[Federal Register Volume 79, Number 37 (Tuesday, February 25, 2014)]
[Proposed Rules]
[Pages 10426-10429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-04057]



12 CFR Part 651

RIN 3052-AC89

Federal Agricultural Mortgage Corporation Governance; Farmer Mac 
Corporate Governance and Standards of Conduct

AGENCY: Farm Credit Administration.

ACTION: Advance notice of proposed rulemaking.


SUMMARY: The Farm Credit Administration (FCA, we, or our) is 
considering issuing new regulations, or clarifying and enhancing 
existing regulations, related to the Federal Agricultural Mortgage 
Corporation (Farmer Mac) board governance and standards of conduct, 
including director election procedures, conflicts of interest and risk 
governance. We are requesting comments on ways to address these issues. 
In keeping with today's financial and economic environment, we believe 
it prudent and timely to undertake a review of our regulatory guidance 
on the identified areas. We intend to use the information and 
suggestions we receive in response to this Advance Notice of Proposed 
Rulemaking (ANPRM) for the development of guidance on Farmer Mac board 
governance and standards of conduct.

DATES: You may send comments on or before April 28, 2014.

ADDRESSES: We offer a variety of methods for you to submit your 
comments. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by email or through the FCA's Web site. 
As facsimiles (fax) are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act, we are no longer 
accepting comments submitted by fax. Regardless of the method you use, 
please do not submit your comments multiple times via different 
methods. You may submit comments by any of the following methods:
     Email: Send us an email at reg-comm@fca.gov.
     FCA Web site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Laurie A. Rea, Director, Office of Secondary Market 
Oversight, Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
VA 22102-5090.
    You may review copies of all comments we receive at our office in 
McLean, Virginia, or on our Web site at http://www.fca.gov. Once you 
are in the Web site, select ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted, including any 
supporting data provided, but for technical reasons we may omit items 
such as logos and special characters. Identifying information that you 
provide, such as phone numbers and addresses, will be publicly 
available. However, we will attempt to remove email addresses to help 
reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: Joe Connor, Associate Director for 
Policy and Analysis, Office of Secondary Market Oversight, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4364, TTY (703) 883-
4056, or Laura McFarland, Senior Counsel, Office of General Counsel, 
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY 
(703) 883-4056.


I. Objective

    The purpose of this ANPRM is to gather public input on how FCA 
     Enhance risk governance at Farmer Mac to further its long-
term safety and soundness and mission achievement;
     Clarify the roles of the board and voting stockholders in 
the Farmer Mac director nomination and election process;

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     Enhance the usefulness, transparency, and consistency of 
conflicts of interest reporting;
     Clarify conflicts of interest prohibitions; and
     Avoid repetitious disclosure and reporting requirements 
given the dual reporting responsibilities of Farmer Mac to the FCA and 
the Securities and Exchange Commission (SEC), while maintaining 
effective and efficient FCA oversight of Farmer Mac.

II. Background

A. Structure and Operation of Farmer Mac

    Farmer Mac is a stockholder-owned, federally chartered 
instrumentality that is an institution of the Farm Credit System and a 
Government-sponsored enterprise (GSE). Farmer Mac was established and 
chartered by the Agricultural Credit Act of 1987 (1987 Act), which was 
enacted on January 6, 1988, to create a secondary market for 
agricultural real estate mortgage loans, rural housing mortgage loans, 
and rural utilities loans.\1\ Farmer Mac also facilitates the capital 
markets funding for USDA-guaranteed farm program and rural development 
loans. Title VIII of the Farm Credit Act of 1971, as amended, (Act) 
governs Farmer Mac.

    \1\ See Agricultural Credit Act of 1987 (Pub. L. 100-233).

