition covered both material and
potential conflicts of interest and that
we had no general definition for the
term ‘‘conflict of interest.’’ We agree
with the commenters that the definition
defined conflicts of interest in general
so should be identified as such.
We are also modifying the definition
for ‘‘reasonable person’’ by removing the
phrase ‘‘based on societal requirements
for the protection of the general
interest.’’ The proposed definition for
the term ‘‘reasonable person’’ was based
on general use of the term in conflictof-interest proceedings and substantially
resembled the legal meaning of the term.
However, comments from Farmer Mac
and a consultant of Farmer Mac objected
to the phrase ‘‘societal requirements’’,
arguing it was not part of the Model
Business Code. One of these
commenters also stated the term should
be defined in a manner that directed
attention to the Corporation’s activities,
not the public at large.
We do not agree with the commenters
in this regard. As one commenter
acknowledged, corporate governance
allows consideration of the public
impact of corporate behavior. In
addition, the Corporation is a GSE with
a public policy purpose and has
directors appointed by the President of
the United States to represent the
public’s interests in the operations of
the Corporation. While we disagree with
the reasons given by the commenters,
we are removing the phrase ‘‘based on
societal requirements for the protection
of the general interest’’ from the
definition for ‘‘reasonable person’’ as we
believe the remaining language allows
for addressing public concerns;
specifically, the use of ‘‘average level of
care.’’ We recognize that these same two
commenters also objected to using an
average level of care measurement when
defining ‘‘reasonable person’’, arguing it
expanded the Corporation’s activities to
include consideration of the general
public and not just stockholders. We
agree that using an average level of care
standard could involve consideration of
the public, but unlike the commenters,
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we do not view that as a difficulty. We
also do not agree with comments that
the phrase ‘‘average level of care’’ in the
definition for ‘‘reasonable person’’
under our conflict of interest rules
expands the mission of the Corporation.
Instead, we believe it emphasizes the
scope of the Corporation’s impact. As
explained earlier, the Corporation has a
statutory public policy purpose and
public representatives on its board of
directors. We believe retaining the
‘‘average level of care’’ language in the
definition for ‘‘reasonable person’’ is
appropriate.
Farmer Mac and stockholders in
Farmer Mac commented on the term
‘‘material’’, asking that we delete the
definition. Farmer Mac commented that
the definition was appropriate for most
of part 651, but stated concerns with
how the term would work with
securities regulations, which have a
different definition for the term. Farmer
Mac specified its concern was focused
on proposed § 651.24. Stockholdercommenters remarked that the term
‘‘material’’ does not carry the same
meaning or standard applied to other
System institutions. These commenters
made particular note of a separate
proposed rulemaking affecting Farm
Credit banks and associations, but not
Farmer Mac.18 These commenters
argued there is no reason for a different
standard among System institutions. As
we are not finalizing in this rulemaking
the proposed contents of § 651.24, we
are not deleting the term ‘‘material’’ and
note that the term is an existing term in
our rules. We also do not consider it
appropriate at this time to substitute the
existing definition with one that has
only been proposed in a separate
rulemaking intended for Farm Credit
banks and associations.
Farmer Mac asked that we remove the
existing definition of ‘‘agent’’ from
§ 651.1, while three stockholdercommenters and an agent of Farmer Mac
objected to agents being included in the
rule at all, arguing that the existing
definition was too broad in its
application. Farmer Mac also stated the
existing definition was too broad and
exceeds the scope of FCA authority. We
also received a call from a member of
the general public asking about the
definition and suggesting it may be
problematic for dual compliance with
both FCA and SEC requirements. The
definition is an existing term that has
been in our rules for over 20 years and
we proposed no changes to it.
Commenters offered no examples of
difficulties that had been encountered
in that time and did not express past
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compliance difficulties with the existing
rule. As we proposed no changes to the
existing term ‘‘agent,’’ we decline to
make any in this final rulemaking.
However, we may reconsider the issue
when revisiting part 651 in the future.
A stockholder-commenter remarked
that the term ‘‘officer’’ seemed to
exclude risk officers and asked if that
was intentional on our part. We
reviewed the existing term ‘‘officer’’, to
which we had proposed no changes,
and agree that it could result in the risk
officer not being included in the
definition. However, that would depend
on whether the Corporation makes the
risk officer a vice president. If not, then
the risk officer would be covered by the
definition of ‘‘employee’’ instead of
‘‘officer.’’
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2. Standards of Conduct [New Subpart
B]
We finalize moving existing § 651.4 to
new subpart B and redesignating it as
new § 651.24. This section addresses
director, officer, employee, and agent
responsibilities. We finalize adding new
§§ 651.21 and 651.25 under subpart B,
but with no content, in reserve for
future rulemaking.
a. Conflicts-of-Interest Policy [New
§ 651.22, Existing §§ 651.1(i) and 651.2]
We finalize the proposed movement
of the existing § 651.2 contents,
regarding conflict-of-interest policies, to
new subpart B and redesignating it as
new § 651.22. We are reserving § 651.2,
with no content, for future rulemaking.
Also, we finalize some amendments to
the existing contents of redesignated
§ 651.22 and make two clarifying
changes. Other proposed changes to the
contents of this section are not being
finalized in this rulemaking.
We finalize moving the list of
imputed interests currently contained in
the existing § 651.1(i) definition of a
‘‘potential conflict-of-interest’’ to this
section (thereby removing it from the
definition) as we received no comments
on this proposed action. We also
finalize the proposed revisions to the
list of imputed interest, as they also
received no comments: removing highly
specific relationships such as ‘‘spouse’’
and ‘‘child’’ and replacing them with
language to address all persons residing
in the household or who are otherwise
legal dependents. These changes are
premised on the ever-evolving
understanding of what is considered a
family, as well as intended to address
non-residential dependents whose
activities and interests may create a
conflict-of-interest for a director, officer,
or employee. We make two clarifying
changes to the list of imputed interest:
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A person’s general partner refers to a
business partner and employment
arrangements include both current and
prospective employment.
b. Conflicts-of-Interest Reporting and
Disclosure [New § 651.23, Existing
§ 651.3]
We finalize moving existing § 651.3 to
new subpart B and redesignating it as
new § 651.23. This section addresses
implementation of the conflict-ofinterest policy. Farmer Mac offered
comments on the existing language of
this section, asking that the separate
disclosure categories be removed. The
rule currently requires Farmer Mac to
provide its conflict of interest policy to
its shareholders, investors, and potential
investors when requested. Farmer Mac
posed that these parties can obtain the
policy from the Corporation’s Web site
or SEC filings so the provision should
be removed. Farmer Mac did not state
that this service could not continue to
be provided, nor assert that the volume
of requests was so high as to create a
burden. We decline to remove this
existing requirement as we continue to
believe the Corporation should strive to
accommodate requests from its
shareholders, investors and, most
especially, potential investors for copies
of the policy.
c. Agents and Conflicts-of-Interest
[Existing § 651.1 Through 651.4]
Farmer Mac, a stockholder in Farmer
Mac, and an agent of Farmer Mac asked
that we remove references to ‘‘agents’’
from the existing rule. Some of these
commenters remarked that agents
should not be treated the same as
directors, officers, and employees.
Others argued that monitoring agent
conduct is burdensome, may deter
agents from working for the
Corporation, and was contrary to
standard contractual agreements with
agents. The agent stated that consultants
and advisors were not intended by
Congress to be subject to our regulatory
or examination authority. The
stockholder-commenter added that we
should instead rely on the Corporation’s
existing practices regarding monitoring
agent behavior.
Congress gave us certain enforcement
authorities for agents of Farm Credit
institutions.19 We also note that agents
have been a part of the existing conflictof-interest rule for over 20 years. No
commenter provided support to
demonstrate that the Corporation has
had difficulty in all those years
19 See sections 5.25, 5.26, and 5.32 of the Act. See
also sections 5.17(a)(9) and (10), 5.19 and 8.11 of
the Act.
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obtaining the services of agents because
of the existing standards of conduct
regulations. We decline to remove
agents from part 651 as part of this final
rulemaking. However, we may
reconsider the issue in the future when
revisiting part 651.
3. Board Governance—Committees
[New Subpart C]
We finalize adding new §§ 651.30,
651.35, and 651.40 under subpart C, but
with no content, in reserve for future
rulemaking. We also finalize adding a
new § 651.50 on board committees. The
new § 651.50 addresses the relationship
between the entire board and its
committees, requires certain
committees, and establish minimum
operational requirements for board
committees (e.g., charters, meeting
minutes). We received comments from
Farmer Mac and its consultant on this
section and make four changes based on
those comments: (1) We specify charter
requirements apply to required
committees; (2) we clarify that charters
are approved by the full board; (3) we
are not finalizing the requirement that
each type of director serve on each
committee; and (4) we clarify that an
agenda may be informal, such as a list
of issues under discussion.
a. Committee Charters [New § 651.50]
In general, Farmer Mac objected to
any regulation of board committees.
Farmer Mac asked that we change the
requirement for all committees to be
chartered, explaining often ad hoc
committees are used in the
Corporation’s business and allowing
committees to develop their own
charters may be a transfer of board
authority. The proposed provision
stated that the Corporation’s board is the
body approving the charter, not the
committee. However, we clarify in
§ 651.50(c) that the committees develop
the charters, but those charters are not
effective unless approved by action of
the full board. In addition, we intended
the provision to apply to standing
committees of the Corporation, so have
modified the rule to clearly limit the
charter requirements to those
committees required to exist by
regulation (i.e. audit, risk, compensation
and corporate governance committees).
We also made conforming changes
elsewhere in this section to clarify that
the committee provisions apply to these
same ‘‘required’’ committees.
Both commenters objected to the
provision in § 651.50(a) that use of a
board committee does not relieve board
members of their legal responsibilities.
The commenters stated that delegations
to committees are permitted and the
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provision was unnecessary. In
paragraph (a) of new § 651.50, we
proposed regulatory language clarifying
that the entire board remains
accountable for committee actions. In
directing the Corporation, the board of
directors may rely on reports from board
committees, but doing so does not
relieve the board of final responsibility.
While activities and tasks may be
delegated to a committee, the fact that
a committee handles some board
responsibilities does not relieve the
board of its legal liabilities for such, nor
does it relieve the board of the ultimate
responsibility for those activities or
tasks. Therefore, we decline to make
changes to § 651.50(a).
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b. Committee Composition
We received comments from Farmer
Mac and its consultant on § 651.50, both
objecting to the proposed requirement
that each committee have representation
from the three types of directors serving
on the Corporation board (Class A
elected, Class B elected, and appointed).
The commenters stated the provision
may result in conflicts of interest,
unqualified directors serving on
committees, and create division on the
board. Commenters offered no support
for the named concerns, but we consider
this issue to be among those we plan to
review when we revisit part 651 in the
future. As a result, we are not finalizing
in § 651.50(c) the requirement that each
committee have representation from the
three types of directors serving on the
Corporation board. In conformance with
this, we also remove the proposed
paragraph designations in paragraph (c).
Farmer Mac and its consultant also
objected to limiting the number of
committees a director may chair. We
proposed in § 651.50(c) that no director
may serve as chair of more than one
committee. The commenters stated that
this was an unnecessary restriction. We
decline to change this limitation based
on comments received. We believe this
limitation is necessary, as it reasonably
distributes responsibilities among
individual members of the board. We
also believe that too great a
concentration of responsibilities among
too few directors would detract from the
board’s overall effectiveness and may
create potential, and unnecessary, safety
and soundness concerns.
c. Committee Agendas
Farmer Mac objected to the
§ 651.50(d) requirement that board
committees have agendas for their
meetings. Farmer Mac explained that
some ad hoc meetings occur with no
prior planning, making development of
an agenda impossible. We appreciate
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that a situation like the one described
may occur and have modified the rule
to allow for an equivalent list of issues
under discussion to be part of the
meeting minutes in lieu of an agenda.
C. Risk Management [Part 653, No
Subparts]
We finalize adding a part 653, with no
subparts, to address risk management
within the Corporation. In doing so, we
remove proposed references to ‘‘risk
tolerance’’ throughout part 653, while
retaining references to risk-appetite, as
we determined the term ‘‘risk-appetite’’
encompassed risk tolerance
consideration. We received comments
from Farmer Mac, stockholders of
Farmer Mac, and the FCC to this part
and discuss them, and any changes, in
the appropriate sections below.
1. General [New § 653.2]
We received comments from Farmer
Mac, the FCC, and stockholders in
Farmer Mac on new § 650.2, which
addresses general board-level risk
management matters. Farmer Mac
expressed agreement with requiring its
board to be actively involved in the
Corporation’s risk framework, but
considered it unreasonable to expect it
to ‘‘ensure’’ all risk-taking is safe and
sound. Farmer Mac asked that it be
allowed to address its ‘‘risk appetite’’ by
areas, such as liquidity risk or
operational risk, instead of one unified
assessment, explaining that the risk
committee’s role represents the
intersection of oversight of all risk areas.
We generally expect functional area
specialists (e.g., finance committee,
credit committee, marketing committee)
to evaluate risk in terms of the
specialized responsibilities of those
operational areas. While we view that as
generally appropriate for day-to-day risk
management, it is nevertheless
important that the entire board consider
risks from all areas when conducting its
enterprise-wide monitoring and
oversight. For that reason, the risk
committee is expected to evaluate risks
from the level of the Corporation, rather
than the functional area. To borrow a
description from the Treadway
Commission,20 we believe the risk
committee aims to strike an optimal
balance between growth and return
goals while attempting to optimize
deployment of resources toward the
entity’s objectives.
In the same way, we view the risk
officer as playing a role that represents
the intersection of risks across
20 ‘‘Enterprise Risk Management—Integrated
Framework’’, Executive Summary, Committee of
Sponsoring Organizations of the Treadway
Commission, September 2004.
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functional area managers. We view the
risk officer’s role to involve monitoring
the balance of risk across all functional
areas and, as needed, recommending
adjustments to re-balance the enterprisewide risk profile in a manner consistent
with the board-approved risk appetite.
This role does not eliminate risk
management responsibility from other
members of the Corporation’s
management team. If a functional area
manager knows that his or her
performance will be evaluated on the
basis of the productivity of that area, the
manager’s focus on that area’s
performance could become out of
proportion to the impact of that effort on
the Corporation’s enterprise-wide risk
position. The risk officer would then
serve as a means of alerting senior
management and the board of the
potential impact that functional area
managers’ activities and positions may
have on the Corporation at the
enterprise-wide level. This should
enable appropriate actions and
strategies to be evaluated and taken
when functional area risk taking
exceeds the overall risk appetite of the
board.
The FCC and two stockholdercommenters agreed with requiring the
Corporation’s board to be actively
involved in the Corporation’s risk
framework, but wanted it expanded to
include capital considerations. These
stockholder-commenters added that the
requirement was not preventative
enough as the Corporation’s board
should be required to approve riskbearing capacity and consider the
Corporation’s public policy mission as
well as capital adequacy. A third
stockholder-commenter remarked that
the part 653 requirements were not
unreasonable, but better suited to nonregulatory guidance. This stockholdercommenter explained that the science of
risk management is an emerging area,
subject to rapid changes, so placing risk
management requirements within a rule
may hinder the Corporation’s ability to
keep pace with best practices in risk
management.
We are replacing the term ‘‘ensure’’
with the phrase ‘‘provide reasonable
assurance’’ when discussing risk-taking
activities in response to comments. We
also add as a clarifying change that the
requirement to monitor risk activities is
expected to be on a regular basis. We
make no other changes to new § 653.2.
While we appreciate the comment
regarding the evolving nature of risk
management, we believe it appropriate
to establish an essential risk
management structure within regulation
and then supplement the rules with the
suggested informal guidance if
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necessary. We also make no changes in
response to comments asking that part
653 address risks associated with
capital. We already address risks to
capital in § 652.61, where we require the
Corporation’s board to approve the
annual capital plan, which must comply
with the board’s risk appetite.
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2. Risk Management [New § 653.3]
We finalize, with changes, new
§ 650.3, which contains the minimum
required risk management program
activities of the Corporation. We
received comments to this section from
Farmer Mac, the FCC, and three Farmer
Mac stockholders. We discuss the
comments, and any changes, in the
appropriate sections below.
a. Risk Management Program [New
§ 653.3(a)]
We are making the following changes
to new § 653.3(a), which requires the
Corporation’s board of directors to have
a risk management program:
• Replacing the phrase ‘‘in effect at
all times’’ in the introductory language
of paragraph (a) with the more
measurable standard ‘‘establish,
maintain, and periodically update’’ the
risk management program;
• Removing the language ‘‘addresses
the Corporation’s exposure to credit,
market, liquidity, business, and
operational risks’’ in paragraph (a)(3) as
it is redundant of language contained
§ 653.3(b)(2);
• Adding language in paragraph (a) to
recognize that implementation of the
risk management program may be
handled by senior management; and
• Adding language to clarify that the
list of requirements in new § 653.3(a)
are the minimum.
In furtherance of these clarifications, we
remove the proposed paragraph (a)(4)
requirement that the risk management
policy specify the independence of
those carrying-out the program.
We received comments to new
§ 650.3(a) from the FCC agreeing with
the provision, but expressing concern
that there was insufficient distinction
between risks in the System and risks
faced by the Corporation. The FCC
asked that ‘‘casual’’ references linking
the Corporation to the System be
eliminated and that we specify the
Corporation is a separate GSE from the
System. In response, we clarify in this
preamble that the Corporation is an
institution of the Farm Credit System,
but is not liable for any debt or
obligation of any other System
institution, and the other System
institutions have no liability for Farmer
Mac’s debt. Also, Farmer Mac is
organized as an investor-owned
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corporation, not a member-owned
cooperative as are other System
institutions, and the Farm Credit System
Insurance Corporation does not insure
Farmer Mac’s securities.
Farmer Mac remarked that the board
does not often involve itself in day-today risk decisions: That is more
properly handled by senior
management. As mentioned above, we
have made clarifying changes to
recognize that daily implementation of
the risk management program may
reside with senior management. Two
stockholder-commenters stated
agreement with the risk management
provisions, but asked that we expand
them to include risk-bearing capacity
and require management of the
Corporation’s capital to be consistent
with Basel III. We have previously
responded to their comment. These
commenters also asked that OSMO
provide further guidance to the
Corporation on specific risk tolerance
measures and for OSMO to closely
monitor the program to ensure it is
implemented in an effective manner. As
noted, FCA may provide for the
guidance on risk management as part of
its oversight of this area. These
stockholder-commenters objected to the
§ 653.3(a) provision requiring risk
management to include consideration of
compensation practices and asked for
the provision to be removed. We believe
the incentive structures related to
functional area managers’ performance
and risk-taking activities, referred to in
our earlier response to comments on
§ 653.2, includes incentive
compensation policies and practices
and that the Corporation’s enterprisewide risk management oversight would
be incomplete without such
consideration.
b. Risk Committee [New § 653.3(b)]
We received comments from Farmer
Mac and two Farmer Mac stockholders
on new § 653.3(b), which addresses the
responsibilities of the risk committee.
The stockholder-commenters agreed in
general with the provisions, but asked
that they more closely resemble the
requirements for other GSEs, including
System institutions. We note that we do
not currently require other System
institutions to have risk committees and
so cannot accommodate the request of
those commenters asking for
consistency among System institutions.
Also, we note that the Corporation is of
a different structure than other System
institutions, necessitating some different
risk management aspects. However, we
did consider the provisions of the recent
risk management rulemaking by the
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49145
Federal Housing Finance Agency
(FHFA).21
Farmer Mac asked that we use the
same experience requirement for the
risk committee as is used for the risk
officer since it could be difficult to
ensure a risk expert is always elected to
the board. For the same reason, Farmer
Mac asked that we change the
committee responsibilities to a level of
understanding of risk rather than
possession of expertise. We agree and
substitute in new § 653.3(b)(1) the
phrase ‘‘an understanding of’’ and
remove the proposed ‘‘expertise’’
requirement when talking about the
requirement that the risk committee
have at least one member who is
familiar with risk management. We also
make changes in new § 653.3(b) to
replace the requirement that the risk
committee be responsible for the
oversight of the risk management
program, as that responsibility rightfully
belongs to the entire Corporation board.
In its place, we require the risk
committee to assist the Corporation
board in overseeing the risk
management program. We believe it is
essential that the tone of the
Corporation’s risk culture and its
procedures for risk decision-making be
set by the Board, even when based on
management’s recommendations.
Further, the board of directors play a
critical role in the ongoing oversight of,
and cohesive implementation of,
operational strategies and plans that
conform to established risk appetites.
We also replaced the proposed
requirement in paragraph (b)(2)(i) that
the risk committee oversee and
document risk management activities
with a requirement to periodically
assess management’s implementation of
the risk management program.
Similarly, we remove the proposed
review requirement of paragraph
(b)(2)(ii) and clarify that risk committee
recommendations relate to changes to
the risk management program. We also
clarify in paragraph (b)(2)(iii) that the
risk committee’s receipt of reports from
Corporation staff is not limited to the
risk officer. We recognize that any
personnel responsible for implementing
the risk management program may be
tasked by Farmer Mac with offering
reports to the risk committee.
We are making technical changes in
new § 653.3(b) to align language with
that contained in other sections (e.g.,
replacing ‘‘risk management practices’’
with ‘‘risk management program’’,
replacing ‘‘risk profile’’ with ‘‘risk
appetite’’). We also remove language
redundant of that contained in new
21 80
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§ 651.50 regarding formation of the risk
committee. As referenced in the
discussion of § 651.50 (preamble section
III.B.3.), we are finalizing the
requirement that the Corporation have a
risk management committee so do not
need to state in § 653.3(b) that the risk
committee must be formed.
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c. Management of Risk [New § 653.3(c)]
We received comments from Farmer
Mac and two Farmer Mac stockholders
on new § 653.3(c), which requires the
Corporation to have a risk officer. The
stockholder-commenters agreed in
general with the need for a risk officer,
but stated that FCA should not require
it as FCA should not make staffing
decisions within a System institution.
These commenters also contended that
requiring a risk officer offers no
assurance, from a safety and soundness
perspective, of compliance with risk
management policies. The stockholdercommenters asked that the entire
paragraph be removed. Farmer Mac
commented on the use of the term
‘‘experience’’ versus ‘‘expertise’’, asking
for similar use for both the risk
committee and the risk officer. Farmer
Mac explained that using different terms
implied different expectations regarding
the background of the risk officer versus
the risk committee expert. Farmer Mac
also asked that the standard be an
understanding of risk issues and not
direct experience in risk issues to
facilitate recruitment. Finally, Farmer
Mac asked for a 1-year phase in to fill
the position.
We earlier addressed most of Farmer
Mac’s comment regarding the level of
expertise required in § 653.3(b). In
response to remaining comments, we
are changing the name of paragraph (c)
from ‘‘Risk Officer’’ to ‘‘Management of
risk’’ and making conforming changes to
reference a ‘‘risk officer, however
styled’’ so as to encompass other
personnel responsible for implementing
the risk management program. We also
remove specific reporting requirements
to ‘‘the chief executive officer and board
risk committee’’ in new § 653.3(c)(4)
and (5) to recognize that Farmer Mac
will exercise its own discretion in
designing a risk management
position(s). We decline to reduce the
level of experience for risk officers to a
mere understanding of risk and have
retained the requirement for experience
in risk management. We are not
delaying the effective date of this rule as
requested by Farmer Mac to facilitate
the Corporation having a risk officer in
place before the rule is effective. Should
the Corporation encounter difficulties in
having a risk officer in place after this
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rule is effective, Farmer Mac should
contact the Director of OSMO.
3. Internal Controls [New § 653.4]
We received comments on new
§ 653.4 from Farmer Mac and two
Farmer Mac stockholders. Farmer Mac
asked that we remove the entire section
on internal controls, stating the
Corporation’s internal control activities
under SEC regulations are sufficient.
