[Federal Register Volume 77, Number 192 (Wednesday, October 3, 2012)]
[Rules and Regulations]
[Pages 60581-60602]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-23726]
[[Page 60581]]
Vol. 77
Wednesday,
No. 192
October 3, 2012
Part III
Farm Credit Administration
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12 CFR Parts 611, 612, 619 et al.
Compensation, Retirement Programs, and Related Benefits; Final Rule
Federal Register / Vol. 77, No. 192 / Wednesday, October 3, 2012 /
Rules and Regulations
[[Page 60582]]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 612, 619, 620 and 630
RIN 3052-AC41
Compensation, Retirement Programs, and Related Benefits
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA, us, we, or our) amends
our regulations for Farm Credit System (System) banks and associations
to require disclosure of pension benefit and supplemental retirement
plans and a discussion of the link between senior officer compensation
and performance. Also, we are amending our regulations to require
timely reporting of significant or material events that occur at System
institutions between annual reporting periods. We believe these
requirements will promote transparency of and consistency in
disclosures and ensure timely reporting to shareholders. In addition,
the final rule establishes minimum responsibilities that a compensation
committee must perform. Further, the final rule requires that System
banks and associations provide for a non-binding, advisory vote on
senior officer compensation by shareholders. Also, the final rule
bifurcates existing annual reporting requirements at Sec. 620.5 and
makes other technical changes.
DATES: Effective Date--This regulation will be effective 30 days after
publication in the Federal Register during which either or both Houses
of Congress are in session. We will publish a notice of the effective
date in the Federal Register.
Compliance Date--All provisions of this rule require compliance on
the effective date, except advisory votes on compensation increases
under Sec. 611.410(b). Advisory votes on compensation increases of 15
percent or more are not required until 2014.
FOR FURTHER INFORMATION CONTACT:
Deborah Wilson, Senior Accountant, Office of Regulatory Policy, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4414, TTY (703)
883-4434,
or
Laura McFarland, Senior Counsel, Office of General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Objective
II. Background
III. Comments and Our Responses
A. General Issues
1. FCA Policy Statement and Executive Orders
2. The Farm Credit Act
3. Examination and Enforcement
4. Informal Guidance
B. Specific Issues
1. Bifurcation of Annual Reporting Requirements Sections
[existing Sec. 620.5(h) through (k); new Sec. 620.6]
2. Enhanced Disclosures of Senior Officer Compensation [new
Sec. 620.6(c)]
a. Pension Benefits Table [Sec. 620.6(c)(4)]
b. Discussion Related to Compensation Programs of Senior
Officers [Sec. 620.6(c)(5)]
c. Tax Reimbursements [Sec. 620.6(c)(3)]
d. Disclosure of Plans [Sec. 620.6(c)(5)]
3. Compensation Committee Responsibilities [Sec. Sec. 620.31
and 630.6(b)]
4. Notice to Shareholders [Sec. Sec. 620.10, 620.11, 620.15,
and 620.17]
5. Non-binding, Advisory Vote by Shareholders on Senior Officer
Compensation [Sec. Sec. 611.100, 620.5(a)(11) and 630.20(i); new
Sec. Sec. 611.360, 611.410 and 620.6(c)(6)]
a. Advisory Votes Based on Increase in Compensation
b. Advisory Votes Based on Petitions
c. Advisory Voting Procedures
d. Reporting and Disclosure of Advisory Votes
6. Disclosure of Supplemental Retirement Plans to Employees
[Sec. 620.5(e)]
7. Miscellaneous [Sec. Sec. 611.330(c), 611.400, 620.2(c) and
(d), 620.4(c), 620.10(c), and 620.11]
C. Compliance Date
IV. Regulatory Flexibility Act
I. Objective
The objectives of the final rule are to:
Improve the transparency and completeness of senior
officer compensation and retirement benefits disclosures;
Promote the continued safety and soundness of System
institutions by establishing minimum responsibilities to be performed
by an institution's compensation committee;
Ensure timely communication with System shareholders on
significant or material events that occur at institutions between
annual reporting periods;
Provide shareholders with a clear and complete
understanding of their institution's obligations and commitments
related to supplemental retirement benefit plans (SRP) for all
employees; and
Encourage member participation in the control and
management of their institution by establishing criteria under which an
institution must provide its voting shareholders the opportunity to
cast a non-binding, advisory vote on senior officer compensation.
II. Background
The Farm Credit Act of 1971, as amended (Act),\1\ authorizes the
FCA to issue regulations implementing the Act's provisions.\2\ Our
regulations are intended to ensure the safe and sound operations of
System institutions and to govern the disclosure of financial
information to shareholders of, and investors in, the System. Congress
explained in section 514 of the Farm Credit Banks and Associations
Safety and Soundness Act of 1992 (1992 Act) \3\ that disclosures of
financial information and compensation paid to senior officers, among
other disclosures, provide System shareholders with information
necessary to better manage their institution and make informed
decisions regarding the operation of their institution.
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\1\ Public Law 92-181, 85 Stat. 583 (1971), 12 U.S.C. 2001, et
seq.
\2\ 12 U.S.C. 2252(a)(8), (9) and (10).
\3\ Public Law 102-552, 106 Stat. 4131 (1992).
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In addition, the FCA Board declared its commitment to support the
cooperative business model and structure of System banks and
associations in its October 14, 2010, resolution.\4\ We emphasize the
cooperative principles of a farmer-owned, Government-sponsored
enterprise by advancing regulatory proposals that encourage farmer- and
rancher-borrowers to participate in the management, control, and
ownership of their institutions.
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\4\ Copies of the resolution may be obtained by contacting the
FCA.
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On November 18, 2010, we issued an advance notice of proposed
rulemaking (ANPRM) to gather information for the development of a
proposed rulemaking on disclosures of senior officer compensation and
other related topics.\5\ In consideration of the responses received,
the FCA issued a proposed rule on January 23, 2012, to amend our
regulations governing:
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\5\ See 75 FR 70619 (Nov. 18, 2010).
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Enhanced disclosures of senior officer compensation and
retirement benefits and supplemental retirement plans for all
employees;
Timely notices to shareholders of significant or material
events occurring at their institution;
Minimum responsibilities to be performed by compensation
committees; and
A non-binding, advisory vote by shareholders on senior
officer compensation.\6\
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\6\ See 77 FR 3172 (Jan. 23, 2012).
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[[Page 60583]]
III. Comments and Our Responses
The comment period for the proposed rule closed on April 16,
2012.\7\ We received 458 comment letters to the proposed rule from
individuals and entities associated with the System, including each of
the four Farm Credit banks, System associations, and the Farm Credit
Council (Council), responding on behalf of its members. The majority of
the comment letters supported the Council's comments. We discuss the
comments to our proposed rule and our responses below. Unless otherwise
discussed in this preamble, areas of the proposed rule that did not
receive comment are finalized as proposed.
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\7\ The FCA extended the original 60-day comment period at the
request of interested parties. See 77 FR 16485 (Mar. 21, 2012).
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A. General Issues
In this section of the preamble, we address comments questioning
our authority to issue this rule, those making reference to policy
statements, laws and our examination authority, and those suggesting
non-regulatory methods to address the subjects within this rulemaking.
1. FCA Policy Statement and Executive Orders
A few commenters stated that the proposed rule was inconsistent
with FCA Board Policy Statement FCA-PS-59.\8\ FCA-PS-59 sets out our
regulatory philosophy on developing and issuing regulations necessary
to carry out the Act and the strategies to accomplish that philosophy.
Commenters asserted they found no reasoned determination of the
beneficial value of the proposed rule relative to the cost. Other
commenters stated that our rule may not comply with the instructions of
Executive Orders 13563 and 13579 that agencies consider quantitative
and qualitative costs and benefits of a rulemaking.\9\ Also, commenters
remarked that we did not specifically identify risks or problems that
needed to be addressed in a rulemaking and that current compensation
practices within the System are not excessive and do not pose undue
risk. Other commenters stated we had not completed a cost-benefit
analysis before proposing the rule. A few commenters expressed concern
at the implementation efforts that would be required if the rule became
final. Many commenters remarked that we should not impose regulatory
requirements that restrict individual institution discretion in
compensation practices. Several commenters expressed concern that the
rule does not give sufficient consideration to the varied asset size
and operations of System institutions. A few commenters stated the rule
was a regulatory burden.
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\8\ Regulatory Philosophy, 76 FR 54638 (Sept. 1, 2011),
effective July 8, 2011.
\9\ E.O. 13563, ``Improving Regulation and Regulatory Review,''
dated January 18, 2011, and E.O. 13579, ``Regulation and Independent
Regulatory Agencies,'' dated July 11, 2011.
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We believe that this rulemaking is consistent with FCA-PS-59 and
the objectives of Executive Orders 13563 and 13579.\10\ FCA-PS-59
incorporates the provisions of the Executive Orders. It states that the
FCA will develop regulations based on a reasoned determination that the
benefits justify the cost of regulating an issue and that preambles to
regulations will explain the rationale for the regulatory approach
adopted. The FCA is the independent Federal agency in the executive
branch of the Government responsible for examining and regulating
System institutions. When issuing regulations, we consider if the
rulemaking duplicates other requirements, would be ineffective, or
impose burdens greater than the benefits received. We promulgate rules
necessary to implement the expectations and requirements of the Act,
which in the case of compensation practices within the System, is to
support shareholder participation in the management, control, and
ownership of the System and, more broadly, to protect and promote the
safety and soundness of System institutions through oversight of
management. We believe this rule clarifies the intended meaning of
certain existing rules, eliminates confusion through reorganization of
the rules, enhances the consistency, transparency, and timeliness of
disclosures to shareholders and investors, helps ensure safe and sound
compensation practices, and enhances communication with and encourages
participation by shareholders in the management and control of their
institution. Therefore, in light of these benefits, we do not believe
this rule is inconsistent with FCA-PS-59 or Executive Orders 13563 and
13579 and does not result in a significant adjustment of or burden to
individual institution operations.
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\10\ Executive Order 13563 does not apply to independent
agencies, but Executive Order 13579 requests independent regulatory
agencies to follow the principles contained in Executive Order
13563.
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The provisions of FCA-PS-59 and the Executive Orders do not limit
us to issuing regulations only when there is an existing adverse risk
or problem. Our responsibilities as a safety and soundness regulator
require us to be proactive and prudent in our rulemaking, as well as
reactive by providing standards that help avert potential problems.
This rulemaking is intended to ensure that appropriate compensation
practices and consistent and transparent disclosure standards exist for
all System institutions. We considered the size, complexity, risks,
interrelationships, and resources of System institutions when
developing this rule. While we believe it is important to preserve
individual institution flexibility when possible, our regulatory
responsibility requires us to issue regulations that we determine
appropriate for safety and soundness. In keeping with today's changing
economic and business environments, and in accordance with the findings
of Congress under section 514 of the 1992 Act and FCA Board Policy
Statement FCA-PS-80, ``Cooperative Operating Philosophy--Serving the
Members of Farm Credit System Institutions,'' \11\ we believed it was
appropriate to review and update our rules on senior officer
compensation disclosures and other related topics.
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\11\ See 75 FR 64728, Oct. 20, 2010.
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2. The Farm Credit Act
Commenters claimed we did not consider the approach taken by other
financial regulators. They questioned if this rulemaking is consistent
with the requirements of other regulators, given the provisions of
section 5.17(a)(8) of the Act.\12\ Section 5.17(a)(8) of the Act
authorizes us to regulate the preparation and dissemination by System
institutions of information on financial condition and operations to
shareholders and investors. This section of the Act instructs the FCA
to establish regulations on the dissemination of financial statements
that are not more burdensome or costly than those of national banks.
Commenters asserted that we need a compelling business justification to
exceed the disclosure requirements of other regulated entities.
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\12\ 12 U.S.C. 2252(a)(8).
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We believe this rulemaking is consistent with the requirements of
other regulators. Commenters referencing section 5.17(a)(8) of the Act
stated that the FCA is to follow the disclosure requirements of
financial entities that are not publicly traded. However, section
5.17(a)(8) of the Act makes no distinction between the financial
regulation of publicly traded and non-publicly traded national banks.
The Act incorporates all financial regulations of commercial banks,
regardless of whether or not the banks are publicly traded. Therefore,
the FCA
[[Page 60584]]
uses all financial industry regulations as the parameters for financial
disclosures, while also considering the cooperative structure of the
System, and has done so in this rulemaking. Further, while FCA
requirements governing the dissemination to shareholders of quarterly
reports may not be more burdensome or costly than the requirements
applicable to national banks, as an independent regulator of the System
we are not required by section 5.17(a)(8) of the Act to mirror the
actions of other regulators. Instead, we consider those policy
positions and decide if we should follow them or take a different
approach. Also, the commenters did not incorporate the admonition of
the 1992 Act regarding compensation disclosures of System directors,
officers, and employees. The 1992 Act requires that FCA regulations
ensure compensation disclosures provide information necessary to assist
shareholders in making informed decisions regarding the operation of
their institutions.
A few commenters asserted that we had violated the provisions in
the Act, which provide for bank and association boards of directors to
establish compensation for senior officers and staff. We are not
regulating the amount or manner in which bank and association senior
officers and employees are compensated. Instead, many of the provisions
in the rule relate to the disclosure of that compensation. Provisions
in the rule also address safety and soundness concerns that an
institution must consider when establishing compensation plans. Our
general authority at section 5.17(a)(9) and (10) of the Act empower us
to issue regulations for the safety and soundness of the System and to
carry out the provisions of the Act. Finally, we are promoting
cooperative principles by providing additional avenues for shareholders
to have a greater voice in how senior officer compensation is
distributed. None of these actions violates provisions in the Act,
especially those relating to determining compensation.
Some commenters stated that our rulemaking efforts conflict with
section 5.17(b) of the Act. This section of the Act precludes the FCA
from approving institution bylaws. The prohibition on bylaw approval
doesn't preclude rulemaking on matters affecting an institution's
bylaws or the safe and sound operations of System institutions. In
fact, section 5.17(a)(9) of the Act directs us to issue rules and
regulations ``necessary or appropriate'' to carry out the Act. As we
have explained in other rulemakings, issuing rules affecting bylaws
does not mean we are approving bylaws in violation of section 5.17(b)
of the Act. In pursuit of ensuring a safe and sound System and carrying
out the Act, institution bylaws are necessarily impacted by our rules.