    As a GSE, Farmer Mac has a public policy purpose embedded in its 
corporate mission. One aspect of this public policy mission includes 
financial services to customer-stakeholders (institutions that lend to 
farmers, ranchers, rural homeowners, and rural utility cooperatives) 
and the resulting flow-through benefits to rural borrowers. Another key 
aspect is the protection of taxpayer-stakeholders because the risk that 
Farmer Mac accepts in the course of business exposes both investors 
(debt and equity purchasers) as well as taxpayers to potential loss. 
The taxpayer's exposure arises in part from Farmer Mac's authority to 
issue debt to the Department of the Treasury to cover guarantee losses 
under certain adverse circumstances.\2\ Thus, an appropriately 
comprehensive approach to Board-level risk governance would acknowledge 
and consider all stakeholder groups.

    \2\ According to the 1987 Act, Farmer Mac, in certain 
circumstances, may borrow up to $1.5 billion from the U.S. Treasury 
to guarantee timely payment of any guarantee obligations of the 
corporation. Public Law 100-233.

    Farmer Mac has two classes of voting common stock: Class A and 
Class B. Class A voting common stock is owned by banks, insurance 
companies, and other financial institutions. Class B voting common 
stock is owned by Farm Credit System (System) institutions. In 
addition, Farmer Mac has nonvoting common stock (Class C), the 
ownership of which is not restricted and is a means for Farmer Mac to 
raise capital. Farmer Mac may also issue nonvoting preferred stock.
    As a GSE, the structure of Farmer Mac's board of directors was 
established by Congress. The Farmer Mac board is, by statute, composed 
of 15 directors representing three segments: Class A stockholders, 
Class B stockholders, and the general public.\3\ Each segment has five 
directors on the board. The Class A and B segments each elect their 
representatives (elected directors)--that is, only Class A stockholders 
elect Class A directors, and only Class B stockholders elect Class B 
directors. The directors representing the general public are appointed 
by the President of the United States (appointed directors). The Act 
limits the terms of elected directors to 1 year, while appointed 
directors serve for an unlimited duration ``at the pleasure of the 
President'' of the United States of America.\4\

    \3\ Section 8.2(b) of the Act (12 U.S.C. 2279aa-2(b)).
    \4\ Section 8.2(b)(6) of the Act (12 U.S.C. 2279aa-2(b)(6)).

    Although the Farmer Mac board is representative in nature, Congress 
chose a corporate structure to govern the operations of Farmer Mac. 
Common law corporate principles affirm the fiduciary duty of directors 
to act in the best interests of Farmer Mac and all of its stockholders. 
However, this fiduciary duty to stockholders must be understood in the 
context of the duty of the directors to further the statutory purpose 
and public mission of Farmer Mac.\5\

    \5\ Farmer Mac was created to provide a secondary market in 
agricultural real estate and rural home loans originated by System 
institutions and other lenders. Its statutory purpose is to: 
increase the availability of long-term credit to farmers and 
ranchers at stable interest rates; provide greater liquidity and 
lending capacity for lenders extending credit to farmers and 
ranchers; facilitate capital market investments in providing long-
term agricultural funding, including funds at fixed rates of 
interest; and to enhance the ability of individuals in small rural 
communities to obtain financing for moderate-priced homes. See 
section 701 of the 1987 Act.

B. FCA Oversight and Rulemaking

    Farmer Mac is regulated by FCA through the FCA Office of Secondary 
Market Oversight (OSMO). Section 8.11 of the Act specifies that FCA 
provides oversight, regulation, examination, and enforcement authority 
over Farmer Mac to ensure it operates in a safe and sound manner. In 
addition, the Act requires Farmer Mac to register its equities with the 
SEC and be subject to SEC disclosure regulations under section 14 of 
the Securities and Exchange Act of 1934.\6\ Also, Farmer Mac's Class A 
and Class C stocks are publicly traded on the New York Stock Exchange 
(NYSE). Thus, Farmer Mac must comply with both FCA and SEC disclosure 
and reporting requirements. Notwithstanding the shared regulation of 
Farmer Mac's reports and disclosures to stockholders, FCA, acting 
through OSMO, is the safety and soundness and mission regulator of 
Farmer Mac. As such, FCA has the authority to regulate how Farmer Mac 
performs its powers, functions, and duties in furtherance of its public 
policy purposes.