Farmer Mac then asked us to mirror SEC
regulation if we retained the provision
or make the following changes to it:
remove the term ‘‘ensure’’, incorporate
more flexibility, and avoid expanding
the role of the directors. Farmer Mac
also asked for clarification on paragraph
(b)(6) regarding information reported to
the board of directors, as it considered
the provision to be vague.
We decline the request to remove the
entire section requiring internal
controls. We continue to believe that the
Corporation’s board oversight of internal
controls is a critical component of its
responsibility for monitoring corporate
activities and providing reasonable
assurances that the controls will prevent
excessive risk taking, mitigate
operational risks, and minimize the
potential for unsafe and unsound
activities. The corporate environment is
influenced by management’s
philosophy, operating style, integrity,
ethical values, and commitment to
competence. If this foundation is strong,
if the corporate environment is positive,
the overall system of internal controls
will be more effective. Further, a sound
system of comprehensive and integrated
internal controls is vital to the
operations of any organization and
especially those whose business is
taking financial risk. In the more than
two decades since the Corporation was
chartered, business and operational
environments have become significantly
more complex and technology-driven. A
system of internal controls should
dynamically respond to such changes in
complexity—not just in business unit
operations but also in compliance with
increasingly complex laws, regulations,
and industry standards. We also decline
to rely solely on the internal control
assessment the Corporation prepares for
the SEC since that assessment is
targeted at financial reporting issues,
pursuant to provisions in the SarbanesOxley Act.22 As a safety and soundness
22 The Sarbanes-Oxley Act stressed the
importance of public companies maintaining
internal controls when it comes to their financial
reporting by requiring public companies to include
details on the company’s financial internal controls
inside of their annual reports. Also, the SEC
requires filers to include an attestation of ‘‘internal
controls over financial reporting’’ in annual reports.
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regulator, our interest in internal
controls extends beyond preparation of
financial report. While we believe
effective financial controls reduce the
risk of asset loss and help ensure that
financial information is complete and
accurate, and agree that financial
statements need to be reliable and
comply with laws and regulations, we
also believe safety and soundness
internal controls extend to the
operations, programs, and resources of
the Corporation. We are, however,
making some changes based on the
comments. We change paragraph (a) to
clarify the expected internal controls are
safety and soundness controls over the
Corporation’s operations, programs, and
resources. We also remove the ‘‘ensure’’
language from paragraph (a), to which a
commenter objected. Also, we are
substituting the requirement in
paragraph (b)(6) for ‘‘transparency’’ with
the Corporation’s board in response to a
comment. We instead require that
internal controls address ‘‘the
completeness and quality’’ of
information shared with the
Corporation’s board.
Farmer Mac also asserted that
requiring it to have internal controls
would deviate from what FHFA requires
of the only other secondary market GSEs
(Fannie Mae and Freddie Mac).23 We
believe that the current differences
between the operating structures of the
housing GSEs and Farmer Mac, in
particular the conservatorships of the
housing GSEs, makes comparison of
their regulatory structures less useful.
We believe internal controls are
important for Farmer Mac regardless of
whether another regulator adopted them
for the housing GSEs. The overall
purpose of an internal controls system
is to help an entity achieve its mission
and accomplish certain goals and
objectives. An effective internal control
system should promote orderly,
economical, efficient and effective
operations; safeguard resources against
loss due to waste, abuse,
mismanagement, errors and fraud;
promote adherence to statutes,
regulations, and operating procedures;
as well as develop and maintain reliable
financial and management data (and
accurately report that data in a timely
manner), all of which can help protect
the Corporation’s safe and sound
operation and its reputation.
23 See footnote 15, Appendix B, of the Farmer
Mac comment letter to the proposed rulemaking.
See also, 12 CFR 1236, Appendix A, ‘‘Prudential
Management and Operations Standard,’’ containing
some FHFA internal controls requirements for the
secondary market housing GSEs (e.g., ‘‘Standard 1—
Internal Controls and Information Systems’’).
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We had proposed in paragraphs (c)
and (d) that the Corporation establish a
monitoring system for its internal
controls and to report to us on the
effectiveness of those controls.
Stockholder-commenters objected to the
requirement for annual reports on
internal controls, explaining such
reports would be burdensome and could
reduce the attention given the issue
during FCA examinations. The
commenters instead stated that FCA
should rely primarily on its examination
authority for review of internal controls.
We make changes to paragraphs (c) and
(d) to address the comments objecting to
annual reports on internal controls, but
do so in a manner that also satisfies the
underlying purpose of proposing an
annual report on the effectiveness of
internal controls. We are removing
paragraph (d), which required the
annual report to OSMO, in its entirety.
In connection with this, we enhance the
provision in paragraph (c) to require the
monitoring of internal controls to
include an identification and
documentation of weaknesses in
internal controls. We continue to
believe the Corporation’s internal
control system needs to be monitored to
assess whether controls are effective and
operating as intended. On-going
monitoring occurs through routine
managerial activities such as
supervision, reconciliations, checklists,
comparisons, performance evaluations,
and status reports. Monitoring may also
occur through separate internal
evaluations (e.g., internal audits/
reviews) or from use of external sources
(e.g., comparison to peer groups or
industry standards, surveys, etc.).
Deficiencies found during monitoring
should then be documented and
reported to those responsible for the
function, with serious deficiencies being
reported to top management or the
board. To ensure this monitoring occurs,
the rule requires the Corporation to
document the process used to identify
and resolve weaknesses in its internal
controls, as well as document what
weaknesses were found. This change,
along with the internal controls over
financial reporting made to SEC, should
provide the necessary source documents
for our examination of the Corporation’s
internal controls, similar to what would
have resulted from the proposed annual
report to OSMO.
D. Disclosure and Reporting [Part 655]
Part 655 contains the existing
financial disclosure and reporting
provisions for the Corporation. We
received comments to part 655 from
Farmer Mac, an agent of Farmer Mac,
and a Farmer Mac stockholder. There
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were no comments opposing the
proposed organizational changes and,
therefore, we finalize them as proposed.
We also finalize as proposed the
movement of existing provisions into
the relevant subparts.
We discuss final changes to part 655,
and the related comments received, in
the appropriate sections below.
1. Definitions [New Subpart A: New
§ 655.1]
We received a comment from Farmer
Mac on the definition for ‘‘material’’ in
part 655, asking us to remove the
definition or restate that used by the
SEC. We proposed defining ‘‘material’’
as information required when ‘‘there is
a substantial likelihood that a
reasonable person would attach
importance in making investor
decisions or determining the financial
condition of the Corporation.’’ We
decline Farmer Mac’s request as it did
not argue that the term ‘‘material,’’ as
used in part 655, presented any conflict
with SEC reporting rules.24 Rather, we
note that, like the SEC, our rule
interprets the term in a manner similar
to the Financial Accounting Standards
Board (FASB) Concepts Statement No. 2
explanation of ‘‘materiality.’’ 25 FASB,
in turn, relied on the U.S. Supreme
Court explanation that a fact is material
under Federal securities laws if there is
a ‘‘substantial likelihood’’ the fact
would be ‘‘viewed by the reasonable
investor as having significantly altered
the ‘total mix’ of information made
available.’’ 26 We also note that our rule
substantially resembles the SEC Rule
405 definition,27 with adjustments made
for financial safety and soundness
considerations. We finalize the term
‘‘material’’ and its definition as
proposed. However, we are not
finalizing adding the term ‘‘report’’ and
24 See SEC Staff Accounting Bulletin: No. 99—
Materiality, 17 CFR part 211 (August 12, 1999),
explaining the meaning of ‘‘material’’ as ‘‘A matter
is ‘material’ if there is a substantial likelihood that
a reasonable person would consider it important.’’
25 FASB, Statement of Financial Accounting
Concepts No. 2, Qualitative Characteristics of
Accounting Information, 132 (1980). In this
bulletin, FASB explained the concept of
‘‘materiality’’ as ‘‘The omission or misstatement of
an item in a financial report is material if, in the
light of surrounding circumstances, the magnitude
of the item is such that it is probable that the
judgment of a reasonable person relying upon the
report would have been changed or influenced by
the inclusion or correction of the item.’’
26 See TSC Industries v. Northway, Inc., 426 U.S.
438, 449–450 (1976), where the court noted that
determining materiality required ‘‘delicate
assessments of the inferences a ‘reasonable
shareholder’ would draw from a given set of facts
and the significance of those inferences to him
. . .’’. See also Basic, Inc. v. Levinson, 485 U.S. 224
(1988).
27 17 CFR 230.405.
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49147
its accompanying definition to new
§ 651.1 as the term is sufficiently
explained in the relevant provisions of
the rule.
2. Prohibitions [Proposed New § 655.2]
We received comments on new
§ 655.2 from Farmer Mac and an agent
of Farmer Mac. Farmer Mac asked that
all references to ‘‘agents’’ be removed
and that the provision include a
materiality standard so as to limit FCA
actions. Farmer Mac asserted that FCA
has no authority to regulate non-System
persons or entities, suggesting FCA limit
itself to imposing an obligation on the
Corporation to monitor its agents.
Farmer Mac again stated that FCA
should not intrude into areas under SEC
jurisdiction. Farmer Mac also asked that
we defer to the SEC for determining
compliance, specifically mentioning the
SEC rules on omissions and
misstatements in reports filed with the
SEC. The agent to Farmer Mac stated the
regulation of agents was intrusive and
burdensome, adding that Congress did
not intend consultants and advisors to
be subject to FCA authority.
We proposed new § 655.2 to prohibit
directors, officers, employees, or agents
of the Corporation from making
misleading, inaccurate, or incomplete
part 655 disclosures. The provision
would have covered reports and
disclosures made to FCA, stockholders
of Farmer Mac, and the general public.
Contrary to the remarks of some
commenters, the provision did not
assert direct regulatory authority over
the general actions of an agent of Farmer
Mac. Instead, the provision would have
required Farmer Mac to control its
agents, or issue corrections to
disclosures made by the same if those
disclosures were determined to be
misleading, inaccurate, or incomplete.
As explained in section 8.3(c)(4) of the
Act, Farmer Mac has a statutory duty to
take necessary precautions, including
obtaining surety bonds, against any
losses caused by the acts of its agents.
Further, FCA has statutory authority to
issue cease-and-desist orders to agents
of the Corporation in appropriate
circumstances. In addition, we reject the
argument of Farmer Mac that
misleading, inaccurate, or incomplete
disclosures are the exclusive
jurisdiction of the SEC. Not every report
or disclosure made by Farmer Mac is in
response to a requirement of the SEC,
particularly those we require under our
rules in part 655. Rather, activities of
the Corporation extend beyond
registered securities issued or
guaranteed by Farmer Mac, and we have
long had regulations addressing Farmer
Mac disclosures related to securities not
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registered under the Securities Act of
1933. All this notwithstanding, in
response to the concerns expressed by
commenters regarding dual compliance
with SEC regulations, we are not
finalizing the contents of § 655.2 at this
time.
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3. Reports of Condition [New Subpart B:
Existing § 655.1; New §§ 655.10 and
655.15]
Our existing rule requires the
Corporation to make annual reports to
its shareholders, and we had proposed
enhancements to this existing
requirement. The enhancement
included adding quarterly reports,
increasing the information in the
reports, reducing distribution
timeframes, and requiring the reports to
be signed and certified as accurate. We
received comments on these proposed
changes from Farmer Mac and a Farmer
Mac stockholder. The stockholdercommenter only remarked that we
should remove references to ‘‘EDGAR’’,
the SEC Web site portal, as the name of
the portal may change. We agree and
have removed all references to
‘‘EDGAR’’ in part 655.
Farmer Mac objected to our rules
containing any different reporting or
disclosure requirements than those
required by the SEC. Farmer Mac stated
reporting and disclosures are the
jurisdiction of the SEC and FCA should
reconsider any regulation of the matter.
We reject the argument of Farmer Mac
that financial reports and disclosures
are the exclusive jurisdiction of the SEC
and remind the Corporation that we
have long had regulations addressing
financial reports and disclosures made
by the Corporation. Further, FCA may
require disclosure necessary to the
safety and soundness of the
Corporation.28 In particular, we may
require disclosures suitable to the
purpose for which Farmer Mac was
created, to follow disclosure practices
appropriate to secondary market
activities, and to aid in reducing risks in
secondary market transactions.29 We
also point out that SEC rules do not
prohibit its filers from making financial
reports to other Federal agencies.30
While we understand Farmer Mac’s
desire to only concern itself with one
unified set of reporting and disclosure
requirements, we cannot uniformly
adopt SEC reporting and disclosure
requirements. As explained in the
proposed rulemaking, SEC requires
28 Sections
5.17(a)(8) and 8.11 of the Act (12
U.S.C. 2252(a)(8) and 2279aa–11).
29 Section 8.11(a)(1) and (2) of the Act (12 U.S.C.
2279aa–11).
30 Refer to 17 CFR 240.12b–33.
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certain reporting and disclosures to
satisfy its role in ensuring listed
companies provide sufficient
information to the investing public. We,
on the other hand, concern ourselves
with ensuring disclosures and report
made by the Corporation address safety
and soundness concerns, which include
all the activities of the Corporation.
Where we can in this rule, we have
allowed Farmer Mac to use SEC filings
in satisfaction of our requirements.
However, the SEC is a separate agency
and can change its reporting and
disclosure requirements without
consulting FCA. For this reason, we
limit the extent that SEC filing
requirements may also satisfy our
requirements and do so in a manner to
avoid conflict with SEC requirements
and unnecessary duplication of effort by
Farmer Mac.
a. Annual Reports
Our existing rule requires the
Corporation to make annual reports to
its shareholders consistent with
shareholder reports required by the SEC,
and to submit copies of such to us. We
note that the Corporation must also file
annual and quarterly reports with the
SEC (10Q and 10K, respectively), which
may include additional information not
part of the annual report to
shareholders.31 Farmer Mac asked us to
mirror SEC annual reporting
requirements. Doing so would include
removing the proposed quarterly
reporting to shareholders.32 We finalize
the proposed language that the annual
reports to shareholders must be either
equivalent in content to that required
under the Securities Act or as we so
instruct. However, we are not finalizing
the proposed requirement in § 655.10(a)
that the Corporation make quarterly
shareholder reports. Farmer Mac also
asked that we remove the requirement
to file any paper copies of reports with
OSMO. We decline this request for
31 The SEC requires registered entities to file an
annual report on Form 10–K, which may contain
more detailed information about the company’s
financial condition than the annual report to
shareholders. The annual report on Form 10–K
provides a comprehensive overview of the
company’s business and financial condition and
includes audited financial statements. Although
similarly named, the annual report on Form 10–K
is distinct from the ‘‘annual report to shareholders,’’
which a company must send to its shareholders
when it holds an annual meeting to elect directors.
www.sec.gov/answers/form10k.htm.
32 Currently, the SEC does not require registrants
to issue a quarterly report to shareholders.
However, the issuance of such a report might be
required by the listing standards of a national
securities exchange or association. In addition,
communications about quarterly results are subject
to Regulation FD, Fair Disclosure, as well as Form
8–K disclosure requirements.
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reasons discussed in the proposed
rulemaking preamble.
b. Certification of Reports
Farmer Mac said that there was no
need for requiring signatures and
certifications on reports as the SEC
already addresses how reports are to be
signed and certified. Farmer Mac also
asked that we define ‘‘financially
accurate’’ as used in new § 655.10(b),
explaining it is not a term used in the
SEC-required certification of reports. We
finalize with changes the signature and
certification requirements of new
§ 655.10(b). Our proposed certification
did not conflict with SEC laws or
regulations, but may have caused
compliance issues with SEC
instructions. SEC rules §§ 240.13a–14
and 240.15d–14 require certification of
quarterly and annual reports filed with
them, but SEC instructions for
completing these certifications prohibit
filers from making changes to the
certification language provided in the
SEC rules. Our proposed certification
requirements captured most of the same
information as the SEC certifications,
without giving specific language that
had to be used. To address the
commenter’s concern regarding
compliance with both the SEC and FCA,
we are changing our certification
requirements to require the use of SEC
certifications.33 We also clarify that the
requirements of § 655.10(b) apply to
reports issued under new subpart B of
part 655.
c. Distribution Deadlines
Farmer Mac objected to reducing
distribution deadlines to 90 days, asking
that we keep the current 120-day
deadline so as to provide it greater
flexibility. Farmer Mac added that the
proposed 90-day timeframe ‘‘deviates
from SEC rules,’’ but does not name the
SEC rules being referenced. Farmer Mac
also asserted the shorter timeframe
could increase compliance burden.
Absent a citation to the SEC rules, we
do not see where the number of days
FCA proposed created any compliance
problems with SEC requirements. The
SEC has a three-tiered deadline for
annual reports filed with them that is
based on the size of the filer: 60 days
after fiscal year end for large accelerated
filers, 75 days after fiscal year end for
regular accelerated filers, and 90 days
after fiscal year end for nonaccelerated
33 SEC certifications are designed to be consistent
with the certification requirements of section 302 of
the Sarbanes-Oxley Act, which is intended to
improve the quality of public financial disclosures
that a company provides in its periodic reports to
investors.
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filers.34 Our proposed 90-day deadline
did not conflict with any of these
timeframes. The separate ‘‘annual report
to shareholders’’ 35 required by the SEC
provides that a registered company must
distribute the company’s annual report
to shareholders at least 40 days before
the company holds its annual meeting
or elections.36 Again, our proposed 90day deadline did not conflict with this
timeframe as the Corporation is not
legally required to hold its annual
meeting on any specific date.
Our existing rule requires distribution
of annual reports to shareholders within
120 days of the fiscal year end (i.e. April
of each year). The SEC ties distribution
of shareholder reports to the annual
meeting date (or election date) and
reports to the SEC are tied to fiscal year
end. We use fiscal year end for both
actions. This means to comply with
both the SEC and FCA deadlines the
Corporation currently must distribute its
report to shareholders within 120 days
of fiscal year end and may not hold its
annual meeting (or elections) until 40
days after the report is distributed
(approximately 160 days or June 9th of
each year). We proposed reducing our
deadline to 90 days, which would result
in the Corporation being required to
hold its annual meeting (and elections)
no earlier than May 10th of each year
(approximately 120 days from fiscal
year end). As there is no compliance
issue with SEC rules, we reject the
request of Farmer Mac to follow the SEC
in this regard. We prefer a date certain
under which the Corporation must
distribute its annual report to
shareholders. However, we have
restored the existing 120-day deadline
for distribution of the annual report to
shareholders. We continue to believe
the Corporation is more than capable of
issuing the report sooner, but agree that
the additional time is beneficial to the
director nomination process (due to the
report’s connection to holding annual
meetings/elections under SEC rules).
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d. Interim Reports, Proxy Statements,
and Notices
We proposed in § 655.15 that the
Corporation provide us copies of
34 SEC Web site, www.sec.gov/answers/
form10k.htm. See also Instructions to Form 10–K at
section A.2, www.sec.gov.
35 The SEC-required annual report to
shareholders is usually includes an opening letter
from the Chief Executive Officer, financial data,
results of operations, market segment information,
new product plans, subsidiary activities, and
research and development activities on future
programs. Companies sometimes elect to send their
annual report on Form 10–K to their shareholders
in lieu of, or in addition to, providing shareholders
with a separate annual report to shareholders. SEC
Web site, www.sec.gov/answers/annrep.htm.
36 17 CFR 240.14a–16.
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interim reports (e.g., 8–K), proxy
statements, and notices sent to SEC. We
also proposed that this same
information be posted on the
Corporation’s Web site for public
viewing, but that links to the SEC
electronic filings may be used to satisfy
this requirement. Farmer Mac
commented that these requirements
were an unjustified regulatory burden.
Farmer Mac then asked that we clarify
the scope of notices, interim reports,
and proxy statements required to be sent
to OSMO under § 655.15(a). Farmer Mac
also asked that we remove the
requirement to post on its Web site
these same notices, interim reports, and
proxy statements. Farmer Mac stated
concern with the public posting
requirement since these filings include
all papers and documents made part of
the filing, contending confidential
communication with the SEC may be
made public.
We decline to remove the § 655.15(a)
requirement to provide these complete
filings to OSMO as we continue to
believe it is essential that
communications between the
Corporation and OSMO, its primary
regulator, include the substantive
communications the Corporation has
with the SEC. We also fail to see how
providing us copies of reports and
filings already being prepared is a
burden on the Corporation. We have
clarified in § 655.15(b) that the public
Web site postings may be limited to the
public aspects of the notices, interim
reports, and proxy statements.
4. Reports Related to Securities
Activities [New Subpart C: Existing
§ 655.50; New § 655.20]
Farmer Mac objected to being
required in § 655.20 to send paper
copies to us of reports on unregistered
securities activities. We have removed
the requirement for both electronic and
paper copies, replacing it with a
requirement for either a paper or
electronic copy, whichever is most
conducive to transmitting the
information. We also added language to
clarify the reports are to be sent to the
Director of OSMO.
Farmer Mac requested we clarify the
types of documents covered by § 655.20
and whether daily transactions (e.g.,
issuance of unregistered debt securities)
needed to be filed with us. Farmer Mac
explained that many documents and
daily activities could be covered by the
rule under some interpretations. If so,
the burden of providing that
information to us would be significantly
increased. As we made little change to
existing requirements in this area, we
question the assertion that the rule
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49149
could be misinterpreted or is a burden
on Farmer Mac. Farmer Mac has made
reports to us on its activities regarding
securities not registered under the
Securities Act under this regulatory
requirement since 1993. As such,
Farmer Mac should continue its current
practices addressing daily activities for
filings made under this requirement,
unless we later advise them otherwise.
The Corporation at a minimum must
make special filings with us regarding
those items specifically listed in the
rule. We encourage the Corporation to
contact us when questions arise as to
whether a specific securities action
requires a filing under § 655.20.
Farmer Mac requested we update
existing terminology in § 655.20(b)(2)
regarding securities purchased by the
Corporation under section 8.6(e) of the
Act. We agree that the specific citation
to the Act needed to be updated to
reference the correct paragraph of
section 8.6.37 The current reference
predates Congress moving the relevant
provision from section 8.6(g) to section
8.6(e) of the Act.38 We also revise the
‘‘pooling and servicing agreements’’
terminology as requested by Farmer
Mac. The existing rule used this phrase
to reference those documents employed
in the exercise of the Corporation’s
authority to purchase and hold
securities that are backed by pools of
qualified loans (which loans are secured
by a first lien on agricultural real estate,
per section 8.0(9)(A) of the Act).39 The
phrase ‘‘pooling and servicing
agreements’’ is outdated as such
documents are no longer a fundamental
prerequisite to doing business with
Farmer Mac. We replace this phrase
with one that refers to those documents
supporting issuances of these types of
guaranteed securities and which are
material to the transaction(s).
5. Correspondence Related to Securities
Activities [New Subpart C: Existing
§ 655.50; New § 655.21]
We proposed expanding the existing
requirement to send us copies of
substantive correspondence between
Farmer Mac and the SEC or U.S.
Treasury to cover all subject matters,
instead of just those substantive
communications related to securities
activities and SEC compliance matters.
We also proposed adding similar
37 12
U.S.C. 2279aa–6(e).
Law 104–105, 110 Stat. 164 (February
10, 1996).
39 See former § 621.20(b)(2)(ii) (58 FR 48786,
September 20, 1993) referring to Farmer Mac I
securities, relocated to existing § 655.50(b)(2)(ii)(70
FR 40635, July 14, 2005). Farmer Mac I securities
are those backed by pools of qualified loans as
defined in section 8.0(9)(A) of the Act.
38 Public
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communications with the NYSE and
setting timeframes for providing the
information to us. Farmer Mac asked for
clarification on the types of
correspondence between the
Corporation and the SEC or NYSE that
needed to be sent to us, adding that
sending all substantive communique
could be unworkably burdensome.
Farmer Mac did acknowledge that the
provision was within our oversight
authority, but stated the scope of
communication was too broad. Farmer
Mac went on to equate ‘‘substantive’’
correspondence with ‘‘routine’’
communications received by many
employees of the Corporation through
subscriptions to NYSE market data.