Consequently, we may regulate the terms and conditions by which
institutions exercise their powers through their bylaws, while not
approving the bylaws themselves, and then examine compliance with our
regulations.
3. Examination and Enforcement
Many commenters cited our examination and enforcement authorities
as a sufficient means to address disclosure issues, concluding that
additional regulations are unnecessary. Commenters stated that because
there is no significant safety and soundness concern currently in the
System, the suggested approach would be to minimize the burden of
regulatory requirements and target individual institutions with
possible problems, rather than address the issue at the System level.
We examine to ensure the safety and soundness of System
institutions and their compliance with laws and regulations. This
function is not a substitute for our responsibility to issue
regulations implementing the Act and ensuring the safety and soundness
of System institutions. Our regulations provide minimum standards of
performance by System institutions. Our examiners use our rules as the
basis for compliance determinations and to require any necessary
corrective actions. Regulations reduce the likelihood that examinations
will uncover unsafe and unsound practices and provide a minimum
standard of performance to assure stakeholders of the safe and sound
operations of System institutions.
Also, commenters stated that we have enforcement powers necessary
to correct any unsafe or unsound compensation practices without
adopting this rule. Commenters asserted that the rule undermines a
risk-based examination approach. However, the commenters did not
elaborate on how that examination approach is compromised by this
rulemaking. While we agree with the commenters that we have enforcement
authority, we do not view it as our only tool for ensuring the safety
and soundness of System institutions. Safe and sound operations of
individual System institutions are supported by a clear set of rules,
compliance with those rules and thorough examinations.
4. Informal Guidance
Commenters supported our objective of improving System disclosures,
agreeing that existing regulations needed updating. However, they
questioned the need for additional regulations on shareholder
involvement and the activities of the compensation committees.
Commenters also remarked that adoption of the rule could carry
unintended consequences and undermine the stated objectives of the
rule. The commenters explained that a compensation committee could
manipulate compensation in order to avoid the proposed non-binding,
advisory vote on chief executive officer (CEO) or other senior officer
compensation. We address comments on the non-binding, advisory vote in
that section of this preamble.
Commenters asked that we withdraw the rule and work with the System
to find a non-regulatory approach to strengthen institution disclosures
and compensation practices. Many of these commenters remarked that the
rule is contrary to the guidance contained in ``The Director's Role''
handbook issued by FCA,\13\ pointing out that the handbook emphasizes
the board's governance responsibilities for member-owners and that the
responsibility is undermined by excessive regulation.
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\13\ ``The Director's Role: A Guide to Leading Your Institution
Effectively,'' (FCA publication, www.fca.gov).
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The guidance in ``The Director's Role'' is not contradicted by this
rulemaking. ``The Director's Role'' emphasizes the boards of directors'
responsibilities to member-owners and the use of good governance
practices in fulfilling those responsibilities. This rulemaking
recognizes those responsibilities and promotes good governance through
transparent, timely and consistent disclosures, enhancing the fiduciary
role of the compensation committee, and providing for communication
with and engagement by member-owners. The ``Director's Role''
emphasizes, as does this rulemaking, the cooperative structure of the
System and the related accountability of directors to shareholders.
This rulemaking supports accountability through enhanced disclosures
and advisory votes, while setting a minimum set of responsibilities for
the compensation committee. A voluntary or non-regulatory approach to
strengthening disclosures and compensation is valuable, but it does not
replace the consistency and stability that rules provide in assuring
System stakeholders of complete, consistent and transparent disclosures
and good governance practices over compensation. An effective
compensation and disclosure process is critical to good governance,
[[Page 60585]]
which in turn is essential for institution safety and soundness.
One commenter added that cooperatives are historically given great
deference by State regulators in setting policy. The comment did not
account for the fact that the System is a Government-sponsored
Enterprise (GSE) with a public policy mission.\14\ In the 1992 Act,
Congress reiterated the need for adherence to this mission,
particularly in the area of compensation disclosures, through FCA
regulation.
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\14\ Section 1.1 of the Act (12 U.S.C. 2001).
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We have analyzed the comments received and have amended certain
provisions in this final rulemaking. We discuss comments specific to
certain provisions in the following section of the preamble.
B. Specific Issues
1. Bifurcation of Annual Reporting Requirements Sections [existing
Sec. 620.5(h) through (k); new Sec. 620.6]
We proposed moving the disclosure requirements for directors and
senior officers to new Sec. 620.6. Also, we proposed that Sec.
620.5(h) contain a reference to Sec. 620.6, stating that the
presentation of the Sec. 620.6 disclosures would continue to be
required in the annual report. No changes to the current requirements
of existing Sec. 620.5(h), (j), and (k) were made, except to remove
redundancy and enhance clarity in the regulatory language in existing
Sec. 620.5(i). We also clarified where to disclose the required
statement that the information on compensation for any individual
senior officer, as disclosed in the Summary Compensation Table
(Compensation Table), is available to shareholders upon request. As
conforming technical changes, we proposed changing references to the
disclosures in the annual report related to director and senior officer
compensation and conflicts of interest, and addressed in other sections
of our rules, to their location in new Sec. 620.6. We received no
comments on these organizational changes and finalize them as proposed.
However, we received comments on existing provisions in this section,
and discuss those comments below.
Existing regulations require that the aggregate senior officer
group reported in the Compensation Table include all senior officers
plus employees whose compensation is among the five highest paid during
the fiscal year, regardless of whether or not those employees are
senior officers (the aggregate group). One commenter requested
clarification on what compensation measures should be used to determine
which employees are among the five highest paid. The commenter stated
that if compensation included all elements identified in the
Compensation Table, the aggregate group would be more than just senior
officers. We clarify that compensation measures used to determine which
employees are among the five highest paid includes all amounts included
in the ``total'' column of the Compensation Table. We remind the
commenter that this is not a new provision.\15\
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\15\ This provision was added in a 1986 rulemaking. We explained
that the rule ``* * * required that the aggregate compensation of
senior officers (and at a minimum the top five most highly paid
officers, whether or not designated as senior officers) be disclosed
without naming the individuals included.'' See 51 FR 21336 (June 12,
1986).
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Also, existing regulations provide that shareholders may request
information on the compensation of any individual included in the
aggregate group.\16\ Commenters objected to our clarifying that the
request for information on compensation could be made on any employee
reported in the aggregate group. Commenters asserted that the
clarification ``expanded'' shareholder access to compensation
information on highly compensated employees reported in the aggregate
group. They requested that we limit shareholder access solely to the
information on the compensation of senior officers. Commenters asserted
that employees included in the aggregate group who are not covered by
the Sec. 619.9310 definition of ``senior officer'' should not have
their individual compensation accessible by shareholders. Commenters
stated that release of this information would result in personnel
issues, including ``poaching'' of employees. However, several
commenters acknowledged that most institutions have never received a
request by a shareholder for information on any individual's
compensation reported in the aggregate group.
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\16\ The 1986 final rulemaking preamble stated disclosure of the
salaries of individual senior officers or anyone else included in
the aggregate is available to shareholders upon request. The 1986
rulemaking only limited the ``upon request'' availability to those
whose total compensation exceeded $50,000. See 51 FR 21336 (June 12,
1986). This threshold limit was removed in the 2006 governance
rulemaking. See 71 FR 5740 (February 2, 2006).
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We continue to believe that it is important for shareholders to
have access, without restriction, to individual compensation
information of the aggregate group. We proposed no changes to the
requirement and are not persuaded to change it now, especially as
commenters to this rulemaking stated their institutions have never had
a shareholder make a request under the provision. Institutions may
neither question the reason for a shareholder request, nor record the
request in the shareholder's files. Institutions must promptly provide
the information to their shareholders.
A few commenters requested we change compensation disclosures from
a ``paid'' to an ``earned'' basis to more closely resemble generally
accepted accounting principles (GAAP). We did not propose changes to
this area, but may consider the matter in a future rulemaking. Deferred
compensation reported under Sec. 620.6(c) continues to be reported on
an earned basis.
A few commenters asked that we remove deferred compensation from
the Compensation Table because it is already included in reported
salary or bonus amounts. The commenters suggested reporting deferred
compensation only when the employee bears a risk in the investment or
the institution provides enhanced benefits. These comments relate to an
existing provision that requires reporting of deferred compensation in
the Compensation Table, which has been a requirement since 1994.\17\ As
is currently required, amounts reported in the deferred compensation/
perquisites column of the Compensation Table include the dollar value
of other annual compensation not properly categorized as salary or
bonus. Therefore, the existing rule addresses commenters' issues and,
if followed, prevents duplicative reporting.
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\17\ 59 FR 37406 (July 22, 1994).
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A few commenters objected to the Compensation Table including
disclosure of severance pay to senior officers and requested we allow
institutions discretion on disclosing this information. Commenters
noted that disclosure of this information may result in litigation for
the institution and may limit the use of severance plans. This required
disclosure is not a new disclosure and changes to it were not part of
the proposed rule. In addition, we do not believe that this provision
should be changed since severance plans continue to be used by
institutions, notwithstanding their disclosure in the annual report.
The final rule retains the existing requirement to include severance in
the ``Other'' column of the Compensation Table.
We proposed a definition of supplemental retirement plans in Sec.
619.9335 of our general definition section. We received no comments on
the proposed definition, but in reviewing comments on disclosure of
these retirement plans we identified a
[[Page 60586]]
technical issue with the proposed definition. The proposed rule clearly
explains the definition applies to all supplemental retirement plans
funded by System institutions, not just those of the Farm Credit banks
or associations. We are therefore making a technical correction in the
final rule to replace the term ``Farm Credit bank or association'' with
``Farm Credit institution'' in the Sec. 619.9335 definition of
supplemental retirement plans.
2. Enhanced Disclosures of Senior Officer Compensation [new Sec.
620.6(c)]
We proposed requiring disclosure of:
Institution obligations related to SRPs and supplemental
executive retirement plans (SERPs);
The overall risk and reward structure of compensation,
pension benefit and retirement plans;
The link between institution performance and senior
officer compensation as reported in the Compensation Table; and
The dollar amount of tax reimbursements or tax payments
provided by the institution to senior officers.
The final rule incorporates many suggestions offered by commenters
to clarify provisions of the rule and enhance the value of the
disclosures.
Commenters stated their support for updating existing FCA
regulations on compensation disclosures to ensure consistency,
transparency, and clarity. One commenter asked that the required
disclosures conform to its existing practices. Some commenters also
stated existing disclosures already are more detailed than necessary,
reducing the value of the annual report. A few others remarked that
compensation is a sensitive subject that should not be overly
publicized. Others remarked that disclosure requirements should be
limited to those that are material and meaningful, stating the current
rulemaking creates excessive disclosures that lack materiality.
The FCA weighs the cost and burden of making disclosures against
the value the disclosures provide shareholders and investors. Our rules
must factor in the varied and increasingly complex compensation and
retirement programs at all institutions. We believe the additional
disclosures are necessary to ensure that shareholders are informed of
all the key elements of senior officer compensation and retirement, and
facilitate consistent disclosures among System institutions. Also, we
remind commenters expressing concern over publicizing System
compensation practices that, in addition to the requirement in the 1992
Act for disclosure of compensation paid to senior officers, the System
is a GSE with responsibility for public accountability.
One commenter stated that reporting senior officers in the
aggregate for both the Compensation and Pension Benefits Tables could
produce misleading results. The commenter explained that because the
compensation of a single member of the aggregate group might change,
the aggregate reporting might give results not representative of the
entire group. The commenter did not suggest an alternative reporting
method. In this rulemaking, we did not propose disclosing compensation
on an individual basis and the final rule does not require it. However,
any institution may voluntarily provide clarity and transparency to the
quantitative data by including a qualitative discussion on the
compensation of each member of the aggregate group.
One commenter asked that we change the definition of ``senior
officer'' in Sec. 619.9130 to only include the CEO \18\ and the most
senior level of officers reporting to the CEO. We proposed no changes
to this definition and the final rule does not make one. We continue to
believe the existing definition of senior officer, developed in
consideration of the Securities and Exchange Commission (SEC)
definition for ``executive officer,'' accurately captures senior staff
at institutions.\19\ It includes those senior officer positions found
in most lending institutions and includes other employees involved in
setting institution policy. Therefore, the final rule retains the
existing definition of senior officer.
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\18\ Use of the title ``Chief Executive Officer'' includes all
persons occupying that position or similar positions, regardless of
the actual title used. See 12 CFR 619.9130.
\19\ See governance rulemaking adding definition, 71 FR 5740
(Feb. 2, 2006).
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Commenters suggested having disclosure provisions vary by the size
of the institution. Other commenters endorsed consistency in
disclosures at all sizes of institutions. We continue to believe the
required disclosures are relevant information for shareholders
regardless of the size of the institution. This belief is expressed in
FCA-PS-80, where we explain that System institutions are member-focused
cooperatives deriving benefit from members participating in the
management, control, and ownership of their institutions. Irrespective
of size, shareholders need relevant information in order to engage in
any meaningful way in the management and control of their institutions.
We continue to believe that compensation information on the CEO and
other senior officers is relevant information. Subject to applicable
law and regulations, the quality and quantity of that information
should be based on the compensation policies and practices of the
institution and not driven by size.
a. Pension Benefits Table [Sec. 620.6(c)(4)]
We proposed a new Sec. 620.6(c)(4) that would have required
institutions to disclose certain information on pension benefit plans
in tabular format, including disclosure of SERPs in a Pension Benefit
Table. The information proposed to be disclosed included:
Funded and unfunded present value of accumulated benefits
for CEO and other senior officer pension and retirement benefit plans;
Years of credited service; and
Vested and unvested dollar amounts.
Also, the proposed rule would have required the reporting of off-
balance sheet commitments related to senior officer compensation and
pension benefits, such as benefits earned but not yet vested.
Commenters stated support for improved annual report disclosures on
SRPs, but made several suggested changes to enhance the disclosures.