    \6\ See section 8.12 of the Act (12 U.S.C. 2279aa-12).

    When issuing regulations for Farmer Mac, the Act requires FCA to 
     The purpose of Farmer Mac's mission;
     If Farmer Mac's activities and practices are appropriate 
for an agricultural secondary market; and
     The reduced levels of risks associated with appropriately 
structured secondary market transactions.\7\

    \7\ Section 8.11(a)(1) and (2) of the Act (12 U.S.C. 2279aa-11).

    We last issued regulations on Farmer Mac board governance and 
standards of conduct on March 1, 1994 (59 FR 9622). In that rulemaking, 
we implemented the requirements of section 514 of the Farm Credit Banks 
and Associations Safety and Soundness Act of 1992 (1992 Act) \8\ by 
requiring Farmer Mac to adopt a conflict-of-interest policy that 
defines the types of relationships, transactions, or activities that 
might reasonably be expected to give rise to potential conflicts of 

    \8\ Public Law 102-552, 106 Stat. 4131.

III. Areas of Consideration

    Corporate governance can be defined as the set of processes, 
customs, policies, laws and institutions affecting the way a company is 
directed, administered or controlled. Corporate governance is about 
building credibility, ensuring transparency and accountability as well 
as maintaining an effective channel of information disclosure that 
fosters good corporate performance. The essence of corporate governance 
is to ensure good performance by the entity, provide proper 
accountability to all stakeholders, and mitigate conflicts of interest. 
As part of this, it is essential that corporations practice strong risk 
    Risk management is the identification, assessment and 
prioritization of risks in

[[Page 10428]]

an effort to minimize the impact of unfortunate events while maximizing 
opportunities. In financial institutions, risk can be categorized into 
three categories: credit risk, market risk, and operational risk. 
Usually, it is the board of directors who approve the overall risk-
appetite of the company and monitor internal controls by ensuring 
necessary actions are taken. A strong board uses both risk management 
and corporate governance to steer the corporation towards policies 
supporting long-term sustainable growth in shareholder value, but not 
in a manner that promotes excessive risk-taking, particularly for 
short-term increases in stock price performance.\9\

    \9\ See ``Incorporating Risk Management into Corporate 
Governance,'' Enterprise Risk Management Initiative Staff (Sept. 23, 

    Congress charged us to issue regulations to ensure mission 
compliance and the safety and soundness of Farmer Mac. With the recent 
events in the financial industry, increased sophistication in financial 
markets, and on-going scrutiny of public and agency financial 
activities and related reporting practices, we believe it is prudent to 
review our current regulatory standards related to Farmer Mac's board 
governance and standards of conduct reporting and disclosures, 
contained in part 651 of our rules, to ensure the continuing mission 
compliance and safety and soundness of Farmer Mac. We also believe 
using an ANPRM to solicit opinions and suggestions from investors, 
stockholders, and other interested parties will facilitate the planned 
rulemaking in this area.\10\

    \10\ See www.reginfo.gov, FCA Spring 2013 Unified Agenda, 
``Farmer Mac--Corporate Governance and Standards of Conduct'', dated 
April 24, 2013.

    We have identified the following areas to address in this ANPRM:
     Conflicts of interest for directors, officers and 
     Director nominations and elections;
     Director representational and fiduciary duties;
     Board responsibilities in setting appropriate risk 
tolerance levels and overseeing risk management; and
     General board governance.
    We encourage comments and suggestions on how to enhance regulations 
in the above-identified areas, emphasizing how those programs affect 
the safety and soundness of Farmer Mac, as well as comments on how to 
further facilitate transparent and comprehensive disclosure of Farmer 
Mac's standards of conduct policies and practices.
    In particular, we are interested in what ways Farmer Mac's risk 
governance oversight at the board committee level can be enhanced. We 
are also seeking suggestions on how we might amend our regulations to 
address the director nomination and election process to ensure 
compliance with the plain meaning of the Act as well as whether we 
should address director removal and prohibited conduct in the planned 
rulemaking. Suggestions on how we might amend our regulations to 
address the interaction of representational duties, conflicts of 
interest, and corporate director fiduciary duties to ensure compliance 
with the Act are also sought.