Material such as mass-produced
market updates are not ‘‘substantive
correspondence between the
Corporation and the SEC, U.S. Treasury,
or NYSE’’ nor would we expect to be
sent SEC and NYSE communique
provided to a subscriber list. However,
to alleviate any confusion, we clarify
that correspondence directly addressing
the activities of the Corporation is what
is covered by the provision. Further, we
refer to past clarifications on this issue,
explaining that non-substantive
transmittal letters accompanying SEC
filings, for example, would not be
considered ‘‘substantial’’ and therefore
not required to be filed with the FCA.40
On the other hand, we have particular
interest in interpretive rulings of the
NYSE, the SEC, or the Treasury
Department bearing on Farmer Mac’s
ongoing business activities and expect
such correspondence to be filed with us
under this provision.
Farmer Mac asked that we exclude
communications to NYSE that would be
duplicative of official filings with the
SEC. We agree and have changed the
language of § 655.21(a) accordingly.
Farmer Mac also requested guidance on
how to transmit to us communique
issued via secure electronic portals. We
encourage Farmer Mac to contact us
when they have such communique, at
which time we will provide instructions
on how to provide us copies of such.
In addition, Farmer Mac objected to
being required in § 655.21(c) to notify us
of any exemption it obtained from the
SEC. Farmer Mac asked that we limit
the requirement to those SEC
exemptions obtained under the
Securities Act of 1934. In making this
request, Farmer Mac explained it is not
subject to complete regulation by SEC
and, except for certain mortgage-backed
40 See 58 FR 48786 (September 20, 1993), where
FCA responded in 1993 to a similar comment of
Farmer Mac regarding the meaning of
‘‘substantive’’.
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securities, it is not subject to the 1933
Securities Act and must only file reports
under the 1934 Securities Act. We
decline the request to limit the rule by
naming a specific securities law. The
definition for ‘‘securities’’ contained in
§ 655.1 explains that it means the
securities law(s) appropriate to the
context of the employing provision.
However, we have changed the
requirement to only require notice to us
of those exemptions that are not
generally available under SEC rules to
similarly situated filers.
E. Other Comments
We received comments on portions of
the proposed rule preamble language
that do not address regulatory
provisions and result in no change to
the rule. These comments are discussed
below.
1. Regulatory Flexibility Act
Certification
We received a comment from an agent
of Farmer Mac regarding the Regulatory
Flexibility Act (RFA).41 The commenter
argued this rulemaking would impact a
substantial number of small businesses,
with whom Farmer Mac conducts
business, and therefore would alter our
assessment of the economic impact of
the rulemaking. In the proposed rule,
we certified that the rule would not
have a significant economic impact on
a large number of small entities, and
that Farmer Mac did not qualify as a
‘‘small entity’’ as defined under the
RFA. The RFA does not: (1) Seek
preferential treatment for small entities;
(2) require agencies to adopt regulations
that impose the least burden on small
entities; or (3) mandate exemptions for
small entities. Rather, it requires
agencies to examine public policy issues
using an analytical process that
identifies, among other things, barriers
to small business competitiveness.
Meaning, it requires agencies to analyze
the economic impact of proposed
regulations when there is likely to be a
significant economic impact on a
substantial number of small entities
covered by the rulemaking, and to
consider regulatory alternatives that will
achieve the agency’s goal while
minimizing the burden on those same
small entities. The rule is directed at
Farmer Mac, which is not a small
business. Further, we see nothing in this
final rulemaking that creates significant
economic barriers to small businesses.
Those areas of the rule referencing
agents of Farmer Mac expound upon
existing regulations or statutory
41 Regulatory Flexibility Act, Pub. L. 96–354, 94
Stat. 1164 (codified at 5 U.S.C. 601).
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provisions and make no reference to the
size of entity serving as an agent to
Farmer Mac.
2. Need for Rulemaking
One stockholder-commenter
expressed general concern with FCA
regulating the corporate governance and
disclosures for Farmer Mac given
existing SEC rules in these areas. This
commenter asked FCA to use caution as
SEC rules are constantly changing. The
commenter also stated FCA did not
need to regulate governance behavior at
Farmer Mac as the Corporation has a
strong history of sophisticated corporate
governance practices.
Voluntary governance is valuable, but
it does not replace the stability that
rules provide in assuring stakeholders of
the safety and soundness of the
Corporation. Our governance rules set a
minimum level of performance that is
mandatory for the Corporation. While
we believe it is important to preserve
individual operating flexibility
wherever and whenever possible, our
responsibility as regulator requires us to
issue regulations we determine
appropriate for safety and soundness
reasons. We believe the assurances
derived from a regulatory minimum
standard, combined with the
Corporation’s voluntary governance
efforts, will increase stockholder,
investor, and public confidence in
Farmer Mac.
Farmer Mac questioned the need for
any regulatory changes, stating that
insufficient recognition was given to its
status as a public company. Farmer Mac
also stated that it is unnecessary for
FCA to regulate many corporate
governance areas due to SEC
requirements and thus we should
remove those provisions. Farmer Mac
explained that it is the mission of the
SEC to protect investors, and the SEC
provides sufficient regulation of board
activities and corporate disclosures.
Farmer Mac added that portions of the
rule presented compliance concerns
with other regulatory elements
unrelated to FCA, but provided no
specific citation to these other rules.
Farmer Mac also asserted that the
rulemaking would potentially harm the
Corporation and those it serves in a
material way instead of enhance safe
and sound operations, but again offered
no specifics.
The FCA, acting through OSMO,
examines and provides general
supervision over the activities of Farmer
Mac pursuant to section 8.11 of the Act.
As discussed elsewhere in this
preamble, the role the SEC plays in the
disclosure and reporting aspects of the
Corporation does not remove our
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responsibility to regulate Farmer Mac’s
safe and sound operations. We have a
responsibility to address corporate
governance within the Corporation
given its importance to the safe and
sound operations of the Corporation and
the current business climate in which
Farmer Mac operates. As a GSE, the
Corporation has strategic objectives that
are both commercially and public policy
oriented. Thus, governance of the
Corporation must be understood and
interpreted not only in the context of
the fiduciary responsibilities to the
Corporation and its shareholders, but
also in the context of the statutory duty
to further the Congressional purposes
the Corporation was chartered to
achieve. In addition, we explained in
the proposed rule preamble that Farmer
Mac, as a publicly traded company, is
subject to many of the governance
requirements of Sarbanes-Oxley, DoddFrank, and SEC disclosure regulations
for publicly traded companies.
However, with the recent events in the
financial industry, increased
sophistication in financial markets, and
on-going scrutiny of GSE financial
activities and related reporting
practices, we believed it prudent to
update our current regulatory standards
related to Farmer Mac’s Board
governance, reporting, and disclosures.
Farmer Mac stated that FCA did not
publish its current concerns with the
risk management and governance
operations of the Corporation in support
of the rulemaking. This rulemaking is
intended to ensure that appropriate
board governance and risk management
practices are in place at Farmer Mac. We
are not limited to issuing regulations
only when there is an existing adverse
risk or problem. Our responsibilities as
a safety and soundness regulator
requires us to be proactive and prudent
in our rulemaking, as well as reactive by
providing standards that help avert
potential problems. Thus, we have
flexibility to issue rules either in
response to a problem or proactively to
ensure the Corporation’s continued safe
and sound business operations.
Farmer Mac also asserted FCA has in
the past ‘‘deferred’’ to the oversight of
the SEC and NYSE. We reject this
assertion. The FCA, as an independent
regulator of the Corporation, is not
required to follow the actions of other
regulators and we have never deferred
our regulatory oversight to another
agency. We do not view our past efforts
to accommodate the Corporation’s
requests to modify our regulations in
light of those issued by other regulators
(whose regulations also affect the
Corporation’s operations) as a
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relinquishment of our safety and
soundness authority.
3. Terminology
Farmer Mac asked that we define an
assortment of terms and phrases used
throughout the rule, asserting that many
of these terms and phrases are not
‘‘established’’ in a body of law. Most of
the terms and phrases identified by
Farmer Mac are derived from corporate
case law, model codes, and the Act
itself. As such, we do not believe it
necessary to further define them.
4. Regulatory Burden
Farmer Mac commented that it
viewed many aspects of the rule as
unnecessary and burdensome, making
them inconsistent with the
‘‘Congressional mandate’’ that we
eliminate unnecessary regulations. As
we understand this comment, Farmer
Mac is referring to the instructions of
the Farm Credit System Reform Act of
1996 (1996 Act) 42 to reduce regulatory
burdens. Section 212(b) of the 1996 Act
requires us to continuously review our
regulations to eliminate rules that are
unnecessary, unduly burdensome,
costly, or not based on law. The 1996
Act specifies that we are to make these
eliminations only if they would be
consistent with law, safety, and
soundness. As explained throughout
this preamble, Congress charged us to
issue regulations to ensure the safety
and soundness of the Corporation and
this rule is consistent with the law and
safety and soundness concerns.
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), FCA hereby certifies the final
rule will not have a significant
economic impact on a substantial
number of small entities. The
Corporation has assets and annual
income over the amounts that would
qualify it as a small entity. Therefore,
the Corporation is not considered a
‘‘small entity’’ as defined in the
Regulatory Flexibility Act.
List of Subjects
12 CFR Part 650
12 CFR Part 651
Agriculture, Banks, banking, Conduct
standards, Conflict of interests,
Elections, Ethical conduct, Rural areas.
42 Public Law 104–105, 110 Stat. 162 (February
10, 1996).
Frm 00013
Fmt 4700
12 CFR Part 653
Agriculture, Banks, banking, Capital,
Conduct standards, Credit, Finance,
Rural areas.
12 CFR Part 655
Accounting, Agriculture, Banks,
banking, Accounting and reporting
requirements, Disclosure and reporting
requirements, Financial disclosure,
Rural areas.
For the reasons stated in the
preamble, parts 650, 651, 653, and 655
of chapter VI, title 12 of the Code of
Federal Regulations are amended as
follows:
PART 650—FEDERAL AGRICULTURAL
MORTGAGE CORPORATION
GENERAL PROVISIONS
1. The authority citation for part 650
is revised to read as follows:
■
Authority: Secs. 4.12, 5.9, 5.17, 5.25, 8.11,
8.12, 8.31, 8.32, 8.33, 8.34, 8.35, 8.36, 8.37,
8.41 of Pub. L. 92–181, 85 Stat. 583 (12
U.S.C. 2183, 2243, 2252, 2261, 2279aa–11,
2279aa–12, 2279bb, 2279bb–1, 2279bb–2,
2279bb–3, 2279bb–4, 2279bb–5, 2279bb–6,
2279cc); sec. 514 of Pub. L. 102–552, 106
Stat. 4102; sec. 118 of Pub. L. 104–105, 110
Stat. 168.
2. Add subpart B, under the heading
‘‘Conservators, Receivers, and
Liquidations’’ consisting of existing
§§ 650.1 through 650.80 as redesignated
in the following table:
■
Old section
650.1, no subpart ......
650.5, no subpart ......
650.10, no subpart ....
650.15, no subpart ....
650.20, no subpart ....
650.25, no subpart ....
650.30, no subpart ....
650.35, no subpart ....
650.40, no subpart ....
650.45, no subpart ....
650.50, no subpart ....
650.55, no subpart ....
650.60, no subpart ....
650.65, no subpart ....
650.70, no subpart ....
650.75, no subpart ....
650.80, no subpart ....
New section
650.13,
650.14,
650.10,
650.15,
650.20,
650.25,
650.30,
650.35,
650.40,
650.45,
650.50,
650.55,
650.60,
650.65,
650.70,
650.75,
650.80,
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
subpart
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
3. Add a new subpart A to read as
follows:
■
Agriculture, Banks, banking, Credit,
Reporting and recordkeeping
requirements, Rural areas.
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49151
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Subpart A—Regulation, Examination and
Enforcement
Sec.
650.1 Definitions.
650.2 Regulatory authority.
650.3 Supervision and enforcement.
650.4 Access to Corporation records and
personnel.
650.5 Reports of examination.
650.6 Criminal referrals.
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Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Rules and Regulations
Subpart A—Regulation, Examination
and Enforcement
§ 650.1
Definitions.
The following definitions apply to
this part:
Act or Authorizing statute means the
Farm Credit Act of 1971, as amended.
Business day means a day the
Corporation is open for business,
excluding the legal public holidays
identified in 5 U.S.C. 6103(a).
Corporation or Farmer Mac means the
Federal Agricultural Mortgage
Corporation and its affiliates.
FCA means the Farm Credit
Administration, an independent Federal
agency of the executive branch.
NYSE means the New York Stock
Exchange, a listing exchange.
OSMO means the FCA Office of
Secondary Market Oversight, which is
responsible for the general supervision
of the safe and sound exercise of the
Corporation’s powers, functions, and
duties and compliance with laws and
regulations.
Our or we means the FCA or OSMO,
as appropriate to the context of the
provision employing the term.
SEC means the Securities and
Exchange Commission.
Securities Act means the Securities
Act of 1933 (15 U.S.C. 77a et seq.) or the
Exchange Act of 1934 (15 U.S.C. 78a et
seq.), or both, as appropriate to the
context of the provision employing the
term.
Signed, when referring to paper form,
means a manual signature, and, when
referring to electronic form, means
marked in a manner that authenticates
each signer’s identity.
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§ 650.2
Regulatory authority.
(a) General. The Corporation is a forprofit Government-sponsored enterprise
developed to provide a secondary
market for qualified agricultural, USDAguaranteed, and rural utility loans, with
public policy objectives included in its
statutory charter. The Corporation is
regulated by the FCA, operating through
OSMO. The Corporation also lists
securities on the NYSE, making it
subject to certain SEC listing and
disclosure requirements.
(b) Primary regulator. The FCA,
operating through OSMO, holds primary
regulatory, examination, and
enforcement authority over the
Corporation. The FCA, operating
through OSMO, is responsible for the
general supervision of the safe and
sound exercise of the Corporation’s
powers, functions, and duties and
compliance with applicable laws and
regulations.
(c) Other regulatory authorities. The
Corporation registers its common stock
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and certain offerings of Farmer Mac
Guaranteed Securities under the
Securities Act and related regulations so
must comply with certain SEC reporting
requirements.
§ 650.3
Supervision and enforcement.
The Act provides FCA, acting through
OSMO, with enforcement authority to
protect the financial safety and
soundness of the Corporation and to
ensure that the Corporation’s powers,
functions, and duties are exercised in a
safe and sound manner.
(a) General supervision. When we
determine the Corporation has violated
a law, rule, or regulation or is engaging
in an unsafe or unsound condition or
practice, we have enforcement authority
that includes, but is not limited to, the
following:
(1) Issue an order to cease and desist;
(2) Issue a temporary order to cease
and desist;
(3) Assess civil monetary penalties
against the Corporation and its
directors, officers, employees, and
agents; and
(4) Issue an order to suspend, remove,
or prohibit directors and officers.
(b) Financial safety and soundness of
the Corporation. When we determine
the Corporation is taking excessive risks
that adversely impact the adequacy of
Regulatory Capital, we have authority to
address that risk. This includes, but is
not limited to, requiring capital
restoration plans, restricting dividend
distributions, requiring changes in the
Corporation’s obligations and assets,
requiring the acquisition of new capital
and restricting those Corporation
activities determined to create excessive
risk to the Corporation’s Regulatory
Capital.
§ 650.4 Access to Corporation records and
personnel.
(a) The Corporation must make its
records available promptly upon request
by OSMO, at a location and in a form
and manner acceptable to OSMO.
(b) The Corporation must make
directors, officers, employees and other
individuals or entities engaged by the
Corporation to participate in the
conduct of the Corporation’s business
available to OSMO during the course of
an examination or supervisory action
when OSMO determines it necessary to
facilitate an examination or supervisory
action.
§ 650.5
Reports of examination.
The Corporation is subject to the
provisions in 12 CFR part 602 regarding
FCA Reports of Examination.
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Frm 00014
Fmt 4700
Sfmt 4700
§ 650.6
Criminal referrals.
The rules at 12 CFR part 612, subpart
B, regarding ‘‘Referral of Known or
Suspected Criminal Violations’’ are
applicable to the Corporation.
■ 4. Revise part 651 to read as follows:
PART 651—FEDERAL AGRICULTURAL
MORTGAGE CORPORATION
GOVERNANCE
Subpart A—General
Sec.
651.1 Definitions.
651.2 [Reserved]
Subpart B—Standards of Conduct
651.21 [Reserved]
651.22 Conflict-of-interest policy.
651.23 Implementation of policy.
651.24 Director, officer, employee, and
agent responsibilities.
Subpart C—Board Governance
651.30 [Reserved]
651.35 [Reserved]
651.40 [Reserved]
651.50 Committees of the Corporation’s
board of directors.
Authority: Secs. 4.12, 5.9, 5.17, 8.3, 8.11,
8.14, 8.31, 8.32, 8.33, 8.34, 8.35, 8.36, 8.37,
8.41 of Pub. L. 92–181, 85 Stat. 583 (12
U.S.C. 2183, 2243, 2252, 2279aa–3, 2279aa–
11, 2279aa–14, 2279bb, 2279bb–1, 2279bb–2,
2279bb–3, 2279bb–4, 2279bb–5, 2279bb–6,
2279cc); sec. 514 of Pub. L. 102–552, 106
Stat. 4102; sec. 118 of Pub. L. 104–105, 110
Stat. 168.
Subpart A—General
§ 651.1
Definitions.
The following definitions apply to
this part:
Act or Authorizing statute means the
Farm Credit Act of 1971, as amended.
Agent means any person (other than a
director, officer, or employee of the
Corporation) who represents the
Corporation in contacts with third
parties or who provides professional
services such as legal, accounting, or
appraisal services to the Corporation.
Affiliate means any entity established
under authority granted to the
Corporation under section 8.3(c)(14) of
the Act.
Appointed director means a member
of the Corporation’s board of directors
who was appointed to the Corporation
board by the President of the United
States of America.
Business day means a day the
Corporation is open for business,
excluding the legal public holidays
identified in 5 U.S.C. 6103(a).
Class A stockholders means holders of
common stock in the Corporation that
are insurance companies, banks, or
other financial institutions or entities.
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Class B stockholders means holders of
common stock in the Corporation that
are Farm Credit System institutions.
Conflict-of-interest means a director,
officer, or employee of the Corporation
has an interest in a transaction,
relationship, or activity that might
adversely affect, or appear to adversely
affect, the ability of the director, officer,
or employee to perform his or her
official duties on behalf of the
Corporation in an objective and
impartial manner in furtherance of the
interest of the Corporation and its
statutory purposes.
Corporation means the Federal
Agricultural Mortgage Corporation and
its affiliates.
Director elections mean the process of
searching for director candidates,
conducting director nominations, and
voting for directors.
Elected director means a member of
the Corporation’s board of directors who
was elected by either Class A or Class
B stockholders.
Employee means any salaried
individual working part-time, full-time,
or temporarily for the Corporation.
Entity means a corporation, company,
association, firm, joint venture,
partnership (general or limited), society,
joint stock company, trust (business or
otherwise), fund, or other organization
or institution.
FCA means the Farm Credit
Administration, an independent Federal
agency of the executive branch.
Material means conflicting interests of
sufficient magnitude or significance that
a reasonable person with knowledge of
the relevant facts would question the
ability of the person having such
interest to discharge official duties in an
objective and impartial manner in
furtherance of the interests and statutory
purposes of the Corporation.
Officer means the salaried president,
vice presidents, secretary, treasurer, and
general counsel, or other person,
however designated, who holds a
position of similar authority in the
Corporation.
OSMO means the FCA Office of
Secondary Market Oversight, which is
responsible for the general supervision
of the safe and sound exercise of the
Corporation’s powers, functions, and
duties and compliance with laws and
regulations.
Our or we means the FCA or OSMO,
as appropriate to the context of the
provision employing the term.
Person means individual or entity.
Reasonable person means a person
under similar circumstances exercising
the average level of care, skill, and
judgment in his or her conduct.
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Resolved means an actual or potential
material conflict-of-interest that has
been altered so that a reasonable person
with knowledge of the relevant facts
would conclude that the conflicting
interest would not adversely affect the
person’s performance of official duties
in an objective and impartial manner
and in furtherance of the interests and
statutory purposes of the Corporation.
Signed, when referring to paper form,
means a manual signature, and, when
referring to electronic form, means
marked in a manner that authenticates
each signer’s identity.
49153
Subpart B—Standards of Conduct
section at any time during the year to
file a signed statement to that effect;
(d) Establish guidelines for
determining when a potential conflict is
material in accordance with this
subpart;
(e) Establish procedures for resolving
or disclosing material conflicts of
interest.
(f) Provide internal controls to ensure
that reports are filed as required and
that conflicts are resolved or disclosed
in accordance with this subpart.
(g) Notify directors, officers, and
employees of the conflict-of-interest
policy and any subsequent changes
thereto and allow them a reasonable
period of time to conform to the policy.
§ 651.21
[Reserved]
§ 651.23
Conflict-of-interest policy.
(a) The Corporation shall disclose any
unresolved material conflicts of interest
involving its directors, officers, and
employees to:
(1) Shareholders through annual
reports and proxy statements; and
(2) Investors and potential investors
through disclosure documents supplied
to them.
(b) The Corporation shall make
available to any shareholder, investor,
or potential investor, upon request, a
copy of its policy on conflicts of
interest. The Corporation may charge a
nominal fee to cover the costs of
reproduction and handling.
(c) The Corporation shall maintain all
reports of all potential conflicts of
interest and documentation of
materiality determinations and
resolutions of conflicts of interest for a
period of 6 years.
§ 651.2
§ 651.22
[Reserved]
The Corporation shall establish and
administer a conflict-of-interest policy
that will provide reasonable assurance
that the directors, officers, employees,
and agents of the Corporation discharge
their official responsibilities in an
objective and impartial manner in
furtherance of the interests and statutory
purposes of the Corporation. The policy
shall, at a minimum:
(a) Define the types of transactions,
relationships, or activities that could
reasonably be expected to give rise to
potential conflicts of interest. For the
purpose of determining whether a
potential conflict of interest exists, the
following interests shall be imputed to
a person subject to this regulation as if
they were that person’s own interests:
(1) Interests of any individual residing
in that person’s household;
(2) Interests of any individual
identified as a legal dependent of that
person;
(3) Interests of that person’s general
business partner;
(4) Interests of an organization or
entity that the person serves as officer,
director, trustee, general partner or
employee; and
(5) Interests of a person, organization,
or entity with which that person is
negotiating for or has an arrangement
concerning current or prospective
employment.
(b) Require each director, officer, and
employee to report in writing, annually,
and at such other times as conflicts may
arise, sufficient information about
financial interests, transactions,
relationships, and activities to inform
the Corporation of potential conflicts of
interest;
(c) Require each director, officer, and
employee who had no transaction,
relationship, or activity required to be
reported under paragraph (b) of this
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Fmt 4700
Sfmt 4700
Implementation of policy.
§ 651.24 Director, officer, employee, and
agent responsibilities.
(a) Each director, officer, employee,
and agent of the Corporation shall:
(1) Conduct the business of the
Corporation following high standards of
honesty, integrity, impartiality, loyalty,
and care, consistent with applicable law
and regulation in furtherance of the
Corporation’s public purpose;
(2) Adhere to the requirements of the
conflict-of-interest policy established by
the Corporation and provide any
information the Corporation deems
necessary to discharge its
responsibilities under this subpart.
(b) Directors, officers, employees, and
agents of the Corporation shall be
subject to the penalties of part C of title
V of the Farm Credit Act of 1971, as
amended, for violations of this
regulation, including failure to adhere to
the conflict-of-interest policy
established by the Corporation.
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Subpart C—Board Governance
653.3
653.4
§ 651.30
[Reserved]
§ 651.35
[Reserved]
§ 651.40
[Reserved]
Authority: Secs. 8.3, 8.4, 8.6, 8.8, and 8.10
of Pub. L. 92–181, 85 Stat. 583 (12 U.S.C.