Commenters noted that allocations to the benefit programs are done on a
macro basis and suggested aggregate plan reporting, which would be in
accordance with GAAP. Commenters explained that institutions are unable
to break out the data into vested and unvested amounts. They stated
that individual reporting would be overly burdensome and goes beyond
reporting required by GAAP and SEC requirements. Also, commenters noted
that plan assets used to fund the benefits are fungible and not
specifically assigned to individual participants. We did not intend
that Sec. 620.6(c)(4) require disclosure by individual employee. The
final rule clarifies that the requirement to separately report pension
benefits was intended to separate CEO benefits from other senior
officers in the aggregate, similar to the reporting requirements in the
Compensation Table. Also, commenters suggested that we align the
disclosures in the Pension Benefits Table to similar System disclosures
and that institutions report payments made during the fiscal year and
the present value of accumulated benefits, in lieu of funded and
unfunded and vested and unvested amounts.
We agree that many of these suggested changes provide more
meaningful disclosures to shareholders and investors on pension
benefits and are consistent with disclosure in the combined System-wide
report to
[[Page 60587]]
investors. Therefore, the final rule at Sec. 620.6(c)(4) replaces the
proposed disclosures in the Pension Benefits Table with the:
Plan name;
Years of credited service for the CEO and the average
years of credited service for the other senior officers;
Present value of accumulated benefits; and
Payments made during the reporting period.
Also, the final rule removes the ``Total'' column from the Pension
Benefits Table and makes corresponding changes to Sec. 620.6(c)(4)(i),
(ii), (iii), and (iv), which describe the required Pension Benefits
Table disclosures. Also, we are moving the requirement that
institutions disclose off-balance sheet commitments of compensation
earned but not yet vested from this section to Sec. 620.5(e)(4)(v).
Also, commenters responded that assumptions used to determine the
present value of pension benefits could vary significantly among
institutions and between reporting periods. Commenters suggested
disclosing changes in pension value and the reason(s) for the change.
Disclosure of the assumptions used to determine the present value was
not a specific requirement of the proposed rule and is not part of the
final rule. However, we refer commenters suggesting disclosure of the
assumptions used to determine the present value of pension benefits or
the reason for a change in the pension value to existing Sec.
620.5(g). Section 620.5(g) requires disclosure of information necessary
to an understanding of the institution's financial condition, changes
in financial condition, results of operations, known trends,
uncertainties, commitments, etc.
Commenters asked how information in the Pension Benefits Table is
included in the Compensation Table. We considered the recommendations,
the formats currently used by System institutions, and that used in the
combined System-wide report to investors. For consistency with industry
practice and the reporting practices of the System, the final rule
requires that the change in pension value be included in the
Compensation Table. The final rule removes the proposed language in
Sec. 620.6(c)(3)(iii) discussing the inclusion of the Pension Benefit
Table in the ``Other'' column of the Compensation Table to eliminate
potential confusion in compensation reported. This change does not
remove the existing requirement to include retirement paid or
contributions made by the institution to a defined contribution plan in
the Compensation Table.
A few commenters requested that the header on the Pension Benefits
Table not refer to ``annual'' but did not explain the reason for the
request. To enhance clarity, the final rule requires that the
information reported in the Pension Benefits Table be as of the most
recent fiscal year end.
A few commenters asked us to clarify the provision in Sec.
620.6(c)(3) exempting disclosure of contributions by an institution to
a defined contribution plan if the plan is made available to all
employees on the same basis. These commenters asked when the
``available to all employees'' is determined and explained that some
plans were previously available to all employees, but are now available
only to senior officers. We decline to make this clarification. If the
plans are not open to all employees during the reporting period they
must be reported in the Compensation Table.
b. Discussion Related to Compensation Programs of Senior Officers
[Sec. 620.6(c)(5)]
We proposed requiring a discussion of the overall risk and reward
structure of compensation, pension benefit and retirement plans, and
the link between institution performance and CEO and other senior
officer compensation as reported in the Compensation Table. We received
comments supporting the requirement to discuss the relationship of
compensation and benefit plans to an institution's business goals and
the link between pay and performance. Commenters explained that
existing disclosures on compensation plans do not characterize their
risk to the overall operations of the institution. They specifically
supported adding incentive pay disclosure to the annual report and
stated that the additional disclosures would benefit the System,
shareholders, and bond investors. However, a few commenters remarked
that the requirement was unreasonable because it was too much
information for the institution to summarize and too much information
for the shareholder to digest. Several commenters expressed concern
that the proposed disclosures would not materially improve the
disclosures and that existing disclosures were fair to employees and
transparent to shareholders.
The intent of the requirement is to provide shareholders with the
information necessary to better manage their institution. We believe
the data currently required to be disclosed and presented in the
Compensation Table must have meaning beyond merely reporting numbers.
Also, we believe the qualitative disclosures will provide shareholders
with information that links pay with performance and will better enable
them to make informed decisions regarding the operation of their
institution. In making these disclosures, we expect institutions to
discuss the criteria used to determine overall performance (e.g.,
capital and risk management, credit risk and risk exposure to earnings,
liquidity management, and compliance with financing agreements). In
addition, we expect a discussion of the benchmarks or other factors
used to determine compensation, including incentive-based compensation.
We reiterate that the discussions can be succinct, but should also be
specific to the institution rather than general or boilerplate
discussions.
Also, in Sec. 620.6(c)(6) we proposed that the institution
disclose in the vicinity of the Compensation Table the authority of
shareholders to petition for an advisory vote on CEO and senior officer
compensation. In the final rule, we are making grammatical changes to
the language. We are not changing the intent of the rule.
c. Tax Reimbursements [Sec. 620.6(c)(3)]
We proposed that tax reimbursements provided by the institution to
senior officers be reported in the ``Deferred/Perquisite'' column in
the Compensation Table as other personal benefits. Overall, commenters
did not object to reporting tax reimbursements as part of senior
officer compensation. However, commenters responded that such
reimbursements are not naturally thought of as perquisites and should
instead be included in the ``Other'' column in the Compensation Table.
We do not object to reporting these reimbursements in the ``Other''
column of the Table. There is no de minimis exception for items
required to be reported in the ``Other'' column and any item reported
in the ``Other'' column must be described in a footnote to the
Compensation Table. Our intent is to provide a more transparent
disclosure of all tax reimbursements to CEOs and other senior officers,
regardless of the dollar amount. Since the requested change fulfills
this intent, the final rule requires tax reimbursements be reported in
the ``Other'' column of the Compensation Table.
Commenters requested that we revise the ``Other'' column of the
Compensation Table to exempt de minimis items from reporting
requirements, similar to that for perquisites. We decline to adopt this
suggestion because we did not propose
[[Page 60588]]
a de minimis level for other compensation. We believe other
compensation is generally of a nature requiring full disclosure.
Also, commenters requested clarification on whether amounts
reported in the perquisites and other compensation columns are reported
by subcategory or by lump sum. The amounts reported in the ``Other''
column may be reported lump sum, but must also be described in a
footnote. Compensation Table columns represent the entire amount for
the reporting period. For example, if $11,600 were reported in the
``Other'' column, existing regulations require that a footnote describe
the dollar amount of each item comprising the $11,600, such as $4,600
for tax reimbursements and $7,000 for severance pay. In addition, the
$5,000 de minimis reporting exemption allowed for perquisites applies
to the total of all perquisites for the reporting period, rather than
each reportable perquisite. For example, if $3,100 was provided in the
form of personal use of a company car and premiums of $2,200 were paid
for life insurance by the institution, the $5,000 perquisite de minimis
is exceeded and the lump sum of $5,300 would be reported in the
Compensation Table.
d. Disclosure of Plans [Sec. 620.6(c)(5)]
Existing disclosure regulations require that an institution
describe ``all'' plans offered to senior officers and highly
compensated employees reported in the aggregate pursuant to which cash
or noncash compensation was paid or distributed during the last fiscal
year or is proposed to be paid or distributed in the future for
performance during the last fiscal year. We proposed clarifying that
the required discussion of plans include compensation, incentive,
performance, and retirement and pension plans.
Commenters requested that we withdraw the requirement to report on
``all'' compensation plans because this requirement would result in
voluminous and excessive disclosures in reports. They stated that the
additional disclosures would give the appearance that compensation
risks are greater than other risks. Also, they stated that disclosure
of all plans goes beyond GAAP and SEC requirements. The proposed rule
did not add the word ``all'' to the rule.
The requirement to report on all plans is an existing requirement.
We are clarifying that compensation plans include all remuneration
plans, such as salary, bonus, deferred compensation, incentive,
performance, and retirement and benefit plans. We believe that the
narrative disclosures can be provided in a succinct manner to include
only those factors necessary to an overall understanding of each plan.
We would expect the disclosures to include, at a minimum, the purpose
or objective of each plan, the material terms of the plans, conditions
of payments, and other information the institution considers necessary
to further an overall understanding of the entire remuneration program
as disclosed in the Compensation and Pension Benefits Table. As
reporting ``all'' plans is existing language, we do not believe the
clarification causes more excessive or burdensome disclosures. We
believe describing all plans will result in enhanced shareholder
understanding of the nature and scope of these plans and provide
qualitative information to the quantified numbers reported in the
Compensation and Pension Benefits Tables. Therefore, we finalize this
provision of the rule as proposed.
Commenters asked if the requirement to discuss all compensation
plans is by individual employee or for the aggregate senior officer
group. One commenter expressed concern that the requirement might
include reporting performance-based compensation on an individual
basis, which could reveal confidential personnel information. The final
rule explains that the disclosures are to be made individually for the
CEO and in the aggregate for other senior officers and those highly
compensated employees included in the aggregate group.
3. Compensation Committee Responsibilities [Sec. Sec. 620.31 and
630.6(b)]
In 2006, the FCA issued the governance rule requiring institutions
to establish compensation committees.\20\ In the 2009 FCA Bookletter
BL-060, ``Compensation Committees,'' we provide guidance on how a
compensation committee should fulfill its obligations to the
institution and shareholders. BL-060 was issued at a time of heightened
concern and scrutiny on senior officer compensation. Continued scrutiny
of, and concern regarding, compensation and retirement practices
requires us to continue our prudent and proactive approach regarding
regulation of compensation committee oversight responsibilities,
including key factors identified in BL-060. We proposed requiring the
compensation committee analyze or review its institution's:
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\20\ See 71 FR 5740 (Feb. 2, 2006).
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Long-term compensation and retirement benefit obligations
and determine they are appropriate to the services performed and not
excessive;
Incentive-based compensation programs and payments and
determine they are structured to consider future losses and risks to
the institution;
Senior officer compensation and incentive-based programs
and determine they support the long-term strategy and promote safe and
sound business practices; and
Compensation programs for other select groups of
employees.
Most commenters responded that the proposed requirements were too
prescriptive and too rigid and did not follow a principles-based
approach. Commenters stated that the guidance provided in BL-060 was
adequate and that it provided the flexibility to adopt best practices.
Commenters emphasized that BL-060 provided needed flexibility not
apparent in the rule for institutions of various sizes and with
different compensation programs. Commenters suggested that we follow
other financial regulators and require the adoption of policies and use
our examination authority to verify compliance with the bookletter.
The responsibilities required by this rulemaking are derived from
key factors identified in BL-060 and, therefore, we do not believe the
requirements in the rule are more rigid than the BL-060 guidance. For
example, a key factor discussed in BL-060 is that a compensation
committee should be able to fully analyze and justify the long-term
liability to the institution in developing compensation packages and
evaluate that incentive programs are based on long-term financial
performance and are consistent with prudent risk-taking and produce a
safe and sound outcome. Also, another key factor discussed is the
committee's responsibility to ensure that retirement benefits are
appropriate and not excessive. Further, we believe it is prudent to
ensure these minimum responsibilities provided as informal guidance in
BL-060 are incorporated into our regulations and routinely considered
by the compensation committee when performing its duties. However, in
consideration of the comments received, the final rule clarifies that
compensation committees must document that the minimum responsibilities
identified in the rule were considered when performing its duties.
Commenters discussed the perceived potential impact on the use of
short- and long-term compensation programs under the rule. One
commenter also questioned if the rule intended to require the use of
claw-back provisions
[[Page 60589]]
to address risks. We did not intend the compensation committee
responsibilities to limit or otherwise constrain the use of short- and
long-term incentive programs, if those programs are determined
appropriate by the committee, and have clarified the rule accordingly.
In addition, we did not intend that the rule require or prohibit the
use of claw-back provisions by the compensation committee. The rule,
instead, seeks to ensure the committee considers the implications of
incentive-based compensation programs, including providing safeguards
that the programs are not unduly influenced by short-term performance
expectations. The rule further clarifies that when conducting a risk
assessment of compensation plans, the assessment is for undue risks. We
recognize that some risks are inherent in any compensation program and
we did not intend to require elimination of all risks.
We continue to promote the cooperative structure of governance and
believe the compensation committee itself should determine that
incentive-based programs and payments:
Are reasonable and proportionate to the services
performed;
Support the institution's business strategy for achieving
stated goals and are in accord with the institution's human capital and
marketing plans;
Ensure that the institution's compensation practices
support the System's basic mission to serve all types of creditworthy
agricultural producers; and
Are structured so payout schedules consider the potential
for future losses or undue risks to the institution.
We also clarify in the rule that existing regulations require that
all compensation committees are to maintain records of meeting minutes.
Documentation ensures that the committee's actions are memorialized,
provides insight for future deliberations, and facilitates examination
activities. In addition, the responsibilities of compensation
committees at associations, banks, and the Funding Corporation are
similar. Therefore, we are making a clarifying change in the final rule
at Sec. 620.31(b) to reflect this.
Commenters agreed that the compensation committee plays a key role
in ensuring compensation programs are appropriate and do not jeopardize
the institution's operations. However, these commenters stated that the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act) \21\ did not place similar risk management
responsibilities on the compensation committees of smaller publicly
traded companies and, therefore, the FCA should not do so. Commenters
requested that compensation committees of smaller institutions be
exempt from complying with the regulation. We did not propose an
exemption to the compensation committee requirements based on the size
of the institution and do not agree with the requested exemption. Risk
management is essential to the overall safety and soundness of each
System institution and we continue to believe that the proposed
compensation committee requirements are appropriate for all
institutions regardless of asset size. The final rule does not provide
for an exemption for smaller institutions.
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\21\ Public Law 111-203, 124 Stat. 1376, (H.R. 4173), July 21,
2010.