IV. Request for Comments

    We request and encourage any interested person(s) to submit 
comments on the following questions and ask that you support any 
comments you submit with relevant data and/or examples. We remind 
commenters that comments, and data submitted in support of a comment, 
are available to the public through our rulemaking files. We also 
invite comments and suggestions on any of the identified areas under 
consideration, regardless of whether specific questions have been 
    Conflicts of Interests for Directors, Officers and Employees:
    (1) What, if any, recusal process should FCA require when there is 
an actual or potential conflict of interest?
    (2) Should FCA regulations authorize bylaw provisions for the 
automatic removal of an elected director found to have violated 
conflicts of interest prohibitions? If so, what types of prohibited 
actions related to conflicts of interest should warrant removal?
    (3) Should bylaw provisions addressing disciplinary actions for 
prohibited actions related to conflicts of interest be regulated, such 
as reduced pay, loss of committee memberships, etc.? If so, please 
explain why and to what extent.
    Director Nominations and Elections:
    (4) How should the Farmer Mac nominating committee be structured 
and what duties should it have?
    (5) To what extent, if any, should appointed directors be involved 
in the elected director nomination process? Please provide the 
reason(s) supporting your response.
    (6) What, if any, additional process besides the nominating 
committee should there be for shareholders to add director-candidates 
to the ballot (e.g. floor nominations, petition)?
    (7) What other director nomination guidelines should be considered 
to preserve the representational election of Class A and B directors on 
the Farmer Mac board?
    Director Representational and Fiduciary Duties:
    (8) Should the FCA amend its regulations to identify certain 
fiduciary responsibilities associated with serving as a director of a 
GSE? If so, how?
    (9) How might FCA clarify existing Farmer Mac board 
responsibilities and authorities to improve the board's ability to 
carry out its fiduciary and oversight responsibilities?
    (10) How might FCA facilitate maintaining a transparent 
representational relationship between elected directors and Class A and 
B stockholders while ensuring the protection of Farmer Mac's 
proprietary business information?
    Board Responsibilities in Risk Governance:
    (11) To what extend should Farmer Mac's risk tolerance consider its 
public policy purpose? How might that be measured?
    (12) How might the FCA ensure that the Farmer Mac board establishes 
an effective risk governance framework, including risk measurements 
(e.g. data collection), risk controls and reporting, and clearly 
articulated statements of risk tolerance?
    (13) If FCA requires the Farmer Mac board to have a risk committee, 
what guidelines should FCA provide regarding the formation and duties 
of the committee? What qualifications should risk committee members 
possess? What resources should be available to the committee? Should 
the committee have direct access to all members of the Farmer Mac 
management team?
    General Farmer Mac Board Governance:
    (14) To what extent should FCA issue regulations to address 
difficulties Farmer Mac may have as a GSE in complying with modern 
governance standards because of statutory and regulatory requirements 
regarding the structure, selection, and composition of its board?
    (15) How should FCA regulations require Farmer Mac to foster 
diversity in the selection of directors, officers and employees?
    (16) What other Farmer Mac board governance and standards of 
conduct issues should FCA consider addressing through regulation?
    With the benefit of information gained through this ANPRM and our 
internal analysis, we will consider changes to the regulations to 
enhance their fundamental objective--to ensure the safety and soundness 
of Farmer Mac's operations and the furtherance of Farmer Mac's mission.

[[Page 10429]]

    Date: February 19, 2014.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2014-04057 Filed 2-24-14; 8:45 am]