2279aa–3, 2279aa–4, 2279aa–6, 2279aa–8,
and 2279aa–10).
§ 651.50 Committees of the Corporation’s
board of directors.
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(a) General. No committee of the
board of directors may be delegated the
authority of the board of directors to
amend Corporation bylaws. No
committee of the board of directors shall
relieve the board of directors or any
board member of a responsibility
imposed by law or regulation.
(b) Required committees. The board of
directors of the Corporation must have
committees, however styled, that
address risk management, audit,
compensation, and corporate
governance. Neither the risk
management committee nor the audit
committee may be combined with any
other committees. This provision does
not prevent the board of directors from
establishing any other committees that it
deems necessary or useful to carrying
out its responsibilities.
(c) Charter. Each committee required
by this section must develop a formal
written charter that specifies the scope
of the committee’s powers and
responsibilities, as well as the
committee’s structure, processes, and
membership requirements. To be
effective, the charter must be approved
by action of the full board of directors.
No director may serve as chairman of
more than one of the board committees
required by this section.
(d) Frequency of meetings and
records. Each committee of the board of
directors required by this section must
meet with sufficient frequency to carry
out its obligations and duties under
applicable laws, regulations, and its
operating charter. Each of these
committees must maintain minutes of
its meetings. The minutes must record
attendance, the agenda (or equivalent
list of issues under discussion), a
summary of the relevant discussions
held by the committee during the
meeting, and any resulting
recommendations to the board. Such
minutes must be retained for a
minimum of 3 years and must be
available to the entire board of directors
and to OSMO.
■ 5. Add part 653 to read as follows:
PART 653—FEDERAL AGRICULTURAL
MORTGAGE CORPORATION RISK
MANAGEMENT
Sec.
653.1
653.2
Definitions.
General.
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Jkt 238001
§ 653.1
Risk management.
Internal controls.
Definitions.
The following definitions apply to
this part:
Corporation means the Federal
Agricultural Mortgage Corporation and
its affiliates.
FCA means the Farm Credit
Administration, an independent Federal
agency of the executive branch.
OSMO means the FCA Office of
Secondary Market Oversight, which is
responsible for the general supervision
of the safe and sound exercise of the
Corporation’s powers, functions, and
duties and compliance with laws and
regulations.
§ 653.2
General.
The Corporation’s board of directors
must approve the overall risk-appetite of
the Corporation and regularly monitor
internal controls to provide reasonable
assurance that risk-taking activities are
conducted in a safe and sound manner.
§ 653.3
Risk management.
(a) Risk management program. The
Corporation’s board of directors must
establish, maintain, and periodically
update an enterprise-wide risk
management program addressing how
the Corporation’s activities are exercised
in a safe and sound manner. The
implementation of the risk management
program may reside with senior
management. The risk management
program at a minimum must:
(1) Periodically assess and document
the Corporation’s risk profile.
(2) Align the Corporation’s risk profile
with the board-approved risk appetite
and the Corporation’s operational
planning strategies and objectives.
(3) Specify management’s authority to
carry out risk management
responsibilities.
(4) Integrate risk management and
control objectives into management
goals and compensation structures.
(5) Comply with all applicable FCA
regulations and policies.
(b) Risk committee. The Corporation’s
board-level risk committee assists the
full board of directors in the oversight
of the enterprise-wide risk management
program of the Corporation.
(1) The risk committee must have at
least one member with an
understanding of risk management
commensurate with the Corporation’s
capital structure, risk profile,
complexity, activities, size, and other
appropriate risk-related factors.
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(2) The responsibilities of the risk
committee include, but are not limited
to:
(i) Periodically assessing
management’s implementation of the
enterprise-wide risk management
program;
(ii) Recommending changes to the risk
management program to keep the
program commensurate with the
Corporation’s capital structure, risk
appetite, complexity, activities, size,
and other appropriate risk-related
factors; and
(iii) Receiving and reviewing regular
reports directly from personnel
responsible for implementing the
Corporation’s risk management
program.
(c) Management of risk. The
Corporation must have a risk officer,
however styled, who is responsible for
implementing and maintaining the
enterprise-wide risk management
practices of the Corporation. The risk
officer must have risk management
experience commensurate with the
Corporation’s capital structure, risk
appetite, complexity, activities, and
size. The responsibilities of the risk
officer include, but are not limited to:
(1) Identifying and monitoring
compliance with risk limits, exposures,
and controls;
(2) Implementing risk management
policies, procedures, and risk controls;
(3) Developing appropriate processes
and systems for identifying and
reporting risks, including emerging
risks;
(4) Reporting on risk management
issues, emerging risks, and compliance
concerns; and
(5) Making recommendations on
adjustments to the risk management
policies, procedures, and risk controls
of the Corporation.
§ 653.4
Internal controls.
(a) The Corporation’s board of
directors must adopt an internal
controls policy that provides adequate
directions for, and identifies
expectations in, establishing effective
safety and soundness control over, and
accountability for, the Corporation’s
operations, programs, and resources.
(b) The internal controls system must
address:
(1) The efficiency and effectiveness of
the Corporation’s activities;
(2) Safeguarding the assets of the
Corporation;
(3) Evaluating the reliability,
completeness, and timely reporting of
financial and management information;
(4) Compliance with applicable laws,
regulations, regulatory directives, and
the policies of the Corporation’s board
of directors and senior management;
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(5) The appropriate segregation of
duties among the Corporation personnel
so that personnel are not assigned
conflicting responsibilities; and
(6) The completeness and quality of
information provided to the
Corporation’s board of directors.
(c) The Corporation is responsible for
establishing and implementing an
effective system to identify internal
controls weaknesses and taking action
to correct detected weaknesses. The
Corporation must document:
(1) The process used to identify
weaknesses,
(2) Any found weaknesses, and
(3) How identified weaknesses were
addressed.
■ 6. Revise part 655 to read as follows:
PART 655—FEDERAL AGRICULTURAL
MORTGAGE CORPORATION
DISCLOSURE AND REPORTING
REQUIREMENTS
Subpart A—General
Sec.
655.1 Definitions.
Subpart B—Report of Condition of the
Federal Agricultural Mortgage Corporation
655.10 Reports of condition.
655.15 Interim reports, notices, and proxy
statements.
Subpart C—Reports Relating to Securities
Activities of the Federal Agricultural
Mortgage Corporation
655.20 Securities not registered under the
Securities Act.
655.21 Filings and communications with
the U.S. Treasury, the SEC and NYSE.
Authority: Secs. 5.9, 8.3, 8.11, and 8.12 of
Pub. L. 92–181, 85 Stat. 583 (12 U.S.C. 2243,
2279aa–3, 2279aa–11, 2279aa–12).
Subpart A—General
ehiers on DSK5VPTVN1PROD with RULES
§ 655.1
Definitions.
The following definitions apply to
this part:
Act or authorizing statute means the
Farm Credit Act of 1971, as amended.
Business day means a day the
Corporation is open for business,
excluding the legal public holidays
identified in 5 U.S.C. 6103(a).
Corporation means the Federal
Agricultural Mortgage Corporation and
its affiliates.
FCA means the Farm Credit
Administration, an independent Federal
agency of the executive branch.
Material, when used to qualify a
requirement to furnish information as to
any subject, means the information
required for those matters to which
there is a substantial likelihood that a
reasonable person would attach
importance in making investor
decisions or determining the financial
condition of the Corporation.
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15:11 Jul 26, 2016
Jkt 238001
NYSE means the New York Stock
Exchange, a listing exchange.
OSMO means the FCA Office of
Secondary Market Oversight, which is
responsible for the general supervision
of the safe and sound exercise of the
Corporation’s powers, functions, and
duties and compliance with laws and
regulations.
Our or us means the FCA or OSMO,
as appropriate to the context of the
provision employing the term.
Person means individual or entity.
SEC means the Securities and
Exchange Commission.
Securities Act means the Securities
Act of 1933 (15 U.S.C. 77a et seq.) or the
Exchange Act of 1934 (15 U.S.C. 78a et
seq.), or both, as appropriate to the
context of the provision employing the
term.
Signed, when referring to paper form,
means a manual signature, and, when
referring to electronic form, means
marked in a manner that authenticates
each signer’s identity.
Subpart B—-Reports of Condition of
the Federal Agricultural Mortgage
Corporation
§ 655.10
Reports of condition.
(a) General. The Corporation must
prepare and publish annual reports to
its shareholders of its condition,
including financial statements and
related schedules, exhibits, and other
documents that are part of the reports.
The contents of each report must be
equivalent in content to the annual
report to shareholders required by the
Securities Act unless we issue
instructions otherwise.
(b) Signatures and certification. Each
report issued under this subpart must be
signed. The Corporation must designate
the representatives who will sign each
report. The name and position title of
each person signing the report must be
printed beneath his or her signature.
The signatories must certify the report
by using the SEC rules on certifications
for disclosures in annual reports to
shareholders.
(c) Distribution. The Corporation must
distribute the signed annual report of
condition to its shareholders within 120
days of its fiscal year-end. Within 5 days
of signing, the Corporation must provide
us one paper and one electronic copy of
every signed report that is distributed to
its shareholders. If the report is the same
as that filed with the SEC, the
Corporation may instead provide the
signed reports to us only in electronic
form and simultaneous with filing the
report with the SEC.
(1) The Corporation must publish on
its Web site a copy of each annual report
PO 00000
Frm 00017
Fmt 4700
Sfmt 4700
49155
to shareholders within 3 business days
of filing the report with us. The report
must remain on the Web site until the
next report is posted. When the reports
are the same as those filed with the SEC,
electronic links to the SEC filings Web
site may be used in satisfaction of this
requirement.
(2) Upon receiving a request for an
annual report of condition from a
stockholder, investor, or the public, the
Corporation must promptly provide the
requester the most recent annual report
issued in compliance with this section.
§ 655.15 Interim reports, notices, and
proxy statements.
(a) The Corporation must provide to
us one paper and one electronic copy of
every interim report, notice, and proxy
statement filed with the SEC within 1
business day of filing the item with the
SEC, including all papers and
documents that are a part of the report,
notice, or statement.
(b) The Corporation must publish a
copy of each interim report, notice, and
proxy statement on its Web site within
5 business days of filing the
document(s) with the SEC. The
Corporation may omit from these
postings confidential, non-public
information contained in the interim
report, notice, or proxy statement. The
interim report, notice, or proxy
statement must remain on the Web site
for 6 months or until the next annual
report of condition is posted, whichever
is later. Electronic links to the SEC
filings Web site may be used in
satisfaction of this requirement.
Subpart C—-Reports Relating to
Securities Activities of the Federal
Agricultural Mortgage Corporation
§ 655.20 Securities not registered under
the Securities Act.
The Corporation must make special
filings with the Director of OSMO for
securities either issued or guaranteed by
the Corporation that are not registered
under the Securities Act. These filings
include, but are not limited to:
(a) Either one paper or one electronic
copy of any offering circular, private
placement memorandum, or
information statement prepared in
connection with the securities offering
at or before the time of the securities
offering.
(b) For securities backed by qualified
loans as defined in section 8.0(9)(A) of
the Act, either one paper or one
electronic copy of the following within
1 business day of the finalization of the
transaction:
(1) The private placement memoranda
for securities sold to investors; and
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(2) The final agreement and all
supporting documents material to the
Corporation’s purchase of a security
under section 8.6(e) of the Act.
(c) For securities backed by qualified
loans as defined in section 8.0(9)(B) of
the Act, the Corporation must provide
summary information on such securities
issued during each calendar quarter in
the form prescribed by us. Such
summary information must be provided
with each report of condition and
performance (Call report) filed pursuant
to § 621.12, and at such other times as
we may require.
§ 655.21 Filings and communications with
the U.S. Treasury, the SEC, and NYSE.
(a) The Corporation must send us one
paper and one electronic copy of every
filing made with U.S. Treasury, the SEC,
or NYSE, including financial statements
and related schedules, exhibits, and
other documents that are a part of the
filing. Such items must be filed with us
no later than 1 business day after the
U.S. Treasury, SEC, or NYSE filing. For
those filings with the NYSE that
duplicate ones made to the SEC, the
Corporation may send only the SEC
filing to us. If the filing is one addressed
in subpart B of this part, no action
under this paragraph is required.
(b) The Corporation must send us,
within 3 business days and according to
instructions provided by us, copies of
all substantive correspondence between
the Corporation and the U.S. Treasury,
the SEC, or NYSE that are directed at
the activities of the Corporation.
(c) The Corporation must notify us
within 1 business day if it becomes
exempt or claims exemption from the
filing requirements of the Securities Act.
Notice is not required when the
Corporation claims an exemption that is
generally available under SEC rules and
regulations to similarly situated filers.
Date: July 20, 2016.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2016–17455 Filed 7–26–16; 8:45 am]
ehiers on DSK5VPTVN1PROD with RULES
BILLING CODE 6705–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2015–8435; Directorate
Identifier 2015–NM–049–AD; Amendment
39–18594; AD 2016–15–03]
RIN 2120–AA64
Airworthiness Directives; Bombardier,
Inc. Airplanes
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Final rule.
AGENCY:
We are adopting a new
airworthiness directive (AD) for certain
Bombardier, Inc. Model BD–700–1A10
and BD–700–1A11 airplanes. This AD
was prompted by reports of operator
inability to open the main passenger
door following severe hot soak
conditions. This AD requires the
incorporation of a new configuration to
the passenger door external handle
detent to enhance the performance
across the full range of the airplane
operating temperatures. We are issuing
this AD to prevent thermal expansion
and permanent deformation at severe
hot soak conditions, creating high
friction between the spring pot housing
and the slider that could result in
inability to open the main passenger
door and impede evacuation in the
event of an emergency.
DATES: This AD is effective August 31,
2016.
The Director of the Federal Register
approved the incorporation by reference
of certain publications listed in this AD
as of August 31, 2016.
ADDRESSES: For service information
identified in this final rule, contact
ˆ
Bombardier, Inc., 400 Cote-Vertu Road
´
West, Dorval, Quebec H4S 1Y9, Canada;
telephone 514–855–5000; fax 514–855–
7401; email
thd.crj@aero.bombardier.com; Internet
https://www.bombardier.com. You may
view this referenced service information
at the FAA, Transport Airplane
Directorate, 1601 Lind Avenue SW.,
Renton, WA. For information on the
availability of this material at the FAA,
call 425–227–1221. It is also available
on the Internet at https://
www.regulations.gov by searching for
and locating Docket No. FAA–2015–
8435.
SUMMARY:
Examining the AD Docket
You may examine the AD docket on
the Internet at https://
www.regulations.gov by searching for
VerDate Sep<11>2014
15:11 Jul 26, 2016
Jkt 238001
PO 00000
Frm 00018
Fmt 4700
Sfmt 4700
and locating Docket No. FAA–2015–
8435; or in person at the Docket
Management Facility between 9 a.m.
and 5 p.m., Monday through Friday,
except Federal holidays. The AD docket
contains this AD, the regulatory
evaluation, any comments received, and
other information. The street address for
the Docket Office (telephone 800–647–
5527) is Docket Management Facility,
U.S. Department of Transportation,
Docket Operations, M–30, West
Building Ground Floor, Room W12–140,
1200 New Jersey Avenue SE.,
Washington, DC 20590.
FOR FURTHER INFORMATION CONTACT:
Cesar A. Gomez, Aerospace Engineer,
Airframe and Mechanical Systems
Branch, ANE–171, FAA, New York
Aircraft Certification Office (ACO), 1600
Stewart Avenue, Suite 410, Westbury,
NY 11590; telephone 516–228–7318; fax
516–794–5531.
SUPPLEMENTARY INFORMATION:
Discussion
We issued a notice of proposed
rulemaking (NPRM) to amend 14 CFR
part 39 by adding an AD that would
apply to certain Bombardier, Inc. Model
BD–700–1A10 and BD–700–1A11
airplanes. The NPRM published in the
Federal Register on January 13, 2016
(81 FR 1584) (‘‘the NPRM’’). The NPRM
was prompted by reports of operator
inability to open the main passenger
door following severe hot soak
conditions. The NPRM proposed to
require the incorporation of a new
configuration to the passenger door
external handle detent to enhance the
performance across the full range of the
airplane operating temperatures. We are
issuing this AD to prevent thermal
expansion and permanent deformation
at severe hot soak conditions, creating
high friction between the spring pot
housing and the slider that could result
in inability to open the main passenger
door and impede evacuation in the
event of an emergency.
Transport Canada Civil Aviation
(TCCA), which is the aviation authority
for Canada, has issued Canadian
Airworthiness Directive CF–2015–03,
dated March 13, 2015 (referred to after
this as the Mandatory Continuing
Airworthiness Information, or ‘‘the
MCAI’’), to correct an unsafe condition
for certain Bombardier, Inc. Model BD–
700–1A10 and BD–700–1A11 airplanes.
The MCAI states:
There have been reports where operators
experienced an inability to open the main
passenger door following severe hot soak
conditions.
Investigation determined that the nylon
slider in the plunger assembly of the door
handle is susceptible to thermal expansion
E:\FR\FM\27JYR1.SGM
27JYR1
Agencies
[Federal Register Volume 81, Number 144 (Wednesday, July 27, 2016)]
[Rules and Regulations]
[Pages 49139-49156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17455]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 /
Rules and Regulations
[[Page 49139]]
FARM CREDIT ADMINISTRATION
12 CFR Parts 650, 651, 653, and 655
RIN 3052-AC89
Federal Agricultural Mortgage Corporation Governance; Standards
of Conduct; Risk Management; and Disclosure and Reporting
AGENCY: Farm Credit Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, we, or our) is finalizing
new regulations related to the Federal Agricultural Mortgage
Corporation's (Farmer Mac or Corporation) risk governance and making
enhancements to existing disclosure and reporting requirements. The
risk governance regulations require the Corporation to establish and
maintain a board-level risk management committee and a risk officer, as
well as risk management policies and internal controls. The changes to
disclosure and reporting requirements remove repetitive reporting and
allow for electronic filing of reports. We also finalize rules on the
examination and enforcement authorities held by the FCA Office of
Secondary Market Oversight (OSMO) over the Corporation.
DATES: This regulation shall become effective no earlier than 30 days
after publication in the Federal Register during which either or both
Houses of Congress are in session. The FCA will publish a notice of the
effective date in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Joseph Connor, Associate Director for
Policy and Analysis, Office of Secondary Market Oversight, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4364, TTY (703) 883-
4056, or Laura McFarland, Senior Counsel, Office of General Counsel,
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY
(703) 883-4056.
SUPPLEMENTARY INFORMATION:
I. Objective
The purpose of this final rule is to:
Enhance risk governance at the Corporation to further its
long-term safety and soundness and mission achievement;
Remove repetitious disclosure and reporting requirements,
given the dual reporting responsibilities of the Corporation to the FCA
and the Securities and Exchange Commission (SEC); and
Clarify the examination and enforcement authority of FCA.
II. Background
Farmer Mac is a stockholder-owned, federally chartered
instrumentality that is an institution of the Farm Credit System
(System) and a Government-sponsored enterprise (GSE). The Corporation
was established and chartered by the Agricultural Credit Act of 1987
(1987 Act) \1\ to create a secondary market for agricultural real
estate mortgage loans, rural housing mortgage loans, rural utility
cooperative loans, and the guaranteed portions of USDA-guaranteed farm
and rural development loans. Title VIII of the Farm Credit Act of 1971,
as amended, (Act) governs the Corporation.
---------------------------------------------------------------------------
\1\ Agricultural Credit Act of 1987 (Pub. L. 100-233, January 6,
1988).
---------------------------------------------------------------------------
The Corporation has two classes of voting common stock: Class A and
Class B. Class A voting common stock is owned by banks, insurance
companies, and other financial institutions. Class B voting common
stock is owned by System institutions. In addition, the Corporation has
nonvoting common stock (Class C), the ownership of which is not
restricted and is a means for the Corporation to raise capital. The
Corporation may also issue nonvoting preferred stock.
The Corporation is regulated by FCA through the Office of Secondary
Market Oversight (OSMO). Congress charged us to issue regulations to
ensure mission compliance and the safety and soundness of the
Corporation. When issuing regulations for the Corporation, the Act
requires FCA to consider:
The purpose for which Farmer Mac was created;
The practices appropriate to the conduct of secondary
markets in agricultural loans; and
The reduced levels of risks associated with appropriately
structured secondary market transactions.\2\
---------------------------------------------------------------------------
\2\ Section 8.11(a)(2) of the Act (12 U.S.C. 2279aa-11(a)(2)).
---------------------------------------------------------------------------
Farmer Mac, as a publicly traded company, is also subject to many
of the governance requirements of Sarbanes-Oxley Act of 2002 (Sarbanes-
Oxley),\3\ Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (Dodd-Frank Act),\4\ and Securities and Exchange Commission (SEC)
disclosure regulations for publicly traded companies, all of which
address reporting requirements and oversight for publicly held
companies and financial institutions. Self-regulatory organizations
(SROs), the New York Stock Exchange (NYSE) in the Corporation's case,
have also issued requirements designed to enhance the accountability
and transparency of corporate business operations.
---------------------------------------------------------------------------
\3\ Public Law 107-204, July 30, 2002.
\4\ Public Law 111-203, 124 Stat. 1376, (H.R. 4173), July 21,
2010.
---------------------------------------------------------------------------
As a GSE, the Corporation has a public policy purpose embedded in
its corporate mission. One aspect of this public policy mission
includes financial services to customer-stakeholders (institutions that
lend to farmers, ranchers, rural homeowners, and rural utility
cooperatives) and the resulting flow-through benefits to rural
borrowers. Another key aspect is the protection of taxpayer-
stakeholders because the risk that the Corporation accepts in the
course of business exposes both investors (debt and equity holders) and
taxpayers to potential loss. The taxpayer's exposure arises in part
from the Corporation's authority to issue debt to the Department of the
Treasury to cover guarantee losses under certain adverse
circumstances.\5\ Thus, an appropriately comprehensive approach to
Board-level risk governance is essential to promote well-reasoned,
risk-related decisions and promote public trust in the risk management
of the Corporation.
---------------------------------------------------------------------------
\5\ According to the 1987 Act, Farmer Mac may, in certain
circumstances, borrow up to $1.5 billion from the U.S. Treasury to
ensure timely payment of any guarantee obligations of the
corporation.
---------------------------------------------------------------------------
[[Page 49140]]
III. Comments and Our Responses: Section-by-Section Analysis
We issued a proposed rule to amend our standards of conduct, board
governance, and reporting regulations for the Corporation on March 26,
2015 (80 FR 15931). The comment period for the proposed rule closed on
June 24, 2015, and 77 comment letters were received. The comments
submitted were from Farmer Mac, stockholders in Farmer Mac, a
consultant to Farmer Mac,\6\ an agent of Farmer Mac,\7\ the Farm Credit
Council (FCC) on behalf of its membership, and a member of the general
public. Prior to the proposed rulemaking, we issued an Advanced Notice
of Proposed Rulemaking (ANPRM) to solicit opinions and suggestions from
investors, stockholders, and other interested parties on ways to
enhance our regulation of the Corporation's governance activities.\8\
---------------------------------------------------------------------------
\6\ The consultant to Farmer Mac explained it had been hired by
Farmer Mac to comment on the proposed rule.
\7\ The agent of Farmer Mac explained it had been working as a
consultant for Farmer Mac for over a year on specific projects.
\8\ 79 FR 10426, February 25, 2014. The comment period for the
ANPRM ended April 28, 2014, and seven comment letters were received.
---------------------------------------------------------------------------
The 77 comments submitted in response to the proposed rule made
various suggestions for changing what we had proposed. Of these
commenters, 69 limited their remarks and suggestions to part 651,
``Standards of Conduct.'' Comments to the Standards of Conduct
provisions involved both existing and proposed provisions.\9\ These
comments were significantly different from what was proposed and lacked
uniformity in the type of changes sought.