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Commenters claimed the rule would create undue costs and burdens
for compensation committees. We believe this rule captures existing
guidance and therefore will not cause undue additional costs and
burdens. Commenters questioned whether the compensation committee
should conduct a pre- or post-review of compensation plans. We would
expect that the dynamic and sometimes complex nature of compensation
plans require ongoing review by the committee. The rule is silent on
when the committee should review compensation plans and allows it to
carry out its responsibilities as it considers appropriate and
necessary to fulfilling its stewardship role and fiduciary duties.
4. Notice to Shareholders [Sec. Sec. 620.10, 620.11, 620.15, and
620.17]
We proposed requiring a separate notice to shareholders of
significant or material events occurring in intervening reporting
periods. The notice would serve to enhance timely and transparent
communication to institution member/owners throughout the institution's
fiscal year. We proposed allowing institutions to distribute the
notice:
In direct communications with shareholders;
Via electronic distribution (e.g., a Web site);
By publication with circulation wide enough to be
reasonably assured that all shareholders have timely access to the
information; or
In the quarterly report to shareholders.
Also, the notice would be dated, signed and provided to the FCA at
the same time it was distributed to shareholders.
Commenters supported such timely notice to shareholders and
investors on significant and material events occurring in the System.
Other commenters stated that significant and material disclosures are
already reported in the quarterly and annual reports and, therefore,
additional notice is unnecessary. Also, commenters noted that the
Federal Farm Credit Banks Funding Corporation (Funding Corporation)
issues press releases on behalf of the System and, as such, supported
withdrawing the requirement for additional notices. One commenter
stated that the rule could force release of information prematurely and
to the detriment of the institution.
We recognize that existing quarterly and annual reports address
material and significant disclosures of financial events. We are also
aware that the Funding Corporation, in response to expectations of
investors in the bond market, issues press releases for System-wide
events. However, we proposed the notice for more than System-wide or
financial events. We emphasized this by including a list of events that
may require notice. Many of those events are disclosed only once a year
in the annual report, if then. Because the notice is issued after a
material or significant event has occurred, we do not believe issuing a
notice is either premature or detrimental to the institution. We
continue to believe that timely communication is important and, given
the various means by which the institution may communicate the event,
we do not believe an interim notice requirement is an unnecessary
burden on institutions or that the communication will cause it to incur
significant costs.
We proposed a list of certain events and circumstances we believed
might be material or significant and that, if so, should be
communicated to shareholders in a timely manner. Commenters expressed
reservations about the materiality or significance of items in the list
and remarked that the list was inflexible. Commenters responded that
institutions should have the ability and latitude to interpret if an
event was significant or material for reporting in a notice and
requested that accounting principles and legal standards be used to
determine if a notice is required. Also, several commenters suggested
we replace the list with a provision requiring notice when determined
necessary by the FCA. Some commenters offered specific remarks about
the list of events themselves, stating that issuing a notice for
personnel events of the type in the list would overstate their impact.
In response to comments, we are not including the list of events in
the final rule. Instead, the final rule at Sec. 620.15(a)
[[Page 60590]]
requires that the institution's board of directors develop, adopt, and
maintain a policy for providing timely notices to shareholders. In
doing so, we believe we address comments made regarding personnel
events listed in the proposed rule. At a minimum, the policy must:
Identify the types of significant or material events
affecting the institution's operations, management, etc. to be
communicated to shareholders; \22\ and
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\22\ In identifying matters of importance to shareholder
decisions, we refer institutions to the objective of section 1.1(b)
of the Act, which encourages member-borrower participation in the
management, control, and ownership of their institution.
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Discuss how the institution will determine materiality and
significance.
We expect the policy to provide sufficient guidance to ensure
consistent reporting in notices of similar events. Also, the final rule
adopts at Sec. 620.15(e) the suggestion by some commenters that the
FCA retain the authority to require a notice when it determines there
has been a significant or material event.
Institutions should consider the following when identifying
material and significant events:
Changes to compensation, incentive, performance, or
retirement and benefit plans;
Changes to institution capitalization bylaws;
Results of shareholder votes;
Early director departures and departures of senior
officers; \23\
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\23\ As considered appropriate and relevant by the board,
disclosure may or may not include the reason for the departure of a
director prior to the end of his or her term of office or for the
departure of a senior officer. For example, the planned departure of
a senior officer may not rise to the level of materiality or
significance to require notice if the departure was part of an
institution's established succession plan.
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Letters of intent to merge;
A change in the external auditor engaged to audit the
institution's financial statements;
A change in an external party engaged to perform internal
audit functions, if the change was due to a disagreement with the party
over the results or findings from the work performed; and
Reportable FCA supervisory and enforcement actions.
The final rule requires that, at a minimum, this part of the policy
include the events that would be covered under the existing definitions
for ``material'' and ``significant'' contained in Sec. 620.1. One
commenter stated the definitions of ``material'' and ``significant'' in
Sec. 620.1(h) and (q) are vague and subjective. We do not agree that
the Sec. 620.1 definitions are vague or overly subjective. The
definitions have been used by institutions for years in preparing
financial reports and are intended to provide some flexibility and
discretion in identifying material and significant events. This
flexibility is necessary to accommodate variations in institution
operations.
Commenters expressed dislike for the requirement to place the
notice on the first page of the quarterly report, if the quarterly
report is used to communicate the event. They noted that the disclosure
should be placed in the report where required by GAAP. The rule does
not necessarily require that the notice be reported on the first page
of the quarterly report. However, the rule requires that the notice be
included at the beginning (i.e., in the opening section) of the
quarterly report, that it be conspicuous, and that it not be included
in a footnote. We continue to believe such events should be prominently
disclosed and not marginalized. We clarify that if GAAP prescribes
where a particular disclosure should be reported, then prominent
disclosure would be made as required by this regulation, but with
reference to the detailed GAAP disclosure. The final rule retains the
requirement that, if the quarterly report is used to issue the notice,
the notice must be prominently disclosed at the beginning of the
report.
The rule requires that the notice be issued as soon as possible,
but not later than 90 days after the event occurs. Commenters requested
clarification when using the quarterly report for notice if the event
occurred soon after a quarterly report is issued, requesting that the
90-day time limit be eliminated in those cases. One commenter requested
that the notice be issued solely in the institution's quarterly report
(or annual report for fourth quarterly period reporting). Others asked
to use an institution's Web site for these notices.
As previously discussed, the proposed rule provided that the notice
could be issued by posting to the institution's Web site,\24\ by
reporting in the quarterly report, or by any means with wide enough
circulation to reasonably assure that all institution shareholders have
access to the information. Given the variety of means available to
issue the notice, we are not persuaded that any delay in issuing the
notice, including for convenience, is warranted. We continue to believe
that communication of significant or material events is important to
shareholders and should be communicated in a timely manner, especially
given the various means by which the institution may communicate the
event. We do not believe that a 90-day requirement is an unnecessary
burden on institutions or that communication will cause it to incur
significant costs.\25\
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\24\ This includes an association using a funding bank's Web
site, if it routinely uses its funding bank's Web site to
communicate with its shareholders.
\25\ Unless our rules specify ``business days'', any use of the
term ``days'' means calendar days. The final rule states the notice
is due within 90 days, so that would be 90 calendar days, not
business days as some commenters stated.
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Also, we do not believe that limiting distribution of the notice to
the quarterly report is sufficient. Quarterly reports traditionally
only update financial information in the annual report. As explained,
the purpose of the notice is timely communication of material and
significant events occurring between annual reporting periods and which
may not be financial events. We believe that using other means to issue
the notice, such as a Web site posting, facilitates access to the
notice by shareholders and investors. Therefore, if the event occurs a
few days after the quarterly report is issued, institutions may have to
use an alternative distribution method for the notice.
The proposed rule included a statement in Sec. 620.11(d) that
notices made part of a quarterly report must comply with both quarterly
reporting requirements and the notice requirements of Sec. 620.15.
Comments were made regarding the potential complications of satisfying
GAAP reporting requirements and the notice requirements. We included
this statement in Sec. 620.11(d) to clarify that the notice, no matter
how it is communicated to the shareholders, must satisfy the provisions
of Sec. 620.15. Since the requirement raised questions on compliance
with GAAP for the quarterly report, the final rule removes the
statement from Sec. 620.11(d) and places it in Sec. 620.15(b)(2). We
believe this change clarifies that the notice does not affect GAAP and
other quarterly reporting requirements contained in Sec. 620.11. We
made technical changes to Sec. 620.15 in the final rule to accommodate
these changes.
We received few comments on the proposed consolidation into Sec.
620.17 of the existing requirements for special notices on permanent
capital. Those few comments received questioned the need for the
consolidation, which we feel was adequately explained in the proposed
rule preamble. The consolidation was a technical change and not
substantive, designed to enhance the clarity and use
[[Page 60591]]
of the rule. Therefore, we finalize the consolidation of our rules on
special notices for permanent capital into Sec. 620.17 as proposed.
5. Non-binding, Advisory Vote by Shareholders on Senior Officer
Compensation [Sec. Sec. 611.100, 620.5(a)(11) and 630.20(i); new
Sec. Sec. 611.360, 611.410 and 620.6(c)(6)]
We proposed requiring Farm Credit banks and associations provide
shareholders the opportunity to cast a non-binding, advisory vote on
senior officer compensation. The vote would be required if either the
CEO's or the aggregate of all other senior officers' compensation, as
disclosed in the Compensation Table, increased or decreased by 15
percent or more from the previous reporting period. We also proposed
authority for association shareholders to petition for the vote at any
time.
All commenters strongly objected to the non-binding advisory vote
and asked that it be withdrawn. Most commenters claimed we were
applying the Dodd-Frank Act to the System, a law they state ``Congress
specifically chose not to apply to the System.'' Commenters added that
System institutions do not compensate staff with stock or stock
options. They stated that compensation in the form of stock options led
to the financial crisis of 2008 for commercial lenders and was a key
motivator for Congress when adding section 951 of the Dodd-Frank Act.
Section 951 of the Dodd-Frank Act requires, in part, that publicly
traded companies hold separate non-binding shareholder advisory votes
on the compensation of executives at least every 3 years. Section 951
also provides that shareholders must vote at least every 6 years on
whether to hold the advisory votes on compensation every 1, 2 or 3
years.
Most commenters expressed a view that advisory votes do not further
cooperative principles or promote the safety and soundness of the
System and would have a negative impact on the cooperative business
model. Several comments focused on the member-controlled board of
directors, citing that members can elect or remove directors.
Commenters also questioned whether holding an advisory vote was a
``best practice'' for cooperative institutions. Commenters stated that
the vote was a referendum on an institution's board decisions and would
result in undermining the discretion and decision-making authority of
the board and the compensation committee. Some added that advisory
votes would replace existing effective ``engagement mechanisms'' and
dilute shareholders' messages to directors. Still others stated that it
is an unfair expectation of the membership, going so far as to state
that members did not want a vote on their institution's compensation
practices. One commenter added that an advisory vote would not reflect
risk assessment or market practices. Commenters asserted that each
shareholder would have a personal view on what is reasonable
compensation, making it difficult for the institution to use the
``feedback'' from the vote or translate it into a practical
recommendation to improve compensation practices. Commenters added that
even with enhanced compensation disclosures, shareholders would not
have the same level of detailed information or access to confidential
information used by the board in reaching compensation decisions. They
asserted that the votes would have to be unanimous to avoid shareholder
dissatisfaction or lawsuits. Commenters stated that advisory votes
could dilute voter participation in other matters, including director
elections, and that shareholders might view the cost of conducting
advisory votes as a misuse of funds. One commenter estimated the cost
of a single advisory vote at $30,000. Commenters also pointed out the
potential for little or no shareholder response on advisory votes,
making the effort a waste of resources.
We are not withdrawing the requirement for a non-binding advisory
vote on compensation, but are including this provision in the final
rule with certain changes. Further, in the proposed rule preamble, we
did not reference the Dodd-Frank Act because its provisions on
compensation practices and disclosures do not apply to the System.
While the Dodd-Frank Act introduced the advisory, non-binding vote to
the corporate community at large, it does not have exclusive
jurisdiction over the use of such a vote. In addition, the Dodd-Frank
Act did not prohibit the use of advisory voting by the System, nor does
it prevent us from regulating the use of non-binding, advisory votes.
As stated in FCA-PS-59, our rulemaking efforts seek to further the
public policy mission of the System, which includes promoting
shareholder involvement in the management, control, and use of the
System. As with other laws not directly involving the System, we
consider the goals and objectives of those laws for applicability to
the System. The Dodd-Frank Act strives, in part, to address
compensation excesses by increasing director accountability and
shareholder involvement. It is true that the System did not play a role
in the activities that led to the 2008 financial crisis, which in turn
led to passage of the Dodd-Frank Act. However, as a GSE operating as
cooperatives, System institutions should continually strive to operate
under high standards. Each institution must be accountable to its
shareholders and should embrace alternative venues for shareholder
involvement in the management and control of the institution.
We explained in the proposed rule preamble that the non-binding
advisory vote was another tool for institutions to use in the
continuous effort to operate under high standards and to further the
System's public policy mission, as well as encourage member-owner
participation. As such, we believe drawing the shareholders' attention
to a matter through advisory voting is relevant to the core principle
of System institutions being member-owned. We do not envision the vote
requiring shareholders to have access to extensive or confidential
compensation information. We believe institutions can provide
shareholders with the necessary information in order that shareholders
may judge whether compensation or compensation changes are justified
and acceptable. The board may then use that feedback in making
compensation decisions. Therefore, the feedback should enhance, rather
than undermine, board decision making. We also believe that the cost of
conducting the vote will not be burdensome since the vote is required
only if a material increase in compensation occurs or if the voting
shareholders petition for the vote.
Several commenters also raised the issue of fiduciary duty,
explaining an advisory vote is not a good exercise of prudent business
judgment. Commenters stated advisory votes also undermine the
responsibility and accountability of the compensation committee. We do
not agree with these comments and continue to believe that advisory
votes are consistent with a board's fiduciary duties of care, loyalty,
and obedience, which require directors to investigate, review, monitor,
and take corrective action when necessary. Boards are often presented
with conflicting information and have to weigh the information and its
source before making decisions. The result of prior advisory votes is
information that should be considered by the board when reviewing or
developing compensation plans. As a result, fiduciary duties require
consideration of, not strict adherence to, the advisory vote results.
As such, we see no fiduciary interference in holding advisory votes.
Instead, we believe the votes advance
[[Page 60592]]
the special fiduciary duty of cooperative boards to be accountable to
shareholders as well as local, State, and Federal government
authorities.
Commenters remarked that section 951 of the Dodd-Frank Act does not
reference increasing shareholder participation, the reason given in the
FCA proposed rule for an advisory vote. Commenters challenged our
statutory basis for the advisory vote, arguing that section 1.1(b) of
the Act does not authorize the FCA to regulate communications between
shareholders and their institutions. Other commenters added that the
FCA has not shown there are existing deficiencies in shareholder
communication or participation to support the requirement.
As we stated earlier, we are not limited to issuing regulations
only when there is a deficiency in institution operations. Section
1.1(b) of the Act states that the objective of the Act is to ``continue
to encourage farmer- and rancher-borrowers participation in the
management, control, and ownership of a permanent system of credit for
agriculture.'' \26\ Further, Congress reiterated in the 1992 Act the
need for shareholder awareness and involvement in the compensation
practices of their institutions. Specifically, the 1992 Act states one
purpose of enhanced compensation disclosures is to assist shareholders
in managing their cooperatives. We do not believe an advisory vote
regulates communications, but rather provides another tool for
shareholders to participate in the management of their institutions. We
recognize that the election of the board of directors by members has
been the primary means for member participation in the management of
their institution. However, we do not believe that it need be the only
tool for shareholder participation.
---------------------------------------------------------------------------
\26\ 12 U.S.C. 2001.
---------------------------------------------------------------------------
Other commenters suggested we require a compensation expert on the
board of directors or require disclosure of the reason for compensation
changes instead of a vote. For the reasons stated above, we continue to
believe an advisory vote on compensation is valuable, notwithstanding
these suggestions. We encourage institutions to consider these
suggestions for their operations, but are not requiring such at this
time.
A few commenters asked why the vote would be non-binding and
limited to senior officer compensation if the objective is to increase
member participation. We believe that a non-binding vote, as opposed to
a binding vote, will provide meaningful feedback to the board of
directors while also allowing the board to use that feedback in the
manner it considers most appropriate. The nature of a binding vote
would require a definite action by the board. Also, we require the vote
solely on the CEO and other senior officer compensation because it is
those employees who make the decisions, or provide information for the
board to make decisions, on institution policy, strategic direction and
operations. However, institutions are not prohibited from seeking
shareholder input on compensation in ways other than holding a non-
binding vote nor does it limit the shareholder votes solely to CEO and
other senior officer compensation. We encourage institutions to expand
shareholder votes as they consider appropriate.
Other commenters pointed out that several financial regulators
chose not to extend a Dodd-Frank Act type of mandatory advisory vote to
their regulated entities not already subject to it. We also chose not
to impose the Dodd-Frank Act style advisory vote on System
institutions. Instead, we determined that material increases in
compensation or the desire of the voting shareholders should determine
if a vote is required.
One commenter suggested that if the vote is required it should be
based on cash compensation instead of all compensation. The commenter
explained that it would be unfair to have a vote on compensation
changes that are beyond the control of the institution or employee,
such as changes in investment values of retirement plans. We do not
agree that an advisory vote on compensation should be limited to cash
outlays. Shareholders should be able to express support or disagreement
with all components of compensation. However, we agree that changes in
pension value may be unrelated to compensation earned or paid and
should not be included in the calculation of the increase. The final
rule at Sec. 611.410(b)(1) explains that the calculation of
compensation increases does not include changes in pension value. We
also clarify that the compensation subject to the vote is that reported
under the provisions of Sec. 620.6(c)(3).
a. Advisory Votes Based on Increase in Compensation
A few commenters stated that 15 percent is an arbitrary threshold.
We do not agree. We selected 15 percent as a threshold based on our
review of reported compensation changes within the System that looked
at recent percentage changes to bank and association CEOs' and other
senior officers' compensation. We chose a threshold that was equal to
or exceeded the olympic average \27\ of percent changes for the 3 years
observed to reflect what may be, in a given year, a significant
increase. The olympic average indicated that 15 percent was a material
increase, an unusual and infrequent occurrence and, therefore, an
advisory vote triggered by the 15-percent increase should not be a
recurring burden on System institutions.
---------------------------------------------------------------------------
\27\ An Olympic average is the average removing the high and low
values.
---------------------------------------------------------------------------
Still others suggested an advisory vote triggered by a percentage
change in reported compensation could result in a vote on the
institution's performance when most of the compensation change is due
to incentive pay programs. We agree with the comments that an advisory
vote on compensation changes may be viewed as providing shareholder
feedback on the overall performance of the institution. As we have
explained, the compensation committee should be reviewing incentive and
performance-based compensation programs to ensure they support the
overall positive performance of the institution and discuss the
relationship between compensation and performance in accordance with
new Sec. 620.6(c)(5).
Commenters expressed concern with the burden and complexity
involved in holding advisory votes based on compensation changes of 15
percent or more for the aggregate group. Some explained the inclusion
of highly compensated employees in the aggregate group could lead to a
15-percent overall increase, and therefore a vote, when there was no
corresponding change in senior officer pay. We agree that including
highly compensated employees in the 15-percent calculation for the
aggregate group may unnecessarily trigger a vote on all senior officer
compensation included in the aggregate amount. We did not intend to
trigger a vote strictly due to changes in pay from commission
activities for highly compensated employees. We recognize incentive pay
for increased lending and related services activities may place
employees who are not involved in the institution's decision-making
processes in the aggregate group. The final rule at Sec. 611.410(b)(2)
provides that the compensation of highly compensated employees, who are
not senior officers, may be removed from the aggregate senior officer
compensation before calculating compensation increases to determine if
[[Page 60593]]
an advisory vote is required. The rule also clarifies that a separate
vote is held if the reported compensation for the CEO, individually, or
other senior officers, in the aggregate, as defined in Sec. 619.9310,
meets or exceeds 15 percent from the previous fiscal year. That is,
compensation increases for the CEO is subject to its own advisory vote,
notwithstanding what occurs to the compensation of the aggregate group.
When proposing the advisory vote on compensation, we used the CEO
and aggregate group because that data is disclosed in the Compensation
Table. The final rule does not require the vote on senior officers in
the aggregate to include highly compensated employees whose
compensation is reported in the aggregate group but who are not
considered senior officers. Therefore, if these employees' compensation
is reported in the aggregate group, institutions should discuss in the
voting material that the vote is solely on the compensation increase of
senior officers (excluding the CEO) and not the compensation of the
entire aggregate group as may be disclosed in the Compensation Table.
Institutions should also ensure the voting information provided to
shareholders is meaningful and relevant and facilitates the
shareholder's decision. In this rulemaking, we did not propose that
senior officer compensation, excluding CEO compensation, be disclosed
in the Compensation Table by individual. However, institutions may make
such individual disclosures without being in conflict with our
regulations. We may reconsider the appropriateness of aggregate
reporting in a future rulemaking, but currently have retained our
aggregate reporting requirements. We emphasize the importance of
providing complete and clear information to shareholders on senior
officer compensation. Transparent disclosure allows them to make
informed decisions on compensation.
One commenter noted that requiring an advisory vote due to a 15-
percent threshold change may have the unintended consequence of causing
compensation committees to discontinue or significantly limit the use
of performance-based incentives as part of executive compensation plans
in order to avoid a vote. Other commenters stated that the 15-percent
threshold may actually lead to inflation of executive compensation over
time, as well as compensation plans which are less impacted by overall
association performance. They noted that the board could elect to shift
a greater share of total compensation from ``at-risk'' variable
performance to base pay in order to avoid triggering a vote.
Common law fiduciary duties prohibit directors from seeking to
avoid compliance with our rules. The compensation committee has final
authority over the compensation plans and practices of its
institutions. Also, its responsibilities include those discussed in our
rules, including the enhancements made in this rulemaking. Our rules
require that:
Compensation committees determine and document the
performance of its duties related to incentive-based compensation
programs;
Programs are reasonable and proportionate to the services
performed;
Payout schedules consider the potential for future losses
or undue risks to the institution; and
Programs support the institution's long-term business
strategy, as well as promote safe and sound business practices.
Also, our rules require compensation committees to act responsibly
and in the best interest of the institution when making compensation
decisions. We remind compensation committees of their duty to the
safety and soundness of the institution. Further, manipulation of
performance-based incentives solely for the purpose of avoiding a vote
would be difficult to justify upon examination by the FCA.
A few commenters stated that CEO compensation increases may easily
exceed the 15-percent threshold, especially when there is a change in
the CEO during the reporting year. Section 611.410(b)(3) provides that
institutions will not be required to hold an advisory vote when
compensation increases 15 percent or more and results from either a
change in personnel or an increase in the number of senior officer
positions included in the aggregate group. Other commenters questioned
the value of holding the vote when compensation decreased. We agree
with the comments that a vote on decreases in compensation is
unnecessary and we are not finalizing that requirement.
b. Advisory Votes Based on Petitions
We proposed that associations hold advisory votes if 5 percent of
the institution's voting shareholders petition for the vote. One
commenter objected to the petition component of the rule explaining
that, without a link between the authority to petition and impropriety
in compensation practices, a petition could be initiated at-will and by
a low percentage of shareholders, creating a nuisance to the
institution. Commenters suggested that institution bylaws, which
provide for shareholder petitions for special meetings, are sufficient
to address any compensation concerns. We do not agree that a
shareholder advisory vote resulting from a petition is either improper
or a nuisance. Institutions have a duty to provide shareholders
opportunities to voice concerns and petitioning for advisory votes is
such an opportunity.
Commenters noted that institutions currently employ ``engagement
mechanisms'' by which shareholders may express their opinions to the
board. Those mechanisms are generally structured or planned by the
institution's management. In contrast, petition authority gives
shareholders the ability to initiate the process and express their
opinion on compensation through an advisory vote. Also, in response to
other matters, commenters noted that most institution bylaws provide
petition authority to shareholders to call a special meeting. While we
believe institutions recognize the value of shareholder-controlled
engagement at their cooperatives, commenters did not discuss the
percentage of shareholder signatures required to petition under these
authorities. Percentage requirements may vary among institutions and,
in some cases, may even exceed average voter turnout. Therefore, we
believe a regulatory provision on shareholder petition authority for an
advisory vote on compensation is a more effective mechanism for
allowing shareholders to express their opinion, if they so desire.
The final rule at Sec. 611.410(c) retains the requirement that
associations hold an advisory vote if petitioned by 5 percent of their
voting shareholders. Since the final rule does not require highly
compensated employees who are not senior officers to be included in the
calculation of the 15-percent increase or to be subject to the vote,
the final rule makes a corresponding change to the petition provision
for advisory votes.
c. Advisory Voting Procedures
Commenters requested guidance on when advisory votes are held,
explaining there appears to be several opportunities for a vote. They
remarked that it is unclear if compensation committees are to delay
work until the receipt of advisory vote results. One commenter
specifically suggested that votes be tied to annual reports to limit
the vote to once a year. Another commenter asked if a record date of
shareholders eligible to vote would be required for advisory votes as
it is for director elections. One commenter asked how to conduct the
votes, stating
[[Page 60594]]
their institution only holds in-person voting.
In Sec. 611.360 of the final rule, we clarify that institutions
are expected to have policies and procedures to implement advisory
voting. When we proposed the rule, we envisioned the advisory vote
being held in conjunction with the annual meeting or director
elections, absent a shareholder petition for the vote. This process
would reduce costs and allow the use of the same stockholder record
list for all voting activities. We also envisioned that shareholders
would vote ``yes'' or ``no'' on CEO and other senior officer
compensation changes. Shareholders would base their vote on
compensation disclosures provided by the institution or through
discussions with the board. However, we did not propose regulations
limiting the vote in this manner, nor does the final rule contain any.
The final rule provides institutions with the flexibility to
determine when and how advisory votes occur. The final rule requires
institutions to address such matters by adopting and maintaining
written policies and procedures. However, the final rule includes a
requirement in Sec. 611.360(a)(1)(i) that an advisory vote on
compensation triggered because of a 15-percent increase in compensation
from the previous fiscal period must occur within 12 months after the
fiscal period in which the increase occurred. This timeframe allows the
institution to provide for the vote at annual meetings or in
conjunction with director elections, thereby reducing the cost to the
institution. Also, it ensures that results of the vote are available
for disclosure in the next annual report.
The final rule at Sec. 611.360(a)(1)(ii) makes clear that the
institution's policies and procedures must identify if votes will be
conducted in-person, by proxy, or by mail. Institutions may choose any
combination of these balloting methods under the final rule. While not
addressed in the regulatory text, we expect compensation committees or
the board to document how it used the vote results and its reasoning.
We also expect institutions to follow normal voting procedures by
setting a record date list of voting shareholders.
Commenters stated that the subject matters of the advisory vote are
not specified in the rule, expressing concern at opening advisory votes
to more than compensation matters. One commenter had no objection to
advisory votes covering more than compensation, and that advisory votes
should be determined by policies at each institution, including the
subject, timing, and manner of the advisory vote. Another commenter
objected to requiring policies on advisory votes of any kind. Since the
rule only requires an advisory vote on senior officer compensation, the
final rule removes the proposed requirement to identify subject matters
of advisory votes. Likewise, the final rule revises the definition of
advisory votes at Sec. 611.100(a) to remove the reference to
compensation practices.
One commenter objected to providing advisory votes at banks on a
one-member, one-vote basis instead of allowing weighted and cumulative
voting. The commenter asserted that giving equal voice to a Farm Credit
bank's shareholders is contrary to cooperative principles. Conversely,
a few commenters expressed concern that one bank shareholder could
control the vote's ``message'' sent to the funding bank if weighted
voting was used. We do not believe that requiring non-binding, advisory
votes be cast on a one-member, one-vote basis is contrary to
cooperative principles. We proposed that all advisory votes be cast on
a one-member, one-vote basis, with no weighted or cumulative voting
allowed. This provision ensures that all bank shareholders, regardless
of asset size or the size of membership, have an equal voice on the
compensation matter. We finalize in Sec. 611.360(c) the requirement
that advisory votes be cast on a one-member, one-vote basis.