---------------------------------------------------------------------------
\9\ We last issued regulations on Farmer Mac Board governance
and standards of conduct on March 1, 1994 (59 FR 9622).
---------------------------------------------------------------------------
As a GSE, the Corporation has certain strategic objectives that are
public policy or ``mission'' oriented. Standards of conduct must be
understood and interpreted not only in the context of the fiduciary
responsibilities to the Corporation and its shareholders, but also in
the context of the statutory duty to further the Congressional purposes
the Corporation was chartered to achieve. We believe standards of
conduct to be among the most potentially complex and nuanced areas of
corporate governance. For this reason, and because of the variety of
comments received to this area of the proposed rule, we believe it
prudent to address proposed changes and related comments on the more
complex components of standards of conduct and board governance
regulations in a separate rulemaking. Thus, we are not finalizing in
this rulemaking many of the proposed changes to part 651, but instead
intend to revisit changes to part 651 in a separate rulemaking.
Proposed changes to parts 650, 653, and 655 are finalized as
proposed unless we say otherwise in this preamble. Included in
finalized changes is the reorganization of our rules addressing the
Corporation's operations through the addition of a new part 653 and
organizational revisions to existing parts 650, 651, and 655. We make
no changes to part 652 or reserved part 654.
A. FCA Oversight and Rulemaking [Part 650]
Existing part 650 contains general provisions, without subparts, on
the supervision of the Corporation. We finalize adding a new subpart A,
entitled ``Regulation, examination and enforcement,'' as well as moving
existing provisions into a new subpart B, entitled ``Conservators,
receivers, and liquidations.'' We finalize the redesignation of
existing Sec. Sec. 650.1 and 650.5 on appointing and removing
receivers or conservators as new Sec. Sec. 650.13 and 650.14,
respectively. We make no other changes to these existing provisions.
We discuss comments received to this part and any changes to the
appropriate sections below.
1. Part 650 Definitions [New Sec. 650.1]
We finalize as proposed all definitions in new Sec. 650.1. We
received no comments objecting to the terms as proposed, but a
stockholder-commenter requested we consolidate all proposed definitions
for parts 650, 651, 653 and 655 into one section and asked for the term
``agent'' to be defined for part 650. We cannot accommodate either of
these requests. We already maintain a global definition section for all
our rules in part 619. Maintaining separate definition sections for use
only in certain regulations eliminates confusion that may arise from
placing terms having specific application for a secondary market along
with terms applicable to Farm Credit banks and associations. We
recognize that many of the terms for the definition sections we
proposed in parts 650, 651, 652, and 655 are duplicative, but their
location in the applicable sections avoids confusion with usage of the
terms in other regulations. We also cannot accommodate the request to
define in part 650 the term ``agent.'' The term ``agent'' as used in
part 650 has two different applications: (1) Agents of the Corporation;
and (2) agents of FCA. A single definition would not capture the two
separate applications of the term, particularly in regards to the
existing rules on liquidation and receivership.
2. Regulatory Authority [New Sec. 650.2]
We finalize the addition of new Sec. 650.2, which provides clarity
on the situation of the Corporation having FCA as its primary
regulator, while also being subject to certain SEC regulatory
disclosure requirements. The new Sec. 650.2 identifies FCA as the
``primary regulator'' of the Corporation, possessing examination,
enforcement, conservatorship, liquidation, and receivership authority
over the Corporation. We finalize this section with one clarifying
change made based on comments received. In Sec. 650.2(b), we clarify
that our supervisory authority to ensure the Corporation follows laws
and regulations relates to compliance with applicable laws and
regulations.
There were four commenters to this section: Farmer Mac, the FCC,
and two stockholders in Farmer Mac. The FCC expressed strong support
for the section clarifying that the Corporation is a GSE with a public
mission. The stockholder-commenters also supported the section
addressing the public policy purpose of the Corporation. Farmer Mac
objected to the provisions on FCA's authority over it, contending that
FCA has no authority over compliance with all laws and regulations.
Farmer Mac explained that instead FCA is to ensure a dependable source
of credit through its examination of the Corporation and regulation of
its safe and sound conduct. Farmer Mac also asked us to either remove
Sec. 650.2(c) or specify the SEC regulations to which it is subject
and exactly mirror language from the Act when describing our role.
However, Farmer Mac added objections to our using the language of the
Act to describe its relationship with the SEC. In that instance, Farmer
Mac asked us to capture the ``nuances of Farmer Mac's regulation by the
SEC.'' \10\
---------------------------------------------------------------------------
\10\ Farmer Mac explained it is not subject to complete
regulation by SEC and, except for certain mortgage-backed
securities, it is not subject to the 1933 Securities Act and must
only file reports under the 1934 Securities Exchange Act. Farmer Mac
comment letter, Appendix B, pages B-2 and B-27.
---------------------------------------------------------------------------
We have clarified that the laws and regulations referenced are
those applicable to the Corporation. We do not name those laws and
regulations as they are subject to change. We also decline the request
to include in the rule an analysis of the Corporation's relationship
with both FCA and SEC, which is not the intent of the rule. The rule at
Sec. 650.2 is identifying us as the primary regulator of the
Corporation. As explained in the proposed rule, the
[[Page 49141]]
discussions Congress had surrounding passage of the Dodd-Frank Act
recognized the long-standing situation where financial institutions are
required to comply with various Federal financial laws and regulations
issued and enforced by several banking regulators, although only one
regulator is the primary regulator. We did modify the language of Sec.
650.2(c) to add clarity and removed reference to the NYSE based on the
comments received.
Farmer Mac asked that we add language in Sec. 650.2(a) for USDA-
guaranteed loans sold into the secondary market. The Corporation has
established a secondary market for the guaranteed portions of USDA-Farm
Service Agency guaranteed Farm Ownership and Operating Loans and USDA-
Rural Development Guaranteed Business and Industry, Community Facility
and Water and Environmental Program loans.\11\ As noted by Farmer Mac,
we are identifying the statutory purposes of the Corporation, we are
not enumerating all of Farmer Mac's business programs. However, we have
added language referencing USDA-guaranteed loans.\12\
---------------------------------------------------------------------------
\11\ Under the Farmer Mac 2 program, Farmer Mac's subsidiary,
Farmer Mac II LLC, buys guaranteed portions directly from lenders.
The original lenders retain the unguaranteed portions of these loans
and continue to service the entire loan.
\12\ Refer to section 8.0(9) of the Act, defining ``qualified
loans''.
---------------------------------------------------------------------------
3. Supervision and Enforcement [New Sec. 650.3]
We finalize adding a new Sec. 650.3 to incorporate into our
regulations the supervision and enforcement authorities over the
Corporation that are given us under the Act. Our enforcement
authorities provide reasonable assurance that, among other things, the
Corporation is adequately capitalized and operating safely. We finalize
this section with clarifying changes made based on comments received.
There were six commenters to this section: Farmer Mac, the FCC,
three stockholders in Farmer Mac, and an agent of Farmer Mac. Three
commenters objected to agents being subject to FCA's enforcement
authorities. Sections 5.25 and 5.26 of the Act specify that agents of a
System institution are subject to our enforcement authorities and
Farmer Mac is identified as a System institution in section 8.1(a)(2)
of the Act. It is these provisions we relied upon when proposing the
provision so we decline to make changes based on the comments. Two of
the stockholder-commenters remarked that financial safety and soundness
oversight should include making the Corporation subject to the Basel
III capital standards. We decline to make changes to our rules in
response to these comments. The existing rules addressing the
Corporation's capital requirements already incorporate appropriate
Basel capital standards, as well as analogous standards of other U.S.
regulators.
Farmer Mac asked for the entire section identifying our enforcement
authorities to be removed or that we directly quote the Act when
identifying those authorities, using no further interpretation of the
statutory language. We are directed by section 5.17(a)(9) of the Act to
issue regulations necessary or appropriate for the implementation of
the Act's provisions, which involves more than a recitation of the Act.
Farmer Mac also asked that we provide a specific ``exhaustive list'' of
our enforcement authorities. We likewise decline this request as our
enumerated enforcement authorities may be amended by Congress or court
interpretations. Further, we do not agree with Farmer Mac's
interpretation of our authorities and decline to make changes to the
rule based on its analysis. Farmer Mac also stated that our safety and
soundness authority should not be viewed to include addressing board
committees, director elections, or recordkeeping activities of the
Corporation. Again, our oversight of the safe and sound operations of
the Corporation necessitates that we consider the Corporation's board
operations and the records of its decision-making analysis and
financial condition.\13\
---------------------------------------------------------------------------
\13\ See section 8.11(a)(1)(B) of the Act authorizing OSMO
``general supervision of the safe and sound performance of the
powers, functions, and duties vested in the Corporation''.
---------------------------------------------------------------------------
Farmer Mac objected to Sec. 650.3(b) referencing when the
Corporation engages in activities having ``excessive risk,'' arguing
the term is undefined. Farmer Mac stated that all of its activities
involve risk and the provision would allow FCA to restrict these
activities and substitute our judgment on how to run the Corporation.
However, Farmer Mac acknowledged section 8.37 of the Act uses the term
``excessive risk''. Farmer Mac also objected to separating risk from
its impact on capital and suggested objective, measureable standards be
set for risk levels. In Sec. 650.3(b), we clarify that risks having
adverse impact to capital, which may lead to certain enforcement
actions, generally refers to the adequacy of the Regulatory Capital
level maintained by the Corporation.
4. Access to Records and Personnel [New Sec. 650.4]
There were three comments objecting to the inclusion of agents in
this section: Farmer Mac, a stockholder in Farmer Mac, and an agent of
Farmer Mac. The agent who commented objected to classifying certain
types of professional assistance received by the Corporation as an
agency relationship, contending that FCA has no authority over certain
types of agents (e.g. consultants, vendors), while the stockholder
commented that the penalties were burdensome. Farmer Mac objected to
being required to make its agents available to our examination staff.
Farmer Mac contended that FCA does not have jurisdiction over all
agents of the Corporation, as would be covered by the existing part 651
definition of ``agent.''
We finalize this section with one change based on comments
received. In Sec. 650.4(b), we replace the word ``agents'' with a more
detailed explanation of the personnel required to be available to us
when requested, which includes those engaged by the Corporation to
participate in the business conducted by the Corporation. For example,
during an examination it may be necessary for our exam staff to speak
with the External Auditor. The Act specifies that directors, officers,
employees, agents, and ``other persons participating in the conduct of
the affairs'' \14\ of a System institution are subject to our
examination and enforcement authorities.\15\ We relied on this language
when developing the clarification for this final rule. We believe the
clarifying language addresses the comments regarding certain ``vendor-
type'' service providers. We also point out that the part 651
definition of ``agent'' is restricted to the provisions in part 651 and
does not carryover to part 650. Also, the stockholder-commenter
objecting to the ``penalties'' listed in this section spoke in error,
as there are no ``penalties'' identified in Sec. 651.4.
Notwithstanding this, we believe this comment is adequately addressed
in our earlier discussion of our enforcement authorities, which
explains the ``penalties'' identified in Sec. 650.3 are derived from
the Act.
---------------------------------------------------------------------------
\14\ See, for example, section 5.32(a) of the Act.
\15\ Refer to section 8.11(b)(3) of Act (12 U.S.C. 2279aa-11).
---------------------------------------------------------------------------
Farmer Mac also asked us to limit our access to Corporation
documents to non-confidential items. In addition, Farmer Mac asked that
there be a materiality and document age threshold controlling which
documents and personnel we could access during our
[[Page 49142]]
examination and enforcement activities. We decline Farmer Mac's
suggestions regarding the scope of our access to corporate documents.
As the safety and soundness regulator, we require full access to the
Corporation's records.\16\ In accessing these records, our activities
are already covered by confidentiality provisions in Federal law.\17\
Further, we view the act of our requesting the records or access to
personnel as establishing the ``materiality'' to our oversight. We
could not permit the Corporation to pre-screen records before release
to us in order for Farmer Mac to, on its own, determine if a record is
material or not for our purposes. Likewise, we cannot provide full
oversight if we restrict our access to a finite period of time. It may
be that the matter under review exceeds that period of time, or records
within that time period make key reference to other, older records.
---------------------------------------------------------------------------
\16\ See section 8.11(b)(3) of Act (12 U.S.C. 2279aa-11(b)(3)).
\17\ Refer to 5 U.S.C. 552(b)(8). See also 12 CFR 602.2.
---------------------------------------------------------------------------
5. Reports of Examination and Criminal Referrals [New Sec. Sec. 650.5
and 650.6]
We finalize as proposed the addition of new Sec. Sec. 650.5 and
650.6, containing cross-citations to existing regulatory provisions
regarding access to FCA Reports of Examination and the Corporation's
obligation to make criminal referrals in certain circumstances. We
received no comments to these two sections. We believe these cross-
cites clarify the applicability of these provisions to the Corporation,
and thereby facilitate compliance with them.
B. Farmer Mac Corporate Governance [Part 651]
Part 651 contains the existing corporate governance provisions for
Farmer Mac, without subparts. As explained earlier in this preamble,
this final rule does not include many of the proposed changes to part
651 since we intend to revisit part 651 in the future. Although we
received many comments on the contents of part 651, no comments
opposing the proposed organizational changes were made and, therefore,
we finalize them as proposed. Specifically, we finalize the addition of
a new subpart A, entitled ``General,'' a new subpart B, entitled
``Standards of Conduct,'' and a new subpart C, entitled ``Board
Governance.'' We also finalize as proposed the movement of the existing
provisions of part 651 into the relevant subparts and adding new
sections in reserve for future rulemaking. We discuss other final
changes to part 651, and the comments received related to the changed
provisions, in the appropriate sections below.
1. Part 651 Definitions [New Subpart A; Existing Sec. 651.1]
We finalize the proposed revisions to our definitions in existing
Sec. 651.1, with two changes based on comments received. We are
changing the term ``potential conflict of interest'' to ``conflict of
interest'', while finalizing the definition as proposed. Two
stockholder-commenters pointed out the definition covered both material
and potential conflicts of interest and that we had no general
definition for the term ``conflict of interest.'' We agree with the
commenters that the definition defined conflicts of interest in general
so should be identified as such.
We are also modifying the definition for ``reasonable person'' by
removing the phrase ``based on societal requirements for the protection
of the general interest.'' The proposed definition for the term
``reasonable person'' was based on general use of the term in conflict-
of-interest proceedings and substantially resembled the legal meaning
of the term. However, comments from Farmer Mac and a consultant of
Farmer Mac objected to the phrase ``societal requirements'', arguing it
was not part of the Model Business Code. One of these commenters also
stated the term should be defined in a manner that directed attention
to the Corporation's activities, not the public at large.
We do not agree with the commenters in this regard. As one
commenter acknowledged, corporate governance allows consideration of
the public impact of corporate behavior. In addition, the Corporation
is a GSE with a public policy purpose and has directors appointed by
the President of the United States to represent the public's interests
in the operations of the Corporation. While we disagree with the
reasons given by the commenters, we are removing the phrase ``based on
societal requirements for the protection of the general interest'' from
the definition for ``reasonable person'' as we believe the remaining
language allows for addressing public concerns; specifically, the use
of ``average level of care.'' We recognize that these same two
commenters also objected to using an average level of care measurement
when defining ``reasonable person'', arguing it expanded the
Corporation's activities to include consideration of the general public
and not just stockholders. We agree that using an average level of care
standard could involve consideration of the public, but unlike the
commenters, we do not view that as a difficulty. We also do not agree
with comments that the phrase ``average level of care'' in the
definition for ``reasonable person'' under our conflict of interest
rules expands the mission of the Corporation. Instead, we believe it
emphasizes the scope of the Corporation's impact. As explained earlier,
the Corporation has a statutory public policy purpose and public
representatives on its board of directors. We believe retaining the
``average level of care'' language in the definition for ``reasonable
person'' is appropriate.
Farmer Mac and stockholders in Farmer Mac commented on the term
``material'', asking that we delete the definition. Farmer Mac
commented that the definition was appropriate for most of part 651, but
stated concerns with how the term would work with securities
regulations, which have a different definition for the term. Farmer Mac
specified its concern was focused on proposed Sec. 651.24.
Stockholder-commenters remarked that the term ``material'' does not
carry the same meaning or standard applied to other System
institutions. These commenters made particular note of a separate
proposed rulemaking affecting Farm Credit banks and associations, but
not Farmer Mac.\18\ These commenters argued there is no reason for a
different standard among System institutions. As we are not finalizing
in this rulemaking the proposed contents of Sec. 651.24, we are not
deleting the term ``material'' and note that the term is an existing
term in our rules. We also do not consider it appropriate at this time
to substitute the existing definition with one that has only been
proposed in a separate rulemaking intended for Farm Credit banks and
associations.
---------------------------------------------------------------------------
\18\ 79 FR 9649 (April 3, 2014).
---------------------------------------------------------------------------
Farmer Mac asked that we remove the existing definition of
``agent'' from Sec. 651.1, while three stockholder-commenters and an
agent of Farmer Mac objected to agents being included in the rule at
all, arguing that the existing definition was too broad in its
application. Farmer Mac also stated the existing definition was too
broad and exceeds the scope of FCA authority. We also received a call
from a member of the general public asking about the definition and
suggesting it may be problematic for dual compliance with both FCA and
SEC requirements. The definition is an existing term that has been in
our rules for over 20 years and we proposed no changes to it.
Commenters offered no examples of difficulties that had been
encountered in that time and did not express past
[[Page 49143]]
compliance difficulties with the existing rule. As we proposed no
changes to the existing term ``agent,'' we decline to make any in this
final rulemaking. However, we may reconsider the issue when revisiting
part 651 in the future.
A stockholder-commenter remarked that the term ``officer'' seemed
to exclude risk officers and asked if that was intentional on our part.
We reviewed the existing term ``officer'', to which we had proposed no
changes, and agree that it could result in the risk officer not being
included in the definition. However, that would depend on whether the
Corporation makes the risk officer a vice president. If not, then the
risk officer would be covered by the definition of ``employee'' instead
of ``officer.''
2. Standards of Conduct [New Subpart B]
We finalize moving existing Sec. 651.4 to new subpart B and
redesignating it as new Sec. 651.24. This section addresses director,
officer, employee, and agent responsibilities. We finalize adding new
Sec. Sec. 651.21 and 651.25 under subpart B, but with no content, in
reserve for future rulemaking.
a. Conflicts-of-Interest Policy [New Sec. 651.22, Existing Sec. Sec.
651.1(i) and 651.2]
We finalize the proposed movement of the existing Sec. 651.2
contents, regarding conflict-of-interest policies, to new subpart B and
redesignating it as new Sec. 651.22. We are reserving Sec. 651.2,
with no content, for future rulemaking. Also, we finalize some
amendments to the existing contents of redesignated Sec. 651.22 and
make two clarifying changes. Other proposed changes to the contents of
this section are not being finalized in this rulemaking.
We finalize moving the list of imputed interests currently
contained in the existing Sec. 651.1(i) definition of a ``potential
conflict-of-interest'' to this section (thereby removing it from the
definition) as we received no comments on this proposed action. We also
finalize the proposed revisions to the list of imputed interest, as
they also received no comments: removing highly specific relationships
such as ``spouse'' and ``child'' and replacing them with language to
address all persons residing in the household or who are otherwise
legal dependents. These changes are premised on the ever-evolving
understanding of what is considered a family, as well as intended to
address non-residential dependents whose activities and interests may
create a conflict-of-interest for a director, officer, or employee. We
make two clarifying changes to the list of imputed interest: A person's
general partner refers to a business partner and employment
arrangements include both current and prospective employment.
b. Conflicts-of-Interest Reporting and Disclosure [New Sec. 651.23,
Existing Sec. 651.3]
We finalize moving existing Sec. 651.3 to new subpart B and
redesignating it as new Sec. 651.23. This section addresses
implementation of the conflict-of-interest policy. Farmer Mac offered
comments on the existing language of this section, asking that the
separate disclosure categories be removed. The rule currently requires
Farmer Mac to provide its conflict of interest policy to its
shareholders, investors, and potential investors when requested. Farmer
Mac posed that these parties can obtain the policy from the
Corporation's Web site or SEC filings so the provision should be
removed. Farmer Mac did not state that this service could not continue
to be provided, nor assert that the volume of requests was so high as
to create a burden. We decline to remove this existing requirement as
we continue to believe the Corporation should strive to accommodate
requests from its shareholders, investors and, most especially,
potential investors for copies of the policy.
c. Agents and Conflicts-of-Interest [Existing Sec. 651.1 Through
651.4]
Farmer Mac, a stockholder in Farmer Mac, and an agent of Farmer Mac
asked that we remove references to ``agents'' from the existing rule.
Some of these commenters remarked that agents should not be treated the
same as directors, officers, and employees. Others argued that
monitoring agent conduct is burdensome, may deter agents from working
for the Corporation, and was contrary to standard contractual
agreements with agents. The agent stated that consultants and advisors
were not intended by Congress to be subject to our regulatory or
examination authority. The stockholder-commenter added that we should
instead rely on the Corporation's existing practices regarding
monitoring agent behavior.
Congress gave us certain enforcement authorities for agents of Farm
Credit institutions.\19\ We also note that agents have been a part of
the existing conflict-of-interest rule for over 20 years. No commenter
provided support to demonstrate that the Corporation has had difficulty
in all those years obtaining the services of agents because of the
existing standards of conduct regulations. We decline to remove agents
from part 651 as part of this final rulemaking. However, we may
reconsider the issue in the future when revisiting part 651.
---------------------------------------------------------------------------
\19\ See sections 5.25, 5.26, and 5.32 of the Act. See also
sections 5.17(a)(9) and (10), 5.19 and 8.11 of the Act.
---------------------------------------------------------------------------
3. Board Governance--Committees [New Subpart C]
We finalize adding new Sec. Sec. 651.30, 651.35, and 651.40 under
subpart C, but with no content, in reserve for future rulemaking. We
also finalize adding a new Sec. 651.50 on board committees. The new
Sec. 651.50 addresses the relationship between the entire board and
its committees, requires certain committees, and establish minimum
operational requirements for board committees (e.g., charters, meeting
minutes). We received comments from Farmer Mac and its consultant on
this section and make four changes based on those comments: (1) We
specify charter requirements apply to required committees; (2) we
clarify that charters are approved by the full board; (3) we are not
finalizing the requirement that each type of director serve on each
committee; and (4) we clarify that an agenda may be informal, such as a
list of issues under discussion.
a. Committee Charters [New Sec. 651.50]
In general, Farmer Mac objected to any regulation of board
committees. Farmer Mac asked that we change the requirement for all
committees to be chartered, explaining often ad hoc committees are used
in the Corporation's business and allowing committees to develop their
own charters may be a transfer of board authority. The proposed
provision stated that the Corporation's board is the body approving the
charter, not the committee. However, we clarify in Sec. 651.50(c) that
the committees develop the charters, but those charters are not
effective unless approved by action of the full board. In addition, we
intended the provision to apply to standing committees of the
Corporation, so have modified the rule to clearly limit the charter
requirements to those committees required to exist by regulation (i.e.
audit, risk, compensation and corporate governance committees). We also
made conforming changes elsewhere in this section to clarify that the
committee provisions apply to these same ``required'' committees.
Both commenters objected to the provision in Sec. 651.50(a) that
use of a board committee does not relieve board members of their legal
responsibilities. The commenters stated that delegations to committees
are permitted and the
[[Page 49144]]
provision was unnecessary. In paragraph (a) of new Sec. 651.50, we
proposed regulatory language clarifying that the entire board remains
accountable for committee actions. In directing the Corporation, the
board of directors may rely on reports from board committees, but doing
so does not relieve the board of final responsibility. While activities
and tasks may be delegated to a committee, the fact that a committee
handles some board responsibilities does not relieve the board of its
legal liabilities for such, nor does it relieve the board of the
ultimate responsibility for those activities or tasks. Therefore, we
decline to make changes to Sec. 651.50(a).
b. Committee Composition
We received comments from Farmer Mac and its consultant on Sec.