A few commenters asserted that an advisory vote would be harmful to
the lender-borrower structure of the System. They stated that giving
members direct influence over the compensation of the managers
administering member loans was inappropriate. Some commenters stated
that institution management could take retribution against shareholders
if the vote resulted in a decrease in pay. The rule at Sec. 611.360(b)
requires all advisory votes to be treated under the confidentiality and
security in voting rules at Sec. 611.340. The confidentiality of the
vote resolves many of the concerns raised, including those questioning
the likelihood of retaliation, undue influence, or improper lender-
borrower actions. Applying the confidentiality voting provisions of
Sec. 611.340 to advisory votes ensures that only the results of the
vote will be reviewed by the board and management, not the identity of
the voter. Further, existing conflicts of interest rules prohibit
directors, officers, and employees from inappropriately seeking to
influence votes or retaliate against the voter.
Comments regarding the funding bank relationship raised the concern
of retaliation, asserting that bank senior officers would not treat
member-associations fairly if those same associations voted on their
compensation. We believe that associations face this same
accountability to member shareholders and this accountability is a core
cooperative principle. We continue to believe confidential advisory
votes, cast using a one-member one-vote scheme, provide accountability
to the member-owners, while protecting members from retaliatory
actions.
d. Reporting and Disclosure of Advisory Votes
Commenters requested clarification regarding the timing of
disclosures on the results of advisory votes. Another commenter asked
if the disclosure requirement included the cost of conducting the
advisory vote. The rule provides flexibility to the institution in that
it does not require and does not prohibit disclosure of the cost of the
vote. The final rule at Sec. 611.360(d) clarifies that reporting
advisory votes is required only if an advisory vote was held during the
fiscal period covered by the annual report. Also, reporting of advisory
votes may be required in accordance with policies adopted by the board
to comply with the new Sec. 620.15 disclosure requirements for notices
to shareholders. Institution boards should consider if the results of
the vote would be a material or significant event that would require
reporting to shareholders in a Sec. 620.15 notice.
To facilitate clarity, the final rule removes redundancies in the
disclosure and reporting requirements for advisory votes. The final
rule consolidates the disclosure of advisory votes in the annual report
into Sec. 620.5(a)(11). The rule also clarifies that disclosures are
required only if advisory votes are held during the reporting period.
Those disclosures must include the types and results of the votes, and
if the vote occurred due to a petition request. The rule retains the
requirement to disclose to shareholders their authority to petition for
an advisory vote in Sec. 620.6(c)(6), but requires a cross-reference
to the disclosures made under Sec. 620.5(a)(11), if any. The rule
finalizes as proposed the advisory vote disclosure requirements in
Sec. 630.20 for the System-wide report to investors.
6. Disclosure of Supplemental Retirement Plans to Employees [Sec.
620.5(e)]
In new Sec. 620.5(e)(4), we proposed requiring disclosures of an
institution's
[[Page 60595]]
obligations and other information for SRPs provided to all employees,
excluding the CEO and other senior officers whose benefits would be
reported in the Pension Benefits Table. The proposed disclosures were
to include a description of the plans, the funded and unfunded
obligations of the plans, and the vested and unvested dollar amounts of
the plans.
Commenters expressed support for the requirement to report funded
and unfunded amounts of SRP liabilities, but requested that we not
require the disclosure of vested and unvested amounts for SERPs and
SRPs citing GAAP considerations. Other commenters explained that GAAP
only requires reporting of the present value of earned benefits, as of
the reporting date. These commenters explained that the proposed
requirement might result in reporting potential benefits, a speculative
process that could only harm shareholders' understanding and trust of
the disclosure. Some commenters stated support for reporting vested and
unvested amounts in Sec. 620.5(e)(4) as long as it was done in total
and aggregated for all plans.
In finalizing the rule, we revised this section to be consistent
with the changes we are making to the reporting of SERPs. The final
rule on SRP disclosures allows aggregate reporting for all SRPs,
including SERPs provided to senior officers and disclosed in the
Pension Benefits Table. With this change, shareholders will be able to
compare the total amount(s) reported in Sec. 620.5(e)(4) with the data
reported in the Pension Benefit Table, enabling shareholders to
identify the proportionate liability of SRPs and SERPs for the CEO and
aggregate group. The SRP disclosures must include the name(s) of the
plan(s), present value of accumulated benefits, funded and unfunded
obligations, and payments made during the year.
A few commenters asked how to determine the ``funded'' amount for
Sec. 620.5(e)(4), asking if the amount was based on the entire plan,
the Rabbi Trust supporting the SERP or something else. In discussing
such plans, the institution should include a discussion of funding from
whatever source and any other disclosures that the institution believes
would be appropriate in order to provide clarity and facilitate an
understanding of the information presented.
We are finalizing the requirement to disclose off-balance sheet
commitments, such as benefits earned but not yet vested. The
requirement is located in this section instead of the proposed
requirement to disclose it with the Pension Benefits Table in
conformance with comments received.
7. Miscellaneous [Sec. Sec. 611.330(c), 611.400, 620.2(c) & (d),
620.4(c), 620.10(c) and 620.11]
In the process of consolidating provisions, some regulatory
language was proposed to be changed to remove redundancy and enhance
clarity. We received no comments on these miscellaneous technical
changes and, except for Sec. 620.2(c), final those provisions as
proposed. In Sec. 620.2(c) we proposed clarifying the language
regarding the electronic delivery of reports to shareholders. We
received no comments on the proposed clarification, but we are making
grammatical corrections to the language in the final rule. The final
language continues to state that electronic distribution of reports may
only occur with shareholder consent and that the provision applies only
to those reports individually sent to shareholders, not all reports.
C. Compliance Date
All provisions of this rule require compliance on the effective
date except the provision of Sec. 611.410(b) requiring advisory votes
for increases in senior officer compensation of 15 percent or more.
Advisory votes on increases of 15 percent or more in CEO or the
aggregate of other senior officers' compensation are not required until
2014. We believe delaying compliance minimizes the potential for
variations in implementation of the vote by establishing the
compensation reported in the 2012 annual report as the ``base line''
from which initial compensation increases are measured. Therefore, an
advisory vote would be required in 2014 if the CEO's or other senior
officers' compensation increased by 15 percent or more in fiscal 2013
compared to fiscal 2012. Results of the advisory vote on increases in
compensation would then be disclosed in the 2014 annual report and
possibly in an interim notice under Sec. 620.15.
We are not delaying compliance in holding advisory votes resulting
from shareholder petitions. Petitions for advisory votes are not tied
to a specific report or disclosure, so establishment of a baseline is
unnecessary. Further, shareholders can currently petition their
institution for special elections or special meetings. Policies and
procedures are in place at institutions to facilitate these petitions.
This familiarity with petition procedures also negates a need for
delayed compliance.
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the final rule would
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the Farm Credit System, considered
together with its affiliated associations, has assets and annual income
in excess of the amounts that would qualify them as small entities.
Therefore, Farm Credit System institutions are not ``small entities''
as defined in the Regulatory Flexibility Act.
List of Subjects
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 612
Agriculture, Banks, banking, Conflict of interests, Crime,
Investigations, Rural areas.
12 CFR Part 619
Agriculture, Banks, banking, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 630
Accounting, Agriculture, Banks, banking, Organization and functions
(Government agencies), Reporting and recordkeeping requirements, Rural
areas.
For the reasons stated in the preamble, parts 611, 612, 619, 620,
and 630 of chapter VI, title 12 of the Code of Federal Regulations are
amended as follows:
PART 611--ORGANIZATION
0
1. The authority citation for part 611 is revised to read as follows:
Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.13, 2.0, 2.1, 2.2, 2.10,
2.11, 2.12, 3.0, 3.1, 3.2, 3.21, 4.12, 4.12A, 4.15, 4.20, 4.21, 5.9,
5.17, 6.9, 6.26, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C.
2002, 2011, 2012, 2013, 2021, 2071, 2072, 2073, 2091, 2092, 2093,
2121, 2122, 2123, 2142, 2183, 2184, 2203, 2208, 2209, 2243, 2252,
2278a-9, 2278b-6, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of
Pub. L. 100-233, 101 Stat. 1568, 1638; sec. 414 of Pub. L. 100-399,
102 Stat. 989, 1004.
0
2. Section 611.100 is amended by:
0
a. Redesignating paragraphs (a) through (f) as paragraphs (c) through
(h), respectively; and
0
b. Adding new paragraphs (a) and (b) to read as follows:
[[Page 60596]]
Sec. 611.100 Definitions.
* * * * *
(a) Advisory vote means a non-binding vote by the voting
stockholders on certain events of the institution.
(b) Business day means a day the institution is open for business,
excluding the legal public holidays identified in 5 U.S.C. 6103(a).
* * * * *
Sec. 611.330 [Amended]
0
3. Section 611.330 is amended by:
0
a. Removing the reference ``Sec. 620.5(j) and (k)'' and adding in its
place, the reference, ``Sec. 620.6(e) and (f)'' in the first sentence
of paragraphs (b)(1) and (b)(2); and
0
b. Adding the words ``in accordance with Sec. 620.21(b) of this
chapter'' to the end of paragraph (c)(1).
0
4. A new Sec. 611.360 is added to subpart C to read as follows:
Sec. 611.360 Advisory votes.
(a) Each Farm Credit bank and association must establish and
maintain written policies and procedures to implement advisory votes.
Advisory votes must be held in accordance with the policies and
procedures, which, at a minimum, must:
(1) Establish the timing, manner, and notice of the vote.
(i) Votes held due to a 15-percent or more increase in compensation
must occur within 12 months after the fiscal year end in which the
increase occurred.
(ii) Votes may be conducted in-person, by proxy, by mail, or any
combination thereof.
(iii) If the vote will be held in connection with an annual meeting
or director elections, notice of the advisory vote must be part of the
Annual Meeting Information Statement, pursuant to Sec. 620.21(d) of
this chapter.
(2) If an association, explain the process for petitioning for an
advisory vote. Associations must allow stockholders to petition for
advisory votes on senior officer compensation under Sec. 611.410.
(3) If a Farm Credit bank that allows stockholders to petition for
advisory votes, explain the process for petitioning for an advisory
vote.
(b) Advisory votes are subject to the requirements of Sec. 611.340
and the provisions of section 4.20 of the Act (12 U.S.C. 2208).
(c) Advisory votes must be cast using a ``one-member, one-vote''
voting scheme and are not subject to the provisions in Sec. 615.5230
of this chapter regarding weighted, cumulative, and other voting
schemes.
(d) Each Farm Credit bank and association must make the disclosures
required by Sec. 620.5(a)(11) of this chapter for advisory votes held
during the annual reporting period.
Subpart D--Compensation Practices of Farm Credit Banks and
Associations
0
5. Revise the heading of subpart D to read as set forth above.
Sec. 611.400 [Amended]
0
6. Section 611.400 is amended by:
0
a. Removing the words ``Farm Credit System banks'' and adding in their
place ``Farm Credit banks'' in paragraph (a);
0
b. Removing the words ``distribute a bookletter to all FCS banks that
communicates'' and adding in their place the word ``communicate'' in
the last sentence of paragraph (b).
0
c. Removing the words ``Farm Credit System bank'' and adding in their
place ``Farm Credit bank'' in paragraph (d)(1); and
0
7. A new Sec. 611.410 is added to subpart D to read as follows:
Sec. 611.410 Advisory votes on senior officer compensation.
(a) Farm Credit banks and associations must hold advisory votes on
the compensation for all senior officers meeting the definition of
Sec. 619.9310 of this chapter and the requirements of paragraphs (b)
and (c) of this section. Stockholders must be allowed to cast an
advisory vote on the compensation of the chief executive officer that
is separate from the advisory vote on other senior officer
compensation. Advisory votes on compensation must be held in accordance
with the policies and procedures established under Sec. 611.360.
(b) If compensation, as reported in the most recent annual report,
for either the chief executive officer or the aggregate senior officer
group increased 15 percent or more from the previous reporting period,
the Farm Credit bank or association must hold an advisory vote.
(1) All compensation reported in the Compensation Table of the
annual report (or the annual meeting information statement), except
changes in pension benefits value reported under Sec.
620.6(c)(3)(iii)(D) of this chapter, must be included in the
calculation to determine if an increase of 15 percent or more occurred
in reported compensation amounts.
(2) Compensation of employees reported in the Compensation Table of
the annual report (or the annual meeting information statement)
pursuant to Sec. 620.6(c)(2)(i) of this chapter may be excluded when
determining if an increase of 15 percent or more occurred.
(3) No advisory vote is required if the 15 percent or more increase
in compensation is solely because of a change during the reporting
period in the senior officers included in the aggregate or the chief
executive officer.
(c) Each association must hold an advisory vote on senior officer
compensation when 5 percent of the voting stockholders petition for the
vote.
(1) Stockholders may petition for an advisory vote on the
compensation of the chief executive officer, the aggregate senior
officer group, or both.
(2) Employees reported in the Compensation Table of the annual
report (or the annual meeting information statement) pursuant to Sec.
620.6(c)(2)(i) of this chapter may be excluded when holding a vote by
petition.
(3) The association must disclose the petition authority in the
annual report to shareholders pursuant to Sec. 620.6(c)(6) of this
chapter.
PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED
CRIMINAL VIOLATIONS
0
8. The authority citation for part 612 continues to read as follows:
Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12
U.S.C. 2243, 2252, 2254).
Sec. 612.2145 [Amended]
0
9. Section 612.2145 is amended by removing the reference ``Sec.
620.5(k)'' and adding in its place, the reference ``Sec. 620.6 (f)''
in paragraph (a)(2).
Sec. 612.2155 [Amended]
0
10. Section 612.2155 is amended by removing the reference ``Sec.
620.5(k)'' and adding in its place, the reference ``Sec. 620.6(f)'' in
paragraph (a)(2).
Sec. 612.2165 [Amended]
0
11. Section 612.2165 is amended by removing the reference ``Sec.
620.5'' and adding in its place ``Sec. Sec. 620.5 and 620.6'' in
paragraph (b)(12).
PART 619--DEFINITIONS
0
12. The authority citation for part 619 is revised to read as follows:
Authority: Secs. 1.4, 1.5, 1.7, 2.1, 2.2, 2.4, 2.11, 2.12, 3.1,
3.2, 3.21, 4.9, 5.9, 5.17, 5.19, 7.0, 7.1, 7.6, 7.8 and 7.12 of the
Farm Credit Act (12 U.S.C. 2012, 2013, 2015, 2072, 2073, 2075, 2092,
2093, 2122, 2123, 2142, 2160, 2243, 2252, 2254, 2279a, 2279a-1,
2279b, 2279c-1, 2279f); sec. 514 of Pub. L. 102-552, 106 Stat. 4102.
0
13. A new Sec. 619.9335 is added to read as follows:
[[Page 60597]]
Sec. 619.9335 Supplemental retirement plan or supplemental executive
retirement plan.
A nonqualified retirement plan that provides benefits in addition
to those covered by other retirement plans for all employees and funded
in whole or part by a Farm Credit institution.
PART 620--DISCLOSURE TO SHAREHOLDERS
0
14. The authority citation for part 620 is revised to read as follows:
Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254); sec. 424
of Pub. L. 100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-
552, 106 Stat. 4102.
0
15. Section 620.2 is amended by revising the section heading and
paragraphs (c) and (d) to read as follows:
Sec. 620.2 Preparing and filing reports.
* * * * *
(c) The reports sent to shareholders must comply with the
requirements of Sec. 620.3 and electronic delivery of those reports
requires shareholder agreement.
(d) Information in any part of a report may be incorporated by
reference in answer or partial answer to any other item of the report,
unless instructions for the report state otherwise.
* * * * *
0
16. Section 620.4 is amended by revising paragraph (c) to read as
follows:
Sec. 620.4 Preparing and providing the annual report.
* * * * *
(c) The report must contain, at a minimum, the information required
by Sec. Sec. 620.5 and 620.6. In addition, the report must contain
such other information as is necessary to make the required statements,
in light of the circumstances under which they are made, not
misleading.
0
17. Section 620.5 is amended by:
0
a. Adding new paragraphs (a)(11) and (e)(4);
0
b. Revising paragraph (h);
0
c. Removing paragraphs (i), (j), and (k); and
0
d. Redesignating existing paragraphs (l), (m), and (n) as paragraphs
(i), (j), and (k), respectively.
The additions and revisions read as follows:
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(a) * * *
(11) Any advisory votes held during the reporting period, including
the types and results of the votes. If an advisory vote resulted from a
shareholder petition, the institution must also discuss the petition.
* * * * *
(e) * * *
(4) Describe supplemental retirement plans funded by the
institution on behalf of senior officers and employees. The description
for each plan must include the:
(i) Plan name;
(ii) Present value of accumulated benefits;
(iii) Payments made during the reporting period;
(iv) Funded and unfunded obligations; and
(v) Off-balance sheet amounts, including benefits earned but not
vested.
* * * * *
(h) Directors and senior officers. In a separate section of the
annual report, make the disclosures required in Sec. 620.6 of this
part.
* * * * *
0
18. A new Sec. 620.6 is added to subpart B to read as follows:
Sec. 620.6 Disclosures in the annual report to shareholders relating
to directors and senior officers.
(a) General. (1) List the names of all directors and senior
officers of the institution, indicating the position title and term of
office of each director, and the position, title, and date each senior
officer commenced employment in his or her current position.
(2) Briefly describe the business experience during the past 5
years of each director and senior officer, including each person's
principal occupation and employment during the past 5 years.
(3) For each director and senior officer, list any other business
interest where the director or senior officer serves on the board of
directors or as a senior officer. Name the position held and state the
principal business in which the business is engaged.
(b) Compensation of directors. Describe the arrangements under
which directors of the institution are compensated for all services as
a director (including total cash compensation and noncash
compensation). Noncash compensation with an annual aggregate value of
less than $5,000 does not have to be reported. State the total cash and
reportable noncash compensation paid to all directors as a group during
the last fiscal year. For the purposes of this paragraph, disclosure of
compensation paid to and days served by directors applies to any
director who served in that capacity at any time during the reporting
period. If applicable, describe any exceptional circumstances
justifying the additional director compensation as authorized by Sec.
611.400(c) of this chapter. For each director, state:
(1) The number of days served at board meetings;
(2) The total number of days served in other official activities,
including any board committee(s);
(3) Any additional compensation paid for service on a board
committee, naming the committee; and
(4) The total cash and noncash compensation paid to each director
during the last fiscal year. Reportable compensation includes cash and
the value of noncash items provided by a third party to a director for
services rendered by the director on behalf of the reporting Farm
Credit institution. Noncash compensation with an annual aggregate value
of less than $5,000 does not have to be reported.
(c) Compensation of senior officers. Disclose the information on
senior officer compensation and compensation plans as required by this
paragraph. The institution must disclose the total amount of
compensation paid to senior officers in substantially the same manner
as the tabular form specified in the Summary Compensation Table
(Compensation Table), located in paragraph (c)(3) of this section.
(1) For each of the last 3 completed fiscal years, report the total
amount of compensation paid and the amount of each component of
compensation paid to the institution's chief executive officer (CEO),
naming the individual. If more than one person served in the capacity
of CEO during any given fiscal year, individual compensation
disclosures must be provided for each CEO.
(2) For each of the last 3 completed fiscal years, report the
aggregate amount of compensation paid, and the components of
compensation paid, to all senior officers as a group, stating the
number of officers in the group without naming them.
(i) If applicable, when any employee who is not a senior officer
has annual compensation at a level that is among the five highest paid
by the institution during the reporting period, include the highly
compensated employee(s) in the aggregate number and amount of
compensation reported in the Compensation Table.
(ii) The report containing the aggregate compensation disclosure
must include a statement that disclosure of information on the total
compensation paid during the last fiscal year to any senior officer, or
to any other employee
[[Page 60598]]
included in the aggregate, is available and will be disclosed to
shareholders of the institution and shareholders of related
associations (if applicable) upon request. This statement must be
located directly beneath the Compensation Table.
(3) The institution must complete the Compensation Table, or
something substantially similar, according to the following
instructions:
Summary Compensation Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual
---------------------------------------------------------------------------------------------------------------------------------------------------------
Deferred/
Name of individual or number in group Year Salary Bonus perquisite Other Total
(a) (b) (c) (d) (e) (f) (g)
--------------------------------------------------------------------------------------------------------------------------------------------------------
CEO............................................... 20XX $ $ $ $ $
20XX
20XX
Aggregate No. of Senior Officers (& other highly
compensated employees, if applicable):
(X)........................................... 20XX
(X)........................................... 20XX
(X)........................................... 20XX
--------------------------------------------------------------------------------------------------------------------------------------------------------
(i) Amounts shown as ``Salary'' (column (c)) and ``Bonus'' (column
(d)) must reflect the dollar value of salary and bonus earned by the
senior officer during the fiscal year. Amounts contributed during the
fiscal year by the senior officer pursuant to a plan established under
section 401(k) of the Internal Revenue Code, or similar plan, must be
included in the salary column or bonus column, as appropriate. If the
amount of salary or bonus earned during the fiscal year is not
calculable by the time the report is prepared, the reporting
institution must provide its best estimate of the compensation
amount(s) and disclose that fact in a footnote to the table.
(ii) Amounts shown as ``deferred/perquisites'' (column (e)) must
reflect the dollar value of other annual compensation not properly
categorized as salary or bonus, including but not limited to:
(A) Deferred compensation earned during the fiscal year, whether or
not paid in cash; or
(B) Perquisites and other personal benefits, including the value of
noncash items, unless the annual aggregate value of such perquisites is
less than $5,000. Reportable perquisites include cash and the value of
noncash items provided by a third party to a senior officer for
services rendered by the officer on behalf of the reporting
institution.
(iii) Compensation amounts reported under the category ``Other''
(column (f)) must reflect the dollar value of all other compensation
not properly reportable in any other column. Items reported in this
column must be specifically identified and described in a footnote to
the table. ``Other'' compensation includes, but is not limited to:
(A) The amount paid to the senior officer pursuant to a plan or
arrangement in connection with the resignation, retirement, or
termination of such officer's employment with the institution.
(B) The amount of contributions by the institution on behalf of the
senior officer to a vested or unvested defined contribution plan unless
the plan is made available to all employees on the same basis.
(C) The dollar value of any tax reimbursement provided by the
institution.
(D) Any changes in the value of pension benefits.
(iv) Amounts displayed under ``Total'' (column (g)) shall reflect
the sum total of amounts reported in columns (c), (d), (e), and (f).
(4) If the institution provides a defined benefit plan or a
supplemental executive retirement plan (SERP) to its senior officers,
the institution must complete the following Pension Benefits Table, or
something substantially similar, for each plan according to the
following instructions:
Pension Benefits Table
----------------------------------------------------------------------------------------------------------------
As of most recent fiscal year-end
-----------------------------------------------------------------------------------------------------------------
Present value of Payments made
Name of individual Years of credited accumulated during reporting
service benefits period
----------------------------------------------------------------------------------------------------------------
CEO.................................................... ................. $ $
Senior Officers as a Group (& other highly compensated
employees, if applicable).
----------------------------------------------------------------------------------------------------------------
(i) Report the credited years of service for the CEO and the
average credited years of service for the senior officer group under
the plan.
(ii) Report the present value of accumulated benefits for the CEO
and the senior officer group under the plan.
(iii) Report payments made during the reporting period under the
plan for the CEO and the senior officer group.
(5) Provide a description of all compensation, retirement,
incentive, and performance plans (plans) pursuant to which cash or
noncash compensation was paid or distributed during the last fiscal
year, or is proposed to be paid or distributed in the future for
performance during the last fiscal year, to those individuals included
in the Compensation Table. Provide the information individually for the
chief executive officer and as a group for the senior officers.
Information provided for
[[Page 60599]]
the senior officer group includes any highly compensated employees
whose compensation is reported in the Compensation Table. The
description of each plan must include, but not be limited to:
(i) A summary of how each plan operates and who is covered by the
plan. The summary must include the criteria used to determine amounts
payable, including any performance formula or measure, as well as the
time period over which the measurement of compensation will be
determined, payment schedules, and any material amendments to the plan
during the last fiscal year.
(ii) The overall risk and reward structure of the plan as it
relates to senior officers' compensation. The description must include,
at a minimum, how each plan is compatible with and promotes the
institution's goals and business strategy and the mission as a
Government-sponsored enterprise.
(iii) A discussion of the relationship between the CEO and senior
officers' compensation to the reporting institution's overall
performance. The disclosure must also discuss the relationship between
the CEO's and senior officers' compensation to their performance.
(6) Adjacent to the Compensation Table, discuss the authority of
shareholders to petition for an advisory vote on CEO and senior officer
compensation. Include a reference to the location in the report where
the discussion of any advisory votes held during the reporting period
is contained.
(7) Associations may disclose the information required by paragraph
(c) of this section in the Annual Meeting Information Statement (AMIS)
pursuant to subpart E of this part. Associations exercising this option
must include a reference in the annual report stating that the senior
officer compensation information is included in the AMIS and that the
AMIS is available for public inspection at the reporting association
offices pursuant to Sec. 620.2(b).
(d) Travel, subsistence, and other related expenses. (1) Briefly
describe your policy addressing reimbursements for travel, subsistence,
and other related expenses as it applies to directors and senior
officers. The report shall include a statement that a copy of the
policy is available to shareholders of the institution and shareholders
of related associations (if applicable) upon request.
(2) For each of the last 3 fiscal years, state the aggregate amount
of reimbursement for travel, subsistence, and other related expenses
for all directors as a group.
(e) Transactions with senior officers and directors. (1) State the
institution's policies, if any, on loans to and transactions with
officers and directors of the institution.
(2) Transactions other than loans. For each person who served as a
senior officer or director on January 1 of the year following the
fiscal year of which the report is filed, or at any time during the
fiscal year just ended, describe briefly any transaction or series of
transactions other than loans that occurred at any time since the last
annual meeting between the institution and such person, any member of
the immediate family of such person, or any organization with which
such person is affiliated.
(i) For transactions relating to the purchase or retirement of
preferred stock issued by the institution, state the name of each
senior officer or director that held preferred stock issued by the
institution during the reporting period, the current amount of
preferred stock held by the senior officer or director, the average
dividend rate on the preferred stock currently held, and the amount of
purchases and retirements by the individual during the reporting
period.
(ii) For all other transactions, state the name of the senior
officer or director who entered into the transaction or whose immediate
family member or affiliated organization entered into the transaction,
the nature of the person's interest in the transaction, and the terms
of the transaction. No information need be given where the purchase
price, fees, or charges involved were determined by competitive bidding
or where the amount involved in the transaction (including the total of
all periodic payments) does not exceed $5,000, or the interest of the
person arises solely as a result of his or her status as a stockholder
of the institution and the benefit received is not a special or extra
benefit not available to all stockholders.
(3) Loans to senior officers and directors. (i) To the extent
applicable, state that the institution (or in the case of an
association that does not carry loans to its senior officers and
directors on its books, its related bank) has had loans outstanding
during the last full fiscal year to date to its senior officers and
directors, their immediate family members, and any organizations with
which such senior officers or directors are affiliated that:
(A) Were made in the ordinary course of business; and
(B) Were made on the same terms, including interest rate,
amortization schedule, and collateral, as those prevailing at the time
for comparable transactions with other persons.
(ii) To the extent applicable, state that no loan to a senior
officer or director, or to any organization affiliated with such
person, or to any immediate family member who resides in the same
household as such person or in whose loan or business operation such
person has a material financial or legal interest, involved more than
the normal risk of collectability; provided that no such statement need
be made with respect to any director or senior officer who has resigned
before the time for filing the applicable report with the Farm Credit
Administration (but in no case later than the actual filing), or whose
term of office will expire or terminate no later than the date of the
meeting of stockholders to which the report relates.
(iii) If the conditions stated in paragraphs (e)(3)(i) and (ii) of
this section do not apply to the loans of the persons or organizations
specified therein, with respect to such loans state:
(A) The name of the officer or director to whom the loan was made
or to whose relative or affiliated organization the loan was made.
(B) The largest aggregate amount of each indebtedness outstanding
at any time during the last fiscal year.
(C) The nature of the loan(s);
(D) The amount outstanding as of the latest practicable date.
(E) The reasons the loan does not comply with the criteria
contained in paragraphs (e)(3)(i) and (e)(3)(ii) of this section.
(F) If the loan does not comply with paragraph (e)(3)(i)(B) of this
section, the rate of interest payable on the loan and the repayment
terms.