651.50, both objecting to the proposed requirement that each committee
have representation from the three types of directors serving on the
Corporation board (Class A elected, Class B elected, and appointed).
The commenters stated the provision may result in conflicts of
interest, unqualified directors serving on committees, and create
division on the board. Commenters offered no support for the named
concerns, but we consider this issue to be among those we plan to
review when we revisit part 651 in the future. As a result, we are not
finalizing in Sec. 651.50(c) the requirement that each committee have
representation from the three types of directors serving on the
Corporation board. In conformance with this, we also remove the
proposed paragraph designations in paragraph (c).
Farmer Mac and its consultant also objected to limiting the number
of committees a director may chair. We proposed in Sec. 651.50(c) that
no director may serve as chair of more than one committee. The
commenters stated that this was an unnecessary restriction. We decline
to change this limitation based on comments received. We believe this
limitation is necessary, as it reasonably distributes responsibilities
among individual members of the board. We also believe that too great a
concentration of responsibilities among too few directors would detract
from the board's overall effectiveness and may create potential, and
unnecessary, safety and soundness concerns.
c. Committee Agendas
Farmer Mac objected to the Sec. 651.50(d) requirement that board
committees have agendas for their meetings. Farmer Mac explained that
some ad hoc meetings occur with no prior planning, making development
of an agenda impossible. We appreciate that a situation like the one
described may occur and have modified the rule to allow for an
equivalent list of issues under discussion to be part of the meeting
minutes in lieu of an agenda.
C. Risk Management [Part 653, No Subparts]
We finalize adding a part 653, with no subparts, to address risk
management within the Corporation. In doing so, we remove proposed
references to ``risk tolerance'' throughout part 653, while retaining
references to risk-appetite, as we determined the term ``risk-
appetite'' encompassed risk tolerance consideration. We received
comments from Farmer Mac, stockholders of Farmer Mac, and the FCC to
this part and discuss them, and any changes, in the appropriate
sections below.
1. General [New Sec. 653.2]
We received comments from Farmer Mac, the FCC, and stockholders in
Farmer Mac on new Sec. 650.2, which addresses general board-level risk
management matters. Farmer Mac expressed agreement with requiring its
board to be actively involved in the Corporation's risk framework, but
considered it unreasonable to expect it to ``ensure'' all risk-taking
is safe and sound. Farmer Mac asked that it be allowed to address its
``risk appetite'' by areas, such as liquidity risk or operational risk,
instead of one unified assessment, explaining that the risk committee's
role represents the intersection of oversight of all risk areas. We
generally expect functional area specialists (e.g., finance committee,
credit committee, marketing committee) to evaluate risk in terms of the
specialized responsibilities of those operational areas. While we view
that as generally appropriate for day-to-day risk management, it is
nevertheless important that the entire board consider risks from all
areas when conducting its enterprise-wide monitoring and oversight. For
that reason, the risk committee is expected to evaluate risks from the
level of the Corporation, rather than the functional area. To borrow a
description from the Treadway Commission,\20\ we believe the risk
committee aims to strike an optimal balance between growth and return
goals while attempting to optimize deployment of resources toward the
entity's objectives.
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\20\ ``Enterprise Risk Management--Integrated Framework'',
Executive Summary, Committee of Sponsoring Organizations of the
Treadway Commission, September 2004.
---------------------------------------------------------------------------
In the same way, we view the risk officer as playing a role that
represents the intersection of risks across functional area managers.
We view the risk officer's role to involve monitoring the balance of
risk across all functional areas and, as needed, recommending
adjustments to re-balance the enterprise-wide risk profile in a manner
consistent with the board-approved risk appetite. This role does not
eliminate risk management responsibility from other members of the
Corporation's management team. If a functional area manager knows that
his or her performance will be evaluated on the basis of the
productivity of that area, the manager's focus on that area's
performance could become out of proportion to the impact of that effort
on the Corporation's enterprise-wide risk position. The risk officer
would then serve as a means of alerting senior management and the board
of the potential impact that functional area managers' activities and
positions may have on the Corporation at the enterprise-wide level.
This should enable appropriate actions and strategies to be evaluated
and taken when functional area risk taking exceeds the overall risk
appetite of the board.
The FCC and two stockholder-commenters agreed with requiring the
Corporation's board to be actively involved in the Corporation's risk
framework, but wanted it expanded to include capital considerations.
These stockholder-commenters added that the requirement was not
preventative enough as the Corporation's board should be required to
approve risk-bearing capacity and consider the Corporation's public
policy mission as well as capital adequacy. A third stockholder-
commenter remarked that the part 653 requirements were not
unreasonable, but better suited to non-regulatory guidance. This
stockholder-commenter explained that the science of risk management is
an emerging area, subject to rapid changes, so placing risk management
requirements within a rule may hinder the Corporation's ability to keep
pace with best practices in risk management.
We are replacing the term ``ensure'' with the phrase ``provide
reasonable assurance'' when discussing risk-taking activities in
response to comments. We also add as a clarifying change that the
requirement to monitor risk activities is expected to be on a regular
basis. We make no other changes to new Sec. 653.2. While we appreciate
the comment regarding the evolving nature of risk management, we
believe it appropriate to establish an essential risk management
structure within regulation and then supplement the rules with the
suggested informal guidance if
[[Page 49145]]
necessary. We also make no changes in response to comments asking that
part 653 address risks associated with capital. We already address
risks to capital in Sec. 652.61, where we require the Corporation's
board to approve the annual capital plan, which must comply with the
board's risk appetite.
2. Risk Management [New Sec. 653.3]
We finalize, with changes, new Sec. 650.3, which contains the
minimum required risk management program activities of the Corporation.
We received comments to this section from Farmer Mac, the FCC, and
three Farmer Mac stockholders. We discuss the comments, and any
changes, in the appropriate sections below.
a. Risk Management Program [New Sec. 653.3(a)]
We are making the following changes to new Sec. 653.3(a), which
requires the Corporation's board of directors to have a risk management
program:
Replacing the phrase ``in effect at all times'' in the
introductory language of paragraph (a) with the more measurable
standard ``establish, maintain, and periodically update'' the risk
management program;
Removing the language ``addresses the Corporation's
exposure to credit, market, liquidity, business, and operational
risks'' in paragraph (a)(3) as it is redundant of language contained
Sec. 653.3(b)(2);
Adding language in paragraph (a) to recognize that
implementation of the risk management program may be handled by senior
management; and
Adding language to clarify that the list of requirements
in new Sec. 653.3(a) are the minimum.
In furtherance of these clarifications, we remove the proposed
paragraph (a)(4) requirement that the risk management policy specify
the independence of those carrying-out the program.
We received comments to new Sec. 650.3(a) from the FCC agreeing
with the provision, but expressing concern that there was insufficient
distinction between risks in the System and risks faced by the
Corporation. The FCC asked that ``casual'' references linking the
Corporation to the System be eliminated and that we specify the
Corporation is a separate GSE from the System. In response, we clarify
in this preamble that the Corporation is an institution of the Farm
Credit System, but is not liable for any debt or obligation of any
other System institution, and the other System institutions have no
liability for Farmer Mac's debt. Also, Farmer Mac is organized as an
investor-owned corporation, not a member-owned cooperative as are other
System institutions, and the Farm Credit System Insurance Corporation
does not insure Farmer Mac's securities.
Farmer Mac remarked that the board does not often involve itself in
day-to-day risk decisions: That is more properly handled by senior
management. As mentioned above, we have made clarifying changes to
recognize that daily implementation of the risk management program may
reside with senior management. Two stockholder-commenters stated
agreement with the risk management provisions, but asked that we expand
them to include risk-bearing capacity and require management of the
Corporation's capital to be consistent with Basel III. We have
previously responded to their comment. These commenters also asked that
OSMO provide further guidance to the Corporation on specific risk
tolerance measures and for OSMO to closely monitor the program to
ensure it is implemented in an effective manner. As noted, FCA may
provide for the guidance on risk management as part of its oversight of
this area. These stockholder-commenters objected to the Sec. 653.3(a)
provision requiring risk management to include consideration of
compensation practices and asked for the provision to be removed. We
believe the incentive structures related to functional area managers'
performance and risk-taking activities, referred to in our earlier
response to comments on Sec. 653.2, includes incentive compensation
policies and practices and that the Corporation's enterprise-wide risk
management oversight would be incomplete without such consideration.
b. Risk Committee [New Sec. 653.3(b)]
We received comments from Farmer Mac and two Farmer Mac
stockholders on new Sec. 653.3(b), which addresses the
responsibilities of the risk committee. The stockholder-commenters
agreed in general with the provisions, but asked that they more closely
resemble the requirements for other GSEs, including System
institutions. We note that we do not currently require other System
institutions to have risk committees and so cannot accommodate the
request of those commenters asking for consistency among System
institutions. Also, we note that the Corporation is of a different
structure than other System institutions, necessitating some different
risk management aspects. However, we did consider the provisions of the
recent risk management rulemaking by the Federal Housing Finance Agency
(FHFA).\21\
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\21\ 80 FR 72327, December 21, 2015.
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Farmer Mac asked that we use the same experience requirement for
the risk committee as is used for the risk officer since it could be
difficult to ensure a risk expert is always elected to the board. For
the same reason, Farmer Mac asked that we change the committee
responsibilities to a level of understanding of risk rather than
possession of expertise. We agree and substitute in new Sec.
653.3(b)(1) the phrase ``an understanding of'' and remove the proposed
``expertise'' requirement when talking about the requirement that the
risk committee have at least one member who is familiar with risk
management. We also make changes in new Sec. 653.3(b) to replace the
requirement that the risk committee be responsible for the oversight of
the risk management program, as that responsibility rightfully belongs
to the entire Corporation board. In its place, we require the risk
committee to assist the Corporation board in overseeing the risk
management program. We believe it is essential that the tone of the
Corporation's risk culture and its procedures for risk decision-making
be set by the Board, even when based on management's recommendations.
Further, the board of directors play a critical role in the ongoing
oversight of, and cohesive implementation of, operational strategies
and plans that conform to established risk appetites.
We also replaced the proposed requirement in paragraph (b)(2)(i)
that the risk committee oversee and document risk management activities
with a requirement to periodically assess management's implementation
of the risk management program. Similarly, we remove the proposed
review requirement of paragraph (b)(2)(ii) and clarify that risk
committee recommendations relate to changes to the risk management
program. We also clarify in paragraph (b)(2)(iii) that the risk
committee's receipt of reports from Corporation staff is not limited to
the risk officer. We recognize that any personnel responsible for
implementing the risk management program may be tasked by Farmer Mac
with offering reports to the risk committee.
We are making technical changes in new Sec. 653.3(b) to align
language with that contained in other sections (e.g., replacing ``risk
management practices'' with ``risk management program'', replacing
``risk profile'' with ``risk appetite''). We also remove language
redundant of that contained in new
[[Page 49146]]
Sec. 651.50 regarding formation of the risk committee. As referenced
in the discussion of Sec. 651.50 (preamble section III.B.3.), we are
finalizing the requirement that the Corporation have a risk management
committee so do not need to state in Sec. 653.3(b) that the risk
committee must be formed.
c. Management of Risk [New Sec. 653.3(c)]
We received comments from Farmer Mac and two Farmer Mac
stockholders on new Sec. 653.3(c), which requires the Corporation to
have a risk officer. The stockholder-commenters agreed in general with
the need for a risk officer, but stated that FCA should not require it
as FCA should not make staffing decisions within a System institution.
These commenters also contended that requiring a risk officer offers no
assurance, from a safety and soundness perspective, of compliance with
risk management policies. The stockholder-commenters asked that the
entire paragraph be removed. Farmer Mac commented on the use of the
term ``experience'' versus ``expertise'', asking for similar use for
both the risk committee and the risk officer. Farmer Mac explained that
using different terms implied different expectations regarding the
background of the risk officer versus the risk committee expert. Farmer
Mac also asked that the standard be an understanding of risk issues and
not direct experience in risk issues to facilitate recruitment.
Finally, Farmer Mac asked for a 1-year phase in to fill the position.
We earlier addressed most of Farmer Mac's comment regarding the
level of expertise required in Sec. 653.3(b). In response to remaining
comments, we are changing the name of paragraph (c) from ``Risk
Officer'' to ``Management of risk'' and making conforming changes to
reference a ``risk officer, however styled'' so as to encompass other
personnel responsible for implementing the risk management program. We
also remove specific reporting requirements to ``the chief executive
officer and board risk committee'' in new Sec. 653.3(c)(4) and (5) to
recognize that Farmer Mac will exercise its own discretion in designing
a risk management position(s). We decline to reduce the level of
experience for risk officers to a mere understanding of risk and have
retained the requirement for experience in risk management. We are not
delaying the effective date of this rule as requested by Farmer Mac to
facilitate the Corporation having a risk officer in place before the
rule is effective. Should the Corporation encounter difficulties in
having a risk officer in place after this rule is effective, Farmer Mac
should contact the Director of OSMO.
3. Internal Controls [New Sec. 653.4]
We received comments on new Sec. 653.4 from Farmer Mac and two
Farmer Mac stockholders. Farmer Mac asked that we remove the entire
section on internal controls, stating the Corporation's internal
control activities under SEC regulations are sufficient. Farmer Mac
then asked us to mirror SEC regulation if we retained the provision or
make the following changes to it: remove the term ``ensure'',
incorporate more flexibility, and avoid expanding the role of the
directors. Farmer Mac also asked for clarification on paragraph (b)(6)
regarding information reported to the board of directors, as it
considered the provision to be vague.
We decline the request to remove the entire section requiring
internal controls. We continue to believe that the Corporation's board
oversight of internal controls is a critical component of its
responsibility for monitoring corporate activities and providing
reasonable assurances that the controls will prevent excessive risk
taking, mitigate operational risks, and minimize the potential for
unsafe and unsound activities. The corporate environment is influenced
by management's philosophy, operating style, integrity, ethical values,
and commitment to competence. If this foundation is strong, if the
corporate environment is positive, the overall system of internal
controls will be more effective. Further, a sound system of
comprehensive and integrated internal controls is vital to the
operations of any organization and especially those whose business is
taking financial risk. In the more than two decades since the
Corporation was chartered, business and operational environments have
become significantly more complex and technology-driven. A system of
internal controls should dynamically respond to such changes in
complexity--not just in business unit operations but also in compliance
with increasingly complex laws, regulations, and industry standards. We
also decline to rely solely on the internal control assessment the
Corporation prepares for the SEC since that assessment is targeted at
financial reporting issues, pursuant to provisions in the Sarbanes-
Oxley Act.\22\ As a safety and soundness regulator, our interest in
internal controls extends beyond preparation of financial report. While
we believe effective financial controls reduce the risk of asset loss
and help ensure that financial information is complete and accurate,
and agree that financial statements need to be reliable and comply with
laws and regulations, we also believe safety and soundness internal
controls extend to the operations, programs, and resources of the
Corporation. We are, however, making some changes based on the
comments. We change paragraph (a) to clarify the expected internal
controls are safety and soundness controls over the Corporation's
operations, programs, and resources. We also remove the ``ensure''
language from paragraph (a), to which a commenter objected. Also, we
are substituting the requirement in paragraph (b)(6) for
``transparency'' with the Corporation's board in response to a comment.
We instead require that internal controls address ``the completeness
and quality'' of information shared with the Corporation's board.
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\22\ The Sarbanes-Oxley Act stressed the importance of public
companies maintaining internal controls when it comes to their
financial reporting by requiring public companies to include details
on the company's financial internal controls inside of their annual
reports. Also, the SEC requires filers to include an attestation of
``internal controls over financial reporting'' in annual reports.
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Farmer Mac also asserted that requiring it to have internal
controls would deviate from what FHFA requires of the only other
secondary market GSEs (Fannie Mae and Freddie Mac).\23\ We believe that
the current differences between the operating structures of the housing
GSEs and Farmer Mac, in particular the conservatorships of the housing
GSEs, makes comparison of their regulatory structures less useful. We
believe internal controls are important for Farmer Mac regardless of
whether another regulator adopted them for the housing GSEs. The
overall purpose of an internal controls system is to help an entity
achieve its mission and accomplish certain goals and objectives. An
effective internal control system should promote orderly, economical,
efficient and effective operations; safeguard resources against loss
due to waste, abuse, mismanagement, errors and fraud; promote adherence
to statutes, regulations, and operating procedures; as well as develop
and maintain reliable financial and management data (and accurately
report that data in a timely manner), all of which can help protect the
Corporation's safe and sound operation and its reputation.
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\23\ See footnote 15, Appendix B, of the Farmer Mac comment
letter to the proposed rulemaking. See also, 12 CFR 1236, Appendix
A, ``Prudential Management and Operations Standard,'' containing
some FHFA internal controls requirements for the secondary market
housing GSEs (e.g., ``Standard 1--Internal Controls and Information
Systems'').
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[[Page 49147]]
We had proposed in paragraphs (c) and (d) that the Corporation
establish a monitoring system for its internal controls and to report
to us on the effectiveness of those controls. Stockholder-commenters
objected to the requirement for annual reports on internal controls,
explaining such reports would be burdensome and could reduce the
attention given the issue during FCA examinations. The commenters
instead stated that FCA should rely primarily on its examination
authority for review of internal controls. We make changes to
paragraphs (c) and (d) to address the comments objecting to annual
reports on internal controls, but do so in a manner that also satisfies
the underlying purpose of proposing an annual report on the
effectiveness of internal controls. We are removing paragraph (d),
which required the annual report to OSMO, in its entirety. In
connection with this, we enhance the provision in paragraph (c) to
require the monitoring of internal controls to include an
identification and documentation of weaknesses in internal controls. We
continue to believe the Corporation's internal control system needs to
be monitored to assess whether controls are effective and operating as
intended. On-going monitoring occurs through routine managerial
activities such as supervision, reconciliations, checklists,
comparisons, performance evaluations, and status reports. Monitoring
may also occur through separate internal evaluations (e.g., internal
audits/reviews) or from use of external sources (e.g., comparison to
peer groups or industry standards, surveys, etc.). Deficiencies found
during monitoring should then be documented and reported to those
responsible for the function, with serious deficiencies being reported
to top management or the board. To ensure this monitoring occurs, the
rule requires the Corporation to document the process used to identify
and resolve weaknesses in its internal controls, as well as document
what weaknesses were found. This change, along with the internal
controls over financial reporting made to SEC, should provide the
necessary source documents for our examination of the Corporation's
internal controls, similar to what would have resulted from the
proposed annual report to OSMO.
D. Disclosure and Reporting [Part 655]
Part 655 contains the existing financial disclosure and reporting
provisions for the Corporation. We received comments to part 655 from
Farmer Mac, an agent of Farmer Mac, and a Farmer Mac stockholder. There
were no comments opposing the proposed organizational changes and,
therefore, we finalize them as proposed. We also finalize as proposed
the movement of existing provisions into the relevant subparts.
We discuss final changes to part 655, and the related comments
received, in the appropriate sections below.
1. Definitions [New Subpart A: New Sec. 655.1]
We received a comment from Farmer Mac on the definition for
``material'' in part 655, asking us to remove the definition or restate
that used by the SEC. We proposed defining ``material'' as information
required when ``there is a substantial likelihood that a reasonable
person would attach importance in making investor decisions or
determining the financial condition of the Corporation.'' We decline
Farmer Mac's request as it did not argue that the term ``material,'' as
used in part 655, presented any conflict with SEC reporting rules.\24\
Rather, we note that, like the SEC, our rule interprets the term in a
manner similar to the Financial Accounting Standards Board (FASB)
Concepts Statement No. 2 explanation of ``materiality.'' \25\ FASB, in
turn, relied on the U.S. Supreme Court explanation that a fact is
material under Federal securities laws if there is a ``substantial
likelihood'' the fact would be ``viewed by the reasonable investor as
having significantly altered the `total mix' of information made
available.'' \26\ We also note that our rule substantially resembles
the SEC Rule 405 definition,\27\ with adjustments made for financial
safety and soundness considerations. We finalize the term ``material''
and its definition as proposed. However, we are not finalizing adding
the term ``report'' and its accompanying definition to new Sec. 651.1
as the term is sufficiently explained in the relevant provisions of the
rule.
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\24\ See SEC Staff Accounting Bulletin: No. 99--Materiality, 17
CFR part 211 (August 12, 1999), explaining the meaning of
``material'' as ``A matter is `material' if there is a substantial
likelihood that a reasonable person would consider it important.''
\25\ FASB, Statement of Financial Accounting Concepts No. 2,
Qualitative Characteristics of Accounting Information, 132 (1980).
In this bulletin, FASB explained the concept of ``materiality'' as
``The omission or misstatement of an item in a financial report is
material if, in the light of surrounding circumstances, the
magnitude of the item is such that it is probable that the judgment
of a reasonable person relying upon the report would have been
changed or influenced by the inclusion or correction of the item.''
\26\ See TSC Industries v. Northway, Inc., 426 U.S. 438, 449-450
(1976), where the court noted that determining materiality required
``delicate assessments of the inferences a `reasonable shareholder'
would draw from a given set of facts and the significance of those
inferences to him . . .''. See also Basic, Inc. v. Levinson, 485
U.S. 224 (1988).
\27\ 17 CFR 230.405.
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2. Prohibitions [Proposed New Sec. 655.2]
We received comments on new Sec. 655.2 from Farmer Mac and an
agent of Farmer Mac. Farmer Mac asked that all references to ``agents''
be removed and that the provision include a materiality standard so as
to limit FCA actions. Farmer Mac asserted that FCA has no authority to
regulate non-System persons or entities, suggesting FCA limit itself to
imposing an obligation on the Corporation to monitor its agents. Farmer
Mac again stated that FCA should not intrude into areas under SEC
jurisdiction. Farmer Mac also asked that we defer to the SEC for
determining compliance, specifically mentioning the SEC rules on
omissions and misstatements in reports filed with the SEC. The agent to
Farmer Mac stated the regulation of agents was intrusive and
burdensome, adding that Congress did not intend consultants and
advisors to be subject to FCA authority.
We proposed new Sec. 655.2 to prohibit directors, officers,
employees, or agents of the Corporation from making misleading,
inaccurate, or incomplete part 655 disclosures. The provision would
have covered reports and disclosures made to FCA, stockholders of
Farmer Mac, and the general public. Contrary to the remarks of some
commenters, the provision did not assert direct regulatory authority
over the general actions of an agent of Farmer Mac. Instead, the
provision would have required Farmer Mac to control its agents, or
issue corrections to disclosures made by the same if those disclosures
were determined to be misleading, inaccurate, or incomplete. As
explained in section 8.3(c)(4) of the Act, Farmer Mac has a statutory
duty to take necessary precautions, including obtaining surety bonds,
against any losses caused by the acts of its agents. Further, FCA has
statutory authority to issue cease-and-desist orders to agents of the
Corporation in appropriate circumstances. In addition, we reject the
argument of Farmer Mac that misleading, inaccurate, or incomplete
disclosures are the exclusive jurisdiction of the SEC. Not every report
or disclosure made by Farmer Mac is in response to a requirement of the
SEC, particularly those we require under our rules in part 655. Rather,
activities of the Corporation extend beyond registered securities
issued or guaranteed by Farmer Mac, and we have long had regulations
addressing Farmer Mac disclosures related to securities not
[[Page 49148]]
registered under the Securities Act of 1933. All this notwithstanding,
in response to the concerns expressed by commenters regarding dual
compliance with SEC regulations, we are not finalizing the contents of
Sec. 655.2 at this time.
3. Reports of Condition [New Subpart B: Existing Sec. 655.1; New
Sec. Sec. 655.10 and 655.15]
Our existing rule requires the Corporation to make annual reports
to its shareholders, and we had proposed enhancements to this existing
requirement. The enhancement included adding quarterly reports,
increasing the information in the reports, reducing distribution
timeframes, and requiring the reports to be signed and certified as
accurate. We received comments on these proposed changes from Farmer
Mac and a Farmer Mac stockholder. The stockholder-commenter only
remarked that we should remove references to ``EDGAR'', the SEC Web
site portal, as the name of the portal may change. We agree and have
removed all references to ``EDGAR'' in part 655.
Farmer Mac objected to our rules containing any different reporting
or disclosure requirements than those required by the SEC. Farmer Mac
stated reporting and disclosures are the jurisdiction of the SEC and
FCA should reconsider any regulation of the matter. We reject the
argument of Farmer Mac that financial reports and disclosures are the
exclusive jurisdiction of the SEC and remind the Corporation that we
have long had regulations addressing financial reports and disclosures
made by the Corporation. Further, FCA may require disclosure necessary
to the safety and soundness of the Corporation.\28\ In particular, we
may require disclosures suitable to the purpose for which Farmer Mac
was created, to follow disclosure practices appropriate to secondary
market activities, and to aid in reducing risks in secondary market
transactions.\29\ We also point out that SEC rules do not prohibit its
filers from making financial reports to other Federal agencies.\30\
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\28\ Sections 5.17(a)(8) and 8.11 of the Act (12 U.S.C.
2252(a)(8) and 2279aa-11).
\29\ Section 8.11(a)(1) and (2) of the Act (12 U.S.C. 2279aa-
11).
\30\ Refer to 17 CFR 240.12b-33.
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While we understand Farmer Mac's desire to only concern itself with
one unified set of reporting and disclosure requirements, we cannot
uniformly adopt SEC reporting and disclosure requirements. As explained
in the proposed rulemaking, SEC requires certain reporting and
disclosures to satisfy its role in ensuring listed companies provide
sufficient information to the investing public. We, on the other hand,
concern ourselves with ensuring disclosures and report made by the
Corporation address safety and soundness concerns, which include all
the activities of the Corporation. Where we can in this rule, we have
allowed Farmer Mac to use SEC filings in satisfaction of our
requirements. However, the SEC is a separate agency and can change its
reporting and disclosure requirements without consulting FCA. For this
reason, we limit the extent that SEC filing requirements may also
satisfy our requirements and do so in a manner to avoid conflict with
SEC requirements and unnecessary duplication of effort by Farmer Mac.
a. Annual Reports
Our existing rule requires the Corporation to make annual reports
to its shareholders consistent with shareholder reports required by the
SEC, and to submit copies of such to us. We note that the Corporation
must also file annual and quarterly reports with the SEC (10Q and 10K,
respectively), which may include additional information not part of the
annual report to shareholders.\31\ Farmer Mac asked us to mirror SEC
annual reporting requirements. Doing so would include removing the
proposed quarterly reporting to shareholders.\32\ We finalize the
proposed language that the annual reports to shareholders must be
either equivalent in content to that required under the Securities Act
or as we so instruct. However, we are not finalizing the proposed
requirement in Sec. 655.10(a) that the Corporation make quarterly
shareholder reports. Farmer Mac also asked that we remove the
requirement to file any paper copies of reports with OSMO. We decline
this request for reasons discussed in the proposed rulemaking preamble.
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\31\ The SEC requires registered entities to file an annual
report on Form 10-K, which may contain more detailed information
about the company's financial condition than the annual report to
shareholders. The annual report on Form 10-K provides a
comprehensive overview of the company's business and financial
condition and includes audited financial statements. Although
similarly named, the annual report on Form 10-K is distinct from the
``annual report to shareholders,'' which a company must send to its
shareholders when it holds an annual meeting to elect directors.
www.sec.gov/answers/form10k.htm.
\32\ Currently, the SEC does not require registrants to issue a
quarterly report to shareholders. However, the issuance of such a
report might be required by the listing standards of a national
securities exchange or association. In addition, communications
about quarterly results are subject to Regulation FD, Fair
Disclosure, as well as Form 8-K disclosure requirements.
---------------------------------------------------------------------------
b. Certification of Reports
Farmer Mac said that there was no need for requiring signatures and
certifications on reports as the SEC already addresses how reports are
to be signed and certified. Farmer Mac also asked that we define
``financially accurate'' as used in new Sec. 655.10(b), explaining it
is not a term used in the SEC-required certification of reports. We
finalize with changes the signature and certification requirements of
new Sec. 655.10(b). Our proposed certification did not conflict with
SEC laws or regulations, but may have caused compliance issues with SEC
instructions. SEC rules Sec. Sec. 240.13a-14 and 240.15d-14 require
certification of quarterly and annual reports filed with them, but SEC
instructions for completing these certifications prohibit filers from
making changes to the certification language provided in the SEC rules.
Our proposed certification requirements captured most of the same
information as the SEC certifications, without giving specific language
that had to be used. To address the commenter's concern regarding
compliance with both the SEC and FCA, we are changing our certification
requirements to require the use of SEC certifications.\33\ We also
clarify that the requirements of Sec. 655.10(b) apply to reports
issued under new subpart B of part 655.
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\33\ SEC certifications are designed to be consistent with the
certification requirements of section 302 of the Sarbanes-Oxley Act,
which is intended to improve the quality of public financial
disclosures that a company provides in its periodic reports to
investors.
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c. Distribution Deadlines
Farmer Mac objected to reducing distribution deadlines to 90 days,
asking that we keep the current 120-day deadline so as to provide it
greater flexibility. Farmer Mac added that the proposed 90-day
timeframe ``deviates from SEC rules,'' but does not name the SEC rules
being referenced. Farmer Mac also asserted the shorter timeframe could
increase compliance burden.
Absent a citation to the SEC rules, we do not see where the number
of days FCA proposed created any compliance problems with SEC
requirements. The SEC has a three-tiered deadline for annual reports
filed with them that is based on the size of the filer: 60 days after
fiscal year end for large accelerated filers, 75 days after fiscal year
end for regular accelerated filers, and 90 days after fiscal year end
for nonaccelerated
[[Page 49149]]
filers.\34\ Our proposed 90-day deadline did not conflict with any of
these timeframes. The separate ``annual report to shareholders'' \35\
required by the SEC provides that a registered company must distribute
the company's annual report to shareholders at least 40 days before the
company holds its annual meeting or elections.\36\ Again, our proposed
90-day deadline did not conflict with this timeframe as the Corporation
is not legally required to hold its annual meeting on any specific
date.
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\34\ SEC Web site, www.sec.gov/answers/form10k.htm. See also
Instructions to Form 10-K at section A.2, www.sec.gov.
\35\ The SEC-required annual report to shareholders is usually
includes an opening letter from the Chief Executive Officer,
financial data, results of operations, market segment information,
new product plans, subsidiary activities, and research and
development activities on future programs. Companies sometimes elect
to send their annual report on Form 10-K to their shareholders in
lieu of, or in addition to, providing shareholders with a separate
annual report to shareholders. SEC Web site, www.sec.gov/answers/annrep.htm.
\36\ 17 CFR 240.14a-16.
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Our existing rule requires distribution of annual reports to
shareholders within 120 days of the fiscal year end (i.e. April of each
year). The SEC ties distribution of shareholder reports to the annual
meeting date (or election date) and reports to the SEC are tied to
fiscal year end. We use fiscal year end for both actions. This means to
comply with both the SEC and FCA deadlines the Corporation currently
must distribute its report to shareholders within 120 days of fiscal
year end and may not hold its annual meeting (or elections) until 40
days after the report is distributed (approximately 160 days or June
9th of each year). We proposed reducing our deadline to 90 days, which
would result in the Corporation being required to hold its annual
meeting (and elections) no earlier than May 10th of each year
(approximately 120 days from fiscal year end). As there is no
compliance issue with SEC rules, we reject the request of Farmer Mac to
follow the SEC in this regard. We prefer a date certain under which the
Corporation must distribute its annual report to shareholders. However,
we have restored the existing 120-day deadline for distribution of the
annual report to shareholders. We continue to believe the Corporation
is more than capable of issuing the report sooner, but agree that the
additional time is beneficial to the director nomination process (due
to the report's connection to holding annual meetings/elections under
SEC rules).
d. Interim Reports, Proxy Statements, and Notices
We proposed in Sec. 655.15 that the Corporation provide us copies
of interim reports (e.g., 8-K), proxy statements, and notices sent to
SEC. We also proposed that this same information be posted on the
Corporation's Web site for public viewing, but that links to the SEC
electronic filings may be used to satisfy this requirement. Farmer Mac
commented that these requirements were an unjustified regulatory
burden. Farmer Mac then asked that we clarify the scope of notices,
interim reports, and proxy statements required to be sent to OSMO under
Sec. 655.15(a). Farmer Mac also asked that we remove the requirement
to post on its Web site these same notices, interim reports, and proxy
statements. Farmer Mac stated concern with the public posting
requirement since these filings include all papers and documents made
part of the filing, contending confidential communication with the SEC
may be made public.
We decline to remove the Sec. 655.15(a) requirement to provide
these complete filings to OSMO as we continue to believe it is
essential that communications between the Corporation and OSMO, its
primary regulator, include the substantive communications the
Corporation has with the SEC. We also fail to see how providing us
copies of reports and filings already being prepared is a burden on the
Corporation. We have clarified in Sec. 655.15(b) that the public Web
site postings may be limited to the public aspects of the notices,
interim reports, and proxy statements.
4. Reports Related to Securities Activities [New Subpart C: Existing
Sec. 655.50; New Sec. 655.20]
Farmer Mac objected to being required in Sec. 655.20 to send paper
copies to us of reports on unregistered securities activities. We have
removed the requirement for both electronic and paper copies, replacing
it with a requirement for either a paper or electronic copy, whichever
is most conducive to transmitting the information. We also added
language to clarify the reports are to be sent to the Director of OSMO.
Farmer Mac requested we clarify the types of documents covered by
Sec. 655.20 and whether daily transactions (e.g., issuance of
unregistered debt securities) needed to be filed with us. Farmer Mac
explained that many documents and daily activities could be covered by
the rule under some interpretations. If so, the burden of providing
that information to us would be significantly increased. As we made
little change to existing requirements in this area, we question the
assertion that the rule could be misinterpreted or is a burden on
Farmer Mac. Farmer Mac has made reports to us on its activities
regarding securities not registered under the Securities Act under this
regulatory requirement since 1993. As such, Farmer Mac should continue
its current practices addressing daily activities for filings made
under this requirement, unless we later advise them otherwise. The
Corporation at a minimum must make special filings with us regarding
those items specifically listed in the rule. We encourage the
Corporation to contact us when questions arise as to whether a specific
securities action requires a filing under Sec. 655.20.
Farmer Mac requested we update existing terminology in Sec.
655.20(b)(2) regarding securities purchased by the Corporation under
section 8.6(e) of the Act. We agree that the specific citation to the
Act needed to be updated to reference the correct paragraph of section
8.6.\37\ The current reference predates Congress moving the relevant
provision from section 8.6(g) to section 8.6(e) of the Act.\38\ We also
revise the ``pooling and servicing agreements'' terminology as
requested by Farmer Mac. The existing rule used this phrase to
reference those documents employed in the exercise of the Corporation's
authority to purchase and hold securities that are backed by pools of
qualified loans (which loans are secured by a first lien on
agricultural real estate, per section 8.0(9)(A) of the Act).\39\ The
phrase ``pooling and servicing agreements'' is outdated as such
documents are no longer a fundamental prerequisite to doing business
with Farmer Mac. We replace this phrase with one that refers to those
documents supporting issuances of these types of guaranteed securities
and which are material to the transaction(s).
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\37\ 12 U.S.C. 2279aa-6(e).
\38\ Public Law 104-105, 110 Stat. 164 (February 10, 1996).
\39\ See former Sec. 621.20(b)(2)(ii) (58 FR 48786, September
20, 1993) referring to Farmer Mac I securities, relocated to
existing Sec. 655.50(b)(2)(ii)(70 FR 40635, July 14, 2005). Farmer
Mac I securities are those backed by pools of qualified loans as
defined in section 8.0(9)(A) of the Act.
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5. Correspondence Related to Securities Activities [New Subpart C:
Existing Sec. 655.50; New Sec. 655.21]
We proposed expanding the existing requirement to send us copies of
substantive correspondence between Farmer Mac and the SEC or U.S.
Treasury to cover all subject matters, instead of just those
substantive communications related to securities activities and SEC
compliance matters. We also proposed adding similar
[[Page 49150]]
communications with the NYSE and setting timeframes for providing the
information to us. Farmer Mac asked for clarification on the types of
correspondence between the Corporation and the SEC or NYSE that needed
to be sent to us, adding that sending all substantive communique could
be unworkably burdensome. Farmer Mac did acknowledge that the provision
was within our oversight authority, but stated the scope of
communication was too broad. Farmer Mac went on to equate
``substantive'' correspondence with ``routine'' communications received
by many employees of the Corporation through subscriptions to NYSE
market data.
Material such as mass-produced market updates are not ``substantive
correspondence between the Corporation and the SEC, U.S. Treasury, or
NYSE'' nor would we expect to be sent SEC and NYSE communique provided
to a subscriber list. However, to alleviate any confusion, we clarify
that correspondence directly addressing the activities of the
Corporation is what is covered by the provision. Further, we refer to
past clarifications on this issue, explaining that non-substantive
transmittal letters accompanying SEC filings, for example, would not be
considered ``substantial'' and therefore not required to be filed with
the FCA.\40\ On the other hand, we have particular interest in
interpretive rulings of the NYSE, the SEC, or the Treasury Department
bearing on Farmer Mac's ongoing business activities and expect such
correspondence to be filed with us under this provision.
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\40\ See 58 FR 48786 (September 20, 1993), where FCA responded
in 1993 to a similar comment of Farmer Mac regarding the meaning of
``substantive''.
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Farmer Mac asked that we exclude communications to NYSE that would
be duplicative of official filings with the SEC. We agree and have
changed the language of Sec. 655.21(a) accordingly. Farmer Mac also
requested guidance on how to transmit to us communique issued via
secure electronic portals. We encourage Farmer Mac to contact us when
they have such communique, at which time we will provide instructions
on how to provide us copies of such.
In addition, Farmer Mac objected to being required in Sec.
655.21(c) to notify us of any exemption it obtained from the SEC.
Farmer Mac asked that we limit the requirement to those SEC exemptions
obtained under the Securities Act of 1934. In making this request,
Farmer Mac explained it is not subject to complete regulation by SEC
and, except for certain mortgage-backed securities, it is not subject
to the 1933 Securities Act and must only file reports under the 1934
Securities Act. We decline the request to limit the rule by naming a
specific securities law. The definition for ``securities'' contained in
Sec. 655.1 explains that it means the securities law(s) appropriate to
the context of the employing provision. However, we have changed the
requirement to only require notice to us of those exemptions that are
not generally available under SEC rules to similarly situated filers.
E. Other Comments
We received comments on portions of the proposed rule preamble
language that do not address regulatory provisions and result in no
change to the rule. These comments are discussed below.
1. Regulatory Flexibility Act Certification
We received a comment from an agent of Farmer Mac regarding the
Regulatory Flexibility Act (RFA).\41\ The commenter argued this
rulemaking would impact a substantial number of small businesses, with
whom Farmer Mac conducts business, and therefore would alter our
assessment of the economic impact of the rulemaking. In the proposed
rule, we certified that the rule would not have a significant economic
impact on a large number of small entities, and that Farmer Mac did not
qualify as a ``small entity'' as defined under the RFA. The RFA does
not: (1) Seek preferential treatment for small entities; (2) require
agencies to adopt regulations that impose the least burden on small
entities; or (3) mandate exemptions for small entities. Rather, it
requires agencies to examine public policy issues using an analytical
process that identifies, among other things, barriers to small business
competitiveness. Meaning, it requires agencies to analyze the economic
impact of proposed regulations when there is likely to be a significant
economic impact on a substantial number of small entities covered by
the rulemaking, and to consider regulatory alternatives that will
achieve the agency's goal while minimizing the burden on those same
small entities. The rule is directed at Farmer Mac, which is not a
small business. Further, we see nothing in this final rulemaking that
creates significant economic barriers to small businesses. Those areas
of the rule referencing agents of Farmer Mac expound upon existing
regulations or statutory provisions and make no reference to the size
of entity serving as an agent to Farmer Mac.
---------------------------------------------------------------------------
\41\ Regulatory Flexibility Act, Pub. L. 96-354, 94 Stat. 1164
(codified at 5 U.S.C. 601).
---------------------------------------------------------------------------
2. Need for Rulemaking
One stockholder-commenter expressed general concern with FCA
regulating the corporate governance and disclosures for Farmer Mac
given existing SEC rules in these areas. This commenter asked FCA to
use caution as SEC rules are constantly changing. The commenter also
stated FCA did not need to regulate governance behavior at Farmer Mac
as the Corporation has a strong history of sophisticated corporate
governance practices.
Voluntary governance is valuable, but it does not replace the
stability that rules provide in assuring stakeholders of the safety and
soundness of the Corporation. Our governance rules set a minimum level
of performance that is mandatory for the Corporation. While we believe
it is important to preserve individual operating flexibility wherever
and whenever possible, our responsibility as regulator requires us to
issue regulations we determine appropriate for safety and soundness
reasons. We believe the assurances derived from a regulatory minimum
standard, combined with the Corporation's voluntary governance efforts,
will increase stockholder, investor, and public confidence in Farmer
Mac.
Farmer Mac questioned the need for any regulatory changes, stating
that insufficient recognition was given to its status as a public
company. Farmer Mac also stated that it is unnecessary for FCA to
regulate many corporate governance areas due to SEC requirements and
thus we should remove those provisions. Farmer Mac explained that it is
the mission of the SEC to protect investors, and the SEC provides
sufficient regulation of board activities and corporate disclosures.
Farmer Mac added that portions of the rule presented compliance
concerns with other regulatory elements unrelated to FCA, but provided
no specific citation to these other rules. Farmer Mac also asserted
that the rulemaking would potentially harm the Corporation and those it
serves in a material way instead of enhance safe and sound operations,
but again offered no specifics.
The FCA, acting through OSMO, examines and provides general
supervision over the activities of Farmer Mac pursuant to section 8.11
of the Act. As discussed elsewhere in this preamble, the role the SEC
plays in the disclosure and reporting aspects of the Corporation does
not remove our
[[Page 49151]]
responsibility to regulate Farmer Mac's safe and sound operations. We
have a responsibility to address corporate governance within the
Corporation given its importance to the safe and sound operations of
the Corporation and the current business climate in which Farmer Mac
operates. As a GSE, the Corporation has strategic objectives that are
both commercially and public policy oriented. Thus, governance of the
Corporation must be understood and interpreted not only in the context
of the fiduciary responsibilities to the Corporation and its
shareholders, but also in the context of the statutory duty to further
the Congressional purposes the Corporation was chartered to achieve. In
addition, we explained in the proposed rule preamble that Farmer Mac,
as a publicly traded company, is subject to many of the governance
requirements of Sarbanes-Oxley, Dodd-Frank, and SEC disclosure
regulations for publicly traded companies. However, with the recent
events in the financial industry, increased sophistication in financial
markets, and on-going scrutiny of GSE financial activities and related
reporting practices, we believed it prudent to update our current
regulatory standards related to Farmer Mac's Board governance,
reporting, and disclosures.
Farmer Mac stated that FCA did not publish its current concerns
with the risk management and governance operations of the Corporation
in support of the rulemaking. This rulemaking is intended to ensure
that appropriate board governance and risk management practices are in
place at Farmer Mac. We are not limited to issuing regulations only
when there is an existing adverse risk or problem. Our responsibilities
as a safety and soundness regulator requires us to be proactive and
prudent in our rulemaking, as well as reactive by providing standards
that help avert potential problems. Thus, we have flexibility to issue
rules either in response to a problem or proactively to ensure the
Corporation's continued safe and sound business operations.
Farmer Mac also asserted FCA has in the past ``deferred'' to the
oversight of the SEC and NYSE. We reject this assertion. The FCA, as an
independent regulator of the Corporation, is not required to follow the
actions of other regulators and we have never deferred our regulatory
oversight to another agency. We do not view our past efforts to
accommodate the Corporation's requests to modify our regulations in
light of those issued by other regulators (whose regulations also
affect the Corporation's operations) as a relinquishment of our safety
and soundness authority.
3. Terminology
Farmer Mac asked that we define an assortment of terms and phrases
used throughout the rule, asserting that many of these terms and
phrases are not ``established'' in a body of law. Most of the terms and
phrases identified by Farmer Mac are derived from corporate case law,
model codes, and the Act itself. As such, we do not believe it
necessary to further define them.
4. Regulatory Burden
Farmer Mac commented that it viewed many aspects of the rule as
unnecessary and burdensome, making them inconsistent with the
``Congressional mandate'' that we eliminate unnecessary regulations. As
we understand this comment, Farmer Mac is referring to the instructions
of the Farm Credit System Reform Act of 1996 (1996 Act) \42\ to reduce
regulatory burdens. Section 212(b) of the 1996 Act requires us to
continuously review our regulations to eliminate rules that are
unnecessary, unduly burdensome, costly, or not based on law. The 1996
Act specifies that we are to make these eliminations only if they would
be consistent with law, safety, and soundness. As explained throughout
this preamble, Congress charged us to issue regulations to ensure the
safety and soundness of the Corporation and this rule is consistent
with the law and safety and soundness concerns.
---------------------------------------------------------------------------
\42\ Public Law 104-105, 110 Stat. 162 (February 10, 1996).
---------------------------------------------------------------------------
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies the final rule will not have
a significant economic impact on a substantial number of small
entities. The Corporation has assets and annual income over the amounts
that would qualify it as a small entity. Therefore, the Corporation is
not considered a ``small entity'' as defined in the Regulatory
Flexibility Act.
List of Subjects
12 CFR Part 650
Agriculture, Banks, banking, Credit, Reporting and recordkeeping
requirements, Rural areas.
12 CFR Part 651
Agriculture, Banks, banking, Conduct standards, Conflict of
interests, Elections, Ethical conduct, Rural areas.
12 CFR Part 653
Agriculture, Banks, banking, Capital, Conduct standards, Credit,
Finance, Rural areas.
12 CFR Part 655
Accounting, Agriculture, Banks, banking, Accounting and reporting
requirements, Disclosure and reporting requirements, Financial
disclosure, Rural areas.
For the reasons stated in the preamble, parts 650, 651, 653, and
655 of chapter VI, title 12 of the Code of Federal Regulations are
amended as follows:
PART 650--FEDERAL AGRICULTURAL MORTGAGE CORPORATION GENERAL
PROVISIONS
0
1. The authority citation for part 650 is revised to read as follows:
Authority: Secs. 4.12, 5.9, 5.17, 5.25, 8.11, 8.12, 8.31, 8.32,
8.33, 8.34, 8.35, 8.36, 8.37, 8.41 of Pub. L. 92-181, 85 Stat. 583
(12 U.S.C. 2183, 2243, 2252, 2261, 2279aa-11, 2279aa-12, 2279bb,
2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 2279bb-5, 2279bb-6, 2279cc);
sec. 514 of Pub. L. 102-552, 106 Stat. 4102; sec. 118 of Pub. L.
104-105, 110 Stat. 168.
0
2. Add subpart B, under the heading ``Conservators, Receivers, and
Liquidations'' consisting of existing Sec. Sec. 650.1 through 650.80
as redesignated in the following table:
------------------------------------------------------------------------
Old section New section
------------------------------------------------------------------------
650.1, no subpart......................... 650.13, subpart B
650.5, no subpart......................... 650.14, subpart B
650.10, no subpart........................ 650.10, subpart B
650.15, no subpart........................ 650.15, subpart B
650.20, no subpart........................ 650.20, subpart B
650.25, no subpart........................ 650.25, subpart B
650.30, no subpart........................ 650.30, subpart B
650.35, no subpart........................ 650.35, subpart B
650.40, no subpart........................ 650.40, subpart B
650.45, no subpart........................ 650.45, subpart B
650.50, no subpart........................ 650.50, subpart B
650.55, no subpart........................ 650.55, subpart B
650.60, no subpart........................ 650.60, subpart B
650.65, no subpart........................ 650.65, subpart B
650.70, no subpart........................ 650.70, subpart B
650.75, no subpart........................ 650.75, subpart B
650.80, no subpart........................ 650.80, subpart B
------------------------------------------------------------------------
0
3. Add a new subpart A to read as follows:
Subpart A--Regulation, Examination and Enforcement
Sec.