(G) If the loan does not comply with paragraph (e)(3)(ii) of this
section, the amount past due, if any, and the reason the loan is deemed
to involve more than a normal risk of collectability.
(f) Involvement in certain legal proceedings. Describe any of the
following events that occurred during the past 5 years and that are
material to an evaluation of the ability or integrity of any person who
served as director or senior officer on January 1 of the year following
the fiscal year for which the report is filed or at any time during the
fiscal year just ended:
(1) A petition under the Federal bankruptcy laws or any State
insolvency law was filed by or against, or a receiver, fiscal agent, or
similar officer was appointed by a court for the business or property
of such person, or any partnership in which such person was a general
partner at or within 2 years before the time of such filing, or any
corporation or business association
[[Page 60600]]
of which such person was a senior officer at or within 2 years before
the time of such filing;
(2) Such person was convicted in a criminal proceeding or is a
named party in a pending criminal proceeding (excluding traffic
violations and other misdemeanors);
(3) Such person was the subject of any order, judgment, or decree,
not subsequently reversed, suspended, or vacated, by any court of
competent jurisdiction, permanently or temporarily enjoining or
otherwise limiting such person from engaging in any type of business
practice.
0
19. Section 620.10 is amended by:
0
a. Revising paragraph (a); and
0
b. Adding a new paragraph (c) to read as follows:
Sec. 620.10 Preparing the quarterly report.
(a) Each institution of the Farm Credit System must:
(1) Prepare and send to the Farm Credit Administration an
electronic copy of its quarterly report within 40 calendar days after
the end of each fiscal quarter, except that no report need be prepared
for the fiscal quarter that coincides with the end of the fiscal year
of the institution;
(2) Publish a copy of its quarterly report on its Web site when it
electronically sends the report to the Farm Credit Administration; and
(3) Ensure the report complies with the applicable provisions of
Sec. Sec. 620.2 and 620.3.
* * * * *
(c) Institutions may use the quarterly report to deliver any notice
required under Sec. 620.15. Notices required under Sec. 620.17 must
be issued separately from the quarterly report, unless otherwise
authorized by the Farm Credit Administration.
0
20. Section 620.11 is amended by:
0
a. Revising the introductory text of paragraph (b);
0
b. Revising paragraphs (c) and (d); and
0
c. Removing paragraphs (e) and (f).
The revisions read as follows:
Sec. 620.11 Content of quarterly report to shareholders.
* * * * *
(b) Rules for condensation. For purposes of this section, major
captions to be provided in the financial statements are the same as
those provided in the financial statements contained in the
institution's annual report to shareholders, except that the financial
statements included in the quarterly report may be condensed into major
captions in accordance with the rules prescribed under this paragraph.
If any amount that would otherwise be required to be shown by this
subpart with respect to any item is not material, it need not be
separately shown. The combination of insignificant items is permitted.
* * * * *
(c) Required content. A quarterly report must, at a minimum,
contain the following items:
(1) Management's discussion and analysis of financial condition and
results of operations. Discuss material changes, if any, to the
information provided to shareholders pursuant to Sec. 620.5(g) that
have occurred during the periods specified in paragraphs (c)(2)(i) and
(ii) of this section. Such additional information as is needed to
enable the reader to assess material changes in financial condition and
results of operations between the periods specified in paragraphs
(c)(2)(i) and (ii) of this section shall be provided.
(i) Material changes in financial condition. Discuss any material
changes in financial condition from the end of the preceding fiscal
year to the date of the most recent interim balance sheet provided. If
the interim financial statements include an interim balance sheet as of
the corresponding interim date of the preceding fiscal year, any
material changes in financial conditions from that date to the date of
the most recent interim balance sheet provided also shall be discussed.
If discussions of changes from both the end and the corresponding
interim date of the preceding fiscal year are required, the discussions
may be combined at the discretion of the institution.
(ii) Material changes in results of operations. Discuss any
material changes in the institution's results of operations with
respect to the most recent fiscal year-to-date period for which an
income statement is provided and the corresponding year-to-date period
of the preceding fiscal year. Such discussion also shall cover material
changes with respect to that fiscal quarter and the corresponding
fiscal quarter in the preceding fiscal year. In addition, if the
institution has elected to provide an income statement for the 12-month
period ended as of the date of the most recent interim balance sheet
provided, the discussion also shall cover material changes with respect
to that 12-month period and the 12-month period ended as of the
corresponding interim balance sheet date of the preceding fiscal year.
(2) Interim financial statements. The following financial
statements must be provided:
(i) An interim balance sheet as of the end of the most recent
fiscal quarter and as of the end of the preceding fiscal year. A
balance sheet for the comparable quarter of the preceding fiscal year
is optional.
(ii) Interim statements of income for the most recent fiscal
quarter, for the period between the end of the preceding fiscal year
and the end of the most recent fiscal quarter, and for the comparable
periods for the previous fiscal year.
(iii) Interim statements of changes in protected borrower capital
and at-risk capital for the period between the end of the preceding
fiscal year and the end of the most recent fiscal quarter, and for the
comparable period for the preceding fiscal year.
(iv) For banks, interim statements of cash flows for the period
between the end of the preceding fiscal year and the end of the most
recent fiscal quarter, and for the comparable period for the preceding
fiscal year. For associations, interim statements of cash flows are
optional.
(3) Other related financial items. State that the financial
statements were prepared under the oversight of the audit committee.
The interim financial information need not be audited or reviewed by a
qualified public accountant or external auditor prior to filing. If,
however, a review of the data is made in accordance with the
established professional standards and procedures for such a review,
the institution may state that a qualified public accountant or
external auditor has performed such a review under the supervision of
the institution's audit committee. If such a statement is made, the
report of a qualified public accountant or external auditor on such
review must accompany the interim financial information.
(d) Notices. Institutions using the quarterly report to deliver any
notice required under Sec. 620.15 must put the notice information at
the beginning of the quarterly report. The notice must be conspicuous
and may not be part of any footnotes to the quarterly report.
0
21. Sections 620.15 and 620.17 are revised to read as follows:
Sec. 620.15 Notice of significant or material events.
When a Farm Credit bank or association determines that it has a
significant or material event, the institution must prepare and provide
to its shareholders and the Farm Credit Administration a notice
disclosing the event(s).
(a) Each bank and association board of directors must establish and
maintain a policy identifying the categories and types of events that
may result in a
[[Page 60601]]
notice under this section. At a minimum, events covered under this
provision include significant events defined in Sec. 620.1(q) and
material events defined in Sec. 620.1(h). The policy must identify how
the significance or materiality of an event will be determined.
(b) A notice issued under this section must be made as soon as
possible, but not later than 90 days after occurrence of the event.
(1) Each institution must electronically provide the notice to the
Farm Credit Administration at the same time as distribution of the
notice to shareholders.
(2) Delivery of the notice to shareholders may be accomplished by
direct communications with the shareholders, posting the notice on the
institution's Web site, as part of the quarterly report to
shareholders, or by publishing the notice in any publication with
circulation wide enough to reasonably assure that all of the
institution's shareholders have access to the information in a timely
manner. No matter how the notice is distributed, it must comply with
all the provisions of this section.
(c) Every notice must be dated and signed in a manner similar to
the requirements of Sec. 620.3(b).
(d) The information required to be included in a notice issued
under this section must be conspicuous, easily understandable,
complete, accurate, and not misleading.
(e) A Farm Credit System institution may be required to issue a
notice under this section at the direction of the Farm Credit
Administration.
Sec. 620.17 Special notice provisions for events related to minimum
permanent capital.
(a) When a Farm Credit bank or association determines that it is
not in compliance with the minimum permanent capital standard
prescribed under Sec. 615.5205 of this chapter, that institution must
prepare and provide to its shareholders and the Farm Credit
Administration a notice stating that the institution has initially
determined it is not in compliance with minimum permanent capital
standards. Such notice must be given within 30 days following the month
end.
(b) When notice is given under paragraph (a) of this section, the
institution must also notify its shareholders and the Farm Credit
Administration when the institution's permanent capital ratio decreases
by one half of 1 percent or more from the level reported in the
original notice, or from that reported in a subsequent notice provided
under this paragraph. This notice must be given within 45 days
following the end of every quarter at which the institution's permanent
capital ratio decreases as specified.
(c) Each institution required to prepare a notice under paragraph
(a) or (b) of this section shall provide the notice to shareholders or
publish it in any publication with circulation wide enough to be
reasonably assured that all of the institution's shareholders have
access to the information in a timely manner. The information required
to be included in this notice must be conspicuous, easily
understandable, and not misleading.
(d) A notice, at a minimum, shall include:
(1) A statement that:
(i) Briefly describes the regulatory minimum permanent capital
standard established by the Farm Credit Administration and the notice
requirement of paragraph (a) of this section;
(ii) Indicates the institution's current level of permanent
capital; and
(iii) Notifies shareholders that the institution's permanent
capital is below the Farm Credit Administration regulatory minimum
standard.
(2) A statement of the effect that noncompliance has had on the
institution and its shareholders, including whether the institution is
currently prohibited by statute or regulation from retiring stock or
distributing earnings or whether the Farm Credit Administration has
issued a capital directive or other enforcement action to the
institution.
(3) A complete description of any event(s) that may have
significantly contributed to the institution's noncompliance with the
minimum permanent capital standard.
(4) A statement that the institution is required by regulation to
provide another notice to shareholders within 45 days following the end
of any subsequent quarter at which the institution's permanent capital
ratio decreases by one half of 1 percent or more from the level
reported in the notice.
0
22. Section 620.21 is amended by revising paragraph (a)(3)(i) to read
as follows:
Sec. 620.21 Contents of the information statement.
(a) * * *
(3) * * *
(i) If any transactions between the institution and its senior
officers and directors of the type required to be disclosed in the
annual report to shareholders under Sec. 620.6(e), or any of the
events required to be disclosed in the annual report to shareholders
under Sec. 620.6(f) have occurred since the end of the last fiscal
year and were not disclosed in the annual report to shareholders, the
disclosures required by Sec. 620.6(e) and (f) shall be made with
respect to such transactions or events in the information statement. If
any material change in the matters disclosed in the annual report to
shareholders pursuant to Sec. 620.6(e) and (f) has occurred since the
annual report to shareholders was prepared, disclosure shall be made of
such change in the information statement.
* * * * *
0
23. Section 620.31 is revised to read as follows:
Sec. 620.31 Compensation committees.
Each Farm Credit bank and association must establish and maintain a
compensation committee by adopting a written charter describing the
committee's composition, authorities, and responsibilities in
accordance with this section. The compensation committee must report
only to the board of directors. All compensation committees are
required to maintain records of meetings, including attendance, for at
least 3 fiscal years.
(a) Composition. Each compensation committee must consist of at
least three members and all committee members must be members of the
institution's board of directors. Every member must be free from any
relationship that, in the opinion of the board, would interfere with
the exercise of independent judgment as a committee member.
(b) Responsibilities. It is the responsibility of each compensation
committee to review the compensation policies and plans for senior
officers and employees and to approve the overall compensation program
for senior officers. In fulfilling its responsibilities, the
compensation committee must document that it determined the:
(1) Institution's projected long-term compensation and retirement
benefit obligations are appropriate to the services performed and not
excessive;
(2) Incentive-based compensation programs and payments are
reasonable and proportionate to the services performed and structured
so the payout schedule considers the potential for future losses or
undue risks to the institution;
(3) Senior officer compensation, incentive, and benefit programs
support the institution's long-term business strategy and mission, as
well as promote safe and sound business practices; and
(4) Compensation programs designed for specific groups of
employees, other
[[Page 60602]]
than senior officers, pose no imprudent risks to the institution.
(c) Resources. Each institution must provide monetary and
nonmonetary resources to enable its compensation committee to perform
its duties.
PART 630--DISCLOSURE TO INVESTORS IN SYSTEM-WIDE AND CONSOLIDATED
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM
0
24. The authority citation for part 630 is revised to read as follows:
Authority: Secs. 4.2, 4.9, 5.9, 5.17, 5.19 of the Farm Credit
Act (12 U.S.C. 2153, 2160, 2243, 2252, 2254); sec. 424 of Pub. L.
100-233, 101 Stat. 1568, 1656; sec. 514 of Pub. L. 102-552, 106
Stat. 4102.
0
25. Section 630.6 is amended by revising paragraph (b) to read as
follows:
Sec. 630.6 Funding Corporation committees.
* * * * *
(b) Compensation committee. The Funding Corporation must establish
and maintain a compensation committee by adopting a written charter
describing the committee's composition, authorities, and
responsibilities in accordance with this section. The compensation
committee must report only to the board of directors. The compensation
committee is required to maintain records of meetings, including
attendance, for at least 3 fiscal years.
(1) Composition. The committee must consist of at least three
members and all members must be members of the Funding Corporation's
board of directors. Every compensation committee member must be free
from any relationship that, in the opinion of the board, would
interfere with the exercise of independent judgment as a committee
member.
(2) Responsibilities. It is the responsibility of the compensation
committee to review the compensation policies and plans for senior
officers and employees and to approve the overall compensation program
for senior officers. In fulfilling its responsibilities, the
compensation committee must document that it determined the:
(i) Funding Corporation's projected long-term compensation and
retirement benefit obligations are appropriate to the services
performed and not excessive;
(ii) Incentive-based compensation programs and payments are
reasonable and proportionate to the services performed and structured
so the payout schedule considers the potential for future losses or
undue risks to the Funding Corporation; and
(iii) Senior officer compensation, incentive, and benefit programs
support the Funding Corporation's long-term business strategy and
mission, as well as promote safe and sound business practices.
(3) Resources. The Funding Corporation must provide monetary and
nonmonetary resources to enable its compensation committee to perform
its duties.
0
26. Section 630.20 is amended by revising paragraph (i) to read as
follows:
Sec. 630.20 Contents of the annual report to investors.
* * * * *
(i) Compensation of directors and senior officers. State that
information on the compensation of directors and senior officers of
Farm Credit banks is contained in each bank's annual report to
shareholders and that the annual report of each bank is available to
investors upon request pursuant to Sec. 630.3(g). State whether
advisory votes were held in any of the disclosure entities during the
reporting period and the results of such vote.
* * * * *
Dated: September 20, 2012.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2012-23726 Filed 10-2-12; 8:45 am]
BILLING CODE 6705-01-P