650.1 Definitions.
650.2 Regulatory authority.
650.3 Supervision and enforcement.
650.4 Access to Corporation records and personnel.
650.5 Reports of examination.
650.6 Criminal referrals.
[[Page 49152]]
Subpart A--Regulation, Examination and Enforcement
Sec. 650.1 Definitions.
The following definitions apply to this part:
Act or Authorizing statute means the Farm Credit Act of 1971, as
amended.
Business day means a day the Corporation is open for business,
excluding the legal public holidays identified in 5 U.S.C. 6103(a).
Corporation or Farmer Mac means the Federal Agricultural Mortgage
Corporation and its affiliates.
FCA means the Farm Credit Administration, an independent Federal
agency of the executive branch.
NYSE means the New York Stock Exchange, a listing exchange.
OSMO means the FCA Office of Secondary Market Oversight, which is
responsible for the general supervision of the safe and sound exercise
of the Corporation's powers, functions, and duties and compliance with
laws and regulations.
Our or we means the FCA or OSMO, as appropriate to the context of
the provision employing the term.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933 (15 U.S.C. 77a et
seq.) or the Exchange Act of 1934 (15 U.S.C. 78a et seq.), or both, as
appropriate to the context of the provision employing the term.
Signed, when referring to paper form, means a manual signature,
and, when referring to electronic form, means marked in a manner that
authenticates each signer's identity.
Sec. 650.2 Regulatory authority.
(a) General. The Corporation is a for-profit Government-sponsored
enterprise developed to provide a secondary market for qualified
agricultural, USDA-guaranteed, and rural utility loans, with public
policy objectives included in its statutory charter. The Corporation is
regulated by the FCA, operating through OSMO. The Corporation also
lists securities on the NYSE, making it subject to certain SEC listing
and disclosure requirements.
(b) Primary regulator. The FCA, operating through OSMO, holds
primary regulatory, examination, and enforcement authority over the
Corporation. The FCA, operating through OSMO, is responsible for the
general supervision of the safe and sound exercise of the Corporation's
powers, functions, and duties and compliance with applicable laws and
regulations.
(c) Other regulatory authorities. The Corporation registers its
common stock and certain offerings of Farmer Mac Guaranteed Securities
under the Securities Act and related regulations so must comply with
certain SEC reporting requirements.
Sec. 650.3 Supervision and enforcement.
The Act provides FCA, acting through OSMO, with enforcement
authority to protect the financial safety and soundness of the
Corporation and to ensure that the Corporation's powers, functions, and
duties are exercised in a safe and sound manner.
(a) General supervision. When we determine the Corporation has
violated a law, rule, or regulation or is engaging in an unsafe or
unsound condition or practice, we have enforcement authority that
includes, but is not limited to, the following:
(1) Issue an order to cease and desist;
(2) Issue a temporary order to cease and desist;
(3) Assess civil monetary penalties against the Corporation and its
directors, officers, employees, and agents; and
(4) Issue an order to suspend, remove, or prohibit directors and
officers.
(b) Financial safety and soundness of the Corporation. When we
determine the Corporation is taking excessive risks that adversely
impact the adequacy of Regulatory Capital, we have authority to address
that risk. This includes, but is not limited to, requiring capital
restoration plans, restricting dividend distributions, requiring
changes in the Corporation's obligations and assets, requiring the
acquisition of new capital and restricting those Corporation activities
determined to create excessive risk to the Corporation's Regulatory
Capital.
Sec. 650.4 Access to Corporation records and personnel.
(a) The Corporation must make its records available promptly upon
request by OSMO, at a location and in a form and manner acceptable to
OSMO.
(b) The Corporation must make directors, officers, employees and
other individuals or entities engaged by the Corporation to participate
in the conduct of the Corporation's business available to OSMO during
the course of an examination or supervisory action when OSMO determines
it necessary to facilitate an examination or supervisory action.
Sec. 650.5 Reports of examination.
The Corporation is subject to the provisions in 12 CFR part 602
regarding FCA Reports of Examination.
Sec. 650.6 Criminal referrals.
The rules at 12 CFR part 612, subpart B, regarding ``Referral of
Known or Suspected Criminal Violations'' are applicable to the
Corporation.
0
4. Revise part 651 to read as follows:
PART 651--FEDERAL AGRICULTURAL MORTGAGE CORPORATION GOVERNANCE
Subpart A--General
Sec.
651.1 Definitions.
651.2 [Reserved]
Subpart B--Standards of Conduct
651.21 [Reserved]
651.22 Conflict-of-interest policy.
651.23 Implementation of policy.
651.24 Director, officer, employee, and agent responsibilities.
Subpart C--Board Governance
651.30 [Reserved]
651.35 [Reserved]
651.40 [Reserved]
651.50 Committees of the Corporation's board of directors.
Authority: Secs. 4.12, 5.9, 5.17, 8.3, 8.11, 8.14, 8.31, 8.32,
8.33, 8.34, 8.35, 8.36, 8.37, 8.41 of Pub. L. 92-181, 85 Stat. 583
(12 U.S.C. 2183, 2243, 2252, 2279aa-3, 2279aa-11, 2279aa-14, 2279bb,
2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 2279bb-5, 2279bb-6, 2279cc);
sec. 514 of Pub. L. 102-552, 106 Stat. 4102; sec. 118 of Pub. L.
104-105, 110 Stat. 168.
Subpart A--General
Sec. 651.1 Definitions.
The following definitions apply to this part:
Act or Authorizing statute means the Farm Credit Act of 1971, as
amended.
Agent means any person (other than a director, officer, or employee
of the Corporation) who represents the Corporation in contacts with
third parties or who provides professional services such as legal,
accounting, or appraisal services to the Corporation.
Affiliate means any entity established under authority granted to
the Corporation under section 8.3(c)(14) of the Act.
Appointed director means a member of the Corporation's board of
directors who was appointed to the Corporation board by the President
of the United States of America.
Business day means a day the Corporation is open for business,
excluding the legal public holidays identified in 5 U.S.C. 6103(a).
Class A stockholders means holders of common stock in the
Corporation that are insurance companies, banks, or other financial
institutions or entities.
[[Page 49153]]
Class B stockholders means holders of common stock in the
Corporation that are Farm Credit System institutions.
Conflict-of-interest means a director, officer, or employee of the
Corporation has an interest in a transaction, relationship, or activity
that might adversely affect, or appear to adversely affect, the ability
of the director, officer, or employee to perform his or her official
duties on behalf of the Corporation in an objective and impartial
manner in furtherance of the interest of the Corporation and its
statutory purposes.
Corporation means the Federal Agricultural Mortgage Corporation and
its affiliates.
Director elections mean the process of searching for director
candidates, conducting director nominations, and voting for directors.
Elected director means a member of the Corporation's board of
directors who was elected by either Class A or Class B stockholders.
Employee means any salaried individual working part-time, full-
time, or temporarily for the Corporation.
Entity means a corporation, company, association, firm, joint
venture, partnership (general or limited), society, joint stock
company, trust (business or otherwise), fund, or other organization or
institution.
FCA means the Farm Credit Administration, an independent Federal
agency of the executive branch.
Material means conflicting interests of sufficient magnitude or
significance that a reasonable person with knowledge of the relevant
facts would question the ability of the person having such interest to
discharge official duties in an objective and impartial manner in
furtherance of the interests and statutory purposes of the Corporation.
Officer means the salaried president, vice presidents, secretary,
treasurer, and general counsel, or other person, however designated,
who holds a position of similar authority in the Corporation.
OSMO means the FCA Office of Secondary Market Oversight, which is
responsible for the general supervision of the safe and sound exercise
of the Corporation's powers, functions, and duties and compliance with
laws and regulations.
Our or we means the FCA or OSMO, as appropriate to the context of
the provision employing the term.
Person means individual or entity.
Reasonable person means a person under similar circumstances
exercising the average level of care, skill, and judgment in his or her
conduct.
Resolved means an actual or potential material conflict-of-interest
that has been altered so that a reasonable person with knowledge of the
relevant facts would conclude that the conflicting interest would not
adversely affect the person's performance of official duties in an
objective and impartial manner and in furtherance of the interests and
statutory purposes of the Corporation.
Signed, when referring to paper form, means a manual signature,
and, when referring to electronic form, means marked in a manner that
authenticates each signer's identity.
Sec. 651.2 [Reserved]
Subpart B--Standards of Conduct
Sec. 651.21 [Reserved]
Sec. 651.22 Conflict-of-interest policy.
The Corporation shall establish and administer a conflict-of-
interest policy that will provide reasonable assurance that the
directors, officers, employees, and agents of the Corporation discharge
their official responsibilities in an objective and impartial manner in
furtherance of the interests and statutory purposes of the Corporation.
The policy shall, at a minimum:
(a) Define the types of transactions, relationships, or activities
that could reasonably be expected to give rise to potential conflicts
of interest. For the purpose of determining whether a potential
conflict of interest exists, the following interests shall be imputed
to a person subject to this regulation as if they were that person's
own interests:
(1) Interests of any individual residing in that person's
household;
(2) Interests of any individual identified as a legal dependent of
that person;
(3) Interests of that person's general business partner;
(4) Interests of an organization or entity that the person serves
as officer, director, trustee, general partner or employee; and
(5) Interests of a person, organization, or entity with which that
person is negotiating for or has an arrangement concerning current or
prospective employment.
(b) Require each director, officer, and employee to report in
writing, annually, and at such other times as conflicts may arise,
sufficient information about financial interests, transactions,
relationships, and activities to inform the Corporation of potential
conflicts of interest;
(c) Require each director, officer, and employee who had no
transaction, relationship, or activity required to be reported under
paragraph (b) of this section at any time during the year to file a
signed statement to that effect;
(d) Establish guidelines for determining when a potential conflict
is material in accordance with this subpart;
(e) Establish procedures for resolving or disclosing material
conflicts of interest.
(f) Provide internal controls to ensure that reports are filed as
required and that conflicts are resolved or disclosed in accordance
with this subpart.
(g) Notify directors, officers, and employees of the conflict-of-
interest policy and any subsequent changes thereto and allow them a
reasonable period of time to conform to the policy.
Sec. 651.23 Implementation of policy.
(a) The Corporation shall disclose any unresolved material
conflicts of interest involving its directors, officers, and employees
to:
(1) Shareholders through annual reports and proxy statements; and
(2) Investors and potential investors through disclosure documents
supplied to them.
(b) The Corporation shall make available to any shareholder,
investor, or potential investor, upon request, a copy of its policy on
conflicts of interest. The Corporation may charge a nominal fee to
cover the costs of reproduction and handling.
(c) The Corporation shall maintain all reports of all potential
conflicts of interest and documentation of materiality determinations
and resolutions of conflicts of interest for a period of 6 years.
Sec. 651.24 Director, officer, employee, and agent responsibilities.
(a) Each director, officer, employee, and agent of the Corporation
shall:
(1) Conduct the business of the Corporation following high
standards of honesty, integrity, impartiality, loyalty, and care,
consistent with applicable law and regulation in furtherance of the
Corporation's public purpose;
(2) Adhere to the requirements of the conflict-of-interest policy
established by the Corporation and provide any information the
Corporation deems necessary to discharge its responsibilities under
this subpart.
(b) Directors, officers, employees, and agents of the Corporation
shall be subject to the penalties of part C of title V of the Farm
Credit Act of 1971, as amended, for violations of this regulation,
including failure to adhere to the conflict-of-interest policy
established by the Corporation.
[[Page 49154]]
Subpart C--Board Governance
Sec. 651.30 [Reserved]
Sec. 651.35 [Reserved]
Sec. 651.40 [Reserved]
Sec. 651.50 Committees of the Corporation's board of directors.
(a) General. No committee of the board of directors may be
delegated the authority of the board of directors to amend Corporation
bylaws. No committee of the board of directors shall relieve the board
of directors or any board member of a responsibility imposed by law or
regulation.
(b) Required committees. The board of directors of the Corporation
must have committees, however styled, that address risk management,
audit, compensation, and corporate governance. Neither the risk
management committee nor the audit committee may be combined with any
other committees. This provision does not prevent the board of
directors from establishing any other committees that it deems
necessary or useful to carrying out its responsibilities.
(c) Charter. Each committee required by this section must develop a
formal written charter that specifies the scope of the committee's
powers and responsibilities, as well as the committee's structure,
processes, and membership requirements. To be effective, the charter
must be approved by action of the full board of directors. No director
may serve as chairman of more than one of the board committees required
by this section.
(d) Frequency of meetings and records. Each committee of the board
of directors required by this section must meet with sufficient
frequency to carry out its obligations and duties under applicable
laws, regulations, and its operating charter. Each of these committees
must maintain minutes of its meetings. The minutes must record
attendance, the agenda (or equivalent list of issues under discussion),
a summary of the relevant discussions held by the committee during the
meeting, and any resulting recommendations to the board. Such minutes
must be retained for a minimum of 3 years and must be available to the
entire board of directors and to OSMO.
0
5. Add part 653 to read as follows:
PART 653--FEDERAL AGRICULTURAL MORTGAGE CORPORATION RISK MANAGEMENT
Sec.
653.1 Definitions.
653.2 General.
653.3 Risk management.
653.4 Internal controls.
Authority: Secs. 8.3, 8.4, 8.6, 8.8, and 8.10 of Pub. L. 92-181,
85 Stat. 583 (12 U.S.C. 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-8, and
2279aa-10).
Sec. 653.1 Definitions.
The following definitions apply to this part:
Corporation means the Federal Agricultural Mortgage Corporation and
its affiliates.
FCA means the Farm Credit Administration, an independent Federal
agency of the executive branch.
OSMO means the FCA Office of Secondary Market Oversight, which is
responsible for the general supervision of the safe and sound exercise
of the Corporation's powers, functions, and duties and compliance with
laws and regulations.
Sec. 653.2 General.
The Corporation's board of directors must approve the overall risk-
appetite of the Corporation and regularly monitor internal controls to
provide reasonable assurance that risk-taking activities are conducted
in a safe and sound manner.
Sec. 653.3 Risk management.
(a) Risk management program. The Corporation's board of directors
must establish, maintain, and periodically update an enterprise-wide
risk management program addressing how the Corporation's activities are
exercised in a safe and sound manner. The implementation of the risk
management program may reside with senior management. The risk
management program at a minimum must:
(1) Periodically assess and document the Corporation's risk
profile.
(2) Align the Corporation's risk profile with the board-approved
risk appetite and the Corporation's operational planning strategies and
objectives.
(3) Specify management's authority to carry out risk management
responsibilities.
(4) Integrate risk management and control objectives into
management goals and compensation structures.
(5) Comply with all applicable FCA regulations and policies.
(b) Risk committee. The Corporation's board-level risk committee
assists the full board of directors in the oversight of the enterprise-
wide risk management program of the Corporation.
(1) The risk committee must have at least one member with an
understanding of risk management commensurate with the Corporation's
capital structure, risk profile, complexity, activities, size, and
other appropriate risk-related factors.
(2) The responsibilities of the risk committee include, but are not
limited to:
(i) Periodically assessing management's implementation of the
enterprise-wide risk management program;
(ii) Recommending changes to the risk management program to keep
the program commensurate with the Corporation's capital structure, risk
appetite, complexity, activities, size, and other appropriate risk-
related factors; and
(iii) Receiving and reviewing regular reports directly from
personnel responsible for implementing the Corporation's risk
management program.
(c) Management of risk. The Corporation must have a risk officer,
however styled, who is responsible for implementing and maintaining the
enterprise-wide risk management practices of the Corporation. The risk
officer must have risk management experience commensurate with the
Corporation's capital structure, risk appetite, complexity, activities,
and size. The responsibilities of the risk officer include, but are not
limited to:
(1) Identifying and monitoring compliance with risk limits,
exposures, and controls;
(2) Implementing risk management policies, procedures, and risk
controls;
(3) Developing appropriate processes and systems for identifying
and reporting risks, including emerging risks;
(4) Reporting on risk management issues, emerging risks, and
compliance concerns; and
(5) Making recommendations on adjustments to the risk management
policies, procedures, and risk controls of the Corporation.
Sec. 653.4 Internal controls.
(a) The Corporation's board of directors must adopt an internal
controls policy that provides adequate directions for, and identifies
expectations in, establishing effective safety and soundness control
over, and accountability for, the Corporation's operations, programs,
and resources.
(b) The internal controls system must address:
(1) The efficiency and effectiveness of the Corporation's
activities;
(2) Safeguarding the assets of the Corporation;
(3) Evaluating the reliability, completeness, and timely reporting
of financial and management information;
(4) Compliance with applicable laws, regulations, regulatory
directives, and the policies of the Corporation's board of directors
and senior management;
[[Page 49155]]
(5) The appropriate segregation of duties among the Corporation
personnel so that personnel are not assigned conflicting
responsibilities; and
(6) The completeness and quality of information provided to the
Corporation's board of directors.
(c) The Corporation is responsible for establishing and
implementing an effective system to identify internal controls
weaknesses and taking action to correct detected weaknesses. The
Corporation must document:
(1) The process used to identify weaknesses,
(2) Any found weaknesses, and
(3) How identified weaknesses were addressed.
0
6. Revise part 655 to read as follows:
PART 655--FEDERAL AGRICULTURAL MORTGAGE CORPORATION DISCLOSURE AND
REPORTING REQUIREMENTS
Subpart A--General
Sec.
655.1 Definitions.
Subpart B--Report of Condition of the Federal Agricultural Mortgage
Corporation
655.10 Reports of condition.
655.15 Interim reports, notices, and proxy statements.
Subpart C--Reports Relating to Securities Activities of the Federal
Agricultural Mortgage Corporation
655.20 Securities not registered under the Securities Act.
655.21 Filings and communications with the U.S. Treasury, the SEC
and NYSE.
Authority: Secs. 5.9, 8.3, 8.11, and 8.12 of Pub. L. 92-181, 85
Stat. 583 (12 U.S.C. 2243, 2279aa-3, 2279aa-11, 2279aa-12).
Subpart A--General
Sec. 655.1 Definitions.
The following definitions apply to this part:
Act or authorizing statute means the Farm Credit Act of 1971, as
amended.
Business day means a day the Corporation is open for business,
excluding the legal public holidays identified in 5 U.S.C. 6103(a).
Corporation means the Federal Agricultural Mortgage Corporation and
its affiliates.
FCA means the Farm Credit Administration, an independent Federal
agency of the executive branch.
Material, when used to qualify a requirement to furnish information
as to any subject, means the information required for those matters to
which there is a substantial likelihood that a reasonable person would
attach importance in making investor decisions or determining the
financial condition of the Corporation.
NYSE means the New York Stock Exchange, a listing exchange.
OSMO means the FCA Office of Secondary Market Oversight, which is
responsible for the general supervision of the safe and sound exercise
of the Corporation's powers, functions, and duties and compliance with
laws and regulations.
Our or us means the FCA or OSMO, as appropriate to the context of
the provision employing the term.
Person means individual or entity.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933 (15 U.S.C. 77a et
seq.) or the Exchange Act of 1934 (15 U.S.C. 78a et seq.), or both, as
appropriate to the context of the provision employing the term.
Signed, when referring to paper form, means a manual signature,
and, when referring to electronic form, means marked in a manner that
authenticates each signer's identity.
Subpart B---Reports of Condition of the Federal Agricultural
Mortgage Corporation
Sec. 655.10 Reports of condition.
(a) General. The Corporation must prepare and publish annual
reports to its shareholders of its condition, including financial
statements and related schedules, exhibits, and other documents that
are part of the reports. The contents of each report must be equivalent
in content to the annual report to shareholders required by the
Securities Act unless we issue instructions otherwise.
(b) Signatures and certification. Each report issued under this
subpart must be signed. The Corporation must designate the
representatives who will sign each report. The name and position title
of each person signing the report must be printed beneath his or her
signature. The signatories must certify the report by using the SEC
rules on certifications for disclosures in annual reports to
shareholders.
(c) Distribution. The Corporation must distribute the signed annual
report of condition to its shareholders within 120 days of its fiscal
year-end. Within 5 days of signing, the Corporation must provide us one
paper and one electronic copy of every signed report that is
distributed to its shareholders. If the report is the same as that
filed with the SEC, the Corporation may instead provide the signed
reports to us only in electronic form and simultaneous with filing the
report with the SEC.
(1) The Corporation must publish on its Web site a copy of each
annual report to shareholders within 3 business days of filing the
report with us. The report must remain on the Web site until the next
report is posted. When the reports are the same as those filed with the
SEC, electronic links to the SEC filings Web site may be used in
satisfaction of this requirement.
(2) Upon receiving a request for an annual report of condition from
a stockholder, investor, or the public, the Corporation must promptly
provide the requester the most recent annual report issued in
compliance with this section.
Sec. 655.15 Interim reports, notices, and proxy statements.
(a) The Corporation must provide to us one paper and one electronic
copy of every interim report, notice, and proxy statement filed with
the SEC within 1 business day of filing the item with the SEC,
including all papers and documents that are a part of the report,
notice, or statement.
(b) The Corporation must publish a copy of each interim report,
notice, and proxy statement on its Web site within 5 business days of
filing the document(s) with the SEC. The Corporation may omit from
these postings confidential, non-public information contained in the
interim report, notice, or proxy statement. The interim report, notice,
or proxy statement must remain on the Web site for 6 months or until
the next annual report of condition is posted, whichever is later.
Electronic links to the SEC filings Web site may be used in
satisfaction of this requirement.
Subpart C---Reports Relating to Securities Activities of the
Federal Agricultural Mortgage Corporation
Sec. 655.20 Securities not registered under the Securities Act.
The Corporation must make special filings with the Director of OSMO
for securities either issued or guaranteed by the Corporation that are
not registered under the Securities Act. These filings include, but are
not limited to:
(a) Either one paper or one electronic copy of any offering
circular, private placement memorandum, or information statement
prepared in connection with the securities offering at or before the
time of the securities offering.
(b) For securities backed by qualified loans as defined in section
8.0(9)(A) of the Act, either one paper or one electronic copy of the
following within 1 business day of the finalization of the transaction:
(1) The private placement memoranda for securities sold to
investors; and
[[Page 49156]]
(2) The final agreement and all supporting documents material to
the Corporation's purchase of a security under section 8.6(e) of the
Act.
(c) For securities backed by qualified loans as defined in section
8.0(9)(B) of the Act, the Corporation must provide summary information
on such securities issued during each calendar quarter in the form
prescribed by us. Such summary information must be provided with each
report of condition and performance (Call report) filed pursuant to
Sec. 621.12, and at such other times as we may require.
Sec. 655.21 Filings and communications with the U.S. Treasury, the
SEC, and NYSE.
(a) The Corporation must send us one paper and one electronic copy
of every filing made with U.S. Treasury, the SEC, or NYSE, including
financial statements and related schedules, exhibits, and other
documents that are a part of the filing. Such items must be filed with
us no later than 1 business day after the U.S. Treasury, SEC, or NYSE
filing. For those filings with the NYSE that duplicate ones made to the
SEC, the Corporation may send only the SEC filing to us. If the filing
is one addressed in subpart B of this part, no action under this
paragraph is required.
(b) The Corporation must send us, within 3 business days and
according to instructions provided by us, copies of all substantive
correspondence between the Corporation and the U.S. Treasury, the SEC,
or NYSE that are directed at the activities of the Corporation.
(c) The Corporation must notify us within 1 business day if it
becomes exempt or claims exemption from the filing requirements of the
Securities Act. Notice is not required when the Corporation claims an
exemption that is generally available under SEC rules and regulations
to similarly situated filers.
Date: July 20, 2016.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2016-17455 Filed 7-26-16; 8:45 am]
BILLING CODE 6705-01